Knowledge Problem
Hayek on the Use of Knowledge in Society
Hayek considers that the problem of a rational economic order comes from the fact that one cannot gain knowledge of our surrounding circumstances in a concrete way, thus causing conflict. The “economic problem” of the society is not a matter of how to distribute the given resources. It is a problem caused by the fact that not all members of society are being given equal amount of information, which makes it hard for them to act accordingly. Hayek says that this is disregarded by modern economic theory and misconceptions about the economic problem of the society are causing controversies about the proper economic policies that should be implemented.
“Planning” refers to the way available resources should be allocated. Efficient economic systems often fail to be achieved due to the fact that information is not always accurate, which result in unfavorable outcomes. A second problem Hayek encounters is determining whether planning is to be done centrally, by one authority or whether it is to be split among many individuals, who can later bring their work together. Hayek believes that not all knowledge is supposed to be given. It is misleading, Hayek argues, to assume that all knowledge should be given to a single mind (i.e. a centralized economic system), as efficiency cannot be achieved. Hayek considers that common individuals possess unique information that can only be beneficial to the whole society if these people are given the opportunity to get involved in the economic process. Hayek argues that it is impossible for time and space knowledge circumstances to be translated into statistical form by a central authority.
In conclusion, a central system running the economy could never achieve the same efficiency as a free market. Hayek believes that the challenge the economic system faces lies in finding a way to incorporate every individual, each of who has partial knowledge, in the economic system. Thus, planning has to be done is such a way so that ultimate decisions are left to the people who are familiar with their circumstances. Hayek argues that in a free market, individuals can communicate through the price system, which can inform people of the supply and demand of various resources in the economy. Thus, participants do not need to have a comprehensive understanding of the economic system in order to take the right decisions, as the price system can provide them with the adequate information they need in fulfilling their transactions. Spontaneous order thus will make optimal use of knowledge and market efficiency will be attained.
