New Solutions to the Knowledge Problem?

In teaching my students the foundations of the capitalist system each fall, I often begin my course with Hayek’s most famous (and possibly most important) essay “The Use of Knowledge in Society.”  In this article, Hayek makes possibly the two most important points in understanding how and why free markets are the only means to efficiently allocate resources:

  1. It is impossible for any individual or group to possess complete knowledge of all the information necessary to determine how and where resources should be used.
  2. Yet, there must be some means in place to aggregate all this knowledge in order to then communicate how resources should be used.

So, all this dispersed knowledge is necessary to determine how resources should be used but there is no individual or group that can attain complete knowledge.

Some would argue that we simply need to employ smarter mathematical algorithms, use more computing power, and certainly we can determine the use of all resources.  That was the problem with the Soviet system, Stalin simply needed computers to determine how to manage his Marxist experiment.

Hayek goes on to explain that the knowledge needed is dispersed among millions and millions of individuals, and this knowledge is unique to people all over the world.  No individuals or computers could instantly and constantly gather the information needed to determine how many iPhones to produce each day, or how many acres of wheat to grow each year, or how many tons of steel to produce, or how many boxes of Cheerios to manufacture, etc.  Additionally, this knowledge is necessary to determine if copper should be used to produce pipes for plumbing or wiring for electronic components.

Thus, there are no “new” solutions to this knowledge problem that Hayek wrote about in 1945.  Even with all the computing power in the world, and all the sophisticated mathematical models a price system is the only means by which this dispersed knowledge, necessary to communicate how resources are to be used, is aggregated.  Free and unregulated prices are the only mechanism which can communicate the correct information to both producers and consumers throughout the world.

Hayek’s writing is as true today as it ever was.