70th anniversary of Hayek’s use of knowledge in society
September 2015 marks the 70th anniversary of F.A. Hayek’s seminal article “The Use of Knowledge in Society,” which appeared in the prestigious academic journal the American Economic Review. The article is an incredibly nuanced analysis and commentary on the role prices play in society in conveying information to people, which enables them to make informed decisions despite not having particular information about a good or service. It’s still an issue fundamentally misunderstood today by most analysts and people in general.
Hayek explained how people make decisions every day based on the costs they perceive and the benefits they expect from individual actions. The costs people perceive to incur from their actions are largely the price of the good or service consumed. The more closely the price of a good or service matches its actual costs, the better the quality of the decisions made by people. Prices, and therefore the information they transmit to people, get distorted through government regulations, taxation, and other interventions by the state that weaken the ability of prices to convey information. Interestingly, the governor of the Bank of Canada, Stephen Poloz, recently made a major speech that included this very topic—that is, the role of prices in conveying information in the energy industry.
Hayek also explained that prices allow people to make decisions that are based on incredibly complex interactions between thousands, even millions of people without having any particular knowledge of their interactions. The example used in the video below illustrates how a consumer makes an informed decision about whether to purchase coffee now that the price has increased. She doesn’t need to know why the price increased. The increased price conveys the needed information to the consumer in order for her to make an informed decision about the relative costs and benefits of the coffee. The thousands of interactions needed to get the coffee on the shelf in the grocery store—including the decisions by the farmer, the distributors, the shippers, the purchasers at the grocery store, etc.—are all represented by the single price the consumer sees on the shelf. This was and is a profound insight by Hayek into how economies function.
Earlier this year the Fraser Institute launched an initiative to make the work of F.A. Hayek more accessible to average people. Unlike his notable contemporary Milton Freidman, F.A. Hayek never really made an effort to make his work accessible to people other than scholars and academics. The Essential Hayek initiative summarized F.A. Hayek’s 10 most important ideas into plain language and supported the summaries with videos and related materials. The idea of prices conveying information is the focus of chapter two.
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