Image source: PixabayFriedrich von Hayek won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1974. For the 50th anniversary of the prize, the IEA published a short collection of essays called Hayek’s Nobel: 50 Years On, edited by Kristian Niemietz. It Includes Hayek’s speech upon acceptance of the Nobel Prize, “The Pretence of Knowledge,” with three essays placing the essay in historical and modern context by Bruce Caldwell, Peter J. Boettke, and Donald J. Boudreaux.Hayek is perhaps best-known today for the line of argument famously laid out in his 1945 essay, “The Use of Knowledge in Society,” which is also the focus of his Nobel address. He points out that the operation of prices in a market offers a way of coordinating actions. One example focuses on the price of tin. He wrote:

Fundamentally, in a system where the knowledge of the, relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose-and it is very significant that it does not matter- which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere, and that in consequence they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin, but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. 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

Thus, the coordinating action of a market is tightly related to how the price provides signals to producers and users. But Hayek’s point about markets and information operates at a more subtle level as well.Imagine that an economic planner observes that a supply of tin has been eliminated, and want to adjust economic outcomes accordingly. Presumably, there should be some mixture of efforts to expand production of tin in some ways, and to reduce the use of tin in other ways. In turn, those who reduce the use of tin may with to turn to other materials, and so production of those other materials should be increased as well. But what would be the appropriate mixture of these (and other) changes?Hayek argues that it is literally impossible for an economic planner to answer this question. The reason is that consumers of tin literally don’t know how much they might conserve on tin (or switch to substitutes) until they are actually forced experiment with different methods of doing so. Similarly, alternative producers of tin (or substitutes) literally don’t know about how they might adjust production in response to a shortage of tin that happens elsewhere until they actually try to do it. The knowledge of how future adjustments might take place if conditions change is predictable in terms of broad patterns–that is, in response to a shutdown of a supply of tin, users of tin will try to conserve and alternative producers of tin will try to increase output–but specifically who will be able to take these steps most easily and cost-effectively is not known in advance.In Hayek’s Nobel address, he writes:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.

There is much to be said about the strengths and weakness of Hayek’s theory, which I won’t try to do here. But I will point out one consequence of his theory, which is that it is common for politicians to speak as if economic outcomes are just a matter of political will. Maybe the discussion is about saving a factory at risk of closing down, or saving or creating an industry, creating more well-paid jobs, making housing more affordable, reducing the price of eggs, cutting interest rates, and so on and so on. The language of politics often makes it sound as if these and other economic outcomes are just a matter of whether your favorite politician or party is “fighting” for you. It’s just a matter of whether they “want it enough,” as the sportcasters say of the winning team, suggesting that losing and other unwanted outcomes are just about a weakess of desire.In his 1988 essay, Hayek referred to this belief in the malleability of economic outcome as The Fatal Conceit: he wrote of “the fatal conceit that man is able to shape the world around him according to his wishes.”More to the present point, Hayek argued that many people have a tendency to emphasize the role that government plays in economic outcomes, because government actions are large-scale, associated with prominent leaders, and commemorated by writers. The actions of government are the facts that we have written down. But we typically don’t write down, or even observe, the myriad small-scale reactions of individual consumers and producers across an economy as they continually react to changes and shift. Hayek wrote:

The role played by governments is greatly exaggerated in historical accounts because we necessarily know so much more about what organised government did than about what the spontaneous coordination of individual efforts accomplished. This deception, which stems from the nature of those things preserved, such as documents and monuments …

Government economic policy, whatever its announced goals, doesn’t create outcomes. Instead, it changes the context in which economic actors make decisions, which in turn leads to economic outcomes. The distinction matters.

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