How would Hayek solve climate change?

Disclaimer: this post concerns two things about which I don’t know very much: economics and climate policy. If you’d rather read something I’m supremely qualified to talk about, try this post on rookie errors I’ve made in my machine learning career.

We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstance

Hayek, The Use of Knowledge in Society, 1945

So how do you co-ordinate the activities of everybody in an economy when nobody really knows what’s going on?

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all

Hayek, The Use of Knowledge in Society, 1945

If you’re mathematically minded, this conjures up the image of a graph. The economy is a sparsely linked graph. Although each node has relatively few links to other nodes, they’re sufficiently interlinked that information can flow between any two nodes relatively swiftly. Changes in prices to goods swiftly flow to all relevant parts of the economy- and if they don’t, people make money arbitraging them, thus incentivizing rapid information flow.¹

Figures are approximately correct. Note the different units here, which is a common issue. Forks are one of the simplest products you can imagine footprinting, because their footprint is probably dominated by the steel. Imagine trying to draw this diagram for a microwave, or a mobile phone, or a hospital.
A small number of products, foundational to the economy, are responsible for the vast majority of CO2 emissions. If we price carbon diligently for these handful of products, the effect will ripple throughout the economy. The price of derived products will reflect their carbon content.


[1] If you’re really into maths, or at least have a vague and spurious grasp of lots of bits of maths (me), then you might draw some other speculative comparisons:

  • Neural networks are also non-fully-connected graphs. Just like actors in the economy, they have relatively few direct inputs. They get feedback signals only via these inputs (back propagation). And yet those signals — which are really just up/down for each connection- provide enough information for coherent organization of the network as a whole to improve over time.
  • There’s a rich and fascinating literature on the occurrence of different forms of networks in the real world. A surprising number of them end up conforming to a power law (so called scale-free networks), which means that there are a few nodes with tons of connections and lots of nodes with not very many at all. Social networks, airline routes, and the internet all follow this pattern. One beautiful property of such networks is that the average distance between two nodes in the network grows very slowly as nodes are added. This means that information travel remains very rapid. I suspect, completely without evidence, that the economy is similarly organized, with the “highly connected” nodes (hubs) being commodities like cement, steel, flour etc.

Product manager & data scientist. Writing about AI, building things, and climate change.

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