Private knowledge's value (6 Sept 2009)

Krugman's NYT Magazine article, which looks at shortcomings of economics as a discipline, reminded me of a question I have been mulling over. Does macroeconomics, in aggregating and potentially canceling out more localized movements in opposite directions within the data, gloss over the questions that are significant to individuals, which are typically a matter of where they stand in relation to other individuals? Macro data flattens out much of the relative differences in between individuals, but such differences are what register to those individuals and determine to large degree their sense of how the economy is faring and what their prospects are. So when economists and econojournalists begin prognosticating based on the macro data, they create a picture of reality that excludes everyday experience and alienates those whose relative story doesn't fit the general trends. Or what individuals experience as lost opportunities or jobs or wages may show up in aggregate data as something more hopeful about society generally. This means a disconnect between what passes for the truth about society and what people experience in everyday life can grow and deepen, intensifying the perceived antagonism between the two.

To make this less abstract: I couldn't accept the premise reported on in this Christian Science Monitor story that reducing the number of roads for drivers might cut traffic delays.

It all hinges on something called Braess’s Paradox, which states that adding capacity to a network in which all the moving entities rationally seek the most efficient route can sometimes reduce the network’s overall efficiency.... The price of anarchy drops if you close a few roads, because individual drivers are less able to selfishly optimize their routes. In their analysis, the authors identified six streets in Boston and Cambridge: By closing those streets, they say, the optimal collective travel time would decrease between the two points.

Granted, but we as individuals don't care about the overall efficiency of the system; freedom, from our limited point of view, is being able to use our wits (and alternate routes) to beat the system, or at least believe we are. When roads are closed, even if it helps the overall efficiency, it may appear to us as an arbitrary nuisance thwarting our creativity and improvisational skills. We may think, relative to other drivers, we know more and can get through a busy traffic network more quickly. If the state intervenes and negates the value of that knowledge, we are likely to feel unnecessarily frustrated, thwarted in our personal potential.

The stock market, and the efficient markets hypothesis (which Krugman covers, and is discussed at length in Justin Fox's The Myth of the Rational Market), is somewhat analogous -- individuals participate in the market because they believe they can beat it, even though financial theory (in its most dogmatic form) holds that any advantageous information is already priced in. Imagine if the state stepped in and forced investors to accept that they couldn't beat the market, on the idea that it would be more efficient socially to have a few large institutions allocate a country's collective capital. Would all that knowledge that those individual investors believe that they have be wasted -- or are they all deluded in their belief in that knowledge and would thereby be prevented from harming society by acting on it? And would the theoretical gains in efficiency outweigh the enforced impotence that individuals would experience?