IV. The Use of Knowledge in Society
1
The main issue in creating a rational economic order is that no one person has all the information needed to make the best use of resources. Although math can help tackle some logical problems of resource allocation, it does not solve the real economic challenges society faces. This is because knowledge about resources is scattered among many people, and each individual only knows a part of the situation. The economic problem is about using this shared knowledge effectively, not just managing "given" resources. Many misunderstandings in economic theory and policy come from incorrectly applying ideas from natural sciences to social situations, which makes the real economic issues less clear.
2
Planning involves making decisions about how to use available resources, which is essential in any economic activity. In societies where people work together, planners need knowledge that often comes from others. The challenge is how to communicate this knowledge effectively. A major debate in economic planning is whether it should be centrally managed by one authority or divided among many individuals. Central planning aims for a unified approach, while competition promotes decentralized planning. The efficiency of each system depends on how well knowledge is shared and used.
3
Different types of knowledge hold varying importance, and this affects who has access to them. While scientific knowledge is often seen as superior and primarily understood by experts, it is not the only crucial kind of knowledge. Unique, unorganized knowledge based on local circumstances often gives individuals an advantage because it includes information about specific situations or people. This practical knowledge is valuable and can lead to effective decisions when used properly. However, it is often looked down upon compared to theoretical knowledge, and people who leverage this unique knowledge for advantage may be viewed negatively. Society undervalues the importance of utilizing such practical knowledge in commerce, focusing instead on scientific advancements. There is a need to address how to make this practical knowledge more accessible, rather than assuming it should be easily available to everyone.
4
Understanding the importance of time and place is crucial because economic problems only arise due to changes in circumstances. If everything remains constant, there are no new issues requiring decisions or plans. Some people believe that changes are less important today and that technology has made economic decisions less frequent, only requiring attention during major events like building new factories. However, this view doesn't match the reality faced by business managers in competitive industries, where constant adjustments are necessary to manage costs and maintain profitability. Economists often overlook these small, ongoing changes because they focus more on broad statistical data, which appears stable. This stability can be misleading, as it doesn't reflect the day-to-day adjustments needed in the economy. Moreover, important knowledge that helps make decisions cannot always be captured in statistics, as it involves specific details about location or quality. Therefore, central planning based on such statistics may miss critical local factors, making it essential for decisions to be made by those directly involved in the situation.
5
The economic problem of society mainly involves adapting quickly to changes in specific situations. To address this, decisions should be made by people who are familiar with their circumstances, as they know the relevant changes and available resources. Relying on a central authority to manage all these details is inefficient. Decentralization is necessary to ensure that local knowledge is utilized effectively. However, local decision-makers still need additional information to understand how their choices fit into the larger economic system.
Each person requires knowledge about what external events matter to their decisions, but they don’t need to know every detail. They should focus on how changes affect the relative importance of resources they deal with, like comparing the availability of different materials. The “economic calculus” explains how the price system helps solve these problems. Prices serve as indicators of value that condense and reflect the significance of resources.
For example, if a new demand arises for tin or if its supply decreases, users only need to know to adjust their use of tin without understanding all the causes. The price mechanism allows people to react to changes efficiently as they share information through market interactions. This interconnectedness helps ensure the market functions smoothly without requiring everyone to understand the entire system.
6
The price system is an important way to share information in the economy, functioning as a tool that helps people make decisions without needing to know everything. It allows individuals to respond to changes in supply and demand simply by observing price movements, much like an engineer monitors dials. However, these responses are not always perfect, and the assumption that everyone has complete knowledge can mislead our understanding of how this system works.
Despite its flaws, the price system has a remarkable ability to adjust behavior across large numbers of people, even if most of them are unaware of the broader reasons behind their actions. This system has evolved without being purposely designed, and it can help manage resources without demanding conscious control from individuals. The challenge is to find ways to use this mechanism better.
The significance of the price system extends beyond economics, touching upon many social phenomena, including language and cultural practices. Human civilization advances by utilizing methods that allow people to perform tasks without requiring deep thought or understanding. The price mechanism has enabled specialized work and efficient resource use, suggesting that our society is shaped not only by design but also by successful practices that emerged over time.
7
The discussion about the importance of the price system in society has shifted from a primarily political debate to a more intellectual one. Originally, the idea that a price system is essential for complex societies, as proposed by Von Mises, was met with disdain. However, many now recognize its importance, with even figures like Leon Trotsky acknowledging that economic accounting relies on market relations. Scholars may still disagree, but their differences are based more on methodology than on ideology.
Joseph Schumpeter, a prominent economist, illustrates one such methodological difference when he suggests that consumers’ evaluations of goods also imply a valuation of the production factors. This notion is flawed, as it overlooks the fact that consumers do not automatically consider production factors without having all necessary information. The real challenge lies in the fact that knowledge is dispersed among many individuals, making it hard for one person to have all the facts.
An approach that assumes full knowledge is unrealistic and fails to address the crucial issue of how knowledge is shared among people. While equilibrium analysis in economics can be useful, it should not lead to conclusions about real-world problems without recognizing its limitations. It is essential to focus on how the social process and interactions actually work in practice.
1
The main issue in creating a rational economic order is that no one person has all the information needed to make the best use of resources. Although math can help tackle some logical problems of resource allocation, it does not solve the real economic challenges society faces. This is because knowledge about resources is scattered among many people, and each individual only knows a part of the situation. The economic problem is about using this shared knowledge effectively, not just managing "given" resources. Many misunderstandings in economic theory and policy come from incorrectly applying ideas from natural sciences to social situations, which makes the real economic issues less clear.
2
Planning involves making decisions about how to use available resources, which is essential in any economic activity. In societies where people work together, planners need knowledge that often comes from others. The challenge is how to communicate this knowledge effectively. A major debate in economic planning is whether it should be centrally managed by one authority or divided among many individuals. Central planning aims for a unified approach, while competition promotes decentralized planning. The efficiency of each system depends on how well knowledge is shared and used.
3
Different types of knowledge hold varying importance, and this affects who has access to them. While scientific knowledge is often seen as superior and primarily understood by experts, it is not the only crucial kind of knowledge. Unique, unorganized knowledge based on local circumstances often gives individuals an advantage because it includes information about specific situations or people. This practical knowledge is valuable and can lead to effective decisions when used properly. However, it is often looked down upon compared to theoretical knowledge, and people who leverage this unique knowledge for advantage may be viewed negatively. Society undervalues the importance of utilizing such practical knowledge in commerce, focusing instead on scientific advancements. There is a need to address how to make this practical knowledge more accessible, rather than assuming it should be easily available to everyone.
4
Understanding the importance of time and place is crucial because economic problems only arise due to changes in circumstances. If everything remains constant, there are no new issues requiring decisions or plans. Some people believe that changes are less important today and that technology has made economic decisions less frequent, only requiring attention during major events like building new factories. However, this view doesn't match the reality faced by business managers in competitive industries, where constant adjustments are necessary to manage costs and maintain profitability. Economists often overlook these small, ongoing changes because they focus more on broad statistical data, which appears stable. This stability can be misleading, as it doesn't reflect the day-to-day adjustments needed in the economy. Moreover, important knowledge that helps make decisions cannot always be captured in statistics, as it involves specific details about location or quality. Therefore, central planning based on such statistics may miss critical local factors, making it essential for decisions to be made by those directly involved in the situation.
5
The economic problem of society mainly involves adapting quickly to changes in specific situations. To address this, decisions should be made by people who are familiar with their circumstances, as they know the relevant changes and available resources. Relying on a central authority to manage all these details is inefficient. Decentralization is necessary to ensure that local knowledge is utilized effectively. However, local decision-makers still need additional information to understand how their choices fit into the larger economic system.
Each person requires knowledge about what external events matter to their decisions, but they don’t need to know every detail. They should focus on how changes affect the relative importance of resources they deal with, like comparing the availability of different materials. The “economic calculus” explains how the price system helps solve these problems. Prices serve as indicators of value that condense and reflect the significance of resources.
For example, if a new demand arises for tin or if its supply decreases, users only need to know to adjust their use of tin without understanding all the causes. The price mechanism allows people to react to changes efficiently as they share information through market interactions. This interconnectedness helps ensure the market functions smoothly without requiring everyone to understand the entire system.
6
The price system is an important way to share information in the economy, functioning as a tool that helps people make decisions without needing to know everything. It allows individuals to respond to changes in supply and demand simply by observing price movements, much like an engineer monitors dials. However, these responses are not always perfect, and the assumption that everyone has complete knowledge can mislead our understanding of how this system works.
Despite its flaws, the price system has a remarkable ability to adjust behavior across large numbers of people, even if most of them are unaware of the broader reasons behind their actions. This system has evolved without being purposely designed, and it can help manage resources without demanding conscious control from individuals. The challenge is to find ways to use this mechanism better.
The significance of the price system extends beyond economics, touching upon many social phenomena, including language and cultural practices. Human civilization advances by utilizing methods that allow people to perform tasks without requiring deep thought or understanding. The price mechanism has enabled specialized work and efficient resource use, suggesting that our society is shaped not only by design but also by successful practices that emerged over time.
7
The discussion about the importance of the price system in society has shifted from a primarily political debate to a more intellectual one. Originally, the idea that a price system is essential for complex societies, as proposed by Von Mises, was met with disdain. However, many now recognize its importance, with even figures like Leon Trotsky acknowledging that economic accounting relies on market relations. Scholars may still disagree, but their differences are based more on methodology than on ideology.
Joseph Schumpeter, a prominent economist, illustrates one such methodological difference when he suggests that consumers’ evaluations of goods also imply a valuation of the production factors. This notion is flawed, as it overlooks the fact that consumers do not automatically consider production factors without having all necessary information. The real challenge lies in the fact that knowledge is dispersed among many individuals, making it hard for one person to have all the facts.
An approach that assumes full knowledge is unrealistic and fails to address the crucial issue of how knowledge is shared among people. While equilibrium analysis in economics can be useful, it should not lead to conclusions about real-world problems without recognizing its limitations. It is essential to focus on how the social process and interactions actually work in practice.