The Man on the Spot

Nobel Laureate Friedrich von Hayek was a strong advocate of tacit knowledge. This is best explained by this short extract from his 1945 article The Use of Knowledge in Society:
Times have changed since Hayek wrote this and most of the centrally planned economies of which he speaks failed. However, in a sense we have swapped one kind of planned coordination for another. In the middle of the 20th century whole countries were organised using central planning. Now we have corporations acting as coordination mechanisms where most of their activity is controlled and planned by central management. Of course, central management are likely to fall foul of the same knowledge problem that central planners faced.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

Central planning has failed as a way to organise economies but a central structure has not stopped corporations from getting larger and larger. If Wal-mart were a country it would be the in the top 30 economies in the world ranked by GDP, ahead of countries such as Austria, Argentina and Indonesia, and it would rank as China'a 8th largest trading partner. Central planning didn't work out too well for countries but doesn't seem to be doing too bad for companies. In 2006 Wal-mart reported profits of $12billion on sales of $350billion.

How has Wal-mart being so successful and avoided the problems of statistics that "lump together items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision." A recent post by journalist, Charles Platt on the boingboing.net blog provides a great insight.

Platt took a minimum wage job at Wal-mart to see if the commonly held beliefs about the company were true. He found that they were largely untrue and that the reputation was unwarranted. That is not our focus. His piece gives us this gem on tacit knowledge and "the man on the spot".

My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.

That sums it up perfectly.

Decentralised Military Intelligence

The attempted attack on a flight from Amsterdam to Detroit on Christmas Day has been described as a "systematic failure" of the US Intelligence Agencies by President Barack Obama who stated:

"Where our government has information on a known extremist and that information is not shared and acted upon as it should have, so that this extremist boarded a plane with dangerous explosives that could have cost nearly 300 lives, a systemic failure has occurred and I consider that totally unacceptable," Mr Obama said.

"We need to learn from this episode and act quickly to fix the flaws in our system because our security is at stake and lives are at stake."

As with many terrorist attacks, retrospectively it is obvious that intelligence agencies knew about the attack before it occurred. The problem is that the information is disaggregated and decentralised and there is no way of combining and aggregating the information to determine the wisdom of the crowd. Decentralisation is important because it allows for specialisation and the exploration of tacit knowledge. However, aggregation is necessary if the useful information uncovered in one part of the system is to become widely available. James Surowiecki covers this in Chapter 4 of The Wisdom of Crowds.

Section V of Chapter 4 begins:

When it comes to the problem of the U.S. intelligence community before September 11, the problem was not decentralizsation. The problem was the kind of decentralization that the intelligence community was practicising. On the face of it, the division of labor between the different agencies makes a good deal of sense. Specialization allows for a more fine-grained appreciation of information and greater expertise in analysis. And everything we know about decision making suggests that the more diverse the available perspectives on a problem, the more likely it is that the final decision will be smart. Acting Defense Intelligence Agency director Lowell Jacoby suggested precisely this in written testimony before Congress, writing, "Information considered irrelevant noise by one set of analysts may provide critical clues or reveal significant relationships when subjected to analytic scrutiny by another."

What was missing in the intelligence community, though, was any real means of aggregating not just information but also judgements. In other words, there was no mechanism to tap into the collective wisdom of National Security Agency nerds, CIA spooks and FBI agents. There was decentralization but no aggregation, and therefore no organization. Richard Shelby's solution to the problem - creating a truly central intelligence agency - would solve the organization problem, and would make it easier for at least one agency to be in charge of all the information. But it would also forego all the benefits - diversity, local knowledge, independence - that decentralization brings. Shelby was right that information needed to be shared. But he assumed thats someone - or a small group of someones - needed to be at the center, sifting through the information, figuring out what was important and what was not. But everything we know about cognition suggests that a small group of people, no matter how intelligent, simply will not be smarter than the larger group. And the best tool for appreciating the collective significance of the information that the intelligence community had gathered was the collective wisdom of the intelligence community. Centralization is not the answer. But aggregation is.

Decentralisation and Education

Has somebody in Fine Gael HQ being reading The Wisdom of Crowds or more particularly chapter four on decentralisation and specialisation and also FA Hayek's The Use of Knowledge in Society? Here is an extract from this speech education spokesman, Brian Hayes gave to their recent national conference:

But above all, we need to change the desperate centralization that exists in Irish Education. Our central command system, operated from Marlborough Street, prevents schools from deciding what's important to them. Why shouldn't a school decide to make excellence in science and maths or excellence in the Arts; a central part of its work, by having the freedom to hire expert graduates at whatever level of salary is required? We must give schools the autonomy to decide for themselves and reduce the over reliance on the centre.

FA Hayek would be delighted with this approach to using tacit or local knowledge. This piece from The Wall Street Journal takes a completely view and argues that there should be greater centralisation in the US education system.

The Specialisation of Labour

This is Charlie Chaplin's inimitable take on the specialisation of labour from his 1933 film Modern Times, a classic

Part One: The Assemby Line

Part Two: The Feeding Machine and Chaos!

And is the equally classic quote from Adam Smith's The Wealth of Nations.

To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.

But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.

I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size.Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day.

But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

Note that Smith estimates somewhere between a 240 and 4800 fold increase in productivity by dividing the labour in this pin factory!