David Brin Misinterprets Hayek

by Don Boudreaux on August 8, 2012

in Complexity & Emergence, Hayek, Myths and Fallacies, Prices

Here’s a letter to Wired (HT Paul Sand):

David Brin asserts that “Friedrich Hayek … said that the absolute necessity of capitalism is for all the players to know all of what’s going on all the time, so they can make good capitalist decisions.  Even a laborer in a factory, even a peasant, if that peasant knows everything that’s going on, then that peasant can make the best deal for the fish he just caught or the yam he just grew.  The greatest hypocrisy on the planet right now is for those who defend capitalism to not be in favor of radical transparency, for all of us to know who owns everything” (“Why David Brin Hates Yoda, Loves Radical Transparency,” Aug. 8).

Mr. Brin seriously misunderstands Hayek.

Hayek observed that the amount of information necessary to make a modern economy work is unavoidably, and (we might say) radically, dispersed.  It is spread in ever-changing tiny bits across thousands of miles and millions of minds.  The great benefit of market prices is that each one summarizes for society at large a set of particular facts that can be known, in the case of each price, only to a handful of people.  If (to use Hayek’s example) supplies of inputs for making tin shrink, society’s relatively few tin producers will raise the price of tin, thus ‘informing’ tin users that tin has become more scarce and, therefore, that tin users should use less tin and more aluminum, plastic, and other substitutes.*

For Hayek, market prices make economic order and growth possible despite each of us being ignorant of all but a minuscule fraction of the specific facts that must be taken account of for the economy to work well.  The price system enables each person to act as if he possesses knowledge that, in fact, he does not possess – to act as if he knows what is known, in this case, only to a small number of strangers over here and, in that case, only to a small number of different strangers over there.

Whatever the merits of Mr. Brin’s call for governments and banks to become more transparent, he is mistaken to invoke Hayek’s theory of the role of knowledge in support of that call.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

* F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review, Sept. 1945.

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