Information doesn’t matter

The classical economists gave us three basic factors of production: Land (i.e. nature-given resources), Labor (i.e. human effort), and Capital (i.e. tools). Naturally this involves lumping together a lot of heterogeneous things. Capital includes a rock you might use to smash an assailant over the head as well as a particle accelerator. But prices do a brilliant thing: they provide information about the relative scarcity of goods and compress that information into a single dimension

This allows us to aggregate! It means that we can talk about how much capital per capita is available in a region (or better yet, provide a distribution of workers’ access to capital… a project I’m not sure if anyone’s done) and the like.

This whole intellectual project is necessary if we want to talk about the nature and causes of a particular economy’s well being. But the original factors have become less useful as the nature of economic activity has changed over time.

It gradually became clear that the concept of labor was too fuzzy: how do we compare the labor of a doctor with that of a stevedore with that of a professional wrestler? We could try to use prices, but for a variety of reasons that just won’t work very well. Household production and leisure don’t have market prices, market frictions are particularly pronounced, information asymmetries abound and are entangled with principal-agent problems (you don’t have to watch a wrench to ensure that it doesn’t slack off, but your administrator may very well cease to administrate while browsing Facebook).

Economists have dealt with the issue with the idea of human capital. In addition to physical tools, people also have mental tools (skills). This idea leads into the notion of social capital (people invest in relationships), and can be extended in any number of directions. It’s a wonderful lens through which to view the world because it lets us see the nature of what we do.

But it’s not the right way to think about the factors of production. Not because it’s difficult to measure human capital (I’m not convinced it’s really possible to measure much of anything of importance in economics… even though I keep trying to). The problem is that it doesn’t get us down to the core, atomic thing that we’re really interested in.

Boulding tells us [emphasis mine]:

It is much more accurate to identify the factors of production as know-how (that is genetic information structure), energy, and materials, for, as we have seen, all processes of production involve the direction of energy by some know-how structure toward the selection, transportation, and transformation of materials into the product.

And I think he’s on to something here. The basic stuff of our economy is information applied to objects (even information has to be physically embodied in writing, magnetic manipulation of hard drives, or the shape of our neural connections), which requires energy.

But we’ve got the information necessary to do far more than we actually do. What is it that stands between the vast amounts of knowledge at our command being applied to our enormous stocks of physical resources using our still plentiful and cheap energy? Why is there so much slack in our economic systems?

It could simply be transaction costs, but I think we can go deeper. Boulding’s factors give a more refined view of both labor and capital, but he’s still missing the fundamental kernel of labor. It’s not our know-how that matters–we all know we’re supposed to save for retirement and yet we don’t. It’s not that we don’t have enough energy. What’s missing is an appreciation of attention.

Attention is at the root of alertness which Kirzner tells us is the prime mover that sets in motion economizing behavior. Attention is what is necessary to learn. Most importantly, it is what is necessary to remember and apply what we learn. And it’s universal. Laborers have it and so will our future robot overlords. It’s easily as basic as energy and materials. The question then is how to tie it into the notion of know-how (the psychology of learning) and social sciences more generally.

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5 thoughts on “Information doesn’t matter

    • Certainly when we think of classical rhetoric, the emphasis on ethos and pathos relate to the issue of information transmission. Rhetoric is that gap between the source of information and where (in whose mind) it ends up.

      When we’re asking questions about the relationship between some bit of knowledge (e.g. a fact or a recipe) the temptation is to think “two and two is four, no matter who tells me.” But if I’m hearing it from a source I don’t trust that knowledge might go unexploited by me.

      In other words, how I allocate my attention depends on my *evaluation* of the different possible applications of my attention, including the possibility of learning from sources of information with varying degrees of rhetorical effectiveness.

  1. Again, very interesting stuff. Organizations also have habits and routines, have you considered the role of organizational attention?

    • There’s also habits, routines, and reflexes built into culture and other institutions. I haven’t spent any time thinking through these issues but they’re certainly interesting.

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