THE USE OF KNOWLEDGE IN SOCIETY BY F.A.Hayek pages 519-530

Hayek is of the opinion that if a person has the right information and knowledge, there will be economic order. He states that economic calculus developed to solve the economic process, has not adequately provided answers to this because the findings are not translated in a way that the whole society can understand, he claims this information is not given in totality.

He attributes the disconnect between economic theory and economic policy to a misconception about the economic problem in the society, the misconception he says is brought about by an erroneous transfer of social phenomena. To elaborate on this, he gives a scenario where the person in charge of economic planning relies on knowledge conveyed to him. From this, he posses a question of who is then mandated to carry out economic planning? For economic planning to work he suggests that scientific knowledge though important should not be solely relied upon, time and place should be taken into consideration. He uses an example of a manager who can easily grasp economic concepts which the study of an economist ignores.

Hayek stats that every single transaction is of importance he faults statisticians on their inclination to the law of large numbers neglecting small dispositions which have an impact, he frowns on the fact that they are not conveyed to the central planner since they are not analysed.

To curb this, he suggests decentralisation. For problems to first and foremost be solved by people, who are familiar with economic problems caused by the rapid changes of time and place as opposed to first sharing all the knowledge with the central board, for directions. In his argument, he claims that the pricing system can solve the problem. Prices can coordinate and separate actions of different people, he illustrates this by giving an example, of the need to use tin as a raw material has arisen or supply of tin has been cut short. In both scenarios tin has become scarce, the effect of the scarcity of the tin will be felt throughout the entire economic system, tin products, substitutes of tins and so on and people will not be aware of what occasioned the change.

He further states that the price system should be used as a mechanism for communicating information to effectively understand its function. For the right action to be taken there is a need for communication of each action taken because every small action causes a ripple effect which leads to a big problem, he equates changes in the price movement to an engineer who watches the hands of a few dials.

The adjustments he claims may not be perfect. However, he fears that the theoretical habit economists have of approaching problems with the assumption of perfect knowledge has blinded them to the true function of the price mechanism. He admits that the price mechanism is often taken for granted and if people made a deliberate effort to be guided by price changes and understand that their actions have a huge significance beyond their aim.

He concludes the article by stating that the exact problem is the extension of the span of utilisation of resources beyond the control of an individual’s mind, this will make them do what is right without having to be told. That price system is a formality that man has learned to use but not effectively and that an alternative system is yet to be made, he ends the article relieved that the dispute about the indispensability of price system for calculations is laid to rest.