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'Each individual only knows a small fraction of what is known collectively – and that as a result, decisions are best made by those with local knowledge rather than by a central authority'
Summary:'Each individual only knows a small fraction of what is known collectively – and that as a result, decisions are best made by those with local knowledge rather than by a central authority'
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'Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses uni
this view alone:'Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the
arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.'
One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with
A peculiar essay exploring the distribution of knowledge in society from a POV of an early 20th century economist and philosopher in a similar matter one would talk about distribution of 'capital' in this time period. Some points retain validity up to this day better than others. One paragraph that stuck with me though is:One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for - as the statisticians seem occasionally to be inclined to do-by the 'law of large numbers' or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability.
Written in 1945, Hayek correctly pointed out a possibly worrisome trend of generating an increasingly complex and interconnected structures of information, without controlling or understanding their individual elements.
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A brief explanation on individual actions, unknowingly shared knowledge, prices and economy.
The whole world is connected and society can advance because of every single decision we make through our complete understanding of the world as a group - selfish individuals looking out for themselves.
Awesome!
Interesting analysis of the nature of imperfect information in an economy and how we must be aware of this problem in order to maximise efficiency (instead of following mathematical formulae etc). Because no one has all knowledge about everything, no one must be allowed to make all choices in an economy. For Hayek, this is the function of prices, which allow people to make individual decisions based on the factors that are purely relevant to them.
'We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned.'
Definitely feels like he's inspired some pretty smart people (like Sowell).
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Quotes:
-The peculiar character of the problem of a
Quotes:
-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.
-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.'
-Civilization advances by extending the number of important operations which we can perform without thinking about them.
-..emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest...
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'If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicat
'some form of decentralization' = on-chain liquid democracy'If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating
all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the 'man on the spot' cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.'
2. Unlike scientific knowledge, which is the knowledge of what can be generalized, the majority of data required for economic planning is distributed, ever-changing, and can hardly be aggregated via statistics (e.g., whimsical individual preferences). This 'knowledge of the particular' may be constantly frowned upon in our 'modern' (viz. bunch-of-hairless-apes-deifying-science) age, yet economic rewards are obtained by satisfying particular needs, not grand theories.
3. Attempting to centralize this 'knowledge of the particular' for the purpose of economic planning is a risky endeavor, as data might be missing, or out of date, or averaged into oblivion. Consequences should therefore be felt in their entirety by the planners, to ensure a feedback loop - and this is why government planning (i.e., central planning that by force distributes consequences among everyone, not just the planners) is a no-no.
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Some important ideas:
The economic problem is not one of allocation of resources, but a problem of how to use best the knowledge of society to achieve individual goals. This knowledge is disp
Some important ideas:
The economic problem is not one of allocation of resources, but a problem of how to use best the knowledge of society to achieve individual goals. This knowledge is dispersed in millions of people, can not be given to a central authority because It is knowledge of particular circumstances of space and time. This kind of knowledge can only be transmitted by the marvelous price system. This system is not the result of human design but of human action.
I appreciate the historic context and the novelty at the time, but time has shown that the world described isn't black and white.
To be honest - this didn't age well. The anti-central planning sentiment should not require 12 pages of printed text, because errors and misjudgments are seeping in with every unnecessary paragraph.I appreciate the historic context and the novelty at the time, but time has shown that the world described isn't black and white.
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As for the writing itself, Hayek writes in long(er) sentences than (I would assume) most others. But if read carefully and deliberately, the sentence length does not obscure any idea or meaning.
In the essay, Hayek argues that the knowledge in society that is relevant for economic decision making is diffuse, and in particular the knowledge of 'time and place' and othe
An accessible essay on economics, one in which the layman can read and have a better understanding of (economic) decision making.As for the writing itself, Hayek writes in long(er) sentences than (I would assume) most others. But if read carefully and deliberately, the sentence length does not obscure any idea or meaning.
In the essay, Hayek argues that the knowledge in society that is relevant for economic decision making is diffuse, and in particular the knowledge of 'time and place' and other local information is impossible to centralize (and this local information of time/place/etc is no less vital than other more scientific knowledge). So he argues that we keep economic decision make decentralized. But then the question is how does the local decision maker get all the other relevant knowledge (besides that time/place stuff)? Because that industrial production knowledge is also important. Hayek says the solution is in the price system - that this is the mechanism which disperses relevant information for production.
Bottom line: central planners cannot know enough to run an economy and we should rely on the price system to guide economic actors.
This may seem uncontroversial - of course you can't k ow everything. But when Hayek wrote this essay in 1945 the prevailing attitude was that central planners could run an economy and run it better and more efficiently than if the economy was left on its own. WWII was just winding up and large economies, the USA in particular, were 'taken over' by central authorities to plan and produce for the war effort. And lo and behold they won. And many of those central planners thought they could and should plan the economy in times of peace as well or else there's be another Depression. So Hayek's thesis in this essay was not the common knowledge or obvious position. It was contrarian.
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Highlights:
'The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the 'law of large numbers' or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flo
Nice short read, minimal jargon. I feel very sorry for Professor Schumpeter to be badmouthed in such an enduringly important publication.Highlights:
'The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the 'law of large numbers' or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver.'
'Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. 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. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. … the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. … The mere fact that there is one price for any commodity … brings about the solution.'
'the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest'
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i had never before read anything about economy, but this one short essay has made me thi there are 2 types of knowledge: the one being technical and analytical and the other the practical, one attemps to see the world as a big system and one focuses on details. society has choosen to give high regards for the former and neglected the importance of the latter. but by doing so we are neglecting one very important tool and thus we cut our selves short in our knowledge of the economical interactions.
i had never before read anything about economy, but this one short essay has made me think about it. i really liked this one, although to say i have everything understood would be a lie ...more
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