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«Russell S. Sobel and Peter T. Leeson Department of Economics West Virginia University and Mercatus Center George Mason University Abstract To ...»

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The Use of Knowledge in Natural Disaster Relief


Russell S. Sobel and Peter T. Leeson

Department of Economics

West Virginia University


Mercatus Center

George Mason University


To successfully coordinate natural disaster relief, society must solve Hayek’s “knowledge

problem” at three critical information nodes: (1) identification of disaster; (2)

determination of what relief is needed and who needs which relief resources; and (3)

evaluation of on-going relief efforts. This paper investigates the comparative ability of government and the private sector to do this. We find that government is inherently incapable of generating the information needed to solve the knowledge problem at any of these nodes. In contrast, the private sector is capable of solving the knowledge problem at each information node. The results of our analysis suggest that disaster relief reforms which leave government as the primary manager of natural disasters are bound to fail.

Correcting government’s information failure in the context of disaster relief requires eliminating its root cause: government itself.

* We thank the Editor and Pete Boettke for helpful comments and suggestions. We also gratefully acknowledge the financial support of the Mercatus Center.

1 Introduction More than 60 years ago, in his seminal article, “The Use of Knowledge in Society” (1945), Nobel Laureate Friedrich Hayek identified the problem of social coordination:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources—if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these ‘data.’ It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality (1945, 519-520).

Hayek’s critical insight, latter called “the knowledge problem,” highlighted two central features of social organization. First, every society confronts a “division of knowledge” analogous in many respects to the “division of labor.” Information is fragmented, diverse, and often contained in inarticulate forms, held separately and locally by the many individuals who compose society. Second, the foremost obstacle that every effort at social coordination must overcome is somehow tapping into this dispersed information and processing it in forms that individuals can use to mutually achieve their ends.

This article investigates the issue of natural disaster management using Hayek’s key insight about the fundamental “knowledge problem” that all efforts to coordinate social activity must solve. We argue that natural disaster management is no different in this regard than coordinating individuals in “normal” economic contexts. Following a natural disaster there are “relief demanders”—individuals who desperately need disasterrelief supplies, including evacuation, food, shelter, medical attention, etc. On the other side, there are “relief suppliers”—individuals ready and willing to bring their supplies and expertise to bear on the needs of relief demanders. On both sides of this “market,” information is decentralized, local, and often inarticulate. Relief demanders know when relief is needed, what they need, and in what quantities, but not necessarily who has the relief supplies they require or how to obtain them. Similarly, relief suppliers know what relief supplies they have and how they can help, but may be largely unaware of whether relief is required, and if it is, what is needed, by whom, and in what locations and quantities.

We argue that effective natural disaster relief management, just like successful social coordination in “normal” circumstances, must solve Hayek’s knowledge problem.

Specifically, effective disaster management requires efficient information generation at each of three critical nodes, which represent distinct stages in the management and provision of natural disaster relief. The first is the recognition stage; has disaster occurred, how severe is it, and is relief needed? The second is the needs assessment and allocation stage; what relief supplies are needed, who has them readily available, and what areas and individuals need them the most? The third stage is the feedback and evaluation stage; are our disaster relief activities working, and what if anything needs modification?

Hayek suggested a solution to the knowledge problem in the context of economic decision-making generally. Given information’s decentralized nature and importance for achieving social coordination, he concluded the importance of allowing decentralized private sector actors, such as those participating in markets, to direct the bulk of economic decision making. Unlike markets, central planning, Hayek argued, has no way

of tapping into this information in a productive way:

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization (1945, 524).

Using Hayek’s insight, we explore the comparative ability of government and the private sector to generate the appropriate knowledge at each of the three critical disaster management information nodes pointed to above.1 Consistent with Hayek’s argument, we find that decentralized, private decision making effectively generates the appropriate knowledge at each information node. Centralized, political decision making, in contrast, by its very nature, cannot.

Our analysis points to information as the fundamental failure of government natural disaster relief management. Government’s informational deficit in the disaster relief context is an unavoidable outcome of disaster relief management’s centralization when it is provided by the state. This suggests that disaster relief reforms which leave government as the primary manager of natural disasters are bound to fail. Correcting government’s information failure in the context of disaster relief requires eliminating its root cause: government itself. Although our discussion focuses specifically on the case of Hurricane Katrina, the issues of information that we analyze, and Hayek highlighted as The arguments in this paper build upon and extend discussions in Sobel and Leeson (2006a, 2006b).

crucial to coordinating suppliers and demanders, provide important general lessons about disaster relief management.

2 Information Node One: What Disaster?

Information fundamentally depends on the institutional context in which it is created. All institutional contexts create some kind of information. But very few generate the kind needed to coordinate spatially and temporally separated suppliers and demanders. In the context of disaster relief, the first piece of critical information that arises involves determining when in fact a disaster has occurred and thus that relief assistance is needed.

Information about the occurrence of a disaster and the need for disaster relief might seem straightforward. However, when disaster relief management is politically centralized, it is often not. Perhaps surprisingly, the vast majority of disasters declared over the last decade have been for weather events that most people would not consider disasters at all, such as severe thunderstorms, wind, and snow (Garrett and Sobel 2003).

On the other hand, some seemingly major disasters have gone undeclared. The disaster declaration process is clearly more complex and subjective than it first appears.

When disaster relief is centralized and managed by government it necessarily becomes bureaucratized. Government agencies like FEMA are created to oversee and administer relief. These agencies are in turn overseen by other government agencies, each with their own internal bureaucracies, and so on. Following organizational changes after 9/11, for example, FEMA was placed under the umbrella of the Department of Homeland Security, adding new political decision makers to the mix. The layers of bureaucracy ultimately end at some key administrative figure, which in the case of disaster relief is the president, who must declare a disaster before FEMA can act. At each level of the bureaucratic process is a key political decision maker who must sign off before the proposed action can be considered at the next layer of bureaucracy.

Bureaucracy is a necessary and unavoidable outgrowth of state-run activities. It is necessary because unlike private firms, the activities of which are directed by profit seeking, government agencies have no such guide to direct their decision making (Mises 1944). Private firms seek profits as their objective and consequently have but one rule for their managers: maximize profits. Managers who contribute to the firm’s goal and make profits can be rewarded and retained, while those who do not can be punished or let go. Owners’ ability to measure managers’ contribution to this goal is created by monetary profits and losses themselves.

For government agencies, however, things are different. They cannot make do with one rule for their “political managers.” Since government agencies do not aim at making profits and, as we discuss below, they do not sell anything, they are unable to use profits or losses to direct managers’ activities and to ensure that managers are contributing to the agency’s goal. Absent this, some other guide for manager decisions and mechanism for checking the behavior of political agents must be employed. As Tullock puts it, in the absence of the profit and loss system to measure and ensure that political managers undertake activities that contribute to their agency’s goal, “The central problem... is organizing subordinate politicians so that they, to the greatest degree possible, will behave as their superiors want them to behave (2005, 132). This political mechanism for achieving this is bureaucracy. Detailed procedures and protocols must be used in lieu of the profit objective to guide and check political managers’ behavior.

Although bureaucracy is inherent and essential to government agencies for this purpose, it does not follow that all of its effects are positive. Detailed protocols that involve multiple layers of approval before action may be undertaken prevent political agents from engaging in activities at odds with the ends of the agency, but also substantially slow government activities and information revelation. In the case of natural disaster declaration, for example, from government’s perspective, information that a disaster requiring relief attention has occurred does not emerge until the protocol for disaster declaration described above has been carried to its conclusion.

From the view of political actors charged with relieving disaster, there is no disaster to respond to until the president, who is reached in the final stage of the bureaucratic procedure, has officially declared as much. This is true even if a disaster requiring assistance has already struck, the disaster is readily acknowledged and visible in the media, etc. Unavoidable bureaucracy inherent to government management creates a separation between what might be called “private knowledge” of disaster and “political knowledge” of the same disaster.

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