… is from page 19 of Razeen Sally’s 1998 volume, Classical Liberalism and International Economic Order :
Hayek bases his advocacy of economic freedom not on the existence of fully knowledge but on constitutional ignorance. The genius of the market economy is that it allows individuals to use freely what partial knowledge they have in everyday activities of production and consumption. The competitive market is by a long shot the best available device to coordinate existing (fragmented, dispersed and tacit) knowledge, as well as to create new knowledge, in order to cater for material wants. Prices, the heart and soul of a competitive market, impersonally coordinate knowledge in complex societies. General rules of conduct that govern property and contract also aid such knowledge-coordination. They act as symbols or signposts for individuals to cope with their ignorance, anticipate trends and adapt their behaviors. Both prices and general rules enable individuals to make better, although by no means perfect, choices through trial-and-error.
DBx: Near the top of the heap of misunderstandings of the case for a policy of free markets is the myth that this case necessarily is built upon the assumption that individuals possess knowledge that is perfect, foresight that is clear, and judgment that is unclouded.
There are indeed descriptions of how people would interact with each other under these assumptions, and such interactions – as described in many papers and books – are called “markets.” But these so-called “markets” aren’t really markets at all. They’re stylized descriptions of the outcomes that would eventually emerge in an unchanging world if markets were allowed to operate indefinitely.
But the real world is one of change, uncertainty, error, dispersed knowledge, and differences in preferences. And nearly all market activities – certainly the most interesting and important of market activities – are motivated by efforts to cope with these features of reality. An entrepreneur perceives what appears to be today a failure of markets to satisfy as many wants as that entrepreneur senses is possible to satisfy. So she acts. If her sense is correct, her action results in more want-satisfaction for her fellow human beings and she profits – deservedly so. If her sense is incorrect, the losses she suffers both inform her (and others) not to do what she just did and to now avoid doing it.
Sometimes these entrepreneurial perceptions are of small things – say, how to build a better mousetrap. Other times these perceptions are of ‘large’ things – say, how to make reliable and affordable smartphones. Yet each successful entrepreneurial action ‘corrects’ what in retrospect is recognized to have been a market failure.