The Pretence of Knowledge about School Fees
With the government’s tax on private school fees now firmly in place, we can see whether the official forecasts are true or false. Schools have started to shutter, fees have risen by 14%, not the forecast 10%. Critics, including me, have argued that the government simply did not listen to evidence or advice. Instead, they relied on a single IFS study.The government charged headlong into a policy decision armed with only a single, and disputed document.
Attempts to bat away criticism of the policy during the election and in the run up to the implementation of the tax in January, repeatedly went along the lines of “the IFS have said x so x must be true.” When we presented our research, we were met with the same riposte.
Relying on a single source for policy is a dangerous thing - even more so when it decides the fate of tens of thousands of young people. Policy makers can fall into the trap of the ‘Pretence of Knowledge’, a term coined by Nobel Prize Winning economist F.A.Hayek on receipt of his award. The argument is simple - if we rely too much upon academic research, we leave out that which cannot be known or recorded. We assume that we have full knowledge even of areas not yet analysed or reviewed, just because a piece of research has covered the whole topic in some detail. There are areas where we can codify economic data (wages, prices, demand and supply etc), but we cannot codify an entire economy’s changes, or the tolerances for change within it. Economics is not a law of nature or a science - there may be a Smith, but he was not Newton - there are no scientific laws in economics. As Hayek argues, we can understand pattern predictions- like supply and demand. For example, we know that building more houses will mean that prices will come down, but we cannot say with an ironclad resolve that we know how many houses, of which specific type and in which specific location, should be built. We may, as Hayek complained, speak about economics in the technical language of science- but a science it most definitely is not. To assume that you can plan or model an economy is hubristic at best, dangerous at worst.
The ASI’s research into the subject of VAT on school fees reviewed a broader base than that of the IFS - for example, we reviewed what the labour market reaction to such a tax would be, finding that we would be more likely to see labour withdrawal rather than increased work. And with saving rates already at record lows, we do not expect to see cash reserves being burned to fuel increased fee spending. We did not provide all of the answers, nor would we attempt to.
We understand that information asymmetries abound - no model can capture every datum or calculate how culture or psychology affects economics. It is why we prefer free markets, under which such a futile exercise is not even attempted. When the Soviets undertook their early computing exercises, it was in an attempt to plan the economy by acquiring as much data on economic production and consumption as possible - how did that work out? The Pretence of Knowledge is not just a lesson for those who advocated for the implementation of VAT on private schools, but a lesson for everyone who participates in economic thinking. We should take it to heart.
Maxwell Marlow
