Cass Sunstein is currently guest-blogging at Lessig’s place, and has a thought-provoking post on information aggregation, Wikipedia, prices, and Hayek. The post itself and the comments have a lot of good content, and I recommend reading them. It also follows on a prior post on information aggregation more generally, as Sunstein works on a follow-up to his Republic.com book.
One of the interesting things to me is that in the comments on the earlier post, Jimbo Wales (Wikipedia founder) says that Hayek’s ideas informed how he designed Wikipedia, which I had not heretofore realized.
I have several, perhaps random, thoughts on all of the ideas raised in these two posts and the comments therein.
One issue raised is the relevance of the comparison between prices as information aggregators and wikis as information aggregators. It’s a compelling comparison, but I agree with one of the commenters who argued that the comparison to prices is better as a metaphor than as an analytical tool. One reason it’s a better metaphor than analytical tool for the wiki process is that market processes and the prices that emanate from the interaction of market participants are more complex and not so specifically goal-oriented to aggregation. One commenter made this point well: prices are a manifestation of a decentralized mechanism for facilitating the mutual benefit of buyers and sellers; they do not come into being because anyone has the specific goal of aggregating information.
Prices come into being because they are a parsimonious and useful tool for coordinating the wishes of diverse, heterogeneous individuals into mutually beneficial actions. The information aggregation is an important and useful part of that process, because it’s the aggregation of private information on preferences and costs that lets you figure out if you want to buy or sell at that price. Through that process you discover how strong your preferences are, or how high or low your costs are, so you learn the information about the preferences and costs of others in the process of figuring out if it’s worth it to you to buy or sell at that price. But the aggregation is not the goal of the process; the goal of the process is individual happiness, for both buyers and sellers.
And the beauty of prices is that they coordinate not just the diverse, private information and incentives of individuals, but in so doing they enable those individuals to create and receive value. Gains from trade. Surplus. Happiness. Mutual benefit. One of the commenters claimed that wikis are different from prices because in markets it’s about individual gain but in wikis it’s about social gain (my paraphrase). That is a naive misunderstanding of market processes. Market processes are robust and valuable precisely because they provide an institutional framework in which individual incentives are, through no conscious intention, channeled into creating social gain. This is one of the fundamental and oft-overlooked insights about markets: in order to have exchange, you have to cooperate (by adhering to rules/laws) and you have to have something to offer that others want, so you have to pay attention to the desires and preferences of others. As a seller you cannot gain if you are offering stuff that no one wants, or at prices they aren’t willing to pay, so you have to pay attention to someone’s preferences other than your own.
As a small point because this post is long enough, I would also second the remarks of the commenter on the second post who said
You claim that Hayek was “too optimistic” because he didn’t understand that the “price system doesn’t always work”. This is a misreading of Hayek. Can you provide a citation in which he claims that the price system “always works”? I suspect not. Nothing “always works,” and Hayek was smart enough to realize that.
Hayek’s claim is that the price system works better on average than any other system.
Yes. One of the valuable dimensions of Hayek’s contribution to understanding human action is the recognition that human institutions, including markets, are not ever and cannot ever be perfect, because of the cognitive limitations of humans. However, he made the more defensible claim that among the class of human institutions, markets perform better on average than other institutions for the allocation of goods and services and the bringing into being of new goods and services. And of course, rules/institutions matter in determining how well market processes perform those valuable roles, which is why he devoted so much of his work to analyses of emergent order legal systems and their ability to provide necessary monitoring and enforcement to sustain the decentralized network systems we call civil society.
Thanks to Orin Kerr at Volokh for the tip.