Source
Hayek, F. A. (1945), “The Use of Knowledge in Society”, American Economic Review 35(4): 519–530, LIT-1337, read in full in NOTE-1036 from the Econlib reprint.
What was actually shown
Three steps, each argued and none demonstrated.
- Dispersed knowledge. Beside scientific knowledge there is “a body of very important but unorganized knowledge … the knowledge of the particular circumstances of time and place”, in which “practically every individual has some advantage over all others”.
- It cannot be centralized. It “by its nature cannot enter into statistics”, because statistics are made “by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision.” So decisions depending on it must be left to “the ‘man on the spot’”, by “some form of decentralization”.
- Prices coordinate. The man on the spot needs to know only “how much more or less difficult to procure” things have become. In the tin example, a scarcity spreads through substitutes and their substitutes “without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause”. The price system is “a mechanism for communicating information”, marked by “the economy of knowledge with which it operates”.
What could have come out otherwise: if the knowledge that matters for most decisions were general and stable, a body of experts could hold it, and the case would fail. Hayek grants the point for scientific knowledge and denies it for the rest on the premise that “economic problems arise always and only in consequence of change”. The essay does not test that premise.
What this does not say
- Not that prices convey all that decisions need. The essay gives no measure of how close the adjustment comes, and grants that adjustments are “probably never ‘perfect’” and less so “as prices grow more rigid”. What prices do not carry, such as effects on third parties or knowledge held for advantage, is not discussed.
- Not that removing a constraint decentralizes. The argument is for competition, “decentralized planning by many separate persons”, against one plan. It names a third arrangement, planning “delegated to organized industries … in other words, monopoly”, and does not say that freeing a market from public rules yields the first rather than the third.
- Not a result about organizations. It is stated for the economic order. That the same reasoning governs the allocation of decisions inside an organization is a plausible extension the essay does not make.
- Not evidence. The promote_when asks for a model or a measurement.
Connections
- CLAIM-410. The claim treats a change of rules as a change in who holds each governing function. Hayek’s §II puts the economic dispute the same way: “not … whether planning is to be done or not … [but] whether planning is to be done centrally … or is to be divided among many individuals”. This account is the informational reason one allocation of decisions can beat another. It is not a reason that every removal of a constraint improves the allocation.
- TERM-064. The lumping that makes statistics usable centrally is what loses circumstances of time and place: a 1945 statement of what legibility costs.
- THEORY-404. A designed signal moves a Bayesian receiver. Hayek’s prices are signals nobody designs, which carry what a decision needs. Both treat what a decision maker receives as the lever. The pairing is the record’s.
- THEORY-429 (North) answers the same dispersal with institutions, constraints that economize on knowledge, rather than with prices.