18 Jun 2008

Hayek, Knowledge and Prices

gormk says:
I still think .... that you rely too much on your Hayekian pragmatism. And this is reflected in the diversity of "challenges" that you have received recently on your popular blog!
First, it's great to have all the comments and debates on these topics. Water touches people in many ways, and opinions and experiences are bound to vary.

Let me elaborate on Hayek, who is famous for knowledge problem and spontaneous order.

My idea of the knowledge problem (I am no Hayek scholar) is: I know what I know but not what you (or many others) know. For me to organize society (i.e., as a government) to some "optimal" level, I need to know what you know, but that information is hard for you to convey to me credibly ("yes, I need money for my babies") and hard for me to assemble/reconcile ("baby subsidy here versus there"). Hayek said that planned economies would collapse under the weight of the knowledge problem, and he expressed his ideas in one of the most important papers ever published in economics (many economists would agree), The Use of Knowledge in Society [PDF].

After expressing the knowledge problem, Hayek gave a solution: Prices act as a means of coordinating behavior such that no central authority need know or direct action. Thus, a market system will deliver a "spontaneous order" wherein the bread is in the shop when you want it and your salary will reflect the value of your skills and knowledge to everyone around you. (Adam Smith pointed out this result in the 18th century.) Contrast this order with "government order" that people often find frustrating.

Hayek gave us an excellent description of how the world works and how to improve it through more decentralization, markets, price signals, etc. That's why I recommend markets (under private or public management) to "solve" many water problems.

Bottom Line: Hayek tells us to be humble about what we know, to trust in the decisions of others, and facilitate the negotiation and cooperation of many through voluntary mechanisms. What's not to like?