The Knowledge Problem?

I could’ve more predictably started this post with a quote from F.A. Hayek, well known in economics for what is concisely named “the knowledge problem,” which he lays out in his short writing, “The Use of Knowledge in Society.” But what fun is predictability? And, if it’s knowledge-problem quotes you desire, an entire chapter of this There’s No Free Lunch book is dedicated to the subject.

I took more of the “roundabout” path into wealth management (via engineering rather than economics), but – from my non-economist perspective – the knowledge problem can be summarized as follows: it’s impossible to make good decisions without complete information, and NO ONE has complete information because everyone’s circumstances vary so significantly. The POTUS cannot possibly make broad (macro) decisions that are in the best interest of every US citizen at their particular (micro) level. But even making decisions at the local level is not going to be the best thing for every person. There are always tradeoffs. However, the beauty of free markets is that local decisions made with local, specific knowledge can aggregate to good overall outcomes for society.

When I first learned of the knowledge problem (which, I assure you was much later in life than it probably should have been), it screamed “RELATIVITY” to me, and that brings us to today’s quote and Einstein. While Isaac Newton did a relatively (😊) good job explaining motion observed in the world around us, his equations – though extremely impressive for their 1686 origins – weren’t perfect. Einstein introduced his theory of “Special Relativity” in a 1905 paper to help address the shortcomings of Newtonian Mechanics, particularly related to explaining light, including the well-known equation, E=mc2 (if you think about light for a minute, it’s tricky to pin down, so it was a big pain-point of physics: What is it, actually? Does it have mass? Is it a wave or a particle?).