In 1945, the flagship journal of the American Economic Review published one of the ten most important economics articles of the 20th century. Entitled “The Use of Knowledge in Society,” it was written by an Austrian economist named Friedrich Hayek. I deal with this article in every economics course I teach. (For the notes on this article that I share with my students, see this.) The article is explicitly about why central economic planning doesn’t work and why free markets do work. This article put the final intellectual nail in socialism’s coffin. Hayek’s insight was that the most important information that a completely well-intentioned central planner would need to plan an economy is information that the planner can’t have. Instead, this information exists in millions of individuals’ minds and is information that only they can have because of their particular circumstances. Economists who write in the Hayekian tradition call this knowledge of local circumstances “local knowledge.”
Friedrich Hayek’s insights on knowledge and information can be used to fight terrorists. The evidence that Hayek is right often stares us in the face, and many politicians – I include the U.S. government’s top-ranking admiral as a politician – ignore this evidence. Worse, on Fareed Zakaria’s latest GPS (Global Public Square) program, Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, seriously misstated the facts to make it sound as if centralized intelligence works well when what really worked well was, à la Hayek, decentralized “local knowledge.” Worse yet, Zakaria let Mullen get away with his spinning, specifically regarding the Times Square bomber and the Christmas “underpants bomber.”
But I’m getting ahead of myself. Let me say, in more detail, what Hayek’s insight is. Hayek noted that because circumstances constantly change, central planners, no matter how brilliant and informed, cannot keep up with changes and, therefore, are always planning based on obsolete information. Who has the relevant information about your current circumstances? You do. Here’s how Hayek put it:
“The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources – if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these ‘data.’ It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”
Hayek gave examples of relatively mundane decisions that people “on the ground” make, based on their information, to get value out of resources – decisions that a central planner would never be able to replicate. He wrote:
“To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.”
Consider terrorism. Notice that in the most celebrated cases in which terrorists were thwarted, people used their “local knowledge.” (I’ll leave aside cases like the recent Portland, Oregon bomber. Here, the FBI used its local knowledge also, but it’s not a clear example because the FBI encouraged the bomber and even provided him with the “bomb.”) United Flight 93 on that horrible September 11; Richard Reid, the shoe bomber; the Christmas “underpants bomber”; and the Times Square bomber are all instances of successful anti-terrorist acts by what Hayek would call “the man on the spot.” Of course, as the relatives of the victims on Flight 93 can attest, the passengers did not save their own lives. But they likely saved the lives of the terrorists’ intended targets in Washington, D.C. Indeed, it’s because local knowledge has worked so well that I’ve long believed that the TSA was, and is, not required.
The reason local knowledge works better than centralized knowledge is that the people who are right there when the terrorists act are in a better situation to make a difference than are the planners in Moscow or Washington or wherever the central planners sit. When she was U.S. secretary of state, Condoleeza Rice admitted as much. As far as I know, I was the only person at the time – or, for that matter, ever – who pointed out the importance of her admission. On April 8, 2004, Dr. Rice stated, “The problem is that the United States [government] was effectively blind to what was about to happen.” I concluded:
“A centralized government agency can’t be the main body entrusted to protect us. Because it must sift through too much data, almost all of which will turn out to be benign, it moves too slowly. That was Dr. Rice’s insight even if she didn’t dare state it quite so bluntly. The government failed to protect us – that was Mr. [Richard] Clarke’s insight stated bluntly. So let’s protect ourselves.”
Adm. Mullen’s Spin
This brings me to yesterday’s appearance by Adm. Mike Mullen on Fareed Zakaria’s show. Zakaria started off with a good tough question and then pursued it:
ZAKARIA: “But, you know, when one reads about these intelligence failures, if – if you look at the North Korean nuclear facility, which we were taken by surprise, you could look at this Afghan guy, it is puzzling. I mean, we spend tens – we spend more money on intelligence than the rest of the world. We spend $60 billion on it. You oversee a large part of that.”
ZAKARIA: “Why does this happen? In the private sector, these guys would all be fired.”
MULLEN: “Well, I think that’s – I think it’s just too simple an answer. I mean, there is an extraordinary group of professionals who are working hard to – to uncover from an intelligence standpoint all the intelligence and information that we need, and I have seen that. I mean, I’ll shift just quickly to the – the recent threats coming from Yemen, with al-Qaeda on the Arabian peninsula there. And the cargo flights, the bombing that was – the potential – the Times Square incident, and also last year in Detroit.”
But in those last two instances – the Times Square and Detroit bomber incidents – decentralized information worked and centralized information failed. In the Times Square case, it was a vendor, not a member of “an extraordinary group of professionals,” who noted something suspicious and notified the police. In the Detroit case, it was an heroic fellow passenger who foiled the bomber. Even worse, indeed, the U.S. government had plenty of intelligence about the bomber but refused to use it. And Mullen thinks that’s a success?
So, two of Mullen’s prime examples of central intelligence successes are really examples of central intelligence failures and of decentralized intelligence successes. I know that. I bet Mullen knows that. I bet even Zakaria knows that, but he let it drop.
Let’s not let it drop. Even
if Mullen isn’t willing to tell the truth and Zakaria isn’t willing
to call him on it, let’s not let that stop us. We need
to state the truth, clearly and often. Hayek was right.
Mullen is wrong. Centralized intelligence usually doesn’t work.
Decentralized intelligence often does. And the issue matters: for some of us,
our lives are at stake.