Thursday, September 16, 2004

The Market Shall Set You Free

"Memogate" has confirmed something that was first proposed by Friedrich Hayek and the Chicago School of Economics (of which I was a student) - markets work. Recently we have seen the creation of a number of "exchanges", like Tradesports, where individuals can bet on the outcome of any number of events ranging from sports contests to elections to the weather. Invariably, the "predictions" made by these "exchanges", in the form of pricing for each contract, have been more accurate than the predictions of any individual or small group of experts. Likewise, the Iowa Electronic Markets have been a more accurate predictor of elections than virtually any poll. The reason for this is fairly simple - large groups tend to gather and filter information better than small centralized groups. Hayek was one of the first to expound this theory (of course the absolute first was Adam Smith and his "Invisible Hand"), and at the time, it was revolutionary.
Hayek's work focused on how it is that complicated and reliable systems of cooperation come about without any centralized direction. When they do, they outperform systems of "command", systems that rely on central direction. Hayek was an economist and so his primary object of study was the market and how, seemingly counterintuitively, it can work without commands; and why it outperforms large scale centralized economies like the Soviet Union. It doesn't take a directive from Washington to get Apple Computers to make more iPods. Why? Because the market tells Apple how many will sell.
Blogs work in a very similar way. There are millions of them, and all have their particular knowledge, no matter how minute it may seem. When Dan Rather came out with those obviously forged memos, the blogging "marketplace" was able to refute them almost instantly because of the combined base of knowledge of millions of people, as opposed to the knowledge of a small and self-selected group at CBS.

The ease of communication has led to the democratization of information due. In this way, the market produces truth.

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