Edmund Phelps explains “knowledge problem”

Michael Giberson

Occasionally we hear from readers curious about the blog name, “knowledge problem.” Edmund Phelps explains the knowledge problem in an excellent essay that appeared in the Financial Times. (Registration may be required for FT.com; the essay is also posted in full at the FT‘s Capitalism blog.)

Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But … most growth in knowledge is not science-driven. Schumpeterian ­economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

There is much more in the essay than this brief clip reveals. In fact, the very next paragraph provides the one of the best brief explanations of Hayek’s central insight into capitalism. In addition to a little Schumpeter and a lot of Hayek, Phelps nods to David Hume and invokes some Frank Knight on uncertainty.

The whole thing is worth reading.

(HT to Greg Ransom at Taking Hayek Seriously.)


3 thoughts on “Edmund Phelps explains “knowledge problem”

  1. Why do Carl Schramm’s billion-dollar-funded Schrammeconomists ignore Hayek?

    The Entrepreneurship Economist’s Interview With Leading Schrammenomics Disciples Bo Fishback and Dane Stangler: The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year.

    Welcome Bo Fishback and Dane Stangler of growthology and the Schrammonomic school of economics/schrammenomic incubators/ as we celebrate seven years of schrammenomics! Let us begin by reflecting on today’s news:
    http://finance.yahoo.com/news/Economy-shrinks-at-apf-15067036.html?.v=12

    EE’s question: Over the past seven years, how has Schrammenomics helped the economy?

    Dane Stangler’s answer:
    Bo Fishback’s answer:

    EE: Cool! I see Carl Chramm has joined us. He can join it at any time!

    EE’s question: Why do Schrammeconomists ignore the Austrian economists? In Schramm’s recent masterwork, GOOD CAPITALISM, BAD CAPITALISM, why is there no mention of Nobel Laureate F.A. Hayek nor Ludwig Von Mises?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Me too.

    EE’s question: Dane and Bo. Bo and Dane. Danebo and Bodane. If you were running the Kauffman Foundation, would you accept a George Eastman Kodak Medal from Rochester Univeristy, even though Kauffman wired millions of dollars to Rochestser, like Carl Schramm did? Is this not a conflict of interest?

    Carl Schramm’s answer: I’ll take this question! I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Me too.

    EE’s question: Why do you link to freakanomics and other entertainment lite sites at growthology as the economy crashes and burns in massive scandals and why do you never link to mises.org nor dailyreckoning.com nor patrick.net, who offer solutions and commentary from an Austrian standpoint, and who also pass judgment on the ocrruption? Are you afraid your doublespeaking, anti-entrepreneurship Harvard MBA friends and bailed out fiat bankers who never worked a real day in their life won’t talk to you and recommend you for cash prizes and honorary medals for your campaign against the taxpayer and true entrepreneur via “growthology” Harvard-MBA buzzwords?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Me too.

    EE: What does the MBA-inspired buzzword “growthology” mean and has chanting it in unision every day over th last year helped or hurt the economy?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: In a recent WSJ article, Carl Schramm took great pride in the fact that under his leadership, nobody really knows what it is that the Kauffman Foundation is or does. Is it not a leader’s responsibility to be more definitive, expecially in the entrepreneurial realm? For example, Steven Jobs lets defines his company and mission with a clear, articulated vision. Is Schramm hiding something, such as, well, a lack of vision? Or is it just strategically easier to take credit for others’ successes by never committing nor signifying nor string oneself?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Recently Bo Fishback has been emphasizing the fact that entrepreneurial success lies not with the individual, but with the bureuacratic model. He is basing an incubator/conservatory on this this postulate which must discount reality, emprical observations, and exalted economic theory form F.A. Hayek and Ludwig Von Mises. Have you read Hayek’s Road to Serfdom?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: For instance, the following companies did not begin in a bo fishbackian conservatory/incubator lorded over by a Harvard MBA: Microsoft, Google, Facebook, Starbucks, Walmart, Myspace, Twitter, Blogger, and Yahoo. Microsoft and Facebook were started by Harvard dropouts, and Google and Yahoo were started by Stanford grad-school dropouts. Thewre were no MBAs involved, nor incubators, nor schrammenomic models which have been killing the eocnomy for teh past seven years. In fact, tehc/entrepreneur incubators have a vast record of general failure, because they neglect Hayek and the reality of innoavtion–that the MBA’s first instinct is to ignore the innovator and their innovations while serving himself with his pretentious modles that never work. Do you think that past failures is a great way of predicting future success?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Kauffman had meant his funding to go to entrepreneurs and innovators–not to the secondhander “Masterminds” who exalt themselves over true innovators and entrepreneurs, thuslky killing the spirit of entreprneurship which has lead to the epic failure of the Kauffman campuses to produce more wealth than was wired to the administrators under the rule of Schrammenomics. Have you read Hayek’s Road to Serfdom?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: In the following passage, F.A. Hayek describes why the Kauffman Foundation is failing. Calling Harvard MBA incubators “Conservatories” will not change this. Do you not think that the Kauffman Foundation should fund entrepreneurs and innovators and true academics (who quote Mises and Hayek) directly, as opposed to funding bureaucratic buzzword bloggers and innovation-free, technology-free “incubators” and models whose sole purpose is not to serve the entrepreneur and innovator, but line Bo Fishback’s pockets, in the same way that the goal of Schrammenomics is not to illuminate, but to darken the world while dismissing exalted economists Hayek and Mises so as to heiten Schramm’s chances for a nobel prize, just as Fishback dismisses the actual, exalted entrepreneur in all his MBA “models,” while allowing Schramm to spend Kauffman’s funds in purchasing George Eastman Kodak Medals, and transforming the Kauffman Foundation into a Schrammenomics vanity press/ATM for those who support his campaign for the Nobel Prize, while neglecting to fund rugged entrepreneurs, academics, and innovators?

    Hayek wrote: The tragedy of collectivist thought is that, while it starts out to make reason supreme, it ends by destroying reason because it misconceives the process on which the growth of reason depends. It may indeed be said that it is the paradox of all collectivist doctrine and its demands for “conscious” control or “conscious” planning that they necessarily lead to the demand that the mind of some individual should rule supreme—while only the individualist approach to social phenomena makes us recognize the superindividual forces which guide the growth of reason. Individualism is thus an attitude of humility before this social process and of tolerance to other opinions and is the exact opposite of that intellectual hubris which is at the root of the demand for comprehensive direction of social purpose. –F.A. Hayek, The End of Truth, The Road to Serfdom

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    In light of the following article and conflicts of interest, how might you–Bo or Dane–lead the Kauffman Foundation differently? Do you feel that character and integrity are important in the entrepreneurial realm?

    http://dealbreaker.com/2007/05/the-unsurprising-failure-of-et.php

    Posted by John Bunch, Ph.D., May 03, 2007 8:50AM

    It is interesting that Dealbreaker references Carl Shram of the Kauffman Foundation as an authority on ethics. Those of us who live in the Kansas City region know that Carl Schram and been a controversial figure since he was appointed to his post a number of years ago. Board members have resigned in protest of his leadership style and strategic choices. His controversial leadership led to the Missouri Attorney General reviewing the Kauffman Foundation for not staying true to the intent of Ewing Kauffman. The purpose of this review was stated as:

    “In light of the public allegations of a departure from Mr. Kauffman’s intent, lack of appropriate oversight by the Board of Directors, and certain instances of conflicts of interest. ” (http://www.ago.mo.gov/newsreleases/2004/kauffmanreport030404.htm#conclusion)

    See also this editorial from the Kansas City Business Journal (http://www.bizjournals.com/kansascity/stories/2003/09/15/editorial1.html)

    Ewing Kauffman was famous as an ethical leader. Carl Schramm is not.
    –http://dealbreaker.com/2007/05/the-unsurprising-failure-of-et.php

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: I’m with them.

    EE: Is it important to match word and deed as a leader? Is it not important to behave in a moral manner, and turn down awards from Rochester when one’s commandeered foundations wired cash to said institution? Is it not wise to avoid confilicts of interest while one is receiving millions of dollars from a foundation that was left to benefit the public, and not a private vanity press/campaign for the Nobel prize?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: does not Carl Schramm lack intellect? Suppose you were to write a treatise on philosophy and leave out Aristotle, Plato, and Socrates. Suppose you were to write a treatise on physics and leave out Einstein and Newton. Schramm wrote a treatise on kapitalism and he left out Nobel Laureate F.A. Hayek and his teacher Ludwig Von Mises. Conduct a search in GOOD CPITALISM: BAD CAPITALISM. 0 results for ‘hayek’ 0 results for ‘mises.’ Dane and Bo. If you were to write a treatise on economics, would you also completely neglect the Austrians and sound money–the entrepreneur’s money?

    Carl Schramm’s answer: I’m a schrammeconomist and so are they.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Successful entrepreneurs are never afraid to hire people smarter than themselves. Carl–would you consider yourself a successful entrepreneur?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Over the past seven years, have Harvard MBAs created more wealth, or transferred and destroyed more welath?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: In reading the following article, do you consider yourselves to be a part of the “best and brightest?”

    http://www.alternet.org/story/111376/?page=entire “The Best and the Brightest Have Led America Off a Cliff

    By Chris Hedges, Truthdig. Posted December 9, 2008.

    The multiple failures that beset the country, from our mismanaged economy to our shredded constitutional rights to our lack of universal health care to our imperial debacles in the Middle East, can be laid at the feet of our elite universities. Harvard, Yale, Princeton and Stanford, along with most other elite schools, do a poor job educating students to think. They focus instead, through the filter of standardized tests, enrichment activities, advanced-placement classes, high-priced tutors, swanky private schools and blind deference to all authority, on creating hordes of competent systems managers. The collapse of the country runs in a direct line from the manicured quadrangles and halls in places like Cambridge, Mass., Princeton, N.J., and New Haven, Conn., to the financial and political centers of power.

    The nation’s elite universities disdain honest intellectual inquiry, which is by its nature distrustful of authority, fiercely independent and often subversive. They organize learning around minutely specialized disciplines, narrow answers and rigid structures that are designed to produce certain answers. The established corporate hierarchies these institutions service — economic, political and social — come with clear parameters, such as the primacy of an unfettered free market, and with a highly specialized vocabulary. This vocabulary, a sign of the “specialist” and of course the elitist, thwarts universal understanding. It keeps the uninitiated from asking unpleasant questions. It destroys the search for the common good. It dices disciplines, faculty, students and, finally, experts into tiny, specialized fragments. It allows students and faculty to retreat into these self-imposed fiefdoms and neglect the most-pressing moral, political and cultural questions. Those who defy the system — people like Ralph Nader — are branded as irrational and irrelevant. These elite universities have banished self-criticism. They refuse to question a self-justifying system. Organization, technology, self-advancement and information systems are the only things that matter. ” –http://www.alternet.org/story/111376/?page=entire

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: As millions of entreprneurs lose their businesses and credit lines, as millions of people lose their homes and jobs, how do you feel about the Kauffman endowment and the financial industry benefiting in a massive mnner from the TARP bailouts–from the taxpayers–from those very same entreprneurs losing their lines of credit as Bo, Carl, and Dane fly overhead in first class, barking “growthology” and mastermindning new business models?

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Do you ever read Tolstoy? “I sit on a man’s back, choking him, and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by any means possible, except getting off his back.” –Tolstoy Writings on Civil Disobedience and Nonviolence

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

    EE: Finally let’s finish with a joke I recently heard. A Harvard MBA and two lawyers walk into a bar during a massive depression to discuss their plans for inspiring entrepreneurship. One of the lawyers says, “Three scotch and gins–put it on Kauffman’s tab.”

    Carl Schramm’s answer: I’m a schrammeconomist.
    Dane Stangler’s answer: Me too.
    Bo Fishback’s answer: Word up.

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