In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, the local knowledge problem is the argument that the information required for rational
economic planning
Economic planning is a resource allocation mechanism based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution. Planning is a mechanism for the allocation of resources ...
is distributed among individual actors and thus unavoidably exists outside the knowledge of a central authority. Economist
Friedrich Hayek
Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...
observed that "practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation", while
Leonid Hurwicz
Leonid Hurwicz (; August 21, 1917 – June 24, 2008) was a Polish–American economist and mathematician, known for his work in game theory and mechanism design. He originated the concept of incentive compatibility, and showed how desired outcom ...
also noted that there is no incentive for people to share this information truthfully with a central authority.
The Economist
''The Economist'' is a British newspaper published weekly in printed magazine format and daily on Electronic publishing, digital platforms. It publishes stories on topics that include economics, business, geopolitics, technology and culture. M ...
Intelligent design
published 18 October 2007, accessed 15 July 2024
Friedrich Hayek's description
Friedrich Hayek
Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...
described this distributed local knowledge as such:
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.[Friedrich A. Hayek (1945). " The Use of Knowledge". ''American Economic Review''. XXXV: 4. pp. 519–530.]
Because while incomplete this distributed knowledge is essential to economic planning, its necessity is cited as evidence in support of the argument that economic planning must be performed in a similarly distributed fashion by individual actors. In other words, economic planning by a central actor (e.g. a government
bureaucracy
Bureaucracy ( ) is a system of organization where laws or regulatory authority are implemented by civil servants or non-elected officials (most of the time). Historically, a bureaucracy was a government administration managed by departments ...
or a
central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
) necessarily lacks this information because, as Hayek observed, statistical aggregates cannot accurately account for the universe of local knowledge:
One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the "law of large numbers" or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.
As such, the local knowledge problem is a
microeconomic
Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the ...
counterargument to
macroeconomic
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...
arguments that favor central planning and regulation of economic activity.
See also
*
Civic crowdfunding
*
Dispersed knowledge
Dispersed knowledge in economics is the notion that no single agent has information as to all of the factors which influence prices and production throughout the system. The term has been both expanded upon and popularized by American economist ...
*
Tax choice
In public choice theory, tax choice (sometimes called taxpayer sovereignty, earmarking, participatory taxation or fiscal subsidiarity) is an emerging type of citizen sourcing in which individuals or groups of taxpayers decide how to allocate par ...
References
{{reflist
External links
* Alejandro Agafonow (2012)
"The Austrian Dehomogenization Debate, or the Possibility of a Hayekian Planner" ''Review of Political Economy''. 24: 2.
Economic planning
Austrian School