Hayek, F. A. (1945). "The Use of Knowledge in Society". American Economic Review, 35(4), 519-530.
”What is the problem we wish to solve when we try to construct a rational economic order?” (521). Hayek begins by wondering how it is necessarily possible for people to structure an economic order. If there is full transparency and information, then there really isn’t a problem. However, as Hayek rightly notes, there is not full transparency or information: it is impossible to know fully the desires of their neighbor. The problem is thus, “…the utilization of knowledge not given to anyone in its totality” (520).
All economic activity, whether centralized or decentralized, according to Hayek, involves planning. “Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge” (521). If we are looking for experts to use this knowledge, it then becomes a complicated problem of choosing the expert. “What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem” (521).
Scientific knowledge, or the knowledge of experts, will never be the full extent of knowledge. There are other kinds of knowledge that each person possesses that goes above and beyond this professional, elitist knowledge. This is the knowledge of a particular time and space, in the words of Hayek (522). This is a knowledge of needs, desires and goals that can never be fully understood by scientific knowledge.
Additionally, the need for economic planning tends to take place when issues of change arise. This presents a situation in that the scientist must explore her own knowledge and eventually determine a course of action. However, Hayek claims that the type of knowledge that is accessed by these scientists is not necessarily the correct type of knowledge for the situation at hand. In reality, the type of knowledge that must be accessed in order to make economic policy decisions is of a particular time and place, it is owned by a particular individual. This type of knowledge can not be evaluated in the realm of statistics.
There then remains the problem of how you provide the necessary information about the current situation to the person with the knowledge of a particular time and space. Hayek wonders how much information this person requires and eventually concludes that they do not need more information than that is provided them by their immediate surroundings. They only need to know the cost of producing something, that there is more or less of a factor in supply and that the price of various goods has changed and to what level they have changed. These prices eventually act as a tool for coordinating the actions of the many people in a market place; they are the catalyst for bringing the many individuals with particular information of a time and space together to make informed collective decisions.
At the end of the piece, he takes issue with Professor Schumpeter’s formulation of market interaction, where people are taking into consideration very large amounts of knowledge that border on full knowledge. First of all, it is crucial for Hayek to assume that the fullness of knowledge is unattainable. Secondly, he uses this assumption to make the claim that large groups of people with limited knowledge must come together to make decisions. Thirdly, he determines that prices are the mechanism whereby these individuals are able to come together to achieve socially optimum levels of production and consumption, or, rather, economic equilibrium that is, by definition, particular to a time and a space.
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