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:The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - ]<ref>{{cite web |url=http://www.econlib.org/library/Essays/hykKnw1.html |title=The Use of Knowledge in Society |year=1945 |author=F Hayek }}</ref>{{page?|date=January 2013}} :The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - ]<ref>{{cite web |url=http://www.econlib.org/library/Essays/hykKnw1.html |title=The Use of Knowledge in Society |year=1945 |author=F Hayek }}</ref>{{page?|date=January 2013}}

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:It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - ], Some Aspects of the Welfare State.


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:It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - ], {{page?|date=January 2013}} :It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - ], {{page?|date=January 2013}}

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:Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - ],


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:One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - ], '']''{{page?|date=January 2013}} :One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - ], '']''{{page?|date=January 2013}}

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:We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - ],


== Example == == Example ==

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In economics, dispersed knowledge, decentralized knowledge, partial knowledge and local knowledge have all been used to convey the idea that market economies incorporate far greater amounts of information than command economies.

Overview

All agents in the market have imperfect knowledge; however, they all have a good indicator of everyone else's knowledge and intentions, and that is the price.

The price indicates information that the player does not know; by deciding to buy, sell or abstain at that price it also gives the player a chance to bring their knowledge to bear and reflect itself in the price. Most of the knowledge, however, is tacit knowledge: people usually are not fully aware of the knowledge that they are sharing via price signals, nor do they fully perceive the knowledge that they use when they make a price decision.

When a buyer goes to market, the prices he or she finds therein for products and services have been set by the complex calculus that is the sum total of the tacit knowledge residing within the market. Price signals are one possible solution to the economic calculation problem.

Economists

This section contains too many or overly lengthy quotations. Please help summarize the quotations. Consider transferring direct quotations to Wikiquote or excerpts to Wikisource. (December 2012)

John Stuart Mill (Classical liberal),

It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - John Stuart Mill, Principles of Political Economy with some of their Applications to Social Philosophy

Friedrich Hayek (Austrian School),

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Friedrich Hayek

Arthur Pigou (Neoclassical economics),

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - Arthur Pigou, Some Aspects of the Welfare State.

Frank Knight (Chicago School),

It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - Frank Knight, Risk, Uncertainty, and Profit

James M. Buchanan (Chicago School),

Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - James M. Buchanan, Public Finance in Democratic Process

William Easterly (Chicago School),

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!

Ludwig Lachmann (Austrian School),

This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society. - Ludwig Lachmann, The Market Economy and the Distribution of Wealth

David Friedman (Anarcho-capitalist economist),

One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - David Friedman, The Machinery of Freedom

Vernon L. Smith (new classical economist),

We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - Vernon L. Smith, Commonwealth North Forum

Example

Misplaced Pages itself provides an example of the dispersed knowledge concept.

See also

References

  1. F Hayek (1945). "The Use of Knowledge in Society".


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