Ryan Bourne
Ryan Bourne
Fifty years ago today, on October 9, 1974, Friedrich Hayek was announced as a winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
The prize committee recognized Hayek’s “pioneering work in the theory of money and economic fluctuations and … penetrating analysis of the interdependence of economic, social and institutional phenomena.” The prize would cement Hayek as one of the most important economic and political theorists of the 20th century.
Much has been written about Hayek’s numerous contributions, but one of his simplest yet most profound insights is presented in the classic paper “The Use of Knowledge In Society.” It’s a theme crucial to The War on Prices.
A market economy will be more efficient than a centrally planned one, Hayek concludes. Why? Knowledge. Hayek argued that the information needed to allocate resources efficiently in an ever-changing world is dispersed across millions of people. It’s often local, personal, and hard to fully explain. Yes, some knowledge is certainly technical or “scientific”—it can be written down as instruction. But a lot of what we do and how we operate reflects highly personal experience and local understanding.
An estate agent will know about the quirks of their local housing market, the individual shop manager has the most detailed knowledge of how to motivate their difficult staff members, and a specific consumer knows that she prefers one cookie over another, even if she cannot explain why. This practical, on-the-ground information simply can’t be collated by government. A central authority will therefore only ever have access to a tiny fraction of the knowledge that goes into making economic decisions. This “knowledge problem” means that central planning tends to inefficiency and, so, relative poverty.
Fortunately, a market economy is able to harness that knowledge without requiring a central authority to try collating uncollectable information. » Read More
https://www.cato.org/blog/50th-anniversary-hayeks-nobel