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The Use of Knowledge in Society by Hayek

libertariancontrarian:

The Use of Knowledge in Society

libertarianlovefest:

This article, written by Hayek, is listed in The American Economic Review’s top 20 articles of the last 100 years. 

A few quotes:

• the economic calculus which we have developed to solve this logical problem, though an important step toward the solution  of  the  economic problem  of  society,  does  not  yet  provide  an answer to  it.  The  reason for this  is  that  the  ”data” from which the economic calculus starts are never for the whole society  ”given” to  a single mind which could work out the implications, and can never be so  given.
• Fundamentally, in  a  system  where the  knowledge of  the, relevant facts is dispersed among many people, prices can act to coordinate the separate actions  of  different people  in  the  same  way  as  subjective values  help  the  individual to  coordinate the  parts  of  his  plan.
• We must look  at  the  price system  as such a  mechanism for  communicating information if we want to understand its  real function-a function which, of course, it fulfills less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on, and passed on only to those concerned. It  is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of  a few  dials, in  order to  adjust their activities  to changes of which they may never know more than is  reflected in the price movement.
• Of  course, these  adjustments are probably never  ”perfect” in  the sense  in  which  the  economist  conceives  of  them  in  his  equilibrium analysis.  But  I  fear  that  our theoretical habits  of  approaching the problem with the assumption of more or less perfect knowledge on the part  of  almost  everyone  has  made  us  somewhat  blind  to  the  true function of the price mechanism and led us to apply rather misleading standards in judging its  efficiency. The  marvel is  that  in  a  case like that of a scarcity of  one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of  thousands of  people  whose  identity  could  not  be  ascertained by months of  investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. This  is  enough of a marvel even if,  in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or “normal” level.
• I have deliberately used the word “marvel” to shock the reader out of  the  complacency with  which  we  often  take  the  working  of  this mechanism for granted. I  am convinced that if  it  were the  result of deliberate human design, and if the people guided by the price changes understood that  their  decisions  have  significance far  beyond  their immediate aim, this mechanism would have been acclaimed as  one of the greatest triumphs of the human mind. Its misfortune is the double one that  it  is  not  the  product of  human design and that  the  people guided by it usually do not know why they are made to do what they do. But those who clamor for “conscious direction”-and  who cannot believe that anything which has evolved without design (and even without our understanding it)  should solve problems which we should not be able to solve consciously-should  remember this: The problem is precisely how to  extend the span of  our utilization of  resources beyond the span of the control of any one mind; and, therefore, how to dispense with the  need  of  conscious control and how to  provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do. 
• The problem which we meet here is  by  no means peculiar to  economics but arises in connection with nearly all truly social phenomena, with language and most  of  our  cultural inheritance, and  constitutes really the  central theoretical problem of  all social science. As  Alfred Whitehead has said in another connection, “It is a profoundly erroneous truism, repeated by  all  copy-books and by  eminent people when they are making speeches, that we should cultivate the  habit  of  thinking what we are doing. The precise opposite is  the  case.  Civilization advances by  extending the  number of  important operations which we can perform without thinking about them.” This  is  of  profound significance in the social field. We make constant use of formulas, symbols and rules whose meaning we  do not  understand and through the use of  which  we  avail  ourselves  of  the  assistance  of  knowledge  which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful  in  their  own sphere and  which have  in  turn become  the foundation of  the civilization we have built up.
• It  is in many ways fortunate that the dispute about the indispensability  of  the  price system  for  any  rational calculation in  a  complex society  is  now no  longer conducted entirely  between  camps holding different political views. The  thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for  an  atmosphere much  more  conducive  to  reasonable discussion. When  we  find Leon  Trotsky  arguing that  ”economic accounting is unthinkable without market relations”; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning  Board;  and  when  Professor  Abba  P.  Lerner  re- discovers Adam Smith and emphasizes that the essential utility  of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no  longer be  ascribed to  political  prejudice. The  remaining dissent seems clearly to  be  due to  purely intellectual and more particularly methodological differences.