Monday, November 19, 2007

Richard Posner on prices aggregating information better than agencies

on his blog, Becker-Posner:
Friedrich Hayek's great legacy to economics was to show that the price system can aggregate vast amounts of information much more efficiently than a centralized bureaucracy can do. And intelligence agencies are centralized bureaucracies. The innumerable mistakes that the United States has made in Iraq suggest that our government does not have good means of obtaining and evaluating information concerning that country, possibly because of a combination of bureaucratic inefficiency and the vastness of the quantity of relevant data. The people who trade Iraq government bonds do so not because they are told to study Iraq or paid a salary to do so or have an academic or journalistic interest in the country, but because they hope to make money. Presumably therefore they are self-selected for knowing a lot about Iraq--and for thinking they know enough to put their money where their mouth is. They may be right.

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