The Use of Knowledge at the Bank of Canada

Also available at mises.ca

The Bank of Canada’s latest quarterly review suffers from the fatal conceit. Although technically the whole central banking system is a fatal conceit, one of the articles particularly highlights the complete ignorance and arrogance of Canada’s central bankers. Nii Ayi Armah believes that the Bank of Canada can harness the power of “big data” to interpret and accurately predict economic conditions. As Armah himself says,

Reliable information about the current state of the economy is an important component for conducting monetary policy and, since data are the main resource driving current analysis, their accuracy and timeliness are key. A better real-time gauge of current economic conditions can improve assessments of economic momentum and forecasts of future growth.

 
The idea is that by acquiring more information, the more accurate the Bank of Canada’s computer models will be. The only methodological problem, according to Armah, is that, “it remains unclear how best to select, organize and aggregate unstructured data so that they provide meaningful signals about economic conditions.”



 
I can think of another methodological problem. While Armah looks to “economic transactions and social media interactions of billions of people around the world,” as the basis for his big data argument, he fails to realize how tacit this knowledge really is. While he doesn’t suggest overturning the market order for a socialist economy where the BoC determines all resource allocation based on big data, Armah does suggest that this method may be superior to current methods of economic forecasting.
 
And he may be right. If the BoC governs via data collection, the logic would be: larger volumes and greater varieties of data equal better governing. But the premise is wrong. A sound economy is not a result of a central planning board with access to excessive amounts of information. The economy is not a computer model – it is more like a dance floor, or a swarm of birds that fly as one. 
 
But even for the sake of argument – suppose Armah is right and that, “the more timely, accurate and relevant the data, the better our assessment of the current state of economic activity.” The question then becomes, shouldn’t Occam’s Razor apply to this methodology? Price signals already hold the information Armah is striving for.
 
Prices embody information that allow people to act as if they knew all the underlying circumstances in the economy. Economist Frederich Hayek wrote that, “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” People don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity… brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek uses the example of a tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”
 
The problem with the Canadian economy is that price signals have been distorted by the Bank of Canada’s artificially low interest rates and the Big Five’s fractional reserve banking practices. Entrepreneurs don’t know if they’re following real price signals or the distortion caused by inflation. It’s even been suggested that there is no honest pricing left in the Western world. That the entire economy is a pseudo-market where prices don’t really mean anything anymore. This the warning Ludwig von Mises gave in the 20th century. If government intervention didn’t subside, the entire market order would be replaced.
 
Harnessing big data for the Bank of Canada’s methodology may just be another interventionist brick in the socialist wall. As price signals lose their ability to act as information surrogates, and as “economists” continue to either purposefully ignore or remain oblivious to Austrian economics, the more ideas like this one will become popular. If the Soviet Union collapsed due to lack of knowledge via price signals – perhaps Canada can overcome this calculation problem by using technology to, as Armah put it, “improve current analysis by exploiting digital data from economic transactions as well as by measuring consumer sentiment from social media and Internet searches.” But as Ludwig von Mises pointed out a century ago: “Economic affairs cannot be kept going by magistrates and policemen.”