Expert Failure and Market Competition

Roger Koppl tackles these questions about experts and non-​experts in his 2018 book Expert Failure. Especially today, where the demand for “science-​based policy” is likely at an all-​time high, we need a theory of experts. “Expert failure” here is used similarly to “market failure.” It is an outcome that deviates from the desired outcome, in this case, reliable expert advice to help solve a problem.

There are many ways to define an expert. Perhaps the broadest definition is an expert is one who has expertise. This explanation is so simple as almost to be a tautology. However, defining an expert by expertise poses a problem: by highlighting the knowledge differential between the expert and non-​expert, the definition seems to suggest that experts are inherently reliable. To make the definition of expert broad enough to develop a theory but also specific enough to provide insight, I will define an “expert” as “anyone paid to give an opinion.” This definition has several advantages: first, it does not imply reliability on the part of the expert nor powerlessness on the part of the non-​expert. Second (and related), it allows for mistakes in judgment on both the expert side of the market and the non-​expert side of the market. Thirdly, by framing the problem in terms of market exchange, the definition allows us to apply economic tools to the problem of experts.

In his famous 1958 essay “I, Pencil,” Leonard Read demonstrated the complex process of making a pencil. Not only was there the final manufacturer of the pencil, but there were also the chemists, miners, and loggers they relied on for their raw materials. Not to mention the truckers, warehousers, sales reps, and case managers needed to get the raw materials from the mines, forests, and paint factories to the pencil plant. Plus, the HR folks, payroll, and the like who keep the factory running and workers paid. There are also coffee makers, electrical engineers, machinists, and so on. All of them go into the making of a single pencil. The philosophers and plowmen all must play their part.

All of the people mentioned above go into making a pencil. True, some are more directly—and visibly—involved in the process than others, but as the great French economist Frederic Bastiat teaches us, we must look beyond the seen and see the unseen in the process. If there is a problem producing pencils, does it make sense to ask the pencil manufacturer? He certainly would have some insight into how to address the problem. Still, he wouldn’t know how his behavior affects the paint manufacturer (and vice versa). If we focus only on the end manufacture, we miss that none of the people involved in the entire production process can be separated from it. Earlier problems in the production process may be missed.

Each of the people involved in making a pencil also bring their specialized knowledge to the process. The knowledge of making a pencil is distributed among these participants. As Fredrich Hayek discussed over 75 years ago, given the dispersed, tacit, and situational nature of this vital knowledge, it is impossible to centralize all the relevant knowledge needed to coordinate economic activity with a central planner. Fortunately, we have an institution that overcomes the knowledge problem: the price system. By transmitting knowledge of relative scarcities to the participants, prices help coordinate activity by incentivizing owners of resources to use them where they are most valued. The tin consumer does not need to know why the metal is more expensive to know that he needs to conserve it.

Instead of pencils, consider now the market for expert opinion. Experts possess specialized knowledge and information about a particular topic. But the world is a highly complex place. Experts face the problem of being siloed due to specialized knowledge. While they have very specialized knowledge about their field, they lack knowledge outside their silo, rendering them either unaware of or unable to interpret information from other areas. A judge, an expert in the law, may not fully be aware of the myriad of consequences to her ruling.

Due to siloing and the division of knowledge, experts’ central plans face the same problem as a centrally planned economy, even if the problem under consideration is involved in their silo. For example, the COVID pandemic is a public health issue. But it is also an economic issue (how do we get PPE to where it is needed?), an educational issue (how do we educate our youth?), a psychological issue (how do we help people cope?). No one knows how to solve a pandemic, just like no one knows how to make a pencil.

Just like with markets, monopoly/​monopsony problems can infect expert opinion. Suppose there is only one supplier of expert opinion or a single buyer (such as the government). In that case, monopoly experts may not reveal all the necessary information they possess. In a monopolistic market, the monopoly producer restricts output. In the market for expert opinion, the monopoly producer of expert opinion restricts his output of information. Likewise, experts in a monopsony situation may provide information and advice that the single buyer wants to hear. Expert failure thus is likely to arise where there is monopoly or monopsony.

Fortunately, the solution to the problem of expert failure is the same as market failure: competition. Hayek (and later Israel Kirzner) discussed at great length that competition is a process that helps us discover new and more relevant knowledge. In the market for expert opinion, competition turns experts from wizards to teachers. Rather than preaching arcane theory at us, competing experts will have to increase the quality and reliability of their information to win “business.” This outcome holds even if the incoming experts are of low quality.

The idea that increased competition, even if low quality, increases the overall quality in the market may seem counter-​intuitive. But like much of economics, the idea is quite simple. To earn business from buyers, the expert must make his advice accessible to non-​experts. Thus, he will be more straightforward and concise, increase the quality, and be more explicit in his argumentation. When experts are secretive in their reasoning, then conspiracy theories can arise, and the trust in the expert falls.

Likewise, institutions develop to ensure quality when there is competition. Licensing boards and consumer rating agencies (when they have advisory power rather than restrictive power) signal quality. My late professor Walter Williams liked to give this example. If he hung a sign outside his house, “Dr. Walter E. Williams: Discount Brain Surgery,” no one would take him up on it. But it would also force medical doctors to distinguish themselves from Dr. Williams. The local brain surgeon might add “M.D.” to his sign. Or they might band together with other surgeons to create standards of practice that they can advertise on their signs. Either way, the experts are forced to disclose more information to the buying public.

To prevent the problem of expert failure, we need competitive markets in expert opinion. Rather than a monopoly situation, such as the CDC giving directives during a pandemic, we need to allow many voices to be heard. Likewise, rather than a single buyer of expert opinion (such as federal, state, and local governments who then issue legislation and executive orders), allow everyone to buy opinion. Let the experts compete for business and let people decide what advice to take.

One way to deal with expert opinion’s monopolization is to remove regulatory authority from governmental agencies and have them act as advisory boards. For example, many state and local health boards have broad authority to regulate vast swaths of the economy during a pandemic. Many industries were shut down or heavily restricted with little regard to how the industries might be affecting the spread of the virus. In this case, the regulatory agencies acted as monopolists of expert opinion: their opinion was all that mattered and could be imposed on unwilling “purchasers” of the opinion. If instead, these agencies acted in an advisory role that allowed for competition, then better decisions could be made. There would be an incentive for competing experts to make their case so people will purchase their information.

More broadly, academia must become more accessible. High subscription costs to journals restrict the dissemination of knowledge in information to other academics who have universities to pay the fees. Blogs, websites like the Social Sciences Research Network (SSRN), and the like allow researchers to post, discuss, and share their research for free, helping to break the monopoly of the journal system. These websites allow some heterodox voices to come forth. Peer review still plays an important information-​conveying role, just like the “M.D.” on the sign in the brain surgery example above.

Is it possible that, in a competitive marketplace, there are still undesirable outcomes? Of course. Even in free markets, we still see market failure in terms of mutually beneficial exchanges that could occur and do not. But the market is a process, and market failure also represents market opportunities for entrepreneurial experts to provide more information.