The Use of Knowledge in Society

by F.A. Hayek

Presentation copyright © 1997, 1998, 1999 by Barry and Deborah Brownstein

ProloguePrologue

“ Our ignorance is sobering and boundless. Indeed, it is precisely the staggering progress of the natural sciences which constantly opens our eyes anew to our ignorance…With each step forward, with each new problem which we solve, we not only discover new and unsolved problems, but we also discover that where we believed that we were standing on firm and safe ground, all things are insecure and in a state of flux.”- Karl Popper

Our World Is No Longer Newtonian: Linear vs. Complex Systems

a given cause (action) has one effect (outcome)

additive not highly sensitive to

initial conditions closed system in

equilibrium predictable

a given cause or action can have many different outcomes

synergistic very sensitive to initial

conditions open, self-organizing

systems far from equilibrium; allows for discovery

inherently unpredictable

Tom Peters on Hayek and Complex Markets:

"Why spend so much time on Hayek? Simple. To fail to appreciate- in the fullest sense of this term- the richness, passion and raggedness of the market mechanism is to be unprepared to lead a firm (or a regional or national economy)- especially in today's unhinged global marketplace."

‘‘Knowledge Management’- Fad or Knowledge Management’- Fad or Trend?Trend?

• Information is simply facts, knowledge involves conceptual understanding and is frequently tacit

• As the price of information falls utilizing dispersed knowledge is increasingly important to society and to a firm

• ‘(Knowledge Management is) An oxymoron if there ever was one…Don’t be fooled: You can manage information but not knowledge.’- Wall Street Journal January 1998

“The economic problem...is a problem of the utilization of knowledge which is not

given to anyone in its totality.”

What Is The Economic Problem?What Is The Economic Problem?

Knowledge Is DispersedKnowledge Is Dispersed

• “...the knowledge of the circumstances of which we must make use never exists in concentrated or integrated forms but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

Not All Knowledge is “Scientific”Not All Knowledge is “Scientific”

• ‘the unorganized knowledge… of the particular circumstances of time and place.”

• “tacit” knowledge is inarticulable- “we know a great deal that we cannot tell.”– examples-riding a bicycle, grammatical rules

• again the challenge is how to utilize this decentralized knowledge

Central Planning Vs. MarketsCentral Planning Vs. Markets

• “Which system “ is likely to be more efficient depends mainly on the question under which of them we can expect the fuller use be made of the existing knowledge.”

“If ... the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances…”

How Do We Coordinate How Do We Coordinate Individuals in a Market?Individuals in a Market?

“There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.”

“Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate parts of his plan.”

Planning Vs. ‘Markets’ in the Planning Vs. ‘Markets’ in the FirmFirm

• Decisions made at the top

• Communication goes through ‘proper channels’

• resistance to new ideas

• Decisions made by those with ‘best’ local knowledge

• new ideas welcomed and filtered

• responsibilities and incentives to generate new knowledge

• new knowledge may invalidate current beliefs and practices

The Case of Bruegger’s BagelsThe Case of Bruegger’s Bagels

• Vermont based Bruegger’s had the nations’ largest market share of bagels– special recipe and baking process

• Purchased by Quality Dining, an operator of Burger Kings, in 1996 for $142 million

• In less than year lost $203 million or 35cents a bagel and sold the company back for $50 million– Quality had transferred Bruegger’s execs to Indiana

providing no phones and little office space

“I am convinced that if it were the result of deliberate human design , and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the great triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for conscious direction- and those who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously- should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of control of any one mind…”

Appendix: The Promise of the Internet- Let Every Voice Be

Heard

• Mass culture and gatekeepers cater to the center of the normal curve

• The internet regains the tails of the normal distribution. The uncommon becomes as accessible as the common.

• Allows us to pool rare talents and voices, create new communities and thus grow new knowledge