David R. Henderson

Extending Hayek's Insights about Local Knowledge

David R. Henderson*
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Friedrich Hayek's 1945 article in the American Economic Review, "The Use of Knowledge in Society," has become a classic. It was the last in a series of articles in which Hayek put the final intellectual nail in the coffin of socialism. Hayek argued persuasively that the information that is most valuable in an economy is decentralized; it exists in little pieces in the minds of the billions of people acting in the economy. It is not centrally aggregated by government planners and can't be centrally aggregated except as a happy result of free markets. These facts, argued Hayek, are a sufficient reason for socialism to fail. Economists who write in the Hayekian tradition often refer to people's information about their own circumstances as "local knowledge."

Hayek's conclusion about the importance of local knowledge can be extended far beyond markets into many parts of our lives. In this essay, I summarize Hayek's argument and then apply it to some good things that happened on September 11, 2001, and to two cases after 9/11—the case of the "shoe bomber" and that of the "underpants bomber"—when airline passengers acted together to save themselves from terrorists.

Hayek wrote:

[T]here 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. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation.

Hayek went on to show how letting people act on their own information is not chaotic but, rather, relatively harmonious. What allows each person to act on his or her information and to coordinate with others is the price system, the free market.

Hayek gave the example of tin:

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. 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 and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. 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.

The price of tin is not a decentralized piece of information. But it comes about due to a decentralized process in which millions of participants, by their decisions as suppliers or demanders, determine the price.

One U.S. newspaper reporter who had never read Hayek1 reached the same conclusion when he observed the centrally planned Soviet economy in the late 1980s. The reporter, Scott Shane, was the Moscow correspondent for the Baltimore Sun from 1988 to 1991. In his book Dismantling Utopia: How Information Ended the Soviet Union, Shane wrote:

My informal survey suggested that some of the longest lines in Moscow were for shoes. At first I assumed that the inefficient Soviet economy did not produce enough shoes, and for that reason, even in the capital, people were forced to line up for hours to buy them.... Then I looked up the statistics.

I was wrong. The Soviet Union was the largest producer of shoes in the world. It was turning out 800 million pairs of shoes a year—twice as many as Italy, three times as many as the United States, four times as many as China. Production amounted to more than three pairs of shoes per year for every Soviet man, woman, and child.

The problem with shoes, it turned out, was not an absolute shortage. It was a far more subtle malfunction. The comfort, the fit, the design, and the size mix of Soviet shoes were so out of sync with what people needed and wanted that they were willing to stand in line for hours to buy the occasional pair, usually imported, that they liked.

At the root of the dysfunction was the state's control of information. Prices are information—the information producers need in order to know what and how much to produce. In a market for a product as varied in material and design as footwear, shifting prices are like sensors taped to the skin of a patient in a medical experiment; they provide a constant flow of information about consumer needs and preferences. When the state controlled information, it deprived producers of information about demand.

Central planners cannot know what kinds of shoes people want. Prices formed by the decentralized actions of thousands, and sometimes millions, of people in a free market cause the available number and types of shoes to be much more in sync with consumers' wishes.

The importance of decentralized information extends beyond standard markets. Even in activities that do not involve markets directly, people act on their decentralized information in effective ways that no centralized body could mimic.

Consider the three cases that I referred to above: September 11, 2001; the "shoe bomber"; and the "underwear bomber."

 
"On that horrible day, September 11, 2001, three good things happened, all involving people acting on decentralized information."

On that horrible day, September 11, 2001, three good things happened, all involving people acting on decentralized information.

After the first airplane hit the north tower of the World Trade Center in New York City, the Port Authority of New York and New Jersey, which ran the Trade Center, immediately put out an announcement that the south tower was safe. That announcement persuaded many people to turn around and go back up to their offices and convinced others still in the tower to stay in place. Many of these people died. What's the good thing that happened? Hundreds of people ignored that centralized warning, trusting their own instincts instead, and, when the next plane hit the south tower about 17 minutes later, were well on their way to safety.2

The second good thing that happened involved United Flight #93. When the terrorists took over flight 93, some of the passengers broke the rules by using their cell phones to contact friends and relatives. That, by the way, was a breach of a federal law against using cell phones. Had they waited around for a central authority to give them information and/or directions, they might have done nothing. But, instead, they learned decentralized information about the other attacks, which suggested to them that this was not a normal hijacking. If they did not fight back, they would likely perish. During their struggle with the hijackers, the plane crashed into the ground in Pennsylvania, perhaps saving the lives of people on the ground, in the White House or in the U.S. Capitol building.3 The decentralized information they got was valuable.

Third, and finally, consider the almost 4,500 airplanes—3,300 commercial and 1,200 private—that were in the air that morning, airplanes that the air traffic controllers needed to get on the ground safely. Between 9:45 a.m., when the Federal Aviation Authority ordered all planes to land,4 and 10:45 a.m., just one hour later, 2,868 planes were landed. By 12:16 p.m., only military and emergency flights remained in U.S. airspace.

How did those airplanes get on the ground safely? The answer was given in a USA Today article5 written almost one year after 9/11. As reporter Alan Levin put it, doing so

required intense cooperation, swift decision-making and the unflinching work of thousands of people. Across the nation, controllers searched for alternate airports to land large jets even as their traumatized colleagues streamed back from break rooms after watching the attacks on TV.

Levin noted that in the first 15 minutes, 1,100 flights were rerouted, a rate of more than one per second.

He continued:

To deal with the workload, controllers scrapped the normal air traffic boundaries, controller Richard Anderson said. Instead of handing off a descending jet from one controller to another as it got closer to the airport, a single controller guided a jet until the airport's controllers took over. This eliminated as many as a dozen time-consuming radio calls per flight, simplifying matters for pilots and controllers, Anderson said.

Interestingly, noted Levin, after 9/11, FAA officials started to write a set of procedures for getting planes on the ground in case something like 9/11 happened again. But then they stopped. Levin quoted Frank Hatfield, the FAA's eastern region chief: "A lot of things were done intuitively, things that you can't write down in a textbook or you can't train somebody to do." Indeed. Hayek's insight strikes again.

Consider two cases of interrupted terrorism on U.S.-bound flights after 9/11: the cases of the "shoe bomber" and the "underwear bomber."

On December 22, 2001, on a flight from Paris to Miami, terrorist Richard Reid was caught trying to light his shoe, which contained explosives, on fire. One flight attendant tried to subdue him, and fellow passengers stepped in to help. They tied him up with plastic handcuffs, seatbelt extensions, leather waist belts, and headphone cords. A doctor on board administered a tranquilizer. The flight landed safely in Boston.6

On December 25, 2009, Umar Farouk Abdulmutallab, the "underwear bomber," tried to set off an explosive device on a flight from Amsterdam to Detroit shortly before it landed. A fellow passenger, noticing that Abdulmutullab was on fire, jumped on top of him and flight attendants put out the flames with fire extinguishers.7

 

For more on this topic, see "Information and Prices," by Donald J. Boudreaux in the Concise Encyclopedia of Economics and the EconTalk podcast episode, Munger on Price Gouging.

Notice what these two cases have in common. Both involved the failure of government agencies to prevent the passengers from getting on board with weapons, and both involved the successful actions of passengers, acting on their local knowledge, to save the day.

It is difficult to say, a priori, that local knowledge and the actions based on that knowledge will always be superior to centralized information and actions. But what is interesting, and hopeful, is that people acting on their own local knowledge often give better results than centralized government actors do. Hayek's insight is more powerful than even he might have thought.


Footnotes
1.

Based on an email discussion with Scott Shane in around 2003.

2.

See Martha T. Moore and Dennis Cauchon, "Delay meant death on 9/11,". USA Today, September 2, 2002.

4.

The person who gave the order was the FAA's National Operations Manager, Ben Sliney.

5.

Alan Levin, "For air traffic controllers, a historic achievement,". USA Today, August 13, 2002.

6.

The story is told well in at "Richard Reid". Wikipedia.


*David R. Henderson is a research fellow with Stanford University's Hoover Institution and a professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California. He blogs at EconLog.

For more articles by David R. Henderson, see the Archive.

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