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The Ultimate Knowledge Problem

Over at EconLog, Kevin Corcoran has an excellent post refuting a naive-person’s assertion that central planners can acquire all the knowledge they need to successfully ‘plan’ an economy simply by asking people, questionnaire-style, what they want.

But there’s an additional point to be made in response to this naive-person’s assertion. The additional point is this: The knowledge problem as identified by Ludwig von Mises and F.A. Hayek isn’t chiefly about the demands of consumers; instead, it’s about the relative scarcities of inputs. Pasted below (slightly modified) is a comment that I left on Mr. Corcoran’s post.

Very good post!

Yet another point remains to be made: The knowledge problem, as formulated first by Ludwig von Mises in 1920 and, later, by F.A. Hayek and then Don Lavoie, wasn’t focused on the preferences of consumers. This problem was focused on knowledge of the relative scarcities of inputs.

What are the least-cost means of producing the final goods and services demanded by consumers?

Even if we assume (contrary to what’s possible) that the central-planning authority knows the rank-ordering and weights of all consumer preferences for final goods and services, the following question remains: How best to produce these goods and services? If the relative scarcities of alternative inputs isn’t known, then it’s a practical certainty that the production of final goods and services will be done wastefully – that is, using too many resources. The result will be that many final goods and services that could have been produced had knowledge been better will remain unproduced.

While it’s silly, as Kevin correctly notes, to suppose that government can learn consumers’ preferences simply by asking consumers, questionnaire-style, it’s even sillier to suppose that the central-planning authority can get the information it needs to produce ‘rationally’ by asking each input supplier “What is the scarcity of your input relative to the scarcity of other inputs that can be used instead?”

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