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Information, Prices, and Socialism's Flaws: Morgan Rose
12 paragraphs found.

The Austrian economist F. A. Hayek, whose views on information in regard to centralized planning will be discussed below, emphasized the importance of how prices convey only the most relevant information to interested parties. He described this aspect of the price system in a 1945 article, "The Use of Knowledge in Society,":

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 from, 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.2

Information of Time and Place

Hayek, a student of Mises at the University of Vienna in the early 1920s, took up a related point about limitations on the amount of information that central planners can acquire. Hayek's emphasis, however, was less on the manner in which information is conveyed, and more on the amount and types of information it is possible to convey.


For more on these authors, see the biographies of Mises and Hayek in the Concise Encyclopedia of Economics.


Hayek began his 1945 paper, "The Use of Knowledge in Society," by characterizing the problem of constructing a rational economic order of the sort advocated by socialists as largely one of information aggregation:

On certain familiar assumptions the answer is simple enough. 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.... The peculiar character of the problem of a rational economic order is determined 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.3


Hayek argued that the type of society that is able to more fully use all of the existing knowledge is the one that would lead to better outcomes. Further, he argued that there is one important classification of information that cannot be used by a central planner, information that Hayek termed "the knowledge of the particular circumstances of time and place." This is the sort of information that can only be acquired with experience and intimate contact with a specialized industry or locale. According to Hayek, this is

knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards to location, quality, and other particulars, in a way which may be very significant for the specific decision.4


The importance of decentralized information, and the difficulty of conveying certain kinds of it to others, had been commented upon by others before Hayek did so in 1945. Nearly a century before Hayek, English economist John Stuart Mill noted in Principles of Political Economy (1909, first pub. 1848) that no government can attain all of the information known by its constituents.

It must be remembered, besides, that even if a government were superior in intelligence to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose.


Other economists provided examples of knowledge of time and place as described by Hayek. One of the more important forms of particularized knowledge does not concern the physical characteristics of inputs or local vagaries of supply and demand, but instead relates to the abilities, temperaments, and financial situations of the other people with whom an individual may consider transacting. Frank H. Knight, in Part III, Chapter 9, paragraph 37 of Risk, Uncertainty, and Profit (1921) wrote that

men form judgments of other men on the basis of watching their performances over a period of time, and in addition form impressions having some claim to validity from mere personal appearance, conversation, etc.... It is the most difficult to discuss scientifically of all the data connected with the practical bearings of knowledge and uncertainty.


Given the amount of important information about time and place that is outside of the reach of central planners, Hayek asserted that "the central planner will have to find some way or other in which the decisions depending on them can be left to the 'man on the spot,'" in other words, decentralize the decision-making.


This is where the ways in which prices convey information enter the picture. Hayek wrote that "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." Returning to the example of Tom the baker and the sudden increased scarcity of sugar in Allred, we noted that Tom did not need to know what caused the increased scarcity. In fact, very few people having anything to do with sugar need to know what happened. In Hayek's words,

If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system.... The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.


A broader discussion of Hayek's writings as they relate to the organization of society can be found in "The Tradition of Spontaneous Order" by Norman Barry. See in paticular Barry's section on Hayek and knowledge.


Because of the remarkable way in which market prices facilitate communication without conscious effort, it is possible for dispersed individuals to share relevant information among each other. This is so even though it is impossible for a centralized planner to learn the particular information of time and place that dispersed individuals possess. Information is more fully utilized when decision-making is decentralized, and so Hayek concluded that better outcomes are possible where decision-making authority is decentralized rather than in the hands of central planners, a resounding blow to the intellectual support for socialism over capitalism.


The following example draws heavily from one used by F. A. Hayek on page 526 of "The Use of Knowledge in Society,"The American Economic Review, Volume XXXV (September 1945).