The Decentralisation of Knowledge
Today, I would like to talk about Hayek's essay 'The Use of Knowledge in Society'. Hayek perfectly describes how knowledge is distributed among all market participants. No single entity has all the information, and furthermore, it is impossible for any entity to acquire all the information necessary to establish a rational economic order. The preferences and relative importance of goods to each individual are only known to the individual themselves.
Hayek argues that economic planning requires knowledge that statisticians in any central planning authority cannot obtain. This type of knowledge includes information on fine-grained differences in quality and the knowledge of 'time and place'. The latter refers to the information that only certain individuals acquire by training or by being familiar with a certain field or area. The circumstances of time and place are best known by the 'man on the spot' — someone who knows the local situation and is aware of current opportunities.
A decentralised system is the answer to the problem of information being dispersed across different points in the economic network. The 'man on the spot' should be the one to act on changing circumstances in time and place. At least, this covers one aspect of the problem. However, another issue persists: the 'man on the spot' may have intricate knowledge in his field of expertise, but in order to make an economic plan, he needs information from outside his area of expertise. This is where prices come into play.
Prices serve as a means to communicate throughout the economy the factors of scarcity and utilization of a good or service. Hayek provides an example of how information is conveyed through prices.
It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. 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.
I like how he closes the example. It is not necessary for anyone actor to understand the causes but each participant can now act upon the new reality to find the economically most viable way to proceed. The information of the new reality is carried through the economy through all actors even though a majority of the economic actors do not know anything about the cause of the price change. Later he writes this:
The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dispense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.
With prices we have a mechanism where information travels through the system and every actor does what they need to do in order to create the most economic value. It is not a coordinated process but rather the natural result of human incentives and the surrounding economic circumstances. Another important aspect that Hayek mentions is that this mechanism of information distribution through prices is critical for the division of labor to have happened.
This essay does a great job at explaining the mechanics of a decentralised economy where the focus is on the individual and why a decentralised system should be more effective at creating economic value compared to a centrally planned economy. I hope you enjoyed this short commentary and summary of his Essay.
And as always. Stay humble and stack sats.
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