On The Library of Economics and Liberty website, there is an interesting article from a Friedrich Hayek‘s 1945 AER paper (“The Use of Knowledge in Society“). The paper begins with a discussion of scientific compared to practical knowledge (i.e.: the knowledge of the particular circumstances of time and place).
“…scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts”
When academics create economic models, they often assume that practical knowledge is a given. ‘Perfect information’ is a common economic assumption. When finding an equilibrium, economists can calculate the exact quantity of good for a given demand and supply curve. This equilibrium, of course, assumes that there will be no change in supply or demand in the future. Hayek explains:
“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 occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes.”
I am particularly skeptical of macro-economists who claim to have found the steady state equilibrium. While this finding may be true mathematically, a steady state theoretical solution within a world empirically found to be in a constant state of flux is of limited use. Hayek continues:
“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.”
In reality, knowledge, especially practical knowledge is broadly diffused throughout society. Hayek continues on in the essay to rail against the evils of centralized planning and “marvels” and the information imparted through the capitalistic price mechanism. This article is very interesting and certainly deserves a thorough read through the entire article.
- Hayek, Friedrich; (1945) “The Use of Knowledge in Society” American Economic Review, XXXV, No. 4, Sept., pp. 519-530.