The Use of Knowledge in Society
Encyclopedia
"The Use of Knowledge in Society" is a scholarly article written by economist Friedrich Hayek
, first published in the September 1945 issue of The American Economic Review Written (along with The Meaning of Competition) as a rebuttal to fellow economist
Oskar R. Lange and his endorsement of a planned economy
, it was included among the twelve essays in Hayek's 1948 compendium Individualism and Economic Order
. The article argues against the establishment of a Central Pricing Board (advocated by Lange) by highlighting the dynamic and organic nature of market price-fluctuations
, and the benefits of this phenomenon. He asserts that a centrally planned market could never match the efficiency of the open market
because any individual knows only a small fraction of all which is known collectively. A decentralized economy thus complements the dispersed nature of information spread throughout society. In Hayek's words, "The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction." The article also discusses the concepts of 'individual equilibrium' and of Hayek's notion of the divide between information which is useful and practicable versus that which is purely scientific or theoretical.
"The Use of Knowledge in Society" met with a poor reception from fellow economists because of the contemporary political climate and its perception as being overly trivial in its critiques. Partly as a result of this disappointing outcome, Hayek had by the end of the 1940s ceased to target his literature at the established economic community. Twenty years later these ideas had become more tolerable; today several are accepted as basic economic tenets. Specifically, the essay's central argument that market price fluctuations promote efficient distribution of resources is embraced by most modern economists. In 2011 "The Use of Knowledge in Society" was selected as one of the top 20 articles published in the American Economic Review during its first 100 years.
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
, first published in the September 1945 issue of The American Economic Review Written (along with The Meaning of Competition) as a rebuttal to fellow economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
Oskar R. Lange and his endorsement of a planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
, it was included among the twelve essays in Hayek's 1948 compendium Individualism and Economic Order
Individualism and Economic Order
Individualism and Economic Order is a book written by Friedrich Hayek . It is a collection of essays originally published between the 1930s and 40s, discussing topics ranging from moral philosophy to the methods of the social sciences and economic theory to contrast free markets with planned...
. The article argues against the establishment of a Central Pricing Board (advocated by Lange) by highlighting the dynamic and organic nature of market price-fluctuations
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
, and the benefits of this phenomenon. He asserts that a centrally planned market could never match the efficiency of the open market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
because any individual knows only a small fraction of all which is known collectively. A decentralized economy thus complements the dispersed nature of information spread throughout society. In Hayek's words, "The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction." The article also discusses the concepts of 'individual equilibrium' and of Hayek's notion of the divide between information which is useful and practicable versus that which is purely scientific or theoretical.
"The Use of Knowledge in Society" met with a poor reception from fellow economists because of the contemporary political climate and its perception as being overly trivial in its critiques. Partly as a result of this disappointing outcome, Hayek had by the end of the 1940s ceased to target his literature at the established economic community. Twenty years later these ideas had become more tolerable; today several are accepted as basic economic tenets. Specifically, the essay's central argument that market price fluctuations promote efficient distribution of resources is embraced by most modern economists. In 2011 "The Use of Knowledge in Society" was selected as one of the top 20 articles published in the American Economic Review during its first 100 years.
See Also
- Dispersed knowledgeDispersed knowledgeIn economics, dispersed knowledge is information that is dispersed throughout the marketplace, and is not in the hands of any single agent. All agents in the market have imperfect knowledge; however, they all have a good indicator of everyone else's knowledge and intentions, and that is the...
- Invisible handInvisible handIn economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
- Opportunity costOpportunity costOpportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
- The Fatal ConceitThe Fatal ConceitThe Fatal Conceit: The Errors of Socialism is a non-fiction book written by the economist and political philosopher Friedrich Hayek and edited by William Warren Bartley.-Main thesis and arguments:...
External links
- "The Use of Knowledge in Society" full text at the Library of Economics and LibertyLibrary of Economics and LibertyThe Library of Economics and Liberty is a free online library of economics books and articles from a libertarian view and is sponsored by the private Liberty Fund.-Content:...
at the India Policy Institute)