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The Wisdom of Crowds

(As appeared on our July 2017 Newsletter)

I take my title from a 2004 book by James Surowiecki. Its subtitle was “Why the Many are Smarter than the Few”. It is an interesting book focusing on examples where the average result of many relatively untutored opinions can lead to quite accurate results. (Guessing how many sweets in a jar for example.) But I want to take quite a different tack on this subject.

When we talk about how “smart” someone is, the key question is what are we suggesting they are smart about? In deciding whether to defer to “experts” or not, this is important. When you board an aircraft, you do not expect the engineering solutions for flying to have been decided by ballot amongst the passengers. You defer to an engineering expert because they know more about this issue that you or any other random passenger does. You do not feel annoyed that your view has been ignored. In this case the “crowd” would not be at all wise. Indeed its “wisdom” is to know that it is ignorant.

Yet it has become recently fashionable in Europe to argue that the general public are tired of “experts”. I do not believe this means that passengers want to take over the design of aircraft. I believe it is a different type of “expertise” that is causing concern. Rather, my hypothesis is that many are rejecting the pretence that elite governing groups know what is best for us, the general population, in areas where we do have expertise. And the key area where we have expertise is our own preferences.

We may not know how to calculate the aerodynamic lift achieved by a certain design of aircraft wing, but we do know whether we would prefer to go on holiday to Japan or Indonesia. You may find this laughably obvious, yet a large segment of what today is called “public policy” involves substituting the judgments of officials for the individual preferences of members of the general population. This substitution of preference can be direct and obvious, such as the long standing ban of marijuana in many countries, now being removed at long last. More subtly it happens indirectly, when the government itself decides to provide services to the public, funded by taxation or borrowing. The most widespread examples of this are healthcare and education. These public policies have of course been implemented for well meaning reasons. Yet the result is the virtual elimination of choice of the type of service you, as consumer, may prefer. State service tends to be monolithic and imposed by a centralised bureaucracy. For example, in many countries the education syllabus is the same for all children. Even the style of teaching is often mandated by a central authority. Typically teacher training itself is monolithically imposed, so all teachers teach the same syllabus in the same way. Health care is similar. One size fits all. Policies for trading off cost against patient need for example will be imposed as a single set of guidelines.

Beyond the style and content of service delivery (i.e. the quality), the quantity of public service is also usually centrally controlled and planned. In the private sector by contrast, there is no plan. The number of restaurants in Hong Kong is (if we set aside the impact of building use controls) a consequence of the scale of demand. Too many restaurants and profits will fall and operators close; too few and the business opportunity will attract more entrants. On average and over time, supply will tend to match demand. The public sector, however, has neither a profit test nor price incentives to match demand and supply. The number of school places or hospital beds is determined by government planners. Because both are close to free at the point of use, demand will typically overwhelm supply. People will naturally demand large quantities of free goods. Rationing of supply will still take place; not by price but by queuing. Waiting times for hospital beds will lengthen. Public housing is another example of this of rationing by queuing of heavily subsidised goods or services. Yet if citizens were faced with the true cost of hospital treatment or of education places, they may make different decisions. The preferences of people individually are being masked by free public provision.

In many parts of the world today, for example there may be “too much” tertiary education, in the sense that people would not find the cost worth the result if they had the choice of whether to pay that cost or to put the funds towards something else they desired more (for example starting their own business). Interestingly, the policy of student loans may be starting to limit ever increasing demand, yet the perverse policy response in many places is to suggest doing away with loans completely and making tertiary education completely free, so removing any market test of demand.

Imagine instead, diverse education and healthcare sectors. Different types of operators; different styles of service delivery. Not funded by taxation but provided for a fee. Each of us could choose where we want to spend our dollars, and how much to spend, based not only on value for money but taking account of what else we might choose to spend those dollars on. (Please note, this is a quite separate matter from how the poorer sector of society can afford either education or health care, my focus here is on who provides the service and with what diversity, not how it is funded. That’s an issue for another article!)

While health care and education are perhaps the most obvious examples where public planning of resource provision has overwhelmed individual choice, they are far from the only sectors of daily life which see this effect. Take the current example of the taxi industry and Uber (or indeed other ride sharing services). The government through its “public policy” on transport, imposes on all citizens the single option of the regulated taxi industry. For 30 years even the cars used by taxi drivers have been essentially unchanged; the “quality” is uniform, the prices imposed, the supply restricted. In this case, even where the preferences of individual citizens have been laid bare by the large numbers of drivers and customers that have used the Uber platform, the “public policy” decision by the government is to ignore those expressed preferences and prevent citizens from making their own choices.

Notice that apart from the loss of liberty for citizens to make their own choices that results from this, a further obvious negative outcome is planning failure. 100 years after the advent of the planning debacle that characterised Soviet Russia, many people still believe central planning makes sense. And they express puzzlement when it goes wrong. A number of recent articles in the press have bemoaned the waiting lists in hospitals, for example. Why can’t government get this right they complain? Yet many of the same commentators will rail against Mainland China’s excess capacity in steel; itself an example of central planning gone wrong. Central planners never have enough information about preferences, that are constantly changing, to plan effectively. Only markets can align diverse preferences with supply. These failures to allow individuals to exercise their own preferences and decide their own trade-offs between services they want and their capacity to pay for them, never seems to dampen the optimism that  somehow, next time the planning will work.

Our government has been busy planning our retirement savings for a while now. Deciding how you should save; how much your employer must contribute to that; how the retirement funds should be managed; what sort of scheme choices you should have, etc. If only people and indeed companies would conform with the government’s ideas of how we should save for our retirement, then all will be well, is the policy implication. A hundred years of policy failures notwithstanding, the idea of allowing individual citizens to make their own choices based on their own preferences is always rejected by the planners.

Instead of the wisdom of crowds, we have the ignorance of the planners. Which do you prefer?

Nick Sallnow-Smith

Chairman

The Lion Rock Institute