Hayek Submission - Grade: A PDF

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Summary of: The Use of Knowledge in Society by F. A. Hayek

In “The Use of Knowledge”, Hayek begins by identifying the key economic problem impacting people. Many people believe the issue to be scarcity of resources and methods to properly allocate these scarce resources, but Hayek acknowledges that the problem roots from the improper distribution of knowledge among individuals. According to Hayek, if relevant information and knowledge is evenly dispersed, statistical, complete, and non-contradictory, allocating resources would be more rational and efficient. As humans, we are known to engage in decision-making about the allocation of resources and this is called “planning.” The question raised by Hayek is who will do the planning. Either it will be done centrally, meaning by one authority for the entire economic system, or it will be divided among several people. People believe that scientific knowledge is the sum of all knowledge and acquiring all knowledge is a task that can be easily achieved. This ignorance contributes to the larger part of the problem. Hayek introduces statistical information, which is the sort of knowledge that a central authority would use to gather significant information for a specific decision. Decentralized statistical knowledge is the type of information needed by the central planner. Decentralization helps people exploit their local knowledge while making utilizing some type of summary of the knowledge possessed by others that is relevant to their decisions. This helps the planner understand why a resource is more or less scarce. Hayek also introduces the price system as a mechanism for communicating relevant information, one that requires little information to be possessed by the participants to conduct correct actions. The price system addresses the problem of knowing if a resource has become more or less scarce. Fundamentally, in a system

where relevant information is scattered among many people, prices function to coordinate the different actions of different individuals, making the price system a technology for registering change. All in all, Hayek is suggesting that planning and control over our resources should be decentralized, because our knowledge is decentralized and this would allow us to take advantage of those forms of knowledge. But, while it is necessary, decentralization is not sufficient for social coordination because there needs to be a good flow of knowledge between individuals for effective decentralized planning. He acknowledges that no centrally planned economy would match an open market because even a knowledgeable planner would have access to only a small quantity of information that would influence price. Hayek endorses the message that price fluctuations in the price system promote the efficient distribution of resources. Hayek’s paper does not blatantly mention the environment but it does provide a framework for thinking about how our standards as humans relate to natural resource limitations and how entrepreneurs exploit on opportunities to profit. Hayek’s argument on disparate knowledge can be integrated with human interaction with nature. His understanding of the price system as a way of communication suggests that prices offer a way of valuing nature’s bounty. According to him, prices are necessary to coordinate human action, and this applies to environmental protection as well....