The Impact of Hayek's 1945 Paper

Summarizing Key Points of Hayek's 1945 Paper

Even those most prominent for their critiques of Hayek's work, point to Hayek's paper entitled, "The Use of Knowledge in Society" (1945) as a substantial contribution to the study of economics, worthy in an of itself of the Nobel Prize. At the time, the notion of intergrating numbers, calculus and practices of the other sciences into economics was widely received. However, in the process, economists began to make simplifying assumptions, including: possessing all the relevant information, starting out from a system of preferences (given endogenously), and commanding complete knowledge of available means. This gave rise to the Walrasian Model, which implemented calculus to determine the best use of the available means and resources. In short, efficient allocation occurred when the "the marginal rates of substitution between any two commodities or factors must be the same in all their different uses." (1945).

Problems With Walrasian Model

This self contrived economic problem is not real in society. The simplifying assumptions that lay the foundation for the mathematical calculations, are never "given" for the entire society, nor is that knowledge static and equally dispersed amongst all individuals. In sum, it fails to capture the most important and relevant knowledge: the knowledge of circumstance.

The Knowledge of Circumstance

The knowledge of circumstance does not exist in a concentrated or integrated form. In fact, the economic relevance and potential economic benefit of possessing said knowledge is that the knowledge of circumstance is incomplete and often contradictory between multiple economic actors.

All Economies Are Planned

Of interesting note, and often quickly admonished, is Hayek's determination that all economies are "planned," what determines that economy's efficiency is who does the planning. All economic decisions are planned, in that the decision entails a cost-benefit assessment over the employment of scare resources. Since economic relations require the collaboration of numerous parties, this activity must be guided by knowledge. Here is where Hayek finds fault with the socialists state; since most information is that of circumstance and dispersed in a incomplete form to many individuals, this knowledge can only be best utilized when each individual shares his knowledge through the spontaneous order of market interactions. Efficient transmission of this information through economic relations is dependent upon the spontaneous rise of the pricing sytem.