The use of knowledge

by Russ Roberts on May 14, 2007

in Podcast

Here is Hayek on the essential problem of economics:

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.

Here is Vernon Smith saying something very similar:

We know that the essence of
markets is that individual cost and value information is private and
dispersed, and that command and control economies inevitable must fail
to deliver the goods because the appropriate information is not, and
cannot be, given to any one mind.

The current episode of EconTalk and next week’s, look at the issue of aggregating dispersed knowledge.

In this week’s EconTalk, I interview Cass Sunstein, whose latest book, Infotopia, explores the different ways to aggregate dispersed information for better decisions. Next week’s podcast is with Vernon Smith and what experiments have taught us about how markets aggregate information. Enjoy.

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{ 6 comments }

Carl Marks May 14, 2007 at 11:19 am

A slight issue I have with Smith's statement is that the greatest problem for a command economy is not the issue of bringing all data together but rather having the data in a uniform measurement, prices, which only entrepreneurs can accurately appraise in a true market process of exchange in property rights. Brining the data together would indeed prove difficult, but correct calculation is impossible even if the data were brought together.

Bob Smith May 14, 2007 at 12:17 pm

If only I could convince urban planners of the truth of these points.

Slocum May 14, 2007 at 2:06 pm

"command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind."

And even if the information could be "given to any one mind", no one mind could make use of it. It's not just that the information is widely distributed, but also that the cognitive power to process it is also widely distributed. As is the power to convert the information and cognition into action.

Mr. Econotarian May 14, 2007 at 4:09 pm

I disagree with the above posters!

The failure of a command-and-control economy is that markets operate on the fact that individuals have different desires.

Bob may want a green car and Jill may want a red car. To solve this problem, Comrade Commisar decides they'll all be grey.

Carl Marks May 14, 2007 at 6:03 pm

Mr. Econotarian

I'll grant that there are significant issues on the incentive front which make running a socialist state very difficult, but most supporters of the market order will grant the assumption of benevolence to the dictator in order to prove that even when given favorable conditions socialism will still fail.

Marxists also enjoyed talking about the transformation of humans into the new Socialist Man which would be immune from all temptation of personal gain. They would be perfect utilitarians. Economists cannot say whether this state will arise, but they can comment on whether this will change the underlying problem of economic calculation.

A Marxist would also be likely to claim that capitalists are just as greedy as the planners would be, so the two systems are equal in this respect.

Sam Grove May 15, 2007 at 1:02 am

Could we describe markets as ordered chaos?..or perhaps chaotic order.

The failure of a command-and-control economy is that markets operate on the fact that individuals have different desires.

Markets operate in any economy. It's the results that vary. In a command economy, a black market will appear. It can be determined how free a market is by how much of it is underground.

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