Hayek on knowledge

I just read "The Use of Knowledge in Society" by F.A. Hayek (American Economic Review, XXXV, No. 4; September, 1945, pp. 519-30). which I should have read long ago. Here are some quotations from the paper:

"The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess."

"Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place."

"If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them."

Comments: Fortunately, Hayek focuses on the problem of achieving a good allocation of resources in a complex system where decisions are made with imperfect local knowledge. Unfortunately, he treats knowledge as exogenous, not dealing with the allocation of resources:

• to improve knowledge about resources.
• to improve knowledge of technology to exploit resources
• to improve knowledge of how products can be better distributed to consumers
• to improve knowledge of the institutions of society that influence the production and distribution of goods and services
• etc.

Fortunately Hayek recognizes that economic planning can be fully centralized, partially centralized (e.g, in industrial sectoral organizations) or decentralized (as in market institutions and spontaneous "local" groupings). It is not clear that he approaches the possibility of a mixed strategy allocating some planning responsibility to each level may be superior to any pure strategy.

It is interesting to see how much the developments since this was written have outmoded Hayek's concerns. Today of course, Communism has fallen and with it much of the emphasis on central planning. Moreover, a great deal of work is being done to institutionalize systems (especially those utilizing the evolving global information infrastructure) to better exploit local knowledge of time and place. Think of just in time manufacturing and inventory systems. His recommendation that decision making be decentralized to allow the person with the most relevant and accurate knowledge to make the decision is now not only an accepted defense of market economies, but a "common knowledge" among management theorists.

Hayek is reacting to what he feels is an excessive focus on the infrequent decisions such as where to build a factory or what product to produce, at the expense of the large number of smaller decisions. It seems to me that the perception of focus depends on who you talk to. Senior executives and directors of firms and governments, given their limited time and intellectual resources, tend to focus their attention on such decisions. If you talk to the guy on the factory floor, or individual consumers, or the point of sale salesclerk, they focus on quite different decisions, and there are a lot more of them! Economists must simplify models, and in 1945 they had to simplify much more than we do now, since computers have allowed them to model complexity much more successfully. Besides, I suspect that most economists see senior executives and directors as much more of their audience than factory workers, salesclerks or consumers.

Still I strongly recommend that people interested in knowledge for development read this classic article. JAD