The Use of Knowledge in Society

Abstract

Hayek proposes that the problem of a rational economic order is how to secure the best use of resources known to any member of society for ends whose relative importance only these individuals know. Contributing to the difficulties in solving the problem is that no person ever has all the available knowledge that exists when making an economic choice; in reality knowledge is dispersed among all people. Solution of economic problems is made by persons with practical, specialized knowledge of circumstances of time and place. How knowledge on which people base their plans is communicated to people is a crucial problem for explaining economic process. Economic problems cannot be solved by central planning, which cannot take into account all the circumstances of time and place, especially when society must rapidly adapt to change. Only decentralization can ensure that knowledge of particular circumstances will be used by those familiar with the circumstances. Providing information is the true value of the price system, for it is the means of communicating information to those making economic choices so that their choices fit into the whole pattern of changes of the larger economic system; it is a system for registering change. Prices act to coordinate the separate actions of different people. Hayek argues that methodologies (such as those of equilibrium analysis and Joseph Schumpeter) that assume people's knowledge corresponds with the object facts of a situation (i.e., that people act upon full information) are faulty. (TNM)

Keywords: Incomplete information, Adaptation to change, Information exchange, Price system, Resource allocation, Centralized economies, Decentralized economies, Economic policies, Information acquisition, Schumpeter, Joseph A., Economic theory