Hayek, Friedrich A. (1899-1992)
"The Use of Knowledge in Society"
American Economic Review. XXXV, No.
4, September 1945, pp. 519-30. American Economic Association
Available at: Library of Economics and Liberty, link: http://www.econlib.org/library/Essays/hykKnw1.html
The Use of Knowledge in Society
AER, 1945
I
H.1
What is the problem we wish to solve when we try to construct a rational
economic order? On certain familiar assumptions the answer is simple enough. If
we possess all the relevant information, if we can start out from a
given system of preferences, and if we command complete knowledge of
available means, the problem which remains is purely one of logic. That is, the
answer to the question of what is the best use of the available means is
implicit in our assumptions. The conditions which the solution of this optimum
problem must satisfy have been fully worked out and can be stated best in
mathematical form: put at their briefest, they are that the marginal rates of
substitution between any two commodities or factors must be the same in all
their different uses.
H.2
This, however, is emphatically not the economic problem which
society faces. And the economic calculus which we have developed to solve this
logical problem, though an important step toward the solution of the economic
problem of society, does not yet provide an answer to it. The reason for this
is that the "data" from which the economic calculus starts are never
for the whole society "given" to a single mind which could work out
the implications and can never be so given.
H.3
The peculiar character of the problem of a rational economic order is
determined precisely by the fact that the knowledge of the circumstances of
which we must make use never exists in concentrated or integrated form but
solely as the dispersed bits of incomplete and frequently contradictory
knowledge which all the separate individuals possess. The economic problem of
society is thus not merely a problem of how to allocate "given"
resources—if "given" is taken to mean given to a single mind which
deliberately solves the problem set by these "data." It is rather a
problem of how to secure the best use of resources known to any of the members
of society, for ends whose relative importance only these individuals know. Or,
to put it briefly, it is a problem of the utilization of knowledge which is not
given to anyone in its totality.
H.4
This character of the fundamental problem has, I am afraid, been
obscured rather than illuminated by many of the recent refinements of economic
theory, particularly by many of the uses made of mathematics. Though the
problem with which I want primarily to deal in this paper is the problem of a
rational economic organization, I shall in its course be led again and again to
point to its close connections with certain methodological questions. Many of
the points I wish to make are indeed conclusions toward which diverse paths of
reasoning have unexpectedly converged. But, as I now see these problems, this
is no accident. It seems to me that many of the current disputes with regard to
both economic theory and economic policy have their common origin in a
misconception about the nature of the economic problem of society. This
misconception in turn is due to an erroneous transfer to social phenomena of
the habits of thought we have developed in dealing with the phenomena of
nature.
II
H.5
In ordinary language we describe by the word "planning" the
complex of interrelated decisions about the allocation of our available
resources. All economic activity is in this sense planning; and in any society
in which many people collaborate, this planning, whoever does it, will in some
measure have to be based on knowledge which, in the first instance, is not
given to the planner but to somebody else, which somehow will have to be
conveyed to the planner. The various ways in which the knowledge on which
people base their plans is communicated to them is the crucial problem for any
theory explaining the economic process, and the problem of what is the best way
of utilizing knowledge initially dispersed among all the people is at least one
of the main problems of economic policy—or of designing an efficient economic
system.
H.6
The answer to this question is closely connected with that other
question which arises here, that of who is to do the planning. It is
about this question that all the dispute about "economic planning"
centers. This is not a dispute about whether planning is to be done or not. It
is a dispute as to whether planning is to be done centrally, by one authority
for the whole economic system, or is to be divided among many individuals.
Planning in the specific sense in which the term is used in contemporary
controversy necessarily means central planning—direction of the whole economic
system according to one unified plan. Competition, on the other hand, means
decentralized planning by many separate persons. The halfway house between the
two, about which many people talk but which few like when they see it, is the
delegation of planning to organized industries, or, in other words, monopoly.
H.7
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. And this, in turn, depends on whether we are more
likely to succeed in putting at the disposal of a single central authority all
the knowledge which ought to be used but which is initially dispersed among
many different individuals, or in conveying to the individuals such additional
knowledge as they need in order to enable them to fit their plans with those of
others.
III
H.8
It will at once be evident that on this point the position will be different
with respect to different kinds of knowledge; and the answer to our question
will therefore largely turn on the relative importance of the different kinds
of knowledge; those more likely to be at the disposal of particular individuals
and those which we should with greater confidence expect to find in the
possession of an authority made up of suitably chosen experts. If it is today
so widely assumed that the latter will be in a better position, this is because
one kind of knowledge, namely, scientific knowledge, occupies now so prominent
a place in public imagination that we tend to forget that it is not the only
kind that is relevant. It may be admitted that, as far as scientific knowledge
is concerned, a body of suitably chosen experts may be in the best position to
command all the best knowledge available—though this is of course merely
shifting the difficulty to the problem of selecting the experts. 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.
H.9
Today it is almost heresy to suggest that scientific knowledge is not
the sum of all knowledge. But a little reflection will show that there is
beyond question a body of very important but unorganized knowledge which cannot
possibly be called scientific in the sense of knowledge of general rules: the
knowledge of the particular circumstances of time and place. It is with respect
to this that practically every individual has some advantage over all others
because he possesses unique information of which beneficial use might be made,
but of which use can be made only if the decisions depending on it are left to
him or are made with his active coöperation. We need to remember only how much
we have to learn in any occupation after we have completed our theoretical
training, how big a part of our working life we spend learning particular jobs,
and how valuable an asset in all walks of life is knowledge of people, of local
conditions, and of special circumstances. To know of and put to use a machine
not fully employed, or somebody's skill which could be better utilized, or to
be aware of a surplus stock which can be drawn upon during an interruption of
supplies, is socially quite as useful as the knowledge of better alternative
techniques. And the shipper who earns his living from using otherwise empty or
half-filled journeys of tramp-steamers, or the estate agent whose whole
knowledge is almost exclusively one of temporary opportunities, or the arbitrageur
who gains from local differences of commodity prices, are all performing
eminently useful functions based on special knowledge of circumstances of the
fleeting moment not known to others.
H.10
It is a curious fact that this sort of knowledge should today be
generally regarded with a kind of contempt and that anyone who by such
knowledge gains an advantage over somebody better equipped with theoretical or
technical knowledge is thought to have acted almost disreputably. To gain an
advantage from better knowledge of facilities of communication or transport is
sometimes regarded as almost dishonest, although it is quite as important that
society make use of the best opportunities in this respect as in using the
latest scientific discoveries. This prejudice has in a considerable measure
affected the attitude toward commerce in general compared with that toward
production. Even economists who regard themselves as definitely immune to the
crude materialist fallacies of the past constantly commit the same mistake
where activities directed toward the acquisition of such practical knowledge
are concerned—apparently because in their scheme of things all such knowledge
is supposed to be "given." The common idea now seems to be that all
such knowledge should as a matter of course be readily at the command of
everybody, and the reproach of irrationality leveled against the existing
economic order is frequently based on the fact that it is not so available.
This view disregards the fact that the method by which such knowledge can be
made as widely available as possible is precisely the problem to which we have
to find an answer.
IV
H.11
If it is fashionable today to minimize the importance of the knowledge
of the particular circumstances of time and place, this is closely connected
with the smaller importance which is now attached to change as such. Indeed,
there are few points on which the assumptions made (usually only implicitly) by
the "planners" differ from those of their opponents as much as with
regard to the significance and frequency of changes which will make substantial
alterations of production plans necessary. Of course, if detailed economic
plans could be laid down for fairly long periods in advance and then closely
adhered to, so that no further economic decisions of importance would be
required, the task of drawing up a comprehensive plan governing all economic
activity would be much less formidable.
H.12
It is, perhaps, worth stressing that economic problems arise always and
only in consequence of change. So long as things continue as before, or at
least as they were expected to, there arise no new problems requiring a
decision, no need to form a new plan. The belief that changes, or at least
day-to-day adjustments, have become less important in modern times implies the
contention that economic problems also have become less important. This belief
in the decreasing importance of change is, for that reason, usually held by the
same people who argue that the importance of economic considerations has been
driven into the background by the growing importance of technological
knowledge.
H.13
Is it true that, with the elaborate apparatus of modern production,
economic decisions are required only at long intervals, as when a new factory
is to be erected or a new process to be introduced? Is it true that, once a
plant has been built, the rest is all more or less mechanical, determined by
the character of the plant, and leaving little to be changed in adapting to the
ever-changing circumstances of the moment?
H.14
The fairly widespread belief in the affirmative is not, as far as I can
ascertain, borne out by the practical experience of the businessman. In a
competitive industry at any rate—and such an industry alone can serve as a
test—the task of keeping cost from rising requires constant struggle, absorbing
a great part of the energy of the manager. How easy it is for an inefficient
manager to dissipate the differentials on which profitability rests, and that
it is possible, with the same technical facilities, to produce with a great variety
of costs, are among the commonplaces of business experience which do not seem
to be equally familiar in the study of the economist. The very strength of the
desire, constantly voiced by producers and engineers, to be allowed to proceed
untrammeled by considerations of money costs, is eloquent testimony to the
extent to which these factors enter into their daily work.
H.15
One reason why economists are increasingly apt to forget about the
constant small changes which make up the whole economic picture is probably
their growing preoccupation with statistical aggregates, which show a very much
greater stability than the movements of the detail. The comparative stability
of the aggregates cannot, however, be accounted for—as the statisticians
occasionally seem to be inclined to do—by the "law of large numbers"
or the mutual compensation of random changes. The number of elements with which
we have to deal is not large enough for such accidental forces to produce
stability. The continuous flow of goods and services is maintained by constant
deliberate adjustments, by new dispositions made every day in the light of
circumstances not known the day before, by B stepping in at once when A
fails to deliver. Even the large and highly mechanized plant keeps going largely
because of an environment upon which it can draw for all sorts of unexpected
needs; tiles for its roof, stationery for its forms, and all the thousand and
one kinds of equipment in which it cannot be self-contained and which the plans
for the operation of the plant require to be readily available in the market.
H.16
This is, perhaps, also the point where I should briefly mention the fact
that the sort of knowledge with which I have been concerned is knowledge of the
kind which by its nature cannot enter into statistics and therefore cannot be
conveyed to any central authority in statistical form. The statistics which
such a central authority would have to use would have to be arrived at
precisely by abstracting from minor differences between the things, 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. It follows from this that central planning based on
statistical information by its nature cannot take direct account of these
circumstances of time and place and that the central planner will have to find
some way or other in which the decisions depending on them can be left to the
"man on the spot."
V
H.17
If we can agree that the economic problem of society is mainly one of
rapid adaptation to changes in the particular circumstances of time and place,
it would seem to follow that the ultimate decisions must be left to the people
who are familiar with these circumstances, who know directly of the relevant
changes and of the resources immediately available to meet them. We cannot
expect that this problem will be solved by first communicating all this
knowledge to a central board which, after integrating all knowledge,
issues its orders. We must solve it by some form of decentralization. But this
answers only part of our problem. We need decentralization because only thus
can we insure that the knowledge of the particular circumstances of time and
place will be promptly used. But the "man on the spot" cannot decide
solely on the basis of his limited but intimate knowledge of the facts of his
immediate surroundings. There still remains the problem of communicating to him
such further information as he needs to fit his decisions into the whole
pattern of changes of the larger economic system.
H.18
How much knowledge does he need to do so successfully? Which of the
events which happen beyond the horizon of his immediate knowledge are of relevance
to his immediate decision, and how much of them need he know?
H.19
There is hardly anything that happens anywhere in the world that might
not have an effect on the decision he ought to make. But he need not know of
these events as such, nor of all their effects. It does not matter for
him why at the particular moment more screws of one size than of another
are wanted, why paper bags are more readily available than canvas bags,
or why skilled labor, or particular machine tools, have for the moment
become more difficult to obtain. All that is significant for him is how much
more or less difficult to procure they have become compared with other
things with which he is also concerned, or how much more or less urgently
wanted are the alternative things he produces or uses. It is always a question
of the relative importance of the particular things with which he is concerned,
and the causes which alter their relative importance are of no interest to him
beyond the effect on those concrete things of his own environment.
H.20
It is in this connection that what I have called the "economic
calculus" proper helps us, at least by analogy, to see how this problem
can be solved, and in fact is being solved, by the price system. Even the
single controlling mind, in possession of all the data for some small,
self-contained economic system, would not—every time some small adjustment in
the allocation of resources had to be made—go explicitly through all the
relations between ends and means which might possibly be affected. It is indeed
the great contribution of the pure logic of choice that it has demonstrated
conclusively that even such a single mind could solve this kind of problem only
by constructing and constantly using rates of equivalence (or "values,"
or "marginal rates of substitution"), i.e., by attaching to
each kind of scarce resource a numerical index which cannot be derived from any
property possessed by that particular thing, but which reflects, or in which is
condensed, its significance in view of the whole means-end structure. In any
small change he will have to consider only these quantitative indices (or
"values") in which all the relevant information is concentrated; and,
by adjusting the quantities one by one, he can appropriately rearrange his dispositions
without having to solve the whole puzzle ab initio or without needing at
any stage to survey it at once in all its ramifications.
H.21
Fundamentally, in a system in which the knowledge of the relevant facts
is dispersed among many people, prices can act to coördinate the separate
actions of different people in the same way as subjective values help the
individual to coördinate the parts of his plan. It is worth contemplating for a
moment a very simple and commonplace instance of the action of the price system
to see what precisely it accomplishes. Assume that somewhere in the world a new
opportunity for the use of some raw material, say, tin, has arisen, or that one
of the sources of supply of tin has been eliminated. It does not matter for our
purpose—and it is very significant that it does not matter—which of these two
causes has made tin more scarce. All that the users of tin need to know is that
some of the tin they used to consume is now more profitably employed elsewhere
and that, in consequence, they must economize tin. There is no need for the
great majority of them even to know where the more urgent need has arisen, or
in favor of what other needs they ought to husband the supply. If only some of
them know directly of the new demand, and switch resources over to it, and if
the people who are aware of the new gap thus created in turn fill it from still
other sources, the effect will rapidly spread throughout the whole economic
system and influence not only all the uses of tin but also those of its
substitutes and the substitutes of these substitutes, the supply of all the
things made of tin, and their substitutes, and so on; and all this without the
great majority of those instrumental in bringing about these substitutions
knowing anything at all about the original cause of these changes. The whole
acts as one market, not because any of its members survey the whole field, but
because their limited individual fields of vision sufficiently overlap so that
through many intermediaries the relevant information is communicated to all.
The mere fact that there is one price for any commodity—or rather that local
prices are connected in a manner determined by the cost of transport,
etc.—brings about the solution which (it is just conceptually possible) might
have been arrived at by one single mind possessing all the information which is
in fact dispersed among all the people involved in the process.
VI
H.22
We must look at the price system as such a mechanism for communicating
information if we want to understand its real function—a function which, of
course, it fulfils less perfectly as prices grow more rigid. (Even when quoted
prices have become quite rigid, however, the forces which would operate through
changes in price still operate to a considerable extent through changes in the
other terms of the contract.) The most significant fact about this system is
the economy of knowledge with which it operates, or how little the individual
participants need to know in order to be able to take the right action. In
abbreviated form, by a kind of symbol, only the most essential information is
passed on and passed on only to those concerned. It is more than a metaphor to
describe the price system as a kind of machinery for registering change, or a
system of telecommunications which enables individual producers to watch merely
the movement of a few pointers, as an engineer might watch the hands of a few
dials, in order to adjust their activities to changes of which they may never
know more than is reflected in the price movement.
H.23
Of course, these adjustments are probably never "perfect" in
the sense in which the economist conceives of them in his equilibrium analysis.
But I fear that our theoretical habits of approaching the problem with the
assumption of more or less perfect knowledge on the part of almost everyone has
made us somewhat blind to the true function of the price mechanism and led us
to apply rather misleading standards in judging its efficiency. The marvel is
that in a case like that of a scarcity of one raw material, without an order
being issued, without more than perhaps a handful of people knowing the cause,
tens of thousands of people whose identity could not be ascertained by months
of investigation, are made to use the material or its products more sparingly; i.e.,
they move in the right direction. This is enough of a marvel even if, in a
constantly changing world, not all will hit it off so perfectly that their
profit rates will always be maintained at the same constant or
"normal" level.
H.24
I have deliberately used the word "marvel" to shock the reader
out of the complacency with which we often take the working of this mechanism
for granted. I am convinced that if it were the result of deliberate human
design, and if the people guided by the price changes understood that their
decisions have significance far beyond their immediate aim, this mechanism
would have been acclaimed as one of the greatest triumphs of the human mind.
Its misfortune is the double one that it is not the product of human design and
that the people guided by it usually do not know why they are made to do what
they do. But those who clamor for "conscious direction"—and who
cannot believe that anything which has evolved without design (and even without
our understanding it) should solve problems which we should not be able to
solve consciously—should remember this: The problem is precisely how to extend
the span of our utilization of resources beyond the span of the control of any
one mind; and therefore, how to dispense with the need of conscious control,
and how to provide inducements which will make the individuals do the desirable
things without anyone having to tell them what to do.
H.25
The problem which we meet here is by no means peculiar to economics but
arises in connection with nearly all truly social phenomena, with language and
with most of our cultural inheritance, and constitutes really the central
theoretical problem of all social science. As Alfred Whitehead has said in
another connection, "It is a profoundly erroneous truism, repeated by all
copy-books and by eminent people when they are making speeches, that we should
cultivate the habit of thinking what we are doing. The precise opposite is the
case. Civilization advances by extending the number of important operations
which we can perform without thinking about them." This is of profound
significance in the social field. We make constant use of formulas, symbols,
and rules whose meaning we do not understand and through the use of which we
avail ourselves of the assistance of knowledge which individually we do not
possess. We have developed these practices and institutions by building upon
habits and institutions which have proved successful in their own sphere and
which have in turn become the foundation of the civilization we have built up.
H.26
The price system is just one of those formations which man has learned
to use (though he is still very far from having learned to make the best use of
it) after he had stumbled upon it without understanding it. Through it not only
a division of labor but also a coördinated utilization of resources based on an
equally divided knowledge has become possible. The people who like to deride
any suggestion that this may be so usually distort the argument by insinuating
that it asserts that by some miracle just that sort of system has spontaneously
grown up which is best suited to modern civilization. It is the other way
round: man has been able to develop that division of labor on which our
civilization is based because he happened to stumble upon a method which made
it possible. Had he not done so, he might still have developed some other,
altogether different, type of civilization, something like the
"state" of the termite ants, or some other altogether unimaginable
type. All that we can say is that nobody has yet succeeded in designing an
alternative system in which certain features of the existing one can be
preserved which are dear even to those who most violently assail it—such as
particularly the extent to which the individual can choose his pursuits and
consequently freely use his own knowledge and skill.
VII
H.27
It is in many ways fortunate that the dispute about the indispensability
of the price system for any rational calculation in a complex society is now no
longer conducted entirely between camps holding different political views. The
thesis that without the price system we could not preserve a society based on
such extensive division of labor as ours was greeted with a howl of derision
when it was first advanced by von Mises twenty-five years ago. Today the
difficulties which some still find in accepting it are no longer mainly
political, and this makes for an atmosphere much more conducive to reasonable
discussion. When we find Leon Trotsky arguing that "economic accounting is
unthinkable without market relations"; when Professor Oscar Lange promises
Professor von Mises a statue in the marble halls of the future Central Planning
Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes
that the essential utility of the price system consists in inducing the
individual, while seeking his own interest, to do what is in the general
interest, the differences can indeed no longer be ascribed to political
prejudice. The remaining dissent seems clearly to be due to purely
intellectual, and more particularly methodological, differences.
H.28
A recent statement by Professor Joseph Schumpeter in his Capitalism,
Socialism, and Democracy provides a clear illustration of one of the
methodological differences which I have in mind. Its author is pre-eminent
among those economists who approach economic phenomena in the light of a
certain branch of positivism. To him these phenomena accordingly appear as
objectively given quantities of commodities impinging directly upon each other,
almost, it would seem, without any intervention of human minds. Only against
this background can I account for the following (to me startling)
pronouncement. Professor Schumpeter argues that the possibility of a rational
calculation in the absence of markets for the factors of production follows for
the theorist "from the elementary proposition that consumers in evaluating
('demanding') consumers' goods ipso facto also evaluate the means of
production which enter into the production of these goods."*1
H.29
Taken literally, this statement is simply untrue. The consumers do
nothing of the kind. What Professor Schumpeter's "ipso facto"
presumably means is that the valuation of the factors of production is implied
in, or follows necessarily from, the valuation of consumers' goods. But this,
too, is not correct. Implication is a logical relationship which can be
meaningfully asserted only of propositions simultaneously present to one and
the same mind. It is evident, however, that the values of the factors of
production do not depend solely on the valuation of the consumers' goods but
also on the conditions of supply of the various factors of production. Only to a
mind to which all these facts were simultaneously known would the answer
necessarily follow from the facts given to it. The practical problem, however,
arises precisely because these facts are never so given to a single mind, and
because, in consequence, it is necessary that in the solution of the problem
knowledge should be used that is dispersed among many people.
H.30
The problem is thus in no way solved if we can show that all the facts, if
they were known to a single mind (as we hypothetically assume them to be given
to the observing economist), would uniquely determine the solution; instead we
must show how a solution is produced by the interactions of people each of whom
possesses only partial knowledge. To assume all the knowledge to be given to a
single mind in the same manner in which we assume it to be given to us as the
explaining economists is to assume the problem away and to disregard everything
that is important and significant in the real world.
H.31
That an economist of Professor Schumpeter's standing should thus have
fallen into a trap which the ambiguity of the term "datum" sets to
the unwary can hardly be explained as a simple error. It suggests rather that
there is something fundamentally wrong with an approach which habitually
disregards an essential part of the phenomena with which we have to deal: the
unavoidable imperfection of man's knowledge and the consequent need for a
process by which knowledge is constantly communicated and acquired. Any
approach, such as that of much of mathematical economics with its simultaneous
equations, which in effect starts from the assumption that people's knowledge
corresponds with the objective facts of the situation, systematically
leaves out what is our main task to explain. I am far from denying that in our
system equilibrium analysis has a useful function to perform. But when it comes
to the point where it misleads some of our leading thinkers into believing that
the situation which it describes has direct relevance to the solution of
practical problems, it is high time that we remember that it does not deal with
the social process at all and that it is no more than a useful preliminary to
the study of the main problem.
J. Schumpeter, Capitalism,
Socialism, and Democracy (New York; Harper, 1942), p. 175. Professor
Schumpeter is, I believe, also the original author of the myth that Pareto and
Barone have "solved" the problem of socialist calculation. What they,
and many others, did was merely to state the conditions which a rational
allocation of resources would have to satisfy and to point out that these were
essentially the same as the conditions of equilibrium of a competitive market.
This is something altogether different from knowing how the allocation of
resources satisfying these conditions can be found in practice. Pareto himself
(from whom Barone has taken practically everything he has to say), far from
claiming to have solved the practical problem, in fact explicitly denies that
it can be solved without the help of the market. See his Manuel d'économie
pure (2d ed., 1927), pp. 233-34. The relevant passage is quoted in an
English translation at the beginning of my article on "Socialist
Calculation: The Competitive 'Solution,' " in Economica, New
Series, Vol. VIII, No. 26 (May, 1940), p. 125.
========
MLA Style
Hayek, Friedrich A., "The Use of Knowledge in
Society." 1945. Library of Economics and Liberty. 20 December 2012.
<http://www.econlib.org/library/Essays/hykKnw.html>.
APA Style
Hayek, Friedrich A. "The Use of Knowledge in
Society." 1945. Library of Economics and Liberty. Retrieved December 20,
2012 from the World Wide Web: http://www.econlib.org/library/Essays/hykKnw.html
Turabian Style
Hayek, Friedrich A. "The Use of Knowledge in
Society." American Economic Review. XXXV, No. 4. pp. 519-30.
American Economic Association. 1945. Library of Economics and Liberty [Online]
available from http://www.econlib.org/library/Essays/hykKnw.html; accessed 20
December 2012; Internet.
