David R. Henderson  

Hayek on Knowledge

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Rejoinder on Hayek... The Dining Room Table Responds...

I don't want to weigh in comprehensively on co-blogger Bryan's claims about Hayek. What I will say is that it's important to distinguish between three claims:
(1) the claim that many modern libertarians and economists overrate Hayek (a claim with which I agree),
(2) the claim that he was not a great economist (a claim with which I disagree), and
(3) the claim that "his original, true ideas could have been five good blog posts," a claim that Bryan made and one with which I disagree.

What I want to do instead is present my teaching materials I use when I teach Hayek's "The Use of Knowledge in Society," which I spend an hour on in every course I teach. I've copyrighted them, as you can see, but this is my permission to use any or all of them as long as you cite the source.

Notes on Hayek, "The Use of Knowledge in Society"

Copyright David R. Henderson 2007

You might not get the whole value of Hayek's article by reading it once. It's complicated, but that's because there's so much there (and because of his Germanic writing style.) I strongly recommended that you read it at least twice. I regard this essay as the most important economics essay in the last century. Almost 30 years after this article was published, Hayek won the Nobel prize in economic science.

1. The most important paragraph in this article is paragraph H3 and the most important sentence in the article is the first sentence of this paragraph:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources--if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
Economists today who draw on Hayek's insight often refer to this point about dispersed information as "local knowledge." Think about kinds of local knowledge you have about your job or other parts of your economic life, knowledge that would be unavailable to a central planner. Now ask yourself how things would work if you had to get a central planner's permission each time you wanted to act on this knowledge.

2. In paragraph H6, Hayek writes:

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.

I don't really have a question about this. I just want to highlight its importance.

3. Read and reread H9. There's so much in there.

4. In paragraph H10, Hayek writes:

Even economists who regard themselves as definitely immune to the crude materialist fallacies [i.e., thinking in terms of material wealth--remember Heyne, Boettke, and Prychitko's point in Chapter 2] constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned--apparently because in their scheme of things all such knowledge is supposed to be "given."

A couple of years ago, our dishwasher was leaving our dishes streaky and so we called the appliance repair person. He came out--minimum charge $69.95--and in 5 minutes assessed the situation and told us we should use powder instead of liquid dishwash detergent. For a few minutes I was angry. Then I remembered Hayek. Explain. What did I figure out that is contained in this above quote?

5. Read paragraph H15. Some economists who studied the Soviet Union and other centrally planned economies have claimed that the biggest failure of such economies was not in manufacturing but in agriculture. Given Hayek's reasoning in H15, explain why.

6. In paragraph H16, Hayek writes:

It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

Connect this with the Hazlett article on D-Day and the contrasting approaches of the Allies and the Germans.

7. Carefully read paragraph H21, another key paragraph. Hayek writes:

It does not matter for our purpose--and it is very significant that it does not matter--which of these two causes has made tin more scarce.

Why does it not matter?

8. In H22, Hayek gives an analogy between the price system and machinery. What is that analogy?

9. In H23, Hayek uses the word "marvel" to describe the price system and then explains in H24 why he uses that word. Why?

10. See the reading I'm attaching from that noted economic analyst, Howard Stern, for an example of local knowledge. (H/T on Stern reading to Dan Klein.)


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COMMENTS (10 to date)
Philo writes:

The first sentence (of paragraph H3) may be the most important, but it is also one of the worst written. The syntax is garbled. And what is "the problem of a rational economic order"? I *think* this is just *maximizing total utility in the long run*, but maybe I'm mistaken: Hayek doesn't bother to specify. Of course, if the *rational* economic order is defined as the one that *solves* this problem, there never has been and never will be a rational economic order. We needn't be told that "dispersed bits of knowledge" are *incomplete*: this is trivial. But they could not possibly be *contradictory*: knowledge is only of what is true, and truths cannot contradict each other.

It would be tedious to criticize the whole essay in this fashion. The author was so obviously either very careless or very woolly-minded.

(That is not to deny that he was a great economist.)

Snorri Godhi writes:

To be fair to Dr. Caplan, the essay is the size of a long blog post, and could be further condensed by translation into plain English.

My point is, it's not the number of blog posts that matters; it's their content.

Eric H writes:

Thanks for weighing in, David. It's a real privilege to read your teaching materials.

The Use Of Knowledge in Society was a transformative read for me; I know I'll pour over it--struggle through it, really--for years to come.

It was none other than Noble Laureate Vernon Smith who said--I believe--that he has profited from multiple readings of the work. And Thomas Sowell based his Knowledge and Decisions on it.

Ex post complaints about Hayek's prose offer no substantive critique of his ideas, and in my view aren't worth serious consideration. His writing is the product of the interface between his considerable intellect and the world around him. Complaining about that product is really complaining about the interface that produced it, something over which none of us, not even Bryan Caplan, exercise any control.

As far as Caplan's comment that Hayek's best ideas would make at most "five blog posts," I wonder how comfortable Caplan would be were he to hear similar comments from his future readers. Should he make efforts now to distill his ideas into a form of communication as yet undiscovered?

Mike Rulle writes:

This is excellent. The Stern exampe in particular is inspired. Before I ever heard of Hayek, I had a "shadow" intuition this is the correct way of thinking.

But to defend Bryan, who I critiqued earlier today, I imagine he agrees with what you posted here. He simply is emphasizing your first point.

Having said that, my interest is Political Economy or how such ideas can be made into coherent public policy. Bryan's comments bypass this issue.

I don't care if Hayek is overrated or tedious (bloviating?) or repetitive or whatever. I would like if the knowledge you guys have were focused on getting poiticians and the electorate to see the wisdom present in Hayek and others.

His tediousness (if indeed he is tedious) is the pain experts like Bryan need suffer in order to accomplish your Political Economy responsibilities.

Curt Doolittle writes:

RE "Bryan's comments bypass this issue."

Precisely. And the reason why he bypasses that issue is worth more than five blog posts.

Furthermore, the reason he bypasses that issue is the very reason that Hayek is not overrated.


Greg Ransom writes:

Thomas Sowell says he completely missed the understanding contained in Hayek's "The Use of Knowledge in Society" when Friedman taught it to him in grad school. It was years later that the piece began to loom larger and larger in Sowell's output.

I’m fascinated by the idea that obtrusive writing – deliberately clunky while remaining stylish and correct – might be a successful, nay necessary, device for conveying important ideas. Hayek, like Weber, Parsons, Schumpeter, and James M. Buchanan were extremely precise, spare, and deliberate in their ordering and juxtaposition of words. A short sentence might contain layer upon layer of meaning; so it must be obtrusive!!

It is by sifting that constructed order of words that the reader finds nuggets of golden insight about (1) the order of causation in society or economy, (2) the right order of priority in analysis, (3) the relationships between variables, and (4) important concessions or departures in the writer’s worldview.

It is in passages thus styled that you find Hayek’s important concessions about the *actual* interplay of institutional design and spontaneous order. A sentence that needs to be re-read several times may be the most important of sentences.

In his warm review of my book in the new issue of Policy (currently gated at http://www.cis.org.au/POLICY/home.htm), the economic historian Professor Eric Jones says of me and Weber’s writing – “His hero, Weber, was a genius but not always as lucid as he might have been. The reason Wassily Leontief gave why the great Yale economist, Irving Fisher, never founded a school of thought was, ‘Irving Fisher wrote so clearly that everyone understood what he was saying.’”

Professor Jones makes this a mild complaint against Weber's presentational style. But I dwell on the fact that all the writers I mentioned above founded a school of thought!

Greg Ransom writes:

Economists who overrated Hayek:

Hicks, North, Smith, Simon, Harrod, Mises, Samuelson, Lucas , Koopmans, Hurwicz, Robbins, Prescott, Coase, Friedman, Sowell, Williamson, Olstrom, Robbins, Kydland, Phelps,and Keynes.

Economists who didn't overrated Hayek:

David Henderson

Eric H writes:

Mike--

I liked your last sentence:

"His tediousness (if indeed he is tedious) is the pain experts like Bryan need suffer in order to accomplish your Political Economy responsibilities."

Is Bryan's complaint about the blog post an attempt to sidestep those responsibilities?

Troy Camplin writes:

Actually, the insights of this paper demonstrates the extreme importance of the main idea he ended up promoting over the majority of his career -- spontaneous orders. Spontaneous orders are how knowledge as he accurately describes it coordinates itself most efficiently and effectively. Indeed, the best way to coordinate information is through self-organizing, self-regulating systems, of which spontaneous orders are a special kind.

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