On Hayek's ‘Use Of Knowledge’

Harrison Ainsworth

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Hayek's ‘unconveyable economic knowledge’ is like the idea of a ‘private language’. And some centralisation, rather than being defective, is essential to cooperation anyway.

1670 words (7 minutes)


Hayek does not disprove centralisation; centralisation is actually necessary.

Hayek's well-known article “The Use of Knowledge in Society” is often taken to prove that a centralised economy is, because of information limits, in principle impossible. But the article does not and cannot succeed in that – the very character of information means the exact opposite: ‘unconveyable economic knowledge’ is like the idea of a ‘private language’.

Probably the ‘central-planning’ that Hayek, and some later readers, have in mind is undesirable anyway, for practical reasons; no matter. The larger point is that all systems of cooperation (or at least the ones we are interested in as effectively beneficial) are necessarily a configuration of two aspects: distribution, yes, but there must be something centralised too, even though it might seem to be in a rather abstract form.

The misinterpretation is ambiguous, but wrong either way.

The misinterpretation's claim seems quite ambiguous in the text, but it can be distilled into two (conflicting) forms:

  1. 1, knowledge cannot be gathered – it is logically impossible (“The reason for this is that the ‘data’ from which the economic calculus starts are never for the whole society ‘given’ to a single mind which could work out the implications and can never be so given.”);
  2. 2, gathering knowledge is difficult – it is a practical problem (“the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer”).

The two cannot both be right since they are mutually exclusive, but actually both are wrong, for different reasons. Proposition 1 is invalid by having a contradictory notion of information and cooperation (described below), and proposition 2 now has a working solution: the internet – any info you can imagine can be shared.

Centralisation is declared impossible because statistics lose info.

Let us look at proposition 1 – the stronger and more interesting one. In about the first half of the article (the second half seems more sound, and free from this criticism), the following appear:

“The reason for this is that the ‘data’ from which the economic calculus starts are never for the whole society ‘given’ to a single mind which could work out the implications and can never be so given.”

– “The Use of Knowledge in Society” para 2 ; Hayek ; 1945 / article .

“This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the ‘man on the spot’.”

– “The Use of Knowledge in Society” para 16 ; Hayek ; 1945 / article .

So the argument, boiled down, is this:

  1. 1. Centralisation is not possible because the needed knowledge cannot be conveyed.
  2. 2. The knowledge cannot be conveyed because it cannot be abstracted into statistical form (because it is inherently local).

There is a contradiction in there.

But info that is not communicable is not economic.

Hayek says that a central-authority would have to squash everything into statistics, losing local detail. But it is the very abstraction into ‘statistical form’ that makes such knowledge economic at all. Any knowledge isolated within an individual or locality can play no economic role – if the knowledge was purely specific, it would mean nothing to anyone else. Knowledge that cannot be expressed or transmitted cannot be a matter of coordination, because coordination is necessarily between individuals. It is only the finding and using of a general aspect of knowledge, across a group, that gives individual data economic significance.

What do money and prices do? Exactly that: represent local conditions in a general form meaningful across the system. Hayek cannot have it both ways: if local knowledge is incommunicable, then money cannot communicate it either; if money can communicate information through an economy, then that same info, or even more, can be transmitted through other channels, such as the internet.

Think of a concrete example – something extremely localised. There are some abilities that are non-shareable, like perhaps a sophisticated trained sense of smell: you can have such ‘knowledge’, but you did not get it from anywhere, and you cannot give it to anyone else. But such knowledge is essentially non-economic: if you cannot transfer or communicate that ability in any way, it cannot play a part in economic interaction. But what about how that sense of smell might enable you to, for example, assess wine production processes or detect dangerous chemicals? Then in that case it is economic. Your supposedly incommunicable knowledge has an outward effect – and it is that which makes it both communicable informationally and (therefore) economically significant.

Hayek's ‘local knowledge’ seems to fall to something like the private language argument: not communicable = not economic knowledge. If something is not communicable, it can have no economic effect and is not of economic concern. And if something can be economic at all, it is possible to share information about it. (And if it can be communicated, it could possibly be all communicated to one place – centralised.).

Decentralisation is appropriate where our economic model is inadequate.

There is a better argument for decentralisation that Hayek does not make. It is that we do not understand how economies work, not that we lack raw data or the ability to communicate it. It is not that we cannot have complete data/information or that it cannot be gathered. It is that we do not have complete knowledge about what to do with it, we lack the prowess to build a sound plan upon it – our understanding of how economies work is inadequate.

Hayek begins by saying the economy is like a mathematical formula, in zuerstand: all we need is to get the basic information, x and y, for our formula – ‘x + y = z’ – and we can then easily determine how to arrange things: z. And the big problem is then said to be that we cannot get that needed information, x and y. But the real problem is not the ‘x’ and ‘y’ (we can get and gather information well enough), it is that we do not know the ‘+’ – or to rephrase: the economy is ‘f(x,y) = z’, and we do not, or only dimly, know f.

It is this gap in understanding that makes room for decentralised action. (We know what resources are available, and we know what we want, but we do not know how to combine our activities globally.). Since we do not know exactly what to do, we do not know exactly how to instruct people, so to that extent we may as well let people do as they please. The knowledge-gap translates into a leeway of individual freedom. (There are alternatives to freedom that might be more helpfully informative – iteration/experimentation, even randomness – but freedom has a good psychological reason.).

Cooperation is about sharing info, which needs both centrality and delegation.

Perhaps we can now reflect a little. What are ‘central-planning’ and markets in terms of information? How are they distinguished? There is not a clear-cut difference after all; they are distinguished by degree, by variation. Each is a combination of both centrality and delegation.

One needs an abstract idea of centralisation – ‘logical’ rather than physical: it is not that there is a single supervisor or place or organisation; it is about rules – that is, information that shapes behaviour, and its one-to-many duplication, or broadcast.

Then one can see that there must always be some centralisation, because that is what cooperation is, and we want its benefit. Cooperation is a shared constraint on individual action to yield a global positive. Think of the prisoner's dilemma: the appropriate ‘central-planning’ – the withdrawal of delegation – is precisely the remedy needed.

Markets too are centralised, in their rules: of money, property, transactions, etc (there is the key info, the template of control). These are fixed up-front and promulgated to all (there is the broadcast duplication), where all are expected to comply, not to decide for themselves whether to follow the rules, not to give feedback. But is this not the social defect of central-planning? (Control set in place once up-front is not by that immune to the same criticism of control issued actively.). Yes, it is the same form, no, it is not defective simply by that – on the contrary, there lies the cooperative value.

The point that should be taken from Hayek is tripartite: an economic system is a cooperative system, a cooperative system requires sharing information, and money and markets are a good way to share a minimal kind of such information. And the larger point to take from this current article is that cooperative systems necessarily (also) have a core of centralisation (informing their delegation), and we should not avoid centralisation or denigrate it per se, but understand its structure, and use it intelligently.

What will be the ‘anti-post-Hayek moment’?

At some point computational and network tech will bring us clearly past the ‘anti-Hayek moment’: when it is easily possible to run a complete simulation of the economy on a computational system somewhere. But that is quite boring; as hidebound an idea as the market it opposes. The more interesting threshold will be reached perhaps not so long after: the ‘post-anti-Hayek moment’ – when everyone will be able to run their own simulation of the economy on their smartphone.

Then what?



   title:`On Hayek's 'Use Of Knowledge'`
   creator:`Harrison Ainsworth`


   description:`Hayek's 'unconveyable economic knowledge' is like the idea of a 'private language'. And some centralisation, rather than being defective, is essential to cooperation anyway.`
   subject:`philosophy, economics, information`

   rights:`Creative Commons BY-SA 4.0 License`