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FA Hayek – The Use of Knowledge By Society

The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

While Hayek is clearly discussing the import of knowledge distribution and accessibility to economic decision making, an interesting tangent topic becomes evident when focusing on this discussion of irrationality vs. ignorance.  Given a certain knowledge base, a being may make a rational decision which takes into account all knowledge available to him as a means to accomplishing a given goal (which, Hayek would argue, is parametrized by the information to which the decider is privvy).  Another individual, having a different knowledge base available to him, may find himself perplexed by the decision of the first individual; given what Decider2 understands, how can Decider1 possibly consider his solution rational?  This leads to a conundrum in which degree of rationality seems bounded and judged by one’s own perspective rather than by some objective measure (short of alignment with more salient natural laws).  Further, it can be extrapolated that an increase in one’s knowledge base may offer a corresponding increase in the rationality of one’s decision.

I wonder if an increase in one’s knowledge base could lead to a saturation that actually diminishes one’s ability to make rationally useful decisions?  In this sense, the person’s ability to make rational decisions is at very least the result of a person’s knowledge base size corresponded with the ability of that person’s access to the knowledge base to retain the purity of detail and relative utility of each element in the knowledge base.  An example: two people who will be taking a timed test are given the opportunity to bring a 3×5 card with whatever knowledge they would like as a means to increase their test score.  One person writes 10 lines, front and back, corresponding very crude sets of information: person-characteristic, event-date, cause-effect.  The other person utilizes a machine to print 50 lines of information, front and back, with nearly the entire material covered by the test.  The second person clearly has an advantage in terms of size of knowledge base, but the relative utility of the information is decreased by its compression and difficulty in being readily observed and acted upon as the minutes tick away in the testing center.  So while breadth of knowledge is highly critical in finding correct answers, the ability to act upon the knowledge in an efficient manner vis a vis the unique event also plays a role.

Here we return to Hayek’s concern with the value of the market’s pricing system.  The pricing system allows these competing elements of one’s ability to make efficient, rational decisions.  I’m curious, also, to explore the relation of pricing systems to the weighting systems neural networks make in balancing stability and processing speed.  Clearly, this is where the economics of decision making or neuroeconomics comes in.

Later, Hayek discusses the two-way nature of the transmission of knowledge for making economic decisions.  He reasons, and I agree, that — given the inescapable role consequence of change (in time and place) has on economic decisions — the person(s) closest to the source of change must be empowered to act on the changes.  In exploring the problem of how much information need be transferred toward the decision maker from outside of his immediate sphere of influence, however, Hayek suggests that the decision maker must only have the knowledge of supply and demand relative to his sphere.  He insulates his decision maker from knowledge of the catalysts for change in supply and demand.  Is this right?  Certainly at some level the decision maker *is* insualted from this knowledge in full, but does that mean he must be totally divorced from such knowledge?  I posit that the degree to which such a tendency toward distillation of pertinent information (at the expense of overall knowledge) is necessary corresponds to the overall complexity of the structure in which the decider is participating.  The simpler the system, the more knowledge he is likely to have access to or benefit from having access to.  This clearly relates to my concerns above about compression of knowledge vs. breadth of knowledge.

Moving on: “The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.”  This is a beautiful statement toward an overarching theme of capitalism’s truly empowering and democratic strength.  It isn’t that each person need be represented perfectly and equally in the decision, so much as the fact that each person’s knowledge contributes to the solution.