Because this year is the 50th anniversary of its announcement. friedrich hayek They were joint winners of the Nobel Prize in Economics (who shared the award with Gunnar Myrdal), now is a good time to take a closer look at his 1945 article. American Economic Review,”Use of knowledge in society”
When I brought this article up in class about 30 years ago, my students had a hard time following his argument. I think part of it was Hayek’s Germanic writing style, which was full of long sentences. So for a few years, I stopped reporting. But it wasn’t satisfying. So instead, I sent students detailed comments and questions about various paragraphs to help them read the article. It worked.
Update your notes every time you look at them. So I updated it again this morning.
Here are my notes.
Hayek’s Teaching Notes “The Use of Knowledge in Society”
http://www.econlib.org/library/Essays/hykKnw1.html
David R. Henderson
October 9, 2024
I think this article is one of the 10 most important articles published in economics over the past 80 years. So it’s worth the effort.
The most important paragraph of this article is the third paragraph, and the most important sentence of the article is the first sentence of this paragraph.
The peculiar nature of the problem of a rational economic order is that the knowledge of the situation that we have to draw on is never in a concentrated or integrated form, but is simply a scattered collection of incomplete and often contradictory knowledge. It is determined by the fact that it exists only in fragments and is shared by all things. Owned by separate individuals. The economic problem of society is therefore not simply a question of how to allocate “given” resources. “Given” is interpreted to mean given to a single mind that intentionally solves the problem set by these “data”. Rather, it is about how to ensure that resources known to all members of society are best used for purposes whose relative importance is known only to them. That’s a problem. Or, simply put, it is a matter of exploiting knowledge that is not given to anyone in its entirety.
Today’s economists, drawing on Hayek’s insights, often refer to this point about distributed information as “local knowledge.” Think about the local knowledge you have about your work and other parts of your financial life, knowledge that is not available to central planners. Now ask yourself how things would work if you had to get permission from a central planner every time you acted on this knowledge. Think about your work and other parts of your financial life.
In the second paragraph of Section II, Hayek writes:
The answer to this question is closely related to another question that arises here. who It’s about making a plan. This issue is at the heart of the debate over “economic planning.” This is not a debate about whether or not to plan. It is a debate over whether planning should be done centrally by one authority for the entire economic system, or divided among many individuals.
When economists began criticizing the idea of central planning in the early 2020s.th In the 20th century, the response from some who wanted centralized planning was, “Don’t you think we need to plan?” That’s why Hayek has this passage.
Read Section III, second paragraph again. There’s a lot of stuff in there. As an example, consider someone who graduated summa cum laude from Stanford University, Yale University, or Harvard Law School. On a scale of 1 to 10, do you know what will help you do your job on your first day at work? My guess is it won’t be more than a 4, and could probably be a 2 or 3.
In the third paragraph of Section III, Hayek writes:
Even economists who consider themselves immune to the gross materialist fallacy (i.e., thinking in terms of material wealth) are drawn to the acquisition of such practical knowledge. When it comes to activities, we always make the same mistakes. Knowledge should be something that can be “given.”
About 15 years ago, my dishwasher left streaks on the dishes, so I called an appliance repair company. He came out (minimum charge was $69.95), assessed the situation within 5 minutes, and told me I needed to use powdered dish detergent instead of liquid dish detergent. For several minutes I was angry. Then I remembered Hayek. explain. What do you see in this quote?
Read Section IV, paragraph 5. Some economists who have studied the Soviet Union and other centrally planned economies argue that their greatest failure was in agriculture, not manufacturing. Based on Hayek’s reasoning in this paragraph, explain why.
In the sixth paragraph of Section IV, Hayek writes:
For this reason, central planning based on statistical information cannot, by its very nature, directly take these time and place conditions into account, and central planners can leave decisions in accordance with these to organizations. It means you need to find some way. “The man on the spot”
No questions asked about this. Think about it for a moment.
In the first paragraph of Section V, Hayek describes the dilemma:
We need decentralization because only by doing so can we ensure that knowledge about a particular situation of time and place is used immediately. But “people in the room” cannot make decisions based solely on their limited but intimate knowledge of the facts around them. There remains the problem of conveying such further information to him, since his decisions need to fit into the overall pattern of changes in the larger economic system.
This is the dilemma. So far, Hayek has explained why central planning doesn’t work. Things seem hopeless. Information is constantly changing, and each person has only a small amount of information. If things continue like this, the situation is likely to end in chaos. Is there any hope? yes. That’s why I call this next part “Free Market Rescue.”
Let’s see what solves it.
Please read carefully the fifth paragraph of Section V, another important paragraph. Hayek writes:
For our purposes it doesn’t matter. And it’s very important that it doesn’t matter. Which of these two causes made tin more scarce?
Why is something so unimportant so important?
In the first paragraph of Section VI, Hayek provides an analogy between the price system and the machine. What is that analogy?
In the second paragraph of Section VI, Hayek uses the word “wonder” to describe the price system, and then explains why he uses that word in the third paragraph. Why?
For a humorous example of local knowledge, see the attached reading by noted economic analyst Howard Stern.
