Freeman

BOOK REVIEW

The Use of Knowledge in Society

No Other Article Explains the Economic Problem As Clearly

MAY 01, 1996 by DWIGHT R. LEE

Filed Under : Scarcity

If you want to learn as much as possible about economics from just one article, read Friedrich A. Hayek’s “The Use of Knowledge in Society,” published in the September 1945 issue of The American Economic Review. First, no other article explains the economic problem as clearly. Second, none provides a better understanding of the superiority of market economies. Third, it exposes one of the most deplorable fallacies in the standard approach to teaching economics. Finally, it throws a spotlight on the dangerous ignorance of economic planning.

Hayek points out that sensibly allocating scarce resources requires knowledge dispersed among many people, with no individual or group of experts capable of acquiring it all. Informed economic decision-making requires allowing people to act on the information of “time and place” that only they have, while providing a system of communication that motivates us and informs us on how best to do it. Market exchange and prices generate the information and motivation. Yet economics students are invariably taught that the market works properly only if all participants have perfect knowledge. This is nonsense, as Hayek explains. If everyone had perfect knowledge, the case for the market would largely disappear. The market is essential precisely because it allows people to benefit from widely dispersed knowledge when no one has more than the smallest fragment of that knowledge, not even government planners. Every time a government plan restricts market exchange, ignorance is substituted for knowledge.

Read Hayek’s article and you will approach your future reading with a more informed perspective on what economics is about.

ASSOCIATED ISSUE

May 1996

ABOUT

DWIGHT R. LEE

Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.

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It's been 40 years since F. A. Hayek received his Nobel Prize. His insights, particularly on the distribution of knowledge and the impossibility of economic planning, remain hugely important today. In this issue, we look back on the influence of his work. Max Borders and Craig Biddle debate whether liberty must be defended from one absolute foundation, further reflections on Scottish secession, and how technology is already changing our world for the better--including how robots, despite the unease they cause, will only accelerate this process.
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