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.
In his paper The Use of Knowledge in Society, published in the American Economic Review in 1945, Hayek attempts to answer the question how to construct the best economic order. The Austrian economist and philosopher challenges the assumption that knowledge in its completeness is given to all participants in the market place and develops the idea of spontaneous order.
Economics is aimed at finding the best allocation of resources. Through analyzing market conditions, the solution of the problem for perfect rational economic order is given in the form of simultaneous equations and marginal rates of substitutions. Hayek emphasizes the fact that no one actually has all the knowledge, and proves that this is not actually necessary. He denies the importance of experts because they possess only scientific knowledge and our world is ruled by another substantial knowledge-the awareness of time and place. In this sense, people are making decisions that the anti-socialist economist argues should not be centralized. Hayek sees under the decentralized planning a more efficient system for using knowledge. Another problem arises though- how to communicate knowledge among the separate ‘men-on-the spot”?
Since long-term planning is not efficient, changes occur and precisely in these changes arise the economic problems. Hayek expresses his disagreement with the statistic belief of ‘mutual compensation of random changes” (Hayek, 524). According to him, the order lies in the instatistical not centralized knowledge but rather in the individual decisions. In local decisions, people take into account only the relative information, without needing to solve “the whole puzzle ab initio” (Hayek, 525). This is how even the price system evolves as a “mechanism for communicating information” (Hayek, 526). Comparing this to a “marvel” and calling it one of the greatest triumphs of the human mind”, Hayek promotes the spontaneous order as a better explanation to the working economy. He cites the idea that exactly when individuals are not thinking, they are making the crucial decisions ruling the way our civilization operates. After stumbling with unworking methods, men have found the right economic ratios, and this is what prevented our order from becoming something like the “state of the termite ants” (Hayek, 528).
Finally, Hayek wraps up his point that the price system is just a result of the interactions of many people with limited knowledge and denies again the concept of mathematical economics that consumers have perfect knowledge when taking any decision. In taking practical decisions in social life, the man on the spot with his imperfect unshared knowledge builds the working price mechanism, also called by Hayek the spontaneous order.
Friedrich A. Hayek || Ludwig Von Mises || What is Socialist Calculation Debate? || Critiques of the Socialist Calculation Debate || Knowledge Problem || The Impact of Hayek's 1945 Paper || Questions to Ask
