Overview
The knowledge problem, as discussed on The Bob Zadek Show, refers to the difficulty central planners face in acquiring and acting on the dispersed, decentralized information that markets aggregate through millions of individual decisions. The concept is invoked across episodes to explain why government intervention in the economy produces unintended consequences, distorts market signals, and often fails to achieve its stated goals.
Cash For Clunkers and Political Risk
In a 2009 episode, Bob Zadek and Katherine Mangu-Ward discussed the Cash for Clunkers program as an illustration of how government intervention creates what Zadek called “political risk.” Zadek, describing his own experience as a commercial lender, said he would not make loans to businesses where political decisions could determine whether the borrower survived, citing healthcare providers as an example because he could not predict what Congress would do. He argued that once politics is interjected into a market, it becomes impossible to make a lending decision based on business judgment. Cash For Clunkers is a Dud (2009)
Mangu-Ward described how the program confused the people trying to take advantage of it. She noted that Ford was speeding up production of Escorts because the car fit the criteria the government had laid out, but that predictions for how long the money would last ranged from the first week of September to November. She said dealers were left holding the bag, with some already half a million to a million dollars in the hole waiting for government checks. She characterized the program as transferring purchases that would have happened in the future to the present, leaving dealers with extra cars that met criteria no longer relevant once the program ended. Cash For Clunkers is a Dud (2009)
Zadek extended the point to businesses that would lose from the program—automobile repair shops, used car dealers, and auction houses that auctioned off used cars. He argued that these businesses had studied and understood their markets and made decisions about how to employ their capital, but could not underwrite what the clunkers in Washington would do. The result, he said, was that the marketplace becomes all out of whack when people cannot make intelligent business decisions based on the market, and people wait on the sidelines, stifling the economy. Cash For Clunkers is a Dud (2009)
Mangu-Ward added that charities also suffered. She described a series of transactions where people gave old cars to charities, which either fixed them up and gave them to people who needed them or sold them for scrap. Given the choice between a small tax deduction and $4,500 from the federal government, she said, people would choose the government payment, harming the car conversion charities dependent on the secondary effects of the marketplace. Cash For Clunkers is a Dud (2009)
Industrial Policy and the Knowledge Problem
In a 2022 episode, Bob Zadek and Scott Lincicome discussed industrial policy, which Lincicome defined as the government picking winners and losers in the market. He identified several elements: a focus on manufacturing, targeted and directed microeconomic support such as firm-specific or industry-specific measures, an attempt to fix what the government believes to be market failures, and an express protectionist element requiring market-beating outcomes to be generated within national borders. Rethinking Industrial Policy (2022)
Lincicome traced the knowledge problem to F.A. Hayek, the Nobel Prize-winning economist, who argued that the problem with central planning is that a single planner or small group of planners lacks the knowledge to implement a grand economic plan because they lack the decentralized decision-making that is the market process. Lincicome described the market process as millions of people acting in mostly self-interested ways, mostly disconnected from one another, yet collectively very wise and generally tending to pick the right stuff. The planner, by contrast, cannot know precisely what industry will be the next big innovative one or what company will produce the innovation. Rethinking Industrial Policy (2022)
Lincicome offered the 1990s semiconductor memory chip subsidies as an example of failing to surmount the knowledge problem. He said the government thought it needed to protect American DRAM producers from Japan, but it turned out Japan was not the threat—South Korea was, which the United States actually helped grow—and the government even picked the wrong product, as companies were innovating away from memory chips toward logic chips. Rethinking Industrial Policy (2022)
He also identified a temporal problem, which he said industrial policy critics do not talk enough about. Even when politicians pick the right sector and identify a potential market problem, by the time they act, the market has moved on. He cited semiconductors again: two and a half to three years before the episode, congressmen decided to subsidize the domestic semiconductor industry, proposing $10 billion in subsidies. In the meantime, the global pandemic convinced market actors on both the consumer and producer sides to invest more in semiconductor manufacturing in the United States or closer to it, and manufacturers pledged about $80 billion in new investment. Yet politicians were still debating subsidies, the tab had gone from $10 billion to $52 billion, and senators from Michigan added several billion dollars for old chips needed by automotive manufacturers like Ford. Lincicome said the crisis was over but the bill was still moving because once these trains get going, it Rethinking Industrial Policy (2022)
Nationalism and the Knowledge Problem
In a 2018 episode, Bob Zadek and Yoram Hazony discussed liberalism versus nationalism. Hazony argued that the idea that politicians are responsible to the well-being of their own people had been replaced by pooled sovereignty and transnationalism. He cited John Stuart Mill, who wrote almost 150 years earlier that it is impossible for local governments to give up caring about their own needs, which they understand best, and relegate responsibility upward to a central power that is supposed to rationally make all decisions. What ends up happening, Hazony said, is that the central imperial center works out what is best for itself and ends up doing good for nobody. Liberalism vs. Nationalism (2018)
Hazony gave examples of the European Union telling the English what size apples to manufacture, telling the Italians their budget was rejected and deciding who their finance minister would be, telling the Poles they could not change their judicial system, and telling the Hungarians they could not have immigration policies favoring Christians. He said it is simply impossible to have some kind of central brain that figures out what is right for everybody. Liberalism vs. Nationalism (2018)
Zadek framed the discussion around Washington’s Farewell Address, saying Hazony’s words reminded him of Washington’s advice when he left the presidency in 1796. Zadek said it is utter hubris and arrogance to believe we are so confident in our way of doing business that we have a need to export it by force, and that using force to impose our way of doing business crosses a moral line. He said it is perfectly okay to make the case and persuade, and to help if requested, but to impose it upon others through coercion and force is as anti-libertarian as one can possibly be. Liberalism vs. Nationalism (2018)
Across episodes
The knowledge problem appears in the 2009 Cash for Clunkers episode, the 2018 liberalism versus nationalism episode, and the 2022 industrial policy episode. In the earlier episodes, the concept is applied to specific programs and to the structure of national sovereignty; in the later industrial policy episode, Scott Lincicome develops it most systematically, tracing it to Hayek and adding the temporal problem of market movement outpacing legislative action. The excerpts show development in the sophistication of the treatment, from Zadek’s personal lending heuristic in 2009 to Lincicome’s Hayekian framework and concrete semiconductor examples in 2022.
What the sources do not cover
The excerpts do not provide a full definition of the knowledge problem beyond what the speakers say, nor do they cite Hayek’s original works by title. The 2020 episode on John Tamny and experts versus the wisdom of markets is listed only with a summary and topics, with no excerpted dialogue, so its treatment of the knowledge problem cannot be described. The excerpts do not state the outcome of the semiconductor legislation Lincicome was discussing, nor do they provide a concluding definition or resolution of the knowledge problem as a theoretical matter.