Lesson 1 of 8
What no single mind holds
Hayek's claim is that the economic problem is not allocating known resources but using knowledge that exists only in fragments, in thousands of separate heads.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- If all the relevant facts were known to one mind, allocating resources would be a mathematics problem. Hayek's point is that they never are.
- The knowledge that matters most is not scientific knowledge. It is unorganised knowledge of particular circumstances of time and place, held by the person on the spot.
- That knowledge cannot enter a statistic, so it cannot be sent to a central authority in usable form. Everything else in this course follows from that.
Hayek's 1945 paper in the American Economic Review opens by saying that economics has been answering the wrong question. The lesson is short because the argument is, and it is the single most influential thing this tradition produced.
Two kinds of knowledge, and which one can be collected
Scientific and general knowledge
- Rules and regularities that hold generally.
- Can be written down and taught.
- Experts hold more of it than anyone else.
- Can be assembled in one place.
Knowledge of particular circumstances
- Which machine is idle this afternoon.
- Which supplier answers the phone quickly.
- That a skilled person in this town is available.
- Exists where it is used and nowhere else.
One kind can be centralised. The other exists only where it is used.
The wrong problem and the right one
Hayek separates two questions in section one. If you assume that one mind has all the preferences, all the available means and all the technical possibilities, then working out the best use of resources is a problem of logic. It is difficult arithmetic and nothing more.
The real problem, he argues, is different in kind. The knowledge needed never exists in concentrated form. It exists as dispersed and sometimes contradictory fragments, held by separate people, none of whom has more than a small part. The question is how resources get used well given that.
The knowledge nobody respects
Section three is the part most often skipped. Hayek argues that treating scientific knowledge as the only kind that counts is a serious mistake. Alongside general rules there is a mass of unorganised knowledge about particular circumstances: which resources are idle where, who has a skill available, what a local shortage is doing this week.
He points out that people who make a living from exactly that knowledge, the trader who knows about a shipment, the local dealer, are usually regarded as adding nothing. His answer is that this knowledge is as useful as any other and that its possessors hold an advantage no expert can take from them.
Why it cannot be centralised
Section four gives the reason, and the reason is the whole argument. Economic problems arise because things change. Adapting to change means acting on the specific circumstances of a moment, and those circumstances do not survive being turned into a statistic: an aggregate is made by abstracting away exactly the differences that the decision turns on.
Knowledge that cannot enter a statistic cannot be transmitted to a central authority in a form it could act on. So some decisions have to be left to the person on the spot. The next question, which is the next lesson, is how that person learns enough about the rest of the world to decide well.
Check yourself
What does Hayek say the economic problem of society is?
- Allocating known resources among known ends
- Using knowledge that exists only in dispersed fragments, held by separate people
- Measuring aggregate demand accurately
Show the answer
Answer: B.
Section one of the 1945 paper separates the two. The first is a problem of logic once the data is assumed given, and Hayek says that assumption is what hides the real problem.Which kind of knowledge does Hayek say is routinely dismissed?
- Scientific and technical knowledge
- Unorganised knowledge of particular circumstances of time and place
- Statistical knowledge of aggregates
Show the answer
Answer: B.
Section three argues that this knowledge is as useful as scientific knowledge and that the people who live by it are commonly regarded as contributing nothing.Why can that knowledge not be sent to a central authority?
- People refuse to share it
- It cannot enter a statistic, because aggregating removes the differences a decision turns on
- It changes too slowly to be worth reporting
Show the answer
Answer: B.
Section four makes this the pivot of the argument, which is why some decisions must be left to the person on the spot.Sources
- Hayek, 'The Use of Knowledge in Society', American Economic Review, 1945, sections I to IV: the distinction between the logical problem of allocation and the problem of dispersed knowledge, the contrast between scientific knowledge and knowledge of particular circumstances of time and place, and the argument that such knowledge cannot enter statistics and so cannot reach a central authority.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The capacity utilisation example is invented to show what aggregation removes. It describes no published series.
- The argument establishes a limit on central direction. It does not establish that decentralised outcomes are good ones, which is a separate claim needing a separate argument.