Knowledge and Decisions (Sowell, 1996)

With a new preface by the author, this reissue of Thomas Sowell’s classic study of decision making updates his seminal work in the context of The Vision of the Anointed, Sowell, one of America’s most celebrated public intellectuals, describes in concrete detail how knowledge is shared and disseminated throughout modern society. He warns that society suffers from an ever-widening gap between firsthand knowledge and decision making—a gap that threatens not only our economic and political efficiency, but our very freedom because actual knowledge gets replaced by assumptions based on an abstract and elitist social vision f what ought to be.Knowledge and Decisions, a winner of the 1980 Law and Economics Center Prize, was heralded as a ”landmark work” and selected for this prize ”because of its cogent contribution to our understanding of the differences between the market process and the process of government.” In announcing the award, the center acclaimed Sowell, whose ”contribution to our understanding of the process of regulation alone would make the book important, but in reemphasizing the diversity and efficiency that the market makes possible, [his] work goes deeper and becomes even more significant.”

About the Author

Thomas Sowell has taught economics at a number of colleges and universities, including Cornell, University of California Los Angeles, and Amherst. He has published both scholarly and popular articles and books on economics, and is currently a scholar in residence at the Hoover Institution, Stanford University.

p.3 Ideas are everywhere but knowledge is rare.

p.8-9 We start with an idea... at some point in the authentication process, the probability of a mistaken conclusion is reduced to the point where we can say that we "know" this or that. Where that point is varies from person to person, so that what is "knowledge" to one is merely a plausible belief to another and only a theory to someone else... all things fall short of absolute certainty

p.11 Knowledge may be enjoyed as a speculative diversion, but it is needed for decision making. The genesis of ideas and the authentication of knowledge are part of a continuous process which ultimately brings knowledge to bear on decisions - when the system is working ideally.

p.13 General knowledge - expertise, statistics, etc. - is usually more economically used by the higher decision-making units.

p.14-15 While decisions are constrained by the kinds of organizations and the kinds of knowledge involved, the impetus for decisions comes from the internal preferences and external incentives facing those who actually make the decisions. The incentives may be positive or negative - that is, rewards or penalties. Typically, these incentives are structured in some way, so that there are gradations of rewards (or penalties) corresponding to different kinds of results. It is not just a question of being rewarded or not, but of how much reward or penalty is likely to follow from various decisions.

p.15-16 The mere process of formalizing what is to be rewarded presents many complexities and pitfalls. Most problems, decisions, and performances are multidimensional, but somehow the results have to be reduced to a few key indicators which are to be institutionally rewarded or penalized... The need to reduce the indicators to a manageable few is based not only on the need to conserve the time (and sanity) of those who assign rewards and penalties, but also to provide those subject to these incentives with some objective indication of what their performance is expected to be and how it will be judged... key indicators can never tell the whole story.

p.21 decision making in the real world can be understood only in the context of the actual decision-making units that exist, and the specific, respective sets of constraints and incentives within which each operates.

p.44 Before attempting to determine the effect of institutions, it is necessary to consider the inherent circumstances, constraints, and impelling forces at work in the environment within which the institutional mechanisms function.

p.50 One of the major problems of public policy [JLJ - game theory] is to determine what kinds of social institutions [JLJ - structures of game pieces] lead to flexible and reversible transformations, which permit continuous adjustment to changing circumstances

p.57 Among the constraints affecting economic trade-offs are those which depend on time... future benefits must be greater than present benefits to make it worthwhile to wait.

p.59 The process of transforming current assets into future assets is known in economics as "investment."

p.83, 84-85 One of the most basic and pervasive social processes is the sorting and labeling of things, activities, and people... Sorting and labeling processes involve a trade-off of costs and benefits. In general, the more finely the sorting is done, the greater the benefits - and the costs... Sorting and labeling, whether of people or of things, is a sorting and labeling of probabilities rather than of certainties.

p.93 Time is perhaps the ultimate constraint. Few things can be done instantaneously... Time is, of course, never free. Its value is whatever alternative opportunities must be foregone in order to use it for a particular purpose.

p.110 ...decision-making processes, whether formal or informal, face the same basic problem of seeking to maximize well-being subject to some inherent constraint - whether of time, wisdom, or economic resources.

p.110 Effective social knowledge is knowledge of social impact that forces decision makers to adjust accordingly, both initially and subsequently

p.154 Inherent constraints imply limitations... on what can be achieved rationally.

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