Economics

Hayek’s “The Use of Knowledge in Society” – A Summary

I have been thinking a lot about the misunderstandings of Hayek’s “The Use of Knowledge in Society” essay. Below I offer what I think is a quick summary of his argument that stresses both the importance of private property and the price system as jointly necessary for economic coordiation.

1. Knowledge IS decentralized in that each of us has our own personal knowledge of time and place (and that is often tacit).

2. Therefore, planning and control over resources SHOULD BE decentralized so that people can take advantage of those forms of knowledge.

3. HOWEVER, decentralization of control over resources (what Hayek calls “several property”) is necessary BUT NOT SUFFICIENT for social coordination.

4. Effective decentralized planning also requires that people have access, in some form, to the bits of knowledge that other people have so that they can form better plans and have better feedback as to the success and failure of those plans.

5. Providing that knowledge is the primary function of the price system. Prices serve as knowledge surrogates to enable people’s individual knowledge and “fields of vision” to sufficiently overlap so that our plans get COORDINATED.

6. In other words: decentralized control over resources is NECESSARY BUT NOT SUFFICIENT for a functioning economy. Such decentralization requires some process that actually ensures that separately made decisions are, to a signifcant degree, based on as much knowledge as possible so that economic coordination can be achieved. That is what the price system enables us to do. [EDIT: and the prices in question are not, and need not be, equilibrium prices.]

Decentralized decision making without a price system will produce very little coordination and prosperity. Centralized decision making will render a price system useless for economic coordination.

The fact of decentralized knowledge requires that an economy capable of producing increased prosperity for all has both decentralized decision-making (private/several property) and a price system to coordinate those decisions.

  • Jerome Bigge

    In other words a free market is necessary for economic decisions to be made. Without a free market, producers of goods and services have no way of knowing what the true value of their goods and services is. A good example of this is the former USSR. Where quality control was lacking and often those products and services produced were of poor quality and often lacking in quantity along with costing more than what they were worth. The lack of consumer input into the “system” also resulted in people taking the windshield wipers off their cars to prevent theft as the supply was “spotty” at the best if you could find new ones.

    • Pajser

      Jerome, there was lot of anecdotes about consumer dissatisfaction in USSR, and I do not doubt they are true. Nevertheless, Soviet economic growth in period 1913-90 was significantly better than world average in terms of GDP(PPP)/capita (90% => 135%) and Soviet Union in 1990 had significantly better child mortality, life expectancy, food availability, literacy, education, Gini index than world average. I think it proves that free market is not necessary for improvement by many measures.

      • Swami

        I would be careful here, Pajser.

        The USSR was shadowing the creativity of markets. They didn’t create factories or Bessemer Steel, or electric lights, or integrated circuits, or Velcro, or appliances or autos. They mimicked these things which were created by others, and they did so less effectively and efficiently. To see the importance of this, go to the Encyclopedia Brittanica summary of the greatest inventions of all time, below. Note the almost total absence of invention in socialist countries compared to the outrageous proportion coming from market economies (specifically leading market economies with the US dominating).

        http://edinformatics.bmobilized.com/?ref=https%3A%2F%2Fwww.google.com%2F&url=http%3A%2F%2Fwww.edinformatics.com%2Finventions_inventors%2F

        Thus, broadly considered, your argument is simply that as long as some countries have markets and prices to blaze the trail, that other countries can ride their coat tails. I do not think Hayek would disagree. He would probably add that they could have done better and contributed more inventions into the mix along the way if they had established a freer market price system from the start.

        They chose poorly, and they and all of us are worse today (compared to where we could have been if they had chosen wisely and added creative value) because of it. The hundred million or so people they killed along the way who got in the way if their ham fisted planning would probably agree they chose poorly too.

        • Pajser

          Swami – Did you read what I wrote? Soviet Union started at 90% of world GDP(PPP)/capita and ended at 135% and better than world average in many other important indexes. You cannot simply ignore the data and claim that their progress was poor.

          • Swami

            The world did not have free enterprise during the 20th C. If your argument is that planned Soviet economies progressed faster than China, India, Africa and so on then fine. I am sure Hayek would agree. These places were not determined by rule of law, property rights and freedom of contract.

            Prr capita GDP was about a third of the US at end of WWII. In 1970 it was about a third. By 1990 it was trailing to about a fourth and losing ground to the faster growth trend in the US.

            The Soviets shadowed or fast-followed free market economies. The free market economies created the products, the features, the factories, the telecommunication devices and so on, and the Soviets created centrally planned knock offs of lower quality and efficiency.

            There is a line in the Lord of The Rings where they disclose that Orcs were Sauron’s imitation of an elf. The autos produced in the Soviet Union were the orcs to our Hondas and Fords.

          • MARK_D_FRIEDMAN

            Well, okay, but if you happened to have two left feet and needed shoes to match, you couldn’t beat the good ole USSR.

          • Ron H.

            I have two left feet, but it’s only a problem when I dance.

          • Pajser

            My argument is not that USSR progressed faster than “so on” countries. My argument is that USSR progressed significantly faster than world average. Therefore, claims that it didn’t progressed well, or that planned economy cannot progress well are false. It is proven.

            Why and how it progressed so fast – it is another, more complicate issue – because one must approach to it systematically and know lots of data. Without data, everyone can develop his own favorite theory.

            Let me see what you wrote in previous comment:

            That USSR progressed faster only than capitalist countries with little rule of law. Why you claim that if you do not know the data. It is false. USSR 1913-90 progressed faster (in terms of GDP(PPP)/cap growth) than 6 of 12 rich Western European countries, equally fast as Austria, and faster than USA, Canada, New Zealand, Australia – all four “Western offshoots.”

            Comparison USA-USSR? You are “cherry picking” country and periods. But if you want to know, in period 1913-90, USSR progressed faster than USA, more exactly 388% vs 338%.

            Soviets copied technology of developed countries? Sure – all countries, developed or not did the same. It cannot explain why Soviets progressed better than most of capitalist countries.

            Soviet technology was worse than technology of _average_ capitalist country? I do not believe you have information about that. Fortunately, we do not need that information – whoever had better technology, the advantages of that technology are reflected, among other factors, in GDP growth.

          • Swami

            You are both misunderstanding and misrepresenting my arguments.

            It is simple for a third world country to grow faster than a first world country. Everyone knows and expects this.

            1). It is simple statistics. When you start at $4000 per year, it is easy to grow fast with small improvement. Indeed, faster growth is expected just to begin catching up. The link below even shows that the USSR lost ground to other catchup countries.

            http://akarlin.com/2012/06/the-soviet-economy-charting-failure/

            2). Catch up growth is orders of magnitude easier. You just take technology and institutions created elsewhere and mimic it. All the experimentation, false starts, mistakes, uncertainty, dead ends, and turmoil of constant change can be bypassed by adopting mature technologies and procedures developed elsewhere. Reread the Encyclopedia link I provided on what techs were developed where. The communist countries invented pretty much zilch. They were moochers, freeloaders and parasites on the creative juices of their betters. This deprived the rest of the world from benefitting from their potential for creativity. Indeed, the only thing we really learned from them was what not to do.

            3). It is common knowledge that their technology was crap. Nobody with available free market goods was clammoring for Soviet cars, or toasters, or microwaves. Not only did they copy, they copied poorly and inefficiently. Their production processes outside the military were a laughing stock.

            4). Exactly how accurate is per capita growth rate as a measure of well being when you kill a hundred million out of the denominator along the way? Just imagine how much faster they could have grown if they killed two or three hundred million. In the meantime, countries in the west were gaining immigrants in their denominator.

            4). Their system imploded. Even they bailed on it. Everyone seems to realize it was a horrible and failed experiment but you.

          • Pajser

            Neither one of these claims is attempt to prove that Soviet progress was not better than progress of average capitalist country. You simply talk about what you perceive to be bad sides of Soviet economy. Which is possible – one can criticize every economy. But it stays it progressed faster than average capitalist economy.

            Nevertheless, I can comment.

            Yes, some people claim that it is simple for poor countries to progress faster than rich countries, but it didn’t happened in period 1913->90. If most of poor countries failed to catch up – it means it is not simple.

            Link you sent compares USSR, with some countries which progressed better than USSR. Sure. I do not claim that USSR had the best progress in world. But – these economies are cherry picked and there is no reason USSR should be compared exactly to these, and not to other economies.

            Encyclopedia article about inventions? I do not see that average capitalist country that started on same level of development as USSR have larger number of items there.

            Yes, Soviet Union used inventions developed in wealthier capitalist countries. Capitalist countries did that too – but they progressed slower than Soviet Union, on average.

            It is common knowledge that Soviet Union had inferior technology? Compared to average capitalist country? I never heard anyone said that.

            Idea that Soviet Union killed 100 millions people – and that it improved their GDP per capita doesn’t seem reasonable to me.

            Did you found how many people capitalist countries “killed” if you add deaths of malnutrition and lack of medical care?

          • MARK_D_FRIEDMAN

            Um, the Berlin wall was not built to keep West Germans out of East Germany. US citizens and those from other western developed states could freely move to any other nation that would have them. Soviet block citizens, not so much. There was a reason for this.

          • Pajser

            Sure. The politicians believed that they can progress faster with closed borders, and they didn’t care much about individual freedom. One pseudo-communist country had open borders: Yugoslavia. It progressed well too.

          • MARK_D_FRIEDMAN

            I believe you are using “progress” in a perverse way, but suit yourself.

          • Pajser

            Progressed well in terms of GDP(PPP)/cap. What is “real progress” is harder question, of course.

          • MARK_D_FRIEDMAN

            I’m pretty sure “real progress” is incompatible with denying persons the right of exit.

          • Ron H.

            The politicians believed that they can progress faster with closed borders, and they didn’t care much about individual freedom.

            Obviously. And what is the purpose of government, again? Without individual freedom, nothing else matters – your numbers are a joke. Who cares about numbers if they don’t have individual freedom?

          • Pajser

            Frequent criticism of socialism is that it cannot be economically successful because of some inherent problems. I try to show that it is not true.

            Freedom of speech is very important. But socialism with freedom of speech is possible, no one claims it is not possible. It already existed – European Leninist countries in their last stage, after introduction of democracy, but before privatization.

          • Ron H.

            What does “economically successful” mean to you?

          • Pajser

            To me, good satisfaction of human needs, and animal needs too. Or, greater total utility, as in utilitarianism.

          • Ron H.

            To me, good satisfaction of human needs …

            Well, socialism fails miserably at that one. Ask anyone who has lived in one of the many socialist paradises for any length of time. You can tell people prefer some other system – almost any system – to socialism by the direction in which they migrate: East Germany to West Germany; North Korea to south Korea.and China; Cuba to US; etc.

            People from Cuba will risk being eaten alive by sharks to get to Miami.

            While it’s not a socialist country, people from Haiti prefer to travel 500 miles by small boat to Florida, instead of making the 50 mile trip to Cuba. Why do you think that is?

            Or, greater total utility, as in utilitarianism.

            Utitliy for WHOM? You and the planner, or the people who must suffer under your misguided notions of utility? Remember – all value is subjective.

          • Pajser

            I ‘ve spent my youth in one European Leninist country, so I have first hand experiences. There is no need to look which system people prefer by migration – it is enough to ask them. Most of them always prefer capitalism. In Europe, at moments support for socialism came to 20-30%, and these are the peaks.

            I think that utility, or satisfaction of human needs, is objective, and subjective emotions are big part, but not whole of it. For instance, lets say I have lots of money and I regularly support relatives. If nephew asks me something that will make him happier but less healthy, I’ll have to think which side prevails. I influence outcome, and I have responsibility.

            Every individual is in circumstances that he cannot chose some things, and he can chose some things. But these things are determined by other people. I do not think he has more freedom by sole fact that these things are determined by market instead of state. Both are people, organized on different ways.

          • Ron H.

            Freedom of speech is very important.

            Freedom of speech is overrated and misunderstood. In this country It’s something government may not forbid to people in public spaces. On private property the owner decides what others may say or not say.

            For example you can’t come into my hose and insult my wife, or I will toss you out on your ear.

          • Swami

            I was just playing with you to test your metal. Congratulations, Comrade, you pass.

          • Goose

            “Link you sent compares USSR, with some countries
            which progressed better than USSR. Sure. I do not claim that USSR had the best progress in world. But – these countries are cherry picked and there is no reason USSR should be compared exactly to these, and not to
            other economies.”

            Well, why are those economies “bad” comparisons but the ones you chose are “good”? Bear in mind – most of those countries we’re comparing are small, Western European nations a fraction of the USSR’s population and land mass – which, by the way, includ rather sizable oil and gas reserves, as well as some of the most productive arable land in the Eurasian continent.

            That the USSR started at a lower point of development puts you in a bit of a “having cake and eating it too” position. As others have noted, the idea of economic convergence is in fact quite notable and well-established: https://en.wikipedia.org/wiki/Convergence_(economics). Responding to this with “not all developing countries converged” would imply that the USSR only did well on a curve with those countries; you can’t have it both ways.

          • Pajser

            Goose –

            Why are these “bad” comparisons? Because they are picked. Some countries progressed faster than USSR, and some progressed slower. If one picks countries, he can pick whatever suits him. I compared USSR to world average – no one is excluded. That 90%->135% compared to world average is my argument. (But other indexes too, child mortality, life expectancy, literacy etc.)

            Convergence – not only that “not all developing countries converged” but they generally did not converged in period 1913-90. In that period Western Europe + offshoots progressed 340% while world progressed 235%. If Soviet Union converged, it was not typical.

            If we analyze what contributed to that progress, yes, USSR had advantage in oil and most other natural resources; but it had disadvantage in war damage – with 5% of world population it had 30-40% total world war victims. It was under some economic blockade (except during WWII) from most developed countries in the world. They couldn’t buy the modern technology when other countries could. Finally, I think most important disadvantage was that neither regime nor economic model had genuine support from majority of citizens.

          • Ron H.

            Comparison USA-USSR? You are “cherry picking” country and periods. But if you want to know, in period 1913-90, USSR progressed (in terms of GDP(PPP)/cap) 388% and USA 338%.

            What was USSR GDP in 1913? When you start from just above zero, phenomenal growth isn’t surprising. In comparison, the US was a rich country in 1913. Your obsession with GDP is causing you to draw meaningless conclusions about individual well being – which is what people actually care about..

          • Pajser

            In 1913, Soviet GDP(PPP)/cap was 90% of world average. American was 345%.

            But beware, in theory, it is easier to poor countries to progress faster, but in practice, at least in period 1913-90, it was not. In that period Western Europe + offshoots progressed 340% while world progressed 235%. The gap increased.

            You are right that GDP is not all. USSR had good progress in many other things related to individual well being. Life expectancy, child mortality, literacy, education … It was poor about availability and choice of consumer goods. It is hard to measure overall well being.

          • Ron H.

            It is hard to measure overall well being.

            Yes it is. That’s why it’s better to allow people to make their own choices and pursue their own ends. No central planners, no matter how smart they are, can possibly manage the lives of millions of people as well as they can do so for themselves. That’s Hayek’s whole point. Your trotting out GDP, and growth figures, and percentages is meaningless in the context of people’s well being – as they measure it for themselves.

            We can see a socialist paradise in Venezuela imploding as we speak. Shortages of toilet paper? Give me a break. That’s really pathetic.

          • Pajser

            Individual doesn’t manage his life in capitalism. He has some things he cannot chose, and some things he can. Same like in communism. Who determines what these things are? In capitalism, market. In communism, central planner. Why do you think that market can do it better? Because it consists of many people? Central planner can in its decisions include people with “local knowledge” if he estimates benefit is worth of price.

          • Goose

            But this is exactly the point other’s made earlier – the USSR only “looks good” when comparing it to averages which include Africa and South America – countries which were even less developed than the USSR/Russian empire in 1913. Not only that, but many of those countries were under exploitative foreign control for the first third of that time period, and stayed primarily agricultural. Using a “global average” is cherry picking, as is the arbitrary start and end points of 1913-1990. If we want an accurate comparison, we have to choose countries which started out at a similar level of development at the beginning of a given time period. Which is precisely why Swami’s link, upon second inspection, is a better measure – you can see that many countries start up at roughly the same rate of growth in 1945, but the USSR falls behind, permanently, in 1970.

          • Pajser

            I can not agree. There was no cherry picking on my side.

            Taking whole period 1913-90 and all countries for comparison is natural choice. For any statistics, it is better to have greater sample. Particularly, exclusion of some time period cannot be justified. Any hand-picking is suspicious. Even if one compares USSR with countries with similar GDP/cap +- 30%, question is – why not +-50%? Is that number chosen to exclude some and include other countries? Surely, some global effect like alleged convergence (which didn’t happened) can influence results, but it can be discussed. As I have shown, if anything, it was period of divergence.

            But, it is not true that Soviet Union progressed better only than Africa and South America. It progressed better than

            1) Western Europe as whole
            2) Eastern Europe as whole
            3) Western offshoots as whole
            4) Latin America as whole
            5) East Asia as whole
            6) West Asia as whole
            7) Africa as whole

            These are all geo-political groups as given by source of data, Maddison project. I didn’t chosen them.

            About other article – As said, it looks like cherry picking. Restriction of countries for comparison with USSR on those with similar GDP have sense, but sample is much lower, reliability too. Then, why Europe? USSR was in Europe, but its geopolitical position was different. It cannot be justified. but in Europe, but its geopolitical position was different. I cannot see justification for this restriction. Finally, why 1945? It doesn’t make sense. Except: If author compared these few countries with USSR from 1913 – it will turn that some of these had not similar GDP/cap to Soviet Union and reminding few small countries would be obviously too small sample. Finally Spain and other countries compared to USSR had something in common: they joined EU, and as such got lots of direct aid and privileges intended to help in reducing gap to other EU members.

          • Libertymike

            There is one other fundamental flaw in your analysis: you are operating under the assumption that the numbers upon which you rely are reliable. They aren’t and you cannot prove that they are the truth.
            No person should assume that the statistics promulgated by a government are accurate.

          • Pajser

            The data are from Maddison project, not given exclusively by governments, but current state of science. Economics of USSR was and is still discussed, the sources include CIA and contemporary Russian scientists. The numbers are still occasionally corrected – but these days it is marginally only. I have less belief in say, data on Zambia, but world total could be good also, hard to think that scientists systematically erred on the same side. Of course, maybe there is some hidden big mistake somewhere, but it is “what we have now.”

        • Andrew

          Lies, damned lies, and statistics… you can debate numbers from reports all day, but there’s a much louder truth to be heard – EMIGRATION. If the USSR was prospering so much, then why did people flee when given the opportunity? I think a more meaningful pursuit would be reflecting on your trust in statistics. Leave the ivory tower, hit the street, and go talk to an immigrant. That’s the closest you are going to get to truth, my philosophical friends 😉

      • Ron H.

        How much of that GDP growth was government spending on military? GDP per capita is generally a poor measure of well being.

        • Pajser

          Soviet defense expenses were ~17% of Soviet GDP. For comparison, American expenses were 10-15% in period after wwii.

      • Adam Minsky

        Are you arguing that central planning is a viable economic option? Even most Marxists have moved away from this idea. The ruling parties in China, Vietnam, Cuba, and Laos all now advocate some sort of “market socialism” and mixed economy. Even the Democratic Republic of Korea has grudgingly begun to allow private markets to operate.
        Unlike some posters on this thread, I am sympathetic to certain arguments involving market regulation. I am also open to ideas in favor of a robust public sector. But the idea of central planning (or as some called it the “command economy”) seems to have little if anything to recommend it.

        • Pajser

          Yes, Adam, I am “old school” Marxist. Not Leninist, thought. I think that planned economy is theoretically better, although harder to organize.

          • Adam Minsky

            Being an “old school Marxist” doesn’t inevitably lead one to embrace central planning. Marx was an analyst of capitalism. He had little to say about any of the details of socialist society. Lenin’s views on socialist economics appeared to be in flux- he swung wildly between War Communism and the New Economic Policy. It was Stalin who introduced the centralized planning system that you find theoretically attractive, albeit difficult to organize.

          • Pajser

            True, Marx said very little about communist society, but plan was one of these things. For instance, “The life-process of society, which is based on the process of production, … does not strip off its mystical veil until it is treated as production by freely associated men, and is consciously regulated by them in accordance with a settled plan” (Capital, Chapter I, Section IV.) For him, conscious control of economic processes is goal, not only mean for efficient production.

          • Adam Minsky

            A “settled plan” is hardly synonymous with the centralized planning that took place during the days of the USSR. Presumably, these “freely associated men” could have been organized in small decentralized worker run co-ops. ” I’m queasy about speaking for a dead man, but I have to believe that Marx felt that “conscious control of economic processes” could be achieved in the absence of a huge and overweening centralized state and government.

          • Pajser

            I think it must be central plan, otherwise it cannot strip off mystical veil = prices. But, plan can be made by some institution without power to enforce plan, and followed voluntarily by smaller units. Personally, I prefer state – I think division of the world on “our” and “your” part is bad.

          • Ron H.

            Can you see that “mystical veil = prices” is absolutely necessary to coordinate decentralized knowledge that can’t possibly be available in one central place?

            Prices help regulate supply and demand in a way no individual or group could ever do. Lack of prices is what causes shortages and surpluses in centrally planned economies. No one can tell if the best use is being made of scarce resources.

          • Pajser

            No, I do not see that price contains such information.

            For instance, on existing market, price of Ferrari is greater than price of 10 normal cars. If investor has resources to produce either 10 normal cars, or one Ferrari – he should produce Ferrari. Contrary, from point of view of central planner, it is wrong information. Utility of 10 cars is greater than utility of one Ferrari, and central planner should produce 10 normal cars.

          • Ron H.

            Thank you. You have just made my case for me.

            The central planner (and you) have judged the utility of 10 normal cars to be greater than the utility of one Ferrari, but who are you (and the central planner to make a decision as to what will be produced based solely on your own views? remember that all value is subjective, and it is

            You have made no case for why an investor would choose to finance 1 Ferrari instead of 10 regular cars. Asssuming he hopes to profit, and if those are his only two choices, he would finance whichever project he expects to produce a higher profit. If he is correct, he will be rewarded. If not, he may lose money. He will be rewarded by the consumers who buy either a Ferrari or the 10 consumers who buy regular cars.

            Since neither you nor the planner can know what consumer preferences are at any given moment (there’s that knowledge problem) you can’t possibly plan to consistently provide the correct number of Ferraris or regular cars. If you and the planner guess wrong, there may be a line of people at the Ferrari dealership placing orders for future Ferraris, and half of the regular cars may remain on the dealers lot because there is insufficient demand for them.

            In practical terms, the much higher price of Ferraris will limit the number of people who will be able to afford one, but if if someone can afford one and prefers to drive one, they should be able to buy one, don’t you think? In your world none will be available.

            Keep in mind that a Ferrari is much more costly to buy, because it is much more costly to produce. Think of how much more income is provided for others in labor and materials when someone buys a Ferrari, than when they buy a regular car.

            Of course if you intend to force people to drive whatever cr you choose for them, then that’s not a problem. If you plan to decide for people where they will live, and with how many other people not related to them, then your inability to provide what people want isn’t important.

            BTW the price doesn’t *contain* information, it signals that there *is* information about availability of scarce resources so we can act *as if* we had the information.

            When a price increases we know that whatever the price represents is scarcer than before, so we may buy less, or buy a cheaper substitute, thus helping relieve the shortage. The increased price also signals to producers that they can profit by producing more of the whatever, and they will do so, also helping relieve the shortage.

            It isn’t necessary for either consumers or producers to know exactly *why* there is a shortage, only that one exists, and they will act accordingly. The *price* signals that information. A free market with prices acts constantly to move supply and demand toward equilibrium. You and your planner can’t possibly do that at any large scale with millions of goods and services to manage. the market does it automatically.

          • Pajser

            I believe you can see too that utility of Ferrari is low, just you do not like consequences for ideology, so you decided to be radically sceptical about ability of people to understand utility for others. It is huge skepticism, that may have sense as a philosophical speculation, but is not how we behave in life. We always estimate utility for other people. If we do not, it would lead to absurds.

            In economy, one wouldn’t be able to estimate externalities from that position. If I claim that I suffer from single molecule of pollution, or single EM wave, subjectivists wouldn’t be able to know is it true – and as I defend my property, I have advantage, they would conclude that factories and tv stations in whole large area should be closed. Do you think that way, or you think “lets see *objectively* whether this guy suffer, and if he doesn’t – ignore him and leave him to solve his problem with psychiatrist?” I’ll assume you resort to objective thinking. Any case, I and almost all people do.

            Claimed, but non-existing efficiency of use of resources is not really important for market. Progress in capitalism is a result of simple, strong motivation of predominantly selfish beings to work. They work, discover new technologies, and result is progress. Even if use of resources is suboptimal all the time, it doesn’t really matter.

          • Ron H.

            I believe you can see too that utility of Ferrari is low, just you do not like consequences for ideology, so you decided to be radically sceptical about ability of people to understand utility for others. It may have a sense as a philosophical speculation, but it is not how we behave in life. We always estimate utility for other people.

            The utility of a Ferrari is low or high based on the judgement of the person who buys one. Each of us can apply our own subjective valuation to a Ferrari or to anything else, as all value is subjective. We can imagine our values are superior, and that they should be accepted by other people, but we have no right to force those values on others as you and your planner would do. Your judgement is NOT better than that of people making choices for themselves.

            For instance, with such skepticism, subjectivist wouldn’t know which kind of crime is worse, murder attempt or pickpocketing? Victim claims that he would be rather killed than stayed without wallet. You cannot know.

            That’s my point exactly – thank you. We cannot know the priorities of others. Their subjective valuations may be different from ours.

            Efficiencyof use of resources is not really important for market.

            Quite the contrary: Efficient use of resources – the least input for the greatest output – is the profit maximizing goal of capitalist production. It is the desire of individuals to act in their own self interest that causes them to serve others in ways that attract more voluntary exchanges of consumer dollars. than their competitors. Incentives matter.

            And for central planner – how is that after experiences with real, existing, working, progressing planned economy, you still believe that central plan is impossible? For instance, Yugoslavia in period 1952-82, full three decades – had the fastest progress in Europe. How it can happen if central plan is “impossible? “

            Fastest progress in what?

            I’m sorry, I should not have written “impossible”, I should have written “impossible to plan adequately to maximize the benefit of those for whom you are planning”. Only the market can do that.

          • Pajser

            Wait a minute, give me more details. So you cannot compare the crimes. You do not know that genocide is greater crime than pickpocket? Do you think it would be fair that sentence for both is the same? Or what?

          • Ron H.

            Everyone can and does compare the seriousness of crimes, and most of us maintain a hierarchy of what we believe to be the relative severity of crimes. It’s probably safe to say that most people find murder far more serious than pick-pocketing. I will go out on a limb and say that most people also rate pick-pocketing a more serious crime than bumping into someone while walking on the sidewalk.

            My point is that you or I wouldn’t know the exact order in which others rank the importance of things. There is no *objective* value of a Ferrari, and its *subjective* value will vary from person to person. Therefore you and your planner don’t know how many Ferraris to build, nor how many regular cars to build. Nor how much bread or toilet paper or anything else to produce without a price system.

          • Pajser

            Yugoslavia – it was by GDP. As we agreed it is not “real progress.” But it has relation with real progress.

            We agreed that humans have ability to estimate utility for other people (pickpocketing etc.) Similarly, I estimate utility of cars. For all uses, like sparing time, tiredness, help in emergency cases, even driving pleasure, 10 normal cars have greater utility. This is solid argument. One doesn’t need to advocate mysticism of value – there is a simpler way to explain that inefficiency: Ferrari owner’s selfish bias; he cares for his own utility more that for utility of other people. (Libertarian can even accept that, but claim that one can buy Ferrari if he (or his parents ..) gave something of great utility for other people and Ferrari owner’s work (or kinda) is that efficient use of resource I do not see.)

          • Ron H.

            We agreed that humans have ability to estimate utility for other people
            (pickpocketing etc.)

            We can estimate other people’s utility – based on our own scale of values – but this can only ever be an estimate. People demonstrate their preferences by acting on them. They don’t always act in the same way you or I might, because their subjective values are different.

            In my view, people should be allowed to act on their own preferences and make their own decisions. You may believe you and your planner should make decisions for other people based on a belief that your judgement is better than that of other people who you don’t even know. You are entitled to hold that belief (or any other belief), but to act on it by forcing other people against their will is immoral and a violation of their right of self determination.

            Similarly, I estimate utility of cars. For all
            uses, like sparing time, tiredness, help in emergency cases, even
            driving pleasure,

            Yes, and that is YOUR estimate. It may vary from the estimates of other people. For example, beyond the basic utility of moving from point A to point B, I value driving pleasure very highly, so a Ferrari might be a better choice for me than a normal car. I might *settle* for a normal car because I have other uses for my limited funds that arr even MORE important – to ME – than a Ferrari. By what right can you legitimately choose for me?

            Similarly nine other people may make other choices based on their preferences and their limited funds. Some people may have that Ferrari at the top of their list, and might buy one. Can you justify preventing them from doing so?

            Keep in mind – and I believe it was your initial claim – that the GDP represented by 1 Ferrari equals the “value” (the GDP) represented by 10 normal cars. Therefore the only difference difference is the preferences and priorities of individual consumers. I don’t think you can claim that the overall utility experienced by 10 normal car drivers is ten times that of 1 Ferrari driver. How is it measured?

            If you force me to drive a car I don’t like because it’s the only one available, you haven’t improved my well being.

            Ferrari owner’s selfish bias;
            he cares for his own utility more that for utility of other people.

            I have news for you: *everybody* cares more for their own utility than that of others, except maybe that of family members and friends. No one cares more for the utility of people they don’t even know. This is human nature, and isn’t a bad thing.

            It is the need to serve others in order to promote our own self interest that causes the improvements in well being we see all around us. We must attract customers willing to exchange their resources (money) for the goods and services we offer them. The amount of money we attract is a measure of how well we are satisfying others.

            Libertarians, classical liberal economists, and Austrian economists *explicitly claim* that it is the desire to promote our own self interest that requires us to provide value for others so that they will voluntarily and willingly exchange something we value more than what we are giving them. The most efficient use of resources is that which provides the most satisfaction of human wants and needs. Only people choosing for themselves can determine what that most efficient use is, not you and your planner.

          • Pajser

            You claim that it is both inefficient and immoral if other people make decisions about individuals. Most people, including me, accept that only partially. We encourage other people to do what we think is good for them, and if we recognize self-harmful decisions, dependently of harm, we ignore it; criticize; deny our support – and we even force other people to do what we think is better – it is very rare, but it happens.

            Back to Ferrari: even if one does not enjoy a lot by driving normal car, some people do. As long as there are people who enjoy driving normal car – production of Ferrari is inefficient. It is rational criticism, but then, one who has selfish bias doesn’t care. He would say “I want Ferrari, producers want to produce it, producing Ferrari does not harm anyone, so don’t interfere with us.”

            But: Ferrari – like anything else – cannot be produced without restriction of my freedom; and freedom of billions of others. Someone will build the factory and put the fence around it and restrict our freedom to use resources. So, the statement “producing Ferrari does not harm anyone” is not true. They – producer and consumers – interfere with me. I think restriction of freedom is not completely unacceptable, but it requires justification; and production of Ferrari, (if ten normal cars is alternative) is not enough of justification. Libertarians usually do not see that private property is restriction of freedom of non-owners and that it requires justification.

            On market, just like in planned economy, individuals do not chose for themselves. When they chose, they chose between given alternatives, given by other people. There is little importance if other people are organized in market or by central planner – the quality of alternatives is what matters.

            In this very example, if central planner produces 10 cars and not Ferrari, that guy who want Ferrari have no choice. But if market decide for Ferrari, ten people who want normal car have no choice. And it is inefficient.

          • Ron H.

            – and we even force other people to do what we think is better – it is very rare, but it happens.

            Rare? You are suggesting that everyone, including people you don’t even know, should be forced to do what you think is better. The arrogance is breathtaking.

            I can only suggest you ask some of the people in the socialist paradise of Venezuela – some of whom you can see here – standing in line at their local grocery store how efficient they believe their centrally planned economy is.

            It might also be helpful for you to learn some basic economics if you are going to engage in discussions of this sort. You are arguing against a market economy – something you don’t appear to know much about.

            There is nothing new in your latest comment, and It seems you are now repeating yourself, so I’ll assume any further discussion is a waste of my time.

          • Pajser

            I am suggesting that not only I, but most people, almost everyone think it is sometimes moral to force other people to do something what is good for them. It is too usual to be arrogant.

            Venezuela is not much of planned economy. Cuba is, for instance. They are, of course, much poorer country than USA, but they have lower child mortality than USA. If you think it is bad for Venezuelans to stand in line to buy toilet paper, then you could think it is worse for Americans to stand in line to organize funerals. I would think that.

            Market economy is not something very complicated. It is easy to spot its inefficiencies and it is easy to spot errors in Hayek’s attempt to defend it. You just have to look little more carefully.

            Thanks for discussion!

          • Les Kyle Nearhood

            If there was so much progress in the Warsaw Pact Nations they why, after the fall of the berlin wall, Were the lives of so many millions of people revealed to be poor, desperate, and backward ?

          • Pajser

            Only in two Leninist countries, USSR and Yugoslavia, the progress was good. But they started at level 3-4 times poorer than Western Europe or USA, so even at their peak, 1975-80, they were objectively much worse. But if you compare them with countries that started at same level, like South America …

          • Ron H.

            Incidentally, if your goal is to force people to travel as cheaply as possible, you could also make 1000 bicycles for the price of the Ferrari. Good idea?

          • Theresa Klein

            And yet, there are so many car producers, and they aren’t producing Ferraris.

            If everyone started producing Feraris instead of normal cars then the price of Ferraris would fall, no?

            I think the reason that the price of Ferrari’s remains high in spite of the obvious profits to be made is that (a) it is very difficult to produce cars like Ferraris in large quantities, and (b) car producers realize they can produce and sell normal cars in larger volumes thus realizing larger profits even if the profit margin on each unit is smaller.

          • Pajser

            You are right. Elite cars companies tend to have financial problems, so eventually mainstream companies buy them. VW owns Bugatti, Lamborghini and Porsche, and Fiat owns Ferrari and Maserati.

          • Ron H.

            “I think that planned economy is theoretically better, although harder impossible to organize.”

            There – fixed it for you.

            Central planning ignores human nature and the importance of incentives.

  • Irfan Khawaja

    Isn’t every element of Hayek’s argument compatible with the existence and functioning of a regional or municipal planning board, or even a county-wide master plan for resource management? Nothing in the argument as you’ve described it tells us what “decentralization” really means. For that matter, nothing in it determines the structure of property rights or determinately constrains or requires any particular pattern of appropriation. Nor does anything in it imply that coercion is unjust or even inefficient, as long as the coercion is in the service of a decentralized plan (relative to some unspecified conception of centralized planning). Put that way, Hayek’s claims have little normative bite.

    I don’t really see that private property is as central to Hayek’s argument as you’ve made it (there can be decentralized decisions over public property), but even if we assume that it is, the existence of private property is not, as such, incompatible with municipal planning. If property rights are defined around the requirements of planning, there is no incompatibility at all. Nothing about Hayek’s argument excludes that possibility.

    Is Hayek’s argument determinate enough to rule out the very existence of garden-variety decentralized (i.e., local) planning? It’s hard to discuss the matter without discussing traffic patterns and traffic law–the bread and butter of almost every local planning/zoning decision. But once that topic is broached, Hayek’s argument starts to seem increasingly irrelevant, at least in any recognizable municipality in the US or Canada. Arguably, traffic law is already decentralized, but it obviously involves a high degree of government planning. That seems compatible with Hayek’s arguments, but it’s not the conclusion his followers are really after. Applied, say, to traffic policy, Hayek’s argument merely seems to imply the trivial conclusion that if you want to write traffic law or do traffic policy, you ought to have some experience driving on the roads in question. But everybody knows that already.

    Incidentally, it’s always been unclear to me what the scope of Hayek’s argument is supposed to be. Is it supposed to apply to defense policy, as well? In that case, it would imply that the military should be “decentralized.” But what would that mean? That we should abolish officers and the chain of command?

    Here, by the way, is a critique of Hayek’s overall approach by a blogger at my blog:

    https://irfankhawajaphilosopher.com/2016/04/07/morals-and-the-free-society-6-hayek/

    It suggests that Hayek’s argument is self-defeating. The thesis of “The Use of Knowledge” is that knowledge ought to be decentralized. But if Hayek’s epistemic views are as skeptical as the preceding post suggests, the question becomes: what knowledge?

    • Goose

      I don’t think Prof Horowitz’s post is meant to be an exhaustive summary of Hayek’s theories, but rather a quick run-down to help those who are already predisposed to libertarian-ish positions; that being said Hayek does deal with (most of) the questions you pose in the “Law, Legislation, and Liberty” volumes. It should bear noting here that Hayek’s main target was not “some unspecified conception of centralized planning”, but rather explicitly directed at those who advocated direct “public”/governmental control of the vast majority of the economy. It may seem like an easy target now, but large swathes of the intelligentsia in the 40s-50s were predisposed to believe such an arrangement was superior and inevitable.

      I would also further add that the thesis of “The Use of Knowledge” is not that knowledge OUGHT to be decentralized; rather that knowledge as it exists IS decentralized, and property and prices are the best way to coordinate this knowledge (“best” here roughly meaning “providing the most economic and social growth/prosperity”).

      • Irfan Khawaja

        Put that way, the paper is normatively irrelevant today–which is exactly my point. No one needs to be told that knowledge is decentralized in the trivial sense that Hayek means. We no longer live in the 1940s or 50s. Large swathes of the intelligentsia no longer believe what they used to believe. The question then becomes, what are we supposed to take from the paper today? I don’t see that Horwitz really answers this question. Is the decentralization of knowledge in Hayek’s sense supposed to rule out municipal planning? I had no clear answer when I wrote my comment, and still don’t.

        • Swami

          Irfan,

          What we are supposed to take from it today is that the reason markets work so spectacularly well is that they efficiently allow spontaneous creation of value and coordination among billions of people within a specific domain. They allow us to partially solve the greatest single problem in the social sciences — the problem of cooperation.

          If the intelligentsia have now fully embraced this lesson, then I am unaware of it. Indeed, I think they, for the most part, are as ignorant on the value of markets and prices and the explanation for these benefits as ever.

          Steven is trying to spread the word by updating a message that they should have grasped decades ago, but clearly did not.

          As for your inquiry on municipal planning, I am not “getting it.” Hayek didn’t argue against all top down planning, nor do I believe he would suggest that markets and prices allow all the important types of planning. He specifically mentions it may not apply to science in his paper. I assume he would see the value in municipal planning for public goods (all feel free to correct me if wrong).

          Sorry in advance if I am misreading you. I am hoping to read your paper soon.

    • “Nothing in the argument as you’ve described it tells us what “decentralization” really means”

      It seems to me that you need some context Irfan

      ‘The Use of Knowledge Society’ is an economics journal article. Written in the context of the 1930’s English language economic calculation debates. In particular some economists thought of the equilibrium constructs they worked with as more real then they were. The use of Knowledge in Society is an attempt by Hayek to show that they were mistaking the map for the terrain.

      Optimum efficiency is achieved in these equilibrium models when “marginal rates of substitution between any two commodities or factors must be the same in all their different uses”. So economists like Oscar Lange were saying stuff like ‘just get the central planning board to tell the production unit managers to produce where marginal revenue equals marginal costs’. Or trying to find some non market artificial mechanism for doing so.

      “the question becomes: what knowledge?”

      The knowledge of relative scarcities(the value of one good in terms of another) as revealed by profit and loss in a market. Hayek’s point was that you only got towards MR=MC in the real world through a process (see Hayek’s tin mine example) wherein no one in particular has the knowledge that is created in the aggregate. Hayek was saying that this knowledge may well be ‘given’ in the model but the model is only abstracting from the market process. If you take away that process there is no reason to think that the given data exists.

      The conclusion from all this is that you can’t use neoclassical economic models to replace the markets function of coordinating the economising activity of individuals into a coherent whole.

      I will go through some of your questions now

      “I don’t really see that private property is as central to Hayek’s argument”

      Private property in a basic sense is necessary because if you cant buy or sell then you can’t affect the price with your actions.

      “Is Hayek’s argument determinate enough to rule out the very existence of garden-variety decentralized (i.e., local) planning?”

      It really has very little to do with traffic laws and roads the like. At this point I should point out that Hayek in The Road to Serfdom makes the distinction between planning for competition and planning to replace competition. He used the analogy for planning for competition of a gardener creating the right conditions then letting the garden grow. As it happens Hayek did support decentralized government on similar epistemic grounds to his argument about prices. If there are many competing governments then it is easier for experiments to be tried and to be compared with other polities policies. There is far less scope for this experimental evolutionary process with a heavily centralised government imposing uniformity.

      • Irfan Khawaja

        Well, that certainly does answer my question. The question was, does Hayek’s argument rule out garden variety municipal planning, and your answer is “no.” I wonder whether Horwitz would agree with you. But I give you credit for a direct answer. You say that the thesis of the paper has nothing to do with things like traffic laws, roads, and the like, but surely traffic laws and road construction involve economic planning.

        If you’re right, it would be nice for Hayekians to scale back their “anti-planning” rhetoric. One often encounters the hand-waving claim that Hayek’s paper proves that “failure of planning.” You are saying: no it doesn’t. I am saying: no it doesn’t. Perhaps Horwitz would say the same thing. But if so, Hayek’s thesis is compatible with modest, decentralized forms of “central” planning. That looks paradoxical, but isn’t. Local planning is decentralized, but the planners engage in “central” planning relative to their jurisdiction (they sit in the municipal building and plan). If the jurisdiction is sufficiently small, the task is sufficiently feasible.

        Nothing about Hayek’s argument says or implies anything about competing governments. So the argument is perfectly compatible with municipal planning as it actually takes place, say, in the United States. As you say, Hayek seems to be in favor of planning in some places. All I would add is that “planning for competition” (his favored type of planning) could easily involve a lot of planning. In fact, “planning for competition” sounds a lot like “crony capitalism.”

        I understand that Hayek’s paper is economic in nature (I’ve read it), but that wouldn’t preclude its application to defense policy, however absurd that sounds. Both you and Goose ignore that, but ultimately, it can’t be ignored. What’s unclear is how wide-ranging or strong a thesis Hayek intends.

        I can’t help noting that no one seems to want to touch my claim that Hayek’s thesis looks self-defeating. You can’t know that knowledge is decentralized if there isn’t any knowledge to speak of: you couldn’t know it, and there wouldn’t be any. That problem almost makes all the other ones seem superfluous.

        • “The question was, does Hayek’s argument rule out garden variety municipal planning, and your answer is ‘no.’”

          “You say that the thesis of the paper has nothing to do with things like traffic laws, roads, and the like, but surely traffic laws and road construction involve economic planning”

          Yes in a market environment. The roads cost so much to construct or so much a year to maintain. They can survey the prices and reputations of various contractors. They can weigh up the value of properties in deciding the placement of municipal services ect. To paraphrase Mises a municipality is only ‘a socialistic oasis in a society with monetary exchange’.

          Hayek is pretty clear in the Constitution of Liberty. (chapter 22, Housing and Town Planning)

          “But though the price mechanism is an imperfect guide for the use Of urban
          land, it is still an indispensable guide if development is to be left to private
          initiative and if all the knowledge and foresight dispersed among many men
          is to be used. There is a Strong case for taking whatever practical measures
          can be found to cause the mechanism to operate more efficiently by making
          owners take into consideration all the possible effects of their decisions. The
          framework of rules within which the decisions of the private owner are likely
          to agree with the public interest will therefore in this case have to be more
          detailed and more adjusted to particular local circumstances than is necessary
          with other kinds of property. Such ‘ ‘town planning,” which operates largely
          through its effects on the market and through the establishing of general
          conditions to which all developments of a district or neighborhood must
          conform but which, within these conditions, leaves the decisions to the individual
          owner, is part of the effort to make the market mechanism more effective.
          There is a very different type of control, however, which is also practiced
          under the name of “town planning.” Unlike the other, this is motivated by
          the desire to dispense with the price mechanism and to replace it by central
          direction. Much of the town planning that is in fact carried out, particularly
          by architects and engineers who have never understood the role that prices
          play in co-ordinating individual activities, is of this kind”

          and

          “The issue is therefore not whether one ought or ought not to be for town
          planning but whether the measures to be used are to supplement and assist
          the market or to suspend it and put central direction in its place”

          I should add that Hayek is completely open to and in favour of non government substitutes for the functions of municipal planning if they turn out to be feasible.

          “but that wouldn’t preclude its application to defense policy, however absurd that sounds”

          In answer to this I would suggest again the Mises quote above, and also refer you to Law, Legislation and Liberty vol.2 Cosmos and Taxis. Essentially Cosmos is Hayek’s terms for spontaneous orders that are built on simple abstract rules but which scale to larger levels of complexity and scope. Taxis is his term for organisation consciously created and structured for specific goals and purposes. It has increasing problems scaling up in scope and complexity. Taxis is actually apt to your question as it comes from the greek term for Military formation in battle. The more that an oranisation exists for a narrow defined purpose the more suited to direct conscious command and control it is. Being a Taxis is not that difficult in term of the knowledge problem because so much of it is taken care of by the other often rather cosmos like institutions in society, so that they can focus on their purpose. So both modes of organisation are necessary in society and much of Hayek’s work can be categorized in terms warning against of the overuse and misuse of Taxis at the expense of Cosmos.

          “I can’t help noting that no one seems to want to touch my claim that Hayek’s thesis looks self-defeating. You can’t know that knowledge is decentralized if there isn’t any knowledge to speak of: you couldn’t know it, and there wouldn’t be any. That problem almost makes all the other ones seem superfluous”

          This makes very little sense to me you will have to elaborate.

          • Goose

            I’m confused on that issue as well. I don’t see where Hayek claims there is “no knowledge to speak of”; he claims only that the knowledge is dispersed across many actors.

          • Ron H.

            Goose, it isn’t you who is confused. Irfan is misreading or failing to understand Hayek, and raising questions that are either answered by Hayek himself, or outside the scope of the essay. Reading the source itself, linked above, provides answers to all questions that have been asked. Malthus0 has covered the objections admirably.

            Each of us has knowledge about our own wants and how best to satisfy those wants based on our own knowledge of the world around us. A price system acts to allocate scarce resources in the most efficient manner yet discovered. It gives us signals about information elsewhere in the world, that we can’t know directly so that we can make decisions as if we DID have that information, No central planner, at any level, can possibly have enough of that total knowledge to better allocate those resources to maximum benefit for all. That’s it in a nutshell.

            Hayek isn’t claiming that knowledge *should be* decentralized, he is correctly observing that it *is* decentralized, and that the resulting emergent order of a market system with prices as superior to any type of intentional planning in the allocation of scarce resources. Neither Hayek nor anyone else claims a free market system is perfect, only that it’s better than any other system we know of.

          • Irfan Khawaja

            Well, if the question is answered by Hayek himself, I’d be interested in knowing where. Where does Hayek defend the idea that individuals have knowledge of the social world AND defend a conception of “knowledge” that gives that claim determinate meaning. In The Fatal Conceit, he literally says that our “knowledge” consists of “unjustified” and even “irrational” beliefs (75).

            That’s just outright nonsense. There is no plausible account of knowledge according to which unjustified or irrational beliefs count as knowledge: unjustified and irrational beliefs are the paradigm of ignorance, which is the contrary of knowledge. If Hayek addresses this patently obvious problem, I’d appreciate knowing where, but as far as I can see, he just blithely asserts the claim and proceeds as though there was no problem to be solved. But there is.

          • Ron H.

            Some of the questions you asked can only have resulted from your not reading or understanding the essay “The Use Of Knowledge In Society” which is the subject of this blog post. Please read it again.

            There is no plausible account of knowledge according to which unjustified or irrational beliefs count as knowledge:

            Sez you. Perhaps all “knowledge” isn’t of equal validity. As Mark Twain said: ”
            It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

            Mark Twain
            Read more at: http://www.brainyquote.com/quotes/quotes/m/marktwain109624.html
            It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

            Mark Twain
            Read more at: http://www.brainyquote.com/quotes/quotes/m/marktwain109624.htmlIt ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

            Read more at: http://www.brainyquote.com/quotes/quotes/m/marktwain109624.html
            It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
            Read more at: http://www.brainyquote.com/quotes/quotes/m/marktwain109624.html

          • Irfan Khawaja

            In The Fatal Conceit. Page references are given in the blog post I referred to.

          • Irfan Khawaja

            Hayek makes skeptical claims about the possibility of having any knowledge at all about social phenomena, a claim that follows from his skepticism about the power of reason itself (not “rationalism” but reason as such). If we don’t have knowledge, we can’t have knowledge of the claims Hayek makes in “The Use of Knowledge.” I referred readers to the critique of Hayek on my blog on this and related subjects (by David Potts), and that discussion refers to others as well (e.g., one by David Kelley).

            I find that Hayekians have a real head-in-the-sand attitude toward such problems in Hayek. The self-defeating character of his claims is obvious, but there are few takers for people wanting to get him out of them.

          • Irfan Khawaja

            If municipalities are socialistic oases surrounded by the desert of the market–as you say–Mises is conceding the legitimacy of socialism at the municipal level. If Hayek agrees with him, then Hayek is just a municipal socialist. None of that coheres with Horwitz’s point, or with the rhetorical use typically made of Hayek’s “Use of Knowledge” arguments. Their point is that Hayek has made an argument against socialism. But he clearly hasn’t. He’s made an argument that makes gigantic concessions to socialism.

            The distinction between taxis and cosmos doesn’t really help here: it just rests on a false dichotomy. Town planners in the US do not “dispense” with the price system. They acknowledge the importance of prices. In denying that, you’re just setting up a strawman.

            But prices don’t dictate every aspect of town planning. Some aspects are dictated, for instance, by science. The price system doesn’t tell you where to put a yield sign or a stop sign, or where accidents regularly take place, or how to design a road curve, or what the speed limit should be, etc, etc, etc. On these issues, a planner needs to be or consult a scientific expert, and the expert has to do some non-price-based calculations–“consciously created and structured for specific goals and purposes.” In practice, successful town planning is an integrated hybrid of the two functions that Hayek artificially dichotomizes.

            On military planning, can we then infer that military planning is beyond the scope of Hayek’s argument, despite the fact that it obviously has economic facets? Military planners can’t afford to ignore the price system, either. It doesn’t follow that all of the knowledge they rely on is dispersed in the way Hayek claims is generally true of knowledge as such. That suggests that “The Use of Knowledge” rests on a series of exaggerations and failures of exposition. Horwitz wonders why people have misunderstood the paper. One reason is the sheer amount of hand-waving it contains–the failure to specify the subject matter, along with the failure to tell the reader where the thesis applies, where it doesn’t, what it rules in, and what it rules out.

          • Ok 3rd time trying to post this Hopefully it won’t get stuck in the spam filter again.

            “In The Fatal Conceit, he literally says that our “knowledge” consists of “unjustified” and even “irrational” beliefs (75). That’s just outright nonsense. There is no plausible account of knowledge according to which unjustified or irrational beliefs count as knowledge: unjustified and irrational beliefs are the paradigm of ignorance, which is the contrary of knowledge”

            “If we don’t have knowledge, we can’t have knowledge of the claims Hayek makes in ‘The Use of Knowledge'”

            That passage in the Fatal Conceit Hayek does not refer to ‘knowledge’ as an absolute category. He is not as you seem to assume being paradoxical.

            By ‘knowledge’ Hayek is referring to all the facts that go into forming an overall order. The scepticism you refer to is Hayek’s claim about the lack of the ability of individuals to embody all that knowledge.

            “the incurable ignorance of everyone which I am speaking is the ignorance of particular facts which are or will become known to somebody and thereby affect the whole structure of society. This structure of human activities constantly adapts itself, and functions through
            adapting itself, to millions of facts which in their entirety are not known to anybody. (Law Legislation and Liberty Vol 1, Reason and Evolution, p13)”

            These adaptive forces are of evolution and spontaneous or self generated ordering. What Hayek means by people obtaining knowledge through “unjustified” or “irrational beliefs” is that such beliefs have often been selected for by such an adaptive process. As such a philosopher has
            no right to automatically disregard a custom or tradition as irrational just because it does not fit his abstract deductive system.

            “Hayek makes skeptical claims about the possibility of having any knowledge at all about social phenomena”

            This is not the case. That would amount to the denial of the possibility of social science at all. What Hayek does suggest is that the form of our scientific knowledge is restricted by the level of the complexity of the
            phenomena. Control and test experimentation must be progressively replaced with broader more abstract pattern prediction. A corollary of this is that science can not overcome the ignorance described in Hayek’s quote above. For more in depth on this philosophy of science see the first two papers in his anthology Studies In Philosophy, Politics And Economics Degrees of Explanation, and The Theory of Complex Phenomena.
            Hopefully the above clears up any idea of Hayek’s ideas “being self defeating”.

        • assman35

          Its clear from the real world that planning is necessary. The best example of this is Cuba vs United States. Cuba is basically an unplanned economy and the US economy involves tremendous degrees of planning and central coordination compared to Cuba.

          Why is Cuba an unplanned economy? Because essentially its just a huge black market system where the government outlaws all private business but has basically given up on providing for its people. And because large companies are banned there isn’t the scale or the resources to engage in planning. The US on the other hand has behemoth corporations that engage in planning on a huge scale successfully.

          However what the US does not have is a planning monopoly or a single unified central plan. Instead it has a large number of isolated partial plans and a market system which fills in the gaps when the plans fail which they do on a regular basis.

  • zacharywoodman

    I was hoping you’d post this as an article outside of your Facebook page so I could link to it as an educational resource. Very good summary.

  • Jameson Graber

    Most people simply don’t do Hayek justice. To me his real breakthrough was in distinguishing between theoretical and concrete knowledge, and making a powerful case that concrete knowledge is *more* essential to human flourishing than theoretical. Concrete knowledge includes not only knowledge of particular facts but also intuition and personal interpretation. Now lots of people dwell on Hayek’s argument that such concrete knowledge is dispersed among different human minds, but in fact this claim is (or should be) obvious–you can’t possibly know all the continually changing details of everyone else’s existence, much less share their own, intuitive vision of the world they inhabit. The really powerful idea of Hayek’s work is that such concrete, dispersed knowledge must be harnessed for the benefit of society, and that theoretical or “scientific” knowledge is almost completely useless in comparison.

    Then Hayek observes that the price system evolved to perform precisely this function. He says (as I recall) that it would be the most ingenious system ever invented by man, if indeed man had actually invented it. Instead, it evolved, not thanks to humans’ capacity for reason but rather because of our superstitious fondness for things like gold.

    If you put this argument in historical context, you have to appreciate just how *devastatingly* anti-rationalist Hayek is being, here. First he takes away the glory from scientific planners, pointing out that they simply don’t have the tools to do what the price system does naturally. Second, he takes away from civilization all pretense of having created itself through reason and enlightenment. It’s no wonder that Hayek was not well-loved in the early 20th century during which he developed this critique.

    Reducing all of this down to “centralized” versus “decentralized” is a pretty bad way to summarize Hayek.

  • murali284

    Prof Horwitz, the argument doesn’t really work. Here is why. Firstly, we can put pressure on 6 (Especially inclusive of the edit). 6 assumes that even non-equilibrium prices are always or predominantly responses to local knowledge. Now, once I wear my epistemologist hat, You can see how absurd this claim is. Knowledge is really hard to come by. The argument, it would seem would do well enough if non-equilibrium prices were predominantly responses to true belief. Because so long as it responds to true belief, it carries information. But now we know that even this is too strong. non-equilibrium prices are responses to belief (true or otherwise). When they are responses false beliefs (in particular, systematic overestimations of future value), you get bubbles. It is the eventual correction, when everyone realises that their beliefs are false that indicates that the new price is based on good information (or perhaps just better information). And perhaps even that is being too optimistic. After all, the previous beliefs could be true but everyone is somehow mislead into underestimating the value of a particular good. What we can get is thus the far more modest claim that prices won’t reach equilibrium unless they entirely and only reflect pieces of knowledge. But its unclear that you can go from this weaker claim to the conclusion that we should avoid government interference*.

    There is a somewhat related issue with how informative we are to understand prices as being. Suppose I’ve got a bit of local information that gives me pro-tanto reason to believe that project A will be really successful. But I also notice that shares in A are priced really low. If I take prices as highly informative, then I must believe that other people must know something that I don’t and that prices are low for a reason and that my own reasons are defeated. So, I disregard my local information. But if I do that, I am not adding my information to the price signal. But on the other hand, in order to behave in a way that adds my own information to the price signal, I must behave in a way that disregards the possibility that the price reflects other people’s information. So, the Hayekian theory is self effacing. In order for prices to convey local information, we must not believe that it does.

    I’m not sure if this is necessarily a problem for the theory, but self effacing theories are usually a red flag.

    *Pragmatically, we can be sceptical of the likelihood of government interference getting it any better than the market. But since knowledge is hard to come by, we have no expectation that government will likely do worse.

    • Steven Horwitz

      I am using the word knowledge in the way Hayek did, which is very broadly and loosely, and not as “justified true belief.” Knowledge is, in fact, beliefs. And prices are surrogates for people’s perceptions of the world. The social sciences start with the things people believe, not necessarily justified true belief.

      And your footnote is much more important than you think. It’s exactly the argument. Markets are indeed imperfect, but governments are even more imperfect. The reason is that we do actually know that the feedback processes of markets, even as imperfect as they are, work better than those of the political process. That, in fact, is Hayek’s argument and to be skeptical of it in the context of criticizing Hayek’s argument is either begging the question or requires its own argument in support.

      • Markets are imperfect, but governments are even more imperfect.

        This is clearly the key issue, but how does a Hayekian begin to know whether it is true? She obviously can’t rely on some Arrow-Debreu general equilibrium theorem. And she doesn’t want to do some sort of cost-benefit analysis?

        Let’s assume Hayek has proven that a completely centralized decision making envisioned along Stalinist lines is impossible and undesirable. You don’t even want to go from that to saying that on every conceivable margin, centralizing decision-making is impossible: obviously, the whole point of the polemic is that it is possible for society to move in a socialist direction and that should be resisted. What the Hayekian libertarian seems to want to do is say that the argument implies that on every conceivable margin, centralizing decision-making is undesirable. But it pretty obviously doesn’t establish anything of the kind.

        And then there is the problem that real world politics is also a decentralized unplanned process. Politicians try to get votes and influence, creating broader patterns of unplanned order, just like entrepeneurs seeking profits. Is it even possible on Hayekian grounds to get a perspective outside the system from which one could say that one unplanned order is better than the other? Is it even possible to have a modern market economy without some kind of system of politics? How does celebration of decentralized decision-making and emergent orders give any normative criteria whatsoever?

        • Swami

          Pithlord,

          You have changed the argument from the system working less well as prices become more rigid and freedom and decentralization are squelched to one where it is “impossible.” Hayek never argued that central planning is impossible, just that it works less well.

          Nor does Hayek reject all planning or government functions. Nor does he deny the existence of politics.

          He is pointing out the costs of central planning of economic affairs in rigidity of prices. Markets are in modern terms complex adaptive problem solving systems. Central economic master planning is a problem solving system too. If you want to debate which is more creative and generates more solutions to more problems more effectively and efficiently, then so be it. But do you really even believe this?

          • Swami,

            My point is not about what I believe, but about the force of the argument. Hayek and the Austrian school had a very important insight when they pointed out that much knowledge is tacit and local, and therefore cannot be transparent to a central planner. He also had an important insight that law and the market are spontaneous orders. The point I am making is that neither of these insights imply anything remotely libertarian about where the appropriate line between government and the market should lie, since politics is also a spontaneous order and there are obviously also costs of decentralization as well as centralization.

            Politics can be just as creative as markets, but what the participants are being creative about is how to beat each other. Since it is a spontaneous order, the Hayekian argument can be turned against libertarians in favour of incrementalism: how do we know what the consequences would be of a dramatic shift in a pro-market direction? Could a libertarian Supreme Court deciding to uphold Epstein’s view of the Takings clause possibly get the necessary local knowledge of what it would be unleashing? What would happen if Social Security were cancelled tomorrow? Etc.

            I think the better argument for markets is that they are based on exchange, which is a positive-sum activity, while politics and law are based on zero-sum competition. Exchange can have negative-sum byproducts, and politics/law can have positive-sum ones, but it kind of makes sense to bet on the activity that is generating a surplus at the first level of analysis. I don’t think this is a drop dead argument for a purist form of libertarianism, but it justifies a presumption for the market.

          • Swami

            Thanks Pithlord, that explains it well.

            I guess I didn’t take the main post as a “drop dead argument for a purist form of libertarianism” because I didn’t see that in Epstein’s argument, it was’t implied in Hayek’s original piece, and because I am not a libertarian either.

            It is simply a good argument/explanation for free markets, and we don’t have to be libertarians to see the value markets have added to our lives.

          • Swami

            Excuse me, Horwitz’s argument.

          • We are “violently agreeing”. I have no doubt that markets add value to our lives, It’s just that Hayek’s argument — although perhaps useful against 1930s-era leftists — does not prove very much against anyone politically significant nowadays. Bernie Sanders thinks markets in lots of things are great (ice cream, for example).

            Coase seems more useful to me on these issues, since he gives a framework for thinking through when vertical coordination is better/worse than horizontal coordination.

          • MARK_D_FRIEDMAN

            Just out of curiosity, (briefly) what is your understanding of “libertarianism,” and what part of it do you reject?

          • Swami

            From Wikipefia:

            “Libertarianism is a political philosophy that upholds liberty as its principal objective. Libertarians seek to maximize autonomy and freedom of choice, emphasizing political freedom, voluntary association, and the primacy of individual judgment.”

            I do not uphold Liberty as the principle objective. It is an extremely effective means to an end, and it is an objective, but not the principal and by no means the only objective. If socialism led to happier, healthier, flourishing lives, with more knowledge and meaning, then I would be all for it. From an instrumental perspective, I believe strongly in liberty and autonomy. They are extremely effective heuristics.

            I would label myself a classical liberal. I think libertarians tend to take their foundational principles too far and this leads them to impractical visions which cannot survive in the real world. Indeed, sometimes I suspect if the real world violates their core beliefs, many libertarians will abandon the real world rather than their beliefs.

            I enjoy your libertarian anarchist vision. I would love to see someone try it, rather than talk about it. But when (if?) we try it, we will need to learn how it actually works. Reality is messy and institutions and mindsets will need to be adjusted to reality. That is how we learn. We try things, revise them and seek constant progress according to our ever changing and evolving ideals.

            It could also fail miserably or catastrophically. That is why we need to test it small and build it up from there.

          • Ron H.

            Mark:

            Just out of curiosity, (briefly) what is your understanding of “libertarianism,” and what part of it do you reject?

            Swami:

            .”I do not uphold Liberty as the principle objective.

            Translation: “I reject all of it.”

          • MARK_D_FRIEDMAN

            Be kind. He’s much closer to your way of thinking than 99% of the other intellectuals running around out there.

          • Ron H.

            You may be right. I’m not very familiar with Swami’s views, I was just dumbstruck by a rejection of liberty and autonomy as principle objectives.

          • MARK_D_FRIEDMAN

            Well, I’m with you on that. However, for a variety of reasons, autonomy as an intrinsic value and as an instrumental value will tend to converge on the same policies, so he’s a fellow traveler.

          • Swami

            And just to clarify, I said it was not “the principle objective.” They certainly are great objectives, and instrumentally speaking extremely effective courses most of the time.

            But, yeah, I am more of a consequentialist. To be more of a full fledged libertarian I would have to see a proven long term, large scale community which thrives on these principles. Indeed I would LOVE to see such an experiment. Less talk, more proof.

          • Swami

            Ron, still anxiously waiting a response….

            You are “dumbstruck” that anyone rejects Liberty as THE principle objective in life? You do know that this means you are dumbstruck that anyone isn’t a full fledged libertarian….right? Or, to read it more graciously, you are dumbstruck that anyone familiar with the arguments for libertarianism rejects them.

            Care to point out what you assume I and other classical liberals are missing? Do note that I have been one of the strongest proponents on this thread for Horwitz’s argument.

          • Ron H.

            Swami

            Sorry, didn’t mean to leave you hanging.

            My comment probably sounded.a little harsher than I intended. Not having read the discussion between you and Mark at that time, I had a knee-jerk reaction to your response to Mark that you reject liberty as the principle objective.

            To my mind that would mean you reject libertarianism in its entirety, since that’s THE primary principle of libertarianism. It’s even in the name.

          • MARK_D_FRIEDMAN

            Okay, thanks for satisfying my curiosity. I’m not a consequentialist, but I understand its appeal as you describe it. I believe there are versions of “libertarianism” that come close to your ideal, yet still uphold, as they should, autonomy as the primary value. However, I’m not up for a long debate about it here, as I’ve said just about everything useful I can say on the subject here: http://www.amazon.com/Nozicks-Libertarian-Project-Elaboration-Philosophy/dp/1441102973?ie=UTF8&qid=&ref_=tmm_pap_swatch_0&sr=&tag=bleedheartlib-20

          • Lacunaria

            happier, healthier, flourishing lives, with more knowledge and meaning

            By whose measurement? If it’s an individual measurement (subjective value), then you are necessarily arguing for liberty.

          • Swami

            Well I certainly am not arguing against Liberty. But I am unaware that subjective value is equivalent to liberty or necessarily dependent upon it. Care to elaborate?

          • Lacunaria

            Subjective value requires that a person be free to value things as they see fit. You cannot force someone to be happier or more fulfilled with an apple than an orange. They must be free to choose for themselves and it is thus a moral good not to force others in their choices.

            Of course, there are cases where people decide in hindsight that forcing them had the best consequences, but at that point you would be achieving voluntary consent.

            That adult rarity also highlights the natural limits of consequentialism — namely, that we cannot predict such outcomes well enough to justify forcing people in general, so we turn to deontological rules.

            My guess is that you were ignoring how measurement of your desired consequences occurs and implicitly assuming an objective valuation. But if value is subjective, then liberty is not simply an instrument, it is the foundation for achieving ideal consequences.

          • Swami

            Lacunaria,

            Allow me to respectfully counter…

            1) Subjective value may very well require the freedom to value, but stating something is necessary does not mean that it is THE PRINCIPLE OBJECTIVE. (To be specific, consciousness, life, rational self introspection, etc may also be necessary, why are these not also THE principle objective?)
            2). A person can subjectively value something which they did not choose. Slaves still value things, even some things they did not choose for themselves.
            3). I am 100% aware of the heuristic value of freedom and liberty and autonomy. Big fan here, and in many cases for some of the reasons which you cite (which I too cited in my initial comment). I also agree that the value of Liberty is not JUST instrumental, it is also as AN end in itself. People desire freedom as a good and freedom is good is an excellent rule of thumb to enable them to accomplish their other ends. But note they do have other objectives, and any libertarian who argues they don’t (or shouldn’t) is smoking way too much weed.
            4). I am not arguing for “forcing people in general”. There is a hell of a lot of ground between “Liberty is not the principle objective” and “forcing people in general”. The very fact that you collapse the one into the other is exactly the type of rhetorical over-reach that makes some libertarians look bad.
            5). I was not assuming objective valuation.
            6). Your final argument that “Liberty is the foundation for achieving ideal consequences” is itself consequentialist. To the extent it is true, I agree with it. It almost is my argument. My revision would be as follows: “To the extent Liberty is the foundation for ideal consequences, it is an awesome thing”.

            I repeat myself. I am a classical liberal like Hayek. I believe in lots of freedom and autonomy and limited, impartial government. I am however, not one who believes in Liberty as THE PRINCIPLE OBJECTIVE, and I agree that means I am probably not a card carrying libertarian. But I am extremely familiar with the arguments for libertarianism (I have commented on this site since it formed) .

            I hope this clarifies.

          • Lacunaria

            1) Subjective value may very well require the freedom to value, but stating something is necessary does not mean that it is THE PRINCIPLE OBJECTIVE. (To be specific, consciousness, life, rational self introspection, etc may also be necessary, why are these not also THE principle objective?)

            Generically true, and those may be necessary qualities for politics, but they seem like a category error in answer to the question: what should the principal (first) objective of politics be?

            Specifically, the problem that you face is that the morality of politics pertains to the justifiable use of force, and the maximization of values other than liberty (such as happiness and fulfillment) depends upon first obtaining liberty, and putting liberty first also commonly answers the political question on the justifiable use of force.

            2). A person can subjectively value something which they did not choose. Slaves still value things, even some things they did not choose for themselves.

            Sure, but how do you maximize their happiness or fulfillment without letting them choose?

            But note they do have other objectives, and any libertarian who argues they don’t (or shouldn’t) is smoking way too much weed.

            I agree, people have lots of objectives. However, their political objectives should be much fewer and the question is: which of those should generally take primacy over liberty and why?

            4). I am not arguing for “forcing people in general”. There is a hell of a lot of ground between “Liberty is not the principle objective” and “forcing people in general”. The very fact that you collapse the one into the other is exactly the type of rhetorical over-reach that makes some libertarians look bad.

            Perhaps we are talking past each other, because I view politics as “forcing people in general”. How do you define “politics” and what are the pertinent moral aspects?

            I’ve also been assuming that your use of “principle objective” is just a spelling or grammar mistake, but perhaps we are also miscommunicating on what “principal objective” means. Liberty is not the only principle, it is just recurs to make it the primary one when it comes to politics — at least relative to our current political systems.

            6). Your final argument that “Liberty is the foundation for achieving ideal consequences” is itself consequentialist.

            Well, it qualifies consequentialist views by asserting that many relevant consequences cannot be effectively obtained without first obtaining liberty.

            I’m not sure how my own views would be categorized. I don’t license consequences independent of method, but I would use general consequences to argue that liberty is a key deontological principle.

            To the extent it is true, I agree with it. It almost is my argument. My revision would be as follows: “To the extent Liberty is the foundation for ideal consequences, it is an awesome thing”.

            Yes, but that makes it tautological and says practically nothing. This quote of yours says much more:

            I repeat myself. I am a classical liberal like Hayek. I believe in lots of freedom and autonomy and limited, impartial government.

            As Mark says, I think we are on the same team. 🙂

            I know you are a big fan of liberty and I do not mean to disparage you or belittle your commitment in any way. I’m just wondering how you construct your political philosophy, since it seems like liberty ranks pretty high for you.

          • Swami

            Lacunaria and Mark,

            Excellent responses.

            Yes, sorry for the spelling mistake. Hope it didn’t cause too much confusion. Once I made the error I continued to run with it.

            Let me snippet Mark’s comment….

            “Let me offer the following as a way of identifying the differences, if any, that you have with “libertarianism,” and perhaps with Lacunaria. I assume you are familiar with Nozick’s “framework for utopia.” It describes a means by which all persons can flourish as they understand this idea, by selecting the moral/political community they deem most conducive to this goal. But the mainspring for this framework is respect for autonomy, i.e. no competent adult may be coerced into membership in any group, nor coerced to remain. Accordingly, autonomy may only be an instrumental value in this sense, but the realization of all other human values can only be instantiated through respect for autonomy, i.e. by forswearing coercion. Perhaps this obviates some of the apparent conflict s between your two views.”

            Yes, I agree that autonomy and choice in selecting the moral/political community is foundational to flourishing. I do not agree that this makes Liberty the principal objective, but it does make it “the mainspring for this framework”. If so, then I think this means that I am a libertarian according to the cited definition.

            Thanks for the awesome discussion, guys.

          • MARK_D_FRIEDMAN

            Thank you as well. Your points about Hayek expressed my thoughts better than I could have, if that makes sense.

          • MARK_D_FRIEDMAN

            Let me offer the following as a way of identifying the differences, if any, that you have with “libertarianism,” and perhaps with Lacunaria. I assume you are familiar with Nozick’s “framework for utopia.” It describes a means by which all persons can flourish as they understand this idea, by selecting the moral/political community they deem most conducive to this goal. But the mainspring for this framework is respect for autonomy, i.e. no competent adult may be coerced into membership in any group, nor coerced to remain. Accordingly, autonomy may only be an instrumental value in this sense, but the realization of all other human values can only be instantiated through respect for autonomy, i.e. by forswearing coercion. Perhaps this obviates some of the apparent conflicts between your two views?

            I say a little about Nozick’s framework here: http://naturalrightslibertarian.com/2012/12/has-nozick-failed-to-give-us-utopia/

          • Swami

            See my comment below. I think you have me convinced.

          • assman35

            Socialism does lead to happier lives. But without more knowledge or meaning. Effective socialism basically means that people become like pet dogs. Pet dogs are pretty happy.

      • Irfan Khawaja

        Does knowledge for Hayek include unjustified false beliefs?

        The use that Hayek makes of “knowledge” is not just broad and loose, but a recipe for equivocation and confusion (which is exactly what it leads to). If knowledge is just belief, why wasn’t the paper called “The Use of Belief in Society”?

        • Swami

          I think you are introducing a false or at least extreme dichotomy here, Irfan.

          Somewhere south of “justified true belief” we have the land of “reliable knowledge” and the isthmus of “personal preference” and the island of “proven skill and ability.”

          Knowledge includes beliefs, awareness, values, preferences, heuristics, experience, and so on. These change instantly and constantly among every person on earth, and they are dynamic and interactive. Any change anywhere leads to changes and adjustments in all the others.

    • Swami

      Murali,

      I think you have inadvertently reframed the issue from how people coordinate desires, skills and problem solving abilities into a complex and emergent whole to a frame on self amplifying bubbles in financial markets.

      Financial markets do allow people to predict how other people will predict, thus leading to self amplifying feedback processes. OK. No argument here.

      The fundamental value of the underlying system is in coordinating activities. People can solve more problems collectively than apart. But they don’t know what others’ goals are, and they don’t know how to trade off values and goals absent a decentralized system of personal ownership and voluntary exchange using the discovery, incentive and communication system of prices. The market system brings me fresh, wholesome yogurt of my choosing every morning more efficiently than other systems. Hayek explains why, though most still don’t grok it.

      The fact that some guy could try to game the futures market on yogurt by anticipating what people will be anticipating is kind of beside the point.

      • murali284

        The market system brings me fresh yoghurt (ok not so fresh, but still very nice yoghurt) because prices for the production of yoghurt (and probably many similar products) approaches equilibrium very fast. People who mis-estimate the value of the things they produce and purchase very quickly go bust because people with more accurate guesses (and more efficient processes) make a larger profit. I’m not doubting the general efficacy of markets. Instead I was making (rather ineptly) the point that pithlord makes in reply to Horwitz’s reply to me.

  • “Decentralized decision making without a price system will produce very little coordination and prosperity”.

    The promise of “Big Data” is essentially one of superior information coordination in which better decisions can be achieved through hyper-decentralisation (the “wisdom of the crowd” etc). But its prerequisite is the maximisation of the dataset, which creates the economic imperative to provide services gratis. In other words, decentralised decision-making can conflict with a price system.

  • Swami

    Steve,

    I broadly agree, but would like to suggest an elaboration. In reviewing the comments/objections below, I think this elaboration might head off some of their objections.

    The elaboration is that knowledge specifically includes (quoting Hayek) “the relative importance of the particular things with which he is concerned.” IOW, it specifically includes knowledge of the individual’s values, goals, problems, opportunities, skills and tradeoffs at that specific place and time. The price system then allows an efficient, economical system for people to discover, coordinate and realize the fulfillment of said values, skills and goals.

    A central planning process does not know my values and goals at this exact moment. It does not know which alternatives I face. It does not know the values and goals of seven billion others at this time and place. It does not know how to trade off values and arrive at a win/win. A centralized top down process, by itself is incapable of solving and coordinating as well as a decentralized process based upon simple rules of property, voluntary interaction, and control for negative externalities. The top down system would be less knowledgable at the start, would become obsolete within minutes of implementation, and would then interfere and obstruct with the decentralized, smarter and more positive sum process it hopes to replace.

  • 到此一游,立贴为证!

  • Andrew

    Decentralization, you say? Any genial bets on when one world government will arrive? Anyone… Anyone? Perhaps it’s already here – in shadow form, but I will throw out a guess… 25 years at the EARLIEST… just a guess… trying to think about peak oil and another generation of massive population growth… I think it might actually take 2 or 3 generations… many of us might not live long enough to see it.