ABOUT
Friedrich Hayek was a leading economist in the Austrian School of Economics. Hayek, with Mises and many others, advocated laissez-faire capitalism and economic liberty. This essay, The Use of Knowledge in Society, was first published in 1945 in the American Economic Review. Whereas the obvious argument against socialism is that the incentive to work is divorced from productivity, this essay instead offers another reason why centralization is destined to fail.
HISTORY
Given that Hayek was writing in 1945, his essay was not met with critical acclaim. Keynesianism dominated both the political sphere (note Roosevelt’s “New Deal”) and upper education. It was not until later parts of the 20th Century when intellectuals, including Hayek and Milton Friedman, began to challenge the “prime the pump” model. Today, many of Hayek’s arguments are accepted as basic laws of economics. Specifically, the essay’s central argument that market price fluctuations promote the efficient distribution of resources.
ABOUT
Capitalism is unique because it is one of very few “-isms” that acknowledges the inherent ignorance of man. In communism, socialism and progressivism it is assumed that the state (a human institution) is both all-knowing and all-powerful. As the progressive Woodrow Wilson put it, “…omnipotence of legislation is the first postulate of all just political theory.” This, of course, is simply not true. Goethe asserted in Faust that, “Man calls it reason and uses it simply to be more beastly than any beast.” In the case of the USSR this meant the lives of 61,000,000 (43,000,000 under Stalin) (here). In communist Cambodia Pol Pot murdered roughly 29% of the population in the name of omniscience and centralization (here). Of course, these are the stories of humanity, stories of atheist governments and the quest to bring stability and prosperity without liberty. The science of economics is another science, one that, if applied incorrectly, can make Goethe into something of a prophet.
In one of the first pages of his book The Constitution of Liberty, Hayek advocates a mentality antithetical to the progressive school, the Keynesian school and the communist school of thought. “The Socratic maxim that the recognition of our ignorance is the beginning of wisdom has profound significance for our understanding of society…. But though discussions of moral or social problems based on the assumption of perfect knowledge may occasionally be useful as a preliminary exercise in logic, they are of little use in an attempt to explain the real world. (here)” And in two sentences Hayek manages to knock out the axiomatic foundation of Wilson’s progressivism. That is, if you’re willing to accept the fact that man is not all knowing.
In The Use of Knowledge in Society, Hayek contends that “If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic.” However, we do not have the relevant information, we do not start from a given system of preferences and we do not command complete knowledge of available means. Therefore, “the economic problem which society faces” is not one of logic like Keynes may have you believe.
“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.” In other words, no single body could posses all the necessary information for an efficient allocation of resources. The dozens of administrative agencies withstanding, it would be impossible for the government to efficiently distribute pencils from the Wal-Mart in East Tawas, Michigan to the local grocer in Winslow, Arizona. Moreover, imagine the knowledge required to manage the resources that go into a pencil, and extend this to every good and service. If this intrigues you read I, Pencil (here) or watch this video
Hayek is not arguing that we are all too incompetent to operate in an economic system. He is simply asserting that the only way that we can operate with the greatest information is through decentralization. Take wikipedia as an example: millions of people are constantly writing and editing wikipedia. The result is a database that covers nearly everything, almost entirely accurate, and the failures are met with quick corrections. Imagine if ten years ago we had taken the world’s 50 best librarians and told them to compile a website with roughly 13 million articles, including citations, minute-by-minute updates on emerging material and 262 language editions. Or, tell those librarians to compile the equivalent of YouTube, MySpace, Facebook or WordPress. It would be impossible.
Instead, the free interaction of billions of people has sparked an information revolution (just as free-enterprise sparked an industrial revolution). The internet has allowed information, which Hayek asserts is naturally decentralized, to come together through a new electronic medium. More than anything else, the Internet represents an abundance of knowledge that could never be truly centralized at one source. Wikipedia is like the market, though it is not perfect, it arranges all the information from millions of users into into a utilitarian interface and then provides access to millions of people. The market, through a price system, allocates the labor and product of billions efficiently, providing those same billions with access to the goods others have produced.
This is Hayek’s point: no single source can emulate the knowledge and power of millions. Capitalism takes that power and gives the fruit back to the millions.
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