Posts Tagged ‘supply and demand’

Revisiting Hayek’s Relevance to Measurement

May 31, 2018

As so often happens, I’m finding new opportunities for restating what seems obvious to me but does not impact others in the way it ought to. The work of the Austrian economist Friedrich Hayek speaks to me in a particular way that has always, to me, self-evidently expressed ideas of fundamental value and interest. Reviewing his work again lately has opened it up to a new level of detail that is worth sharing here.

Hayek (1948, p. 54) is onto a key point about measurement and its role in economics when he says:

…the spontaneous actions of individuals will, under conditions which we can define, bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody has planned it…?

Decades of measurement research shows that individuals’ spontaneous responses to assessment and survey questions conform to one another in ways that might appear to have been centrally organized according to a single plan. But over and over again the same patterns are produced with no efforts made to guide or coerce responses that conform in that way.

The results of testing and assessment produced in educational measurement can be expressed in economic terms fitting quite well with Hayek’s observation. Student abilities, economically speaking, are human capital resources. Each student has some amount of ability that can be considered a supply of resources available for application to the demands of the challenges posed by the assessment questions. When assessment data fit a Rasch model, the supply of student abilities have spontaneously organized themselves in relation to challenging demands for that supply of abilities posed by the test questions. The invariant consistency of the data and resulting model fit has not been produced by coercing or guiding the students to respond in a particular way. Although questions can be written to vary in difficulty according to a construct theory, and though educational curricula traditionally vary in difficulty across grade levels, the patterns of growth and change that are observed are plainly not taking place as a result of anyone’s intentions or plans.

This kind of complex adaptive, self-organizing process (Fisher, 2017) describes not just the relations of student abilities and task difficulties, but also the relations of customer preferences to product features, patient health and functionality relative to disease and disability, etc. It also, of course, applies to supply and demand relative to a price (Fisher, 2015). For students, the price to be paid follows from the probability of a supply of ability meeting the demand for it posed by the challenges encountered in assessment items.

Getting back to Hayek (1948, p. 54), here we meet the relevance of the

…central question of all social sciences: How can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?

Per Hayek’s point, no one student will know the answers to all of the questions posed in a test, and yet all of the students’ fragments of knowledge combine in a way that bring about results seemingly defined by a single intelligence. It is this bottom up and self-organized emergence of knowledge structures that we capture in measurement and bring into our culture, our sciences, and our economies by bringing things into words and the common languages of standardized metrics.

This spontaneous emergence of structure does not lead directly of its own accord to the creation of markets. Rather, it is vitally important to recognize, along with Miller and O’Leary (2007, p. 710) that:

Markets are not spontaneously generated by the exchange activity of buyers and sellers. Rather, skilled actors produce institutional arrangements, the rules, roles and relationships that make market exchange possible. The institutions define the market, rather than the reverse.

The institutional arrangements we need to make to create efficient markets for human, social, and natural capital will be staggeringly difficult to realize. But a point in time will come when the costs of remaining in our current cultural, political, and economic ruts will be greater, and the benefits will be lower, than the costs and benefits of investing in a new future. That time may be sooner than anyone thinks it will be.

References

Fisher, W. P., Jr. (2015). A probabilistic model of the law of supply and demand. Rasch Measurement Transactions, 29(1), 1508-1511  [http://www.rasch.org/rmt/rmt291.pdf].

Fisher, W. P., Jr. (2017). A practical approach to modeling complex adaptive flows in psychology and social science. Procedia Computer Science, 114, 165-174. Retrieved from https://doi.org/10.1016/j.procs.2017.09.027

Hayek, F. A. (1948). Individualism and economic order. Chicago: University of Chicago Press.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-734.

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