Hayek on Knowledge
By David Henderson
I don’t want to weigh in comprehensively on co-blogger Bryan’s claims about Hayek. What I will say is that it’s important to distinguish between three claims:
(1) the claim that many modern libertarians and economists overrate Hayek (a claim with which I agree),
(2) the claim that he was not a great economist (a claim with which I disagree), and
(3) the claim that “his original, true ideas could have been five good blog posts,” a claim that Bryan made and one with which I disagree.
What I want to do instead is present my teaching materials I use when I teach Hayek’s “The Use of Knowledge in Society,” which I spend an hour on in every course I teach. I’ve copyrighted them, as you can see, but this is my permission to use any or all of them as long as you cite the source.
Copyright David R. Henderson 2007
You might not get the whole value of Hayek’s article by reading it once. It’s complicated, but that’s because there’s so much there (and because of his Germanic writing style.) I strongly recommended that you read it at least twice. I regard this essay as the most important economics essay in the last century. Almost 30 years after this article was published, Hayek won the Nobel prize in economic science.
1. The most important paragraph in this article is paragraph H3 and the most important sentence in the article is the first sentence of this paragraph:
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. The economic problem of society is thus not merely a problem of how to allocate “given” resources–if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
Economists today who draw on Hayek’s insight often refer to this point about dispersed information as “local knowledge.” Think about kinds of local knowledge you have about your job or other parts of your economic life, knowledge that would be unavailable to a central planner. Now ask yourself how things would work if you had to get a central planner’s permission each time you wanted to act on this knowledge.
2. In paragraph H6, Hayek writes:
The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.
I don’t really have a question about this. I just want to highlight its importance.
3. Read and reread H9. There’s so much in there.
4. In paragraph H10, Hayek writes:
Even economists who regard themselves as definitely immune to the crude materialist fallacies [i.e., thinking in terms of material wealth–remember Heyne, Boettke, and Prychitko’s point in Chapter 2] constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned–apparently because in their scheme of things all such knowledge is supposed to be “given.”
A couple of years ago, our dishwasher was leaving our dishes streaky and so we called the appliance repair person. He came out–minimum charge $69.95–and in 5 minutes assessed the situation and told us we should use powder instead of liquid dishwash detergent. For a few minutes I was angry. Then I remembered Hayek. Explain. What did I figure out that is contained in this above quote?
5. Read paragraph H15. Some economists who studied the Soviet Union and other centrally planned economies have claimed that the biggest failure of such economies was not in manufacturing but in agriculture. Given Hayek’s reasoning in H15, explain why.
6. In paragraph H16, Hayek writes:
It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and 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.”
Connect this with the Hazlett article on D-Day and the contrasting approaches of the Allies and the Germans.
7. Carefully read paragraph H21, another key paragraph. Hayek writes:
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.
Why does it not matter?
8. In H22, Hayek gives an analogy between the price system and machinery. What is that analogy?
9. In H23, Hayek uses the word “marvel” to describe the price system and then explains in H24 why he uses that word. Why?
10. See the reading I’m attaching from that noted economic analyst, Howard Stern, for an example of local knowledge. (H/T on Stern reading to Dan Klein.)