"Economic calculus" and the end of curiosity (4 December 2006)

As someone who occasionally complains about free-market ideology and economists' traditional assumptions about rationality -- that it operates universally and consists of individuals' maximizing utility by unerringly choosing among a variety of alternatives to yield the most satisfactory outcome -- I found Hayek's short essay "The Use of Knowledge in Society" interesting. It seems to implicitly acknowledge that the view is ideological (rather than an empirical observation of human nature) while insisting on its profound usefulness upon being widely adopted.

The essay is a concise explanation of how markets can be seen as a system for distributing knowledge via the medium of prices, which are simple and straightforward enough for any participant in an economy to understand. By responding predictably to price changes, individuals can pass along critical information -- "the knowledge of the particular circumstances of time and place" -- without ever having to comprehend it or explain its overall significance.

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.

Hayek pretends to find it strange that this exploiting this kind of knowledge, which is typically the basis of entrepreneurial opportunity, is scorned.

But the possession of such knowledge is not necessarily earned by careful study or diligent habits or admission into prestigious educational institutions but by sheer good fortune; it seems unmerited, its distribution seems random and hence unfair. (Chris Dillow at Stumbling and Mumbling refers to this deploringly as the "managerialist bias" -- the assumption that only those specially trained and certified should be entrusted to make economic decisions that affect us all.) But Hayek insists that knowledge is valid only when it is distributed arbitrarily rather than centralized in the hands of planners (or bureaucrats or educators or whomever), who more likely than not, in his opinion, are corrupted by their power (this is the gist of The Road to Serfdom).

So if knowledge is distributed among people who don't ultimately have enough of it to do any real structural damage with the information -- a happy consequence of democratic societies -- what remains necessary is a mechanism that transcends human agency to aggregate that knowledge and make it socially useful. Enter the market, which allows the semi-informed person to make decisions based on price. As far as Hayek is concerned, when one is making decisions, "It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment."

That almost seems tautological to say decisions are a matter of choosing between the relative importance of things, but actually this is where the economist's assumptions about rationality are imported into the scheme. (Hayek calls it "economic calculus.") Prices think through the importance of information for us so that we don't have to, and it has the added benefit of being unerring at least in the sense that it is impersonal. In other words, prices don't tell us the inherent value of an object but an unbiased accounting of an object's overall significance to society -- and this information, divorced of the reasons behind the number, is all we really need as individuals. "The problem is precisely how to extend the span of out utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do." We receive our marching orders from prices, which in this view reflect society's best interests or at least its collective inclinations, rather than Big Brother. Consequently, all we need to learn from society during our schooling is a proper respect for prices, for always trying to get the most for less (a lesson that, incidentally, is endlessly reinforced in advertisements). This plays out in the inculcation of "rational" behavior, always being concerned with maximizing utility, which is essential to making the entire system able to coherently communicate anything. If people behave in a wasteful way (destroying the accursed share, as in Bataille's theories, perhaps?) what the price system communicates may have less and less to do with what is socially useful and necessary.

This suggests why the market, conceived in these terms, can seem so objectionable -- it obviates the need for human understanding and reduces decision-making to a mechanistic response to a single figure. It suggests that all other considerations are not just misguided but are in fact harmful obfuscations. Extrapolate from this and you yield a worldview that has no regard or use for curiosity -- and a very cursory look at America's chain stores and passive entertainments would seem to support the idea that we already live in that world.

UPDATE: See this Blood and Treasure post for an analysis of Hayek's fondness for "liberal dictatorship". Writes Jamie K.: "I’ve argued before that many of China’s anti subversion laws – like those against 'causing turmoil' or 'disturbing social order' - have a Hayekian feel to them. They’re essentially designed as measures to stop people exercising the conceit of reason."