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… is from pages 162-163 of F.A. Hayek’s profound 1952 book The Counter-Revolution of Science, as this book appears as part of volume 13 (Studies on the Abuse & Decline of Reason [2], Bruce Caldwell, ed. [2010]) of the Collected Works of F.A. Hayek:
The problem of securing an efficient use of our resources is thus very largely one of how that knowledge of the particular circumstances of the moment can be most effectively utilised; and the task which faces the designer of a rational order of society is to find a method whereby this widely dispersed knowledge may best be drawn upon. It is begging the question to describe the task, as is usually done, as one of effectively using the ‘available’ resources to satisfy ‘existing’ needs. Neither the ‘available’ resources nor the ‘existing’ needs are objective facts in the sense of those with which the engineer deals in his limited field: they can never be directly known in all relevant detail to a single planning body. Resources and needs exist for practical purposes only through somebody knowing about them, and there will always be infinitely more known to all the people together than can be known to the most competent authority….
It is important to remember in this connection that the statistical aggregates, upon which it is often suggested, the central authority could rely in its decisions, are always arrived at by a deliberate disregard of the peculiar circumstances of time and place.
DBx: Hayek here summarizes his justly famous criticism, elaborated in his September 1945 American Economic Review paper, “The Use of Knowledge in Society [3],” of that conception of ‘the economic problem’ in which all the countless human preferences competing for satisfaction, as well as all the available means and their relative availabilities, are “given” facts that, at least in principle, can be known and processed by a single mind.
Every person who proposes to arrange to better satisfy human desires by obstructing the competitive price-system’s process of allocating resources must answer this question: How, exactly, will the authority charged with forcibly obstructing the market process acquire the knowledge that that authority must acquire if the allocation of resources that it brings about will indeed be one that better satisfies human desires?
That an advocate of obstructing market processes can explain how some market intervention will better satisfy the preferences of a particular favored group is incontestable, just as it’s incontestable that if I’m allowed to rob you I’m made better off. What must instead be explained is how the proposed market intervention will yield a use of resources that increases the likelihood that any randomly chosen person in the affected society will over time be better able to satisfy his or her consumption preferences – will, in short, have a higher standard of living.
No advocate of obstructing market processes has yet explained how the central authority that is necessary to carry out the intervention will acquire this knowledge. Typically, this ‘knowledge problem’ is not even recognized. And when it is recognized, it’s dismissed – usually blithely – as one that can be overcome with the growth in computing power or with the improvement in statistical methods (or, usually, both).
But these dismissals arise from an utter failure to understand the kinds of knowledge that create the ‘knowledge problem.’ This knowledge is necessarily widely dispersed across millions of different minds; it’s typically very localized (such as what are the options available to deal with the fact that a machine in some factory in Birmingham, Alabama, just broke down); is constantly changing; and is often in internal conflict (as when a merchant believes herself to have found a profitable opportunity to sell electrical wiring to a factory not knowing that a cargo ship carrying the electrical wiring is delayed). And never mind knowledge of the subjective consumption preferences of each of the hundreds of millions of people.
From advocates of full-on socialism to advocates of industrial policy to advocates of using a handful of protective tariffs and subsidies, all as a means of improving the performance of the national economy, this ‘knowledge problem’ looms. To be taken seriously, they must offer a compelling explanation of how the market-intervening authority will acquire this knowledge of time, place, and circumstance. To date, they haven’t come close to meeting this requirement.