About a month ago, economists on Facebook were talking about whether Friedrich Hayek‘s classic 1945 article “The Use of Knowledge in Society” was taught in many Ph.D. economics programs in the United States. The consensus was that it isn’t. I have a personal experience from my Ph.D. program and a conversation with professors from more-mainstream Ph.D. programs to report.
My Experience at UCLA
In my first year of the UCLA program, 1972-73, Hayek’s article was on 3 syllabi. One was Armen Alchian’s first-quarter price theory course. A second, I think, was on Axel Leijonhufvud’s and Robert Clower’s 2-quarter macroeconomics sequence. I don’t remember the 3rd.
Mainstream Schools
In June 1998 I was at a 14-person seminar in Tokyo run by David Weinstein of Columbia University and a University of Michigan finance professor. If I remember correctly, the U of Mich professor was E. Han Kim. Each of us had written a paper on some aspect of government controls on international capital movements or was a discussant of someone else’s paper. With a group that small, we got into a lot of interesting side discussions. More than one participant commented on how eye-opening Hayek’s article had been. No one seemed to disagree.
So one of the participants asked for a show of hands from the various academics about whether they covered Hayek in their classes and/or whether Hayek’s article was covered in the classes they took as Ph.D. students. If I recall correctly, I was the only one who had the article on any of the syllabi of courses I took as a Ph.D. student.
One person, not me, said that it was a bad idea not to cover such an important article. I’ll never forget the response of Jagdish Bhagwati of Columbia University, one of the 14 participants. He agreed that the article was important, but, he said, he and his colleagues expected the students to cover it on their own The participant who said it should be covered asked Jagdish how he and his colleagues expected the students to know about the article. He said he thought they would know but admitted that he never even mentioned it to students.
Note: If you think I have an axe to grind against Jagdish, keep in mind that I thought that because of his work in trade and protectionism, especially in the 1960s and 1970s, he should have shared with Paul Krugman the 2008 Nobel Prize in economics. I still think Jagdish is long overdue.
The picture at the top is of Hayek and me at the second Austrian economics conference in Hartford, CT in June 1975.
READER COMMENTS
Craig Pirrong
Nov 14 2021 at 6:06pm
Another data point. I was an MBA and then PhD student at the Graduate School of Business, University of Chicago, from 1982 to 1987. Ron Dye (now at Northwestern Kellogg) taught Business 401 and 402. He assigned the Hayek article in one of those two classes (can’t remember which–probably 402 which was focused on information economics issues).
David Seltzer
Nov 17 2021 at 4:47pm
Craig, wonderful recollection. I was a grad student at GSB, 1970 to 1972. The wonderful statistician Harry Roberts suggested I read The Road to Serfdom. I’ve read it several times along with the reviews over the last fifty years.
Frank
Nov 14 2021 at 6:57pm
At U Penn PhD program, 1972 or so, it was on the reading list for — Economic Planning!
Those were open minded days.
rsm
Nov 15 2021 at 2:30am
《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.》
Is this where my attempt at reading the essay open-mindedly became derailed, because isn’t he talking about back door, old-boy networks, chatroom collusions, arbitrary, fickle, administered prices that are not about efficiency, really?
Does everyone who’s worked a job understand how certain arbitrary “business logic” decisions affect all sorts of prices from the product to the labor?
If prices are noisy, isn’t your coördinated knowledge system some multiple of that noise?
If prices are noise why not use indexation to neutralize inflation?
KevinDC
Nov 15 2021 at 12:57pm
No. Individuals making use of real time, on the ground knowledge they uniquely possess, “based on special knowledge of circumstances of the fleeting moment not known to others,” has basically no overlap with the concept of “back door, old-boy networks, chatroom collusions, arbitrary, fickle, administered prices” – if anything, it’s a pretty direct negation of those things!
rsm
Nov 16 2021 at 6:19am
Why?
KevinDC
Nov 16 2021 at 9:08am
The differences between the two situations borders on being so self evident that being asked to explain the difference leaves me with little to say beyond just pointing at them and saying “Look!” I struggle to even see what you find similar between the two situations, so maybe explain to me why you see them as the same?
In scenario one, described by Hayek, you have an individual person, making decisions on the ground and in the moment, basing their various decisions on that individual’s unique and direct knowledge of the constantly changing circumstances that they alone are in the situation to possess and act on.
In scenario two, that one you describe, you have groups of people, removed from those circumstances, acting together in networked ways, making administered decisions in an arbitrary and fickle way.
How do you look at those two scenarios and come away thinking “Yep, that seems like exactly the same thing to me!”? What do you see between them that matches up?
Jon Murphy
Nov 16 2021 at 10:36am
To KevinDC’s point, Hayek’s whole point in that article is that prices set in a market setting are emphatically not the same as prices set by “back door, old-boy networks, chatroom collusions, arbitrary, fickle, administered prices.” Such planning, especially when done by some centralized organization like a government, cannot recreate the knowledge generated in the market process.
David Seltzer
Nov 17 2021 at 5:19pm
Jon, central planning, authoritarian by nature, also controls the means of all our ends. Not only economic activity. It would direct every aspect of our lives. For example, setting wages would bar some people from entering certain trades. The most odious; central planning requires the individual to request permission to pursue their purposes. When that happens, one forfeits sovereignty and dominion over their very person.
rsm
Nov 17 2021 at 2:00pm
《basing their various decisions on that individual’s unique and direct knowledge of the constantly changing circumstances that they alone are in the situation to possess and act on.》
Psychological circumstances, no?
Why are you cherry-picking away the very familiar experience of “I know a guy who will give me a good deal because I scratched his back last time, then we can charge the going rate and make a bundle”?
《Hayek’s whole point in that article is that prices set in a market setting are emphatically not the same as prices set by “back door, old-boy networks, chatroom collusions, arbitrary, fickle, administered prices.” 》
Does he assume that? Where is the evidence? Does my own experience (and I don’t think I’m alone in this) of private agents price-setting behavior contradict Hayek’s story?
Also, why won’t individual price setters naturally collude to set prices arbitrarily, because they maximize utility by so doing?
Jon Murphy
Nov 18 2021 at 6:29pm
I don’t understand where you are going here. No one is cherry-picking away anything. That’s an example of Hayekian knowledge in action. The person speaking, given his local knowledge, knows where he can buy low and sell high. Subsequently, the profit he earns sends a signal to others that there are lower cost resources out there and they search out for them to eat into that profit. If the other sellers cannot command such low prices from their suppliers, then it signals that the speaker’s deal is unsustainable; they simply wait it out. So, the benefits the speaker gets are transitory, at best. The prices send important signals.
Of course, an entire economy based off such benevolent relationships is impossible. Hayek shows that (as do many others). Indeed, the vast, overwhelming majority of transactions are impersonal. But nevertheless, relational knowledge is still a form of Hayekian local knowledge (I am working on a paper building that very point).
No, he doesn’t assume that. He proves it in the paper you stopped reading. And your own experience is evidence of Hayek, not evidence against.
They don’t maximize their utility by colluding. See the Prisoners’ Dilemma. If they could actually collude and enforce the agreement, then collective utility is maximized. But individual utility is maximized through defection from the cartel, which gives us the counterintuitive result.
Douglas MacKenzie
Nov 15 2021 at 9:35am
Classroom uses of hayek’s article may have fallen off when the Soviet Union collapsed. This event was seen as definitive refutation of socialism, and the knowledge problem is usually seen as a refutation of central planning. However, the knowledge problem also applies to public choice in social democracy. This issue has definitely retained relevance, and Hayek’s reasoning has been applied to this issue.
https://ideas.repec.org/a/eee/jeborg/v67y2008i3-4p678-688.html
Frank
Nov 15 2021 at 5:36pm
When the Soviet Union union fell, I said to friends: Watch the Left, as they no longer have the albatross of the Soviet Union hanging around their necks.
Nathanael Snow
Nov 15 2021 at 4:51pm
It should also be read when discussing business cycles. Hayek wrote the paper in response to Schumpeter’s argument that cycles emerge from creative destruction. All the arguments in the paper had already been in his earlier papers.
I first read it as an undergrad at North Carolina State, and again for Williams’ Ph.d Micro at GMU.
zeke5123
Nov 15 2021 at 6:33pm
It was on the syllabus in a law class taught by Prof Rizzo (in the NYU Econ Dept) at NYU.
Neel Chamilall
Nov 16 2021 at 5:39am
Thank you for sharing this nice picture, David.
It’s a tragedy that Hayek’s 1945 article as well as his earlier article of 1937, “Economics and Knowledge”, were not taught for so long. Another tragedy is that there are few chances that The American Economic Review and Economica would publish articles like these today if they were submitted to publication.
Bhagwati did highlight the importance of Hayek’s economics of knowledge and criticism of central planning (but does not refer to the 1945 article – he refers to “Economics and Knowledge” and “Knowledge, Evolution, and Society”) in 1992 (“Democracy and Deevelopment”, Journal of Democracy, 3(3), 1992), 1993 (India in Transition: Freeing the Economy), and a few other of his writings. Unless my memory fails, he and Padma Desai did not refer to Hayek on knowledge and central planning in their critique of central planning in India in their book, Planning for Industrialisation (1970). Nor did they do so in their article “Socialism and Indian Economic Policy” (World Development, 3(4), 1975). I guess this was because Jagdish Bhagwati and others used to dismiss Hayek and, especially, Friedman as “conservatives” and/or “ideologues” like so many others when Friedman criticized central planning in India (Bhagwati was a member of the Indian Planning Commission in the 1960s.) Incidentally, and to get back to Hayek’s article, “The Use of Knowledge in Society”, Milton Friedman repeated almost verbatim Hayek’s argument (without quoting the latter) in a memorandum he wrote on India in 1963 under the title “Indian Economic Planning”:
“[Centralized economic planning] is an inefficient way to use the knowledge available to the community as a whole. That knowledge is scattered among millions of individuals each of whom has some special information about local resources and capacities, about the particular competence of particular people, characteristics of his local market, and so on in endless variety. The reason the free market can be so efficient an organizing device is because it enables this scattered information to be effectively coordinated and each individual to contribute his mite. Centralized economic planning substitutes the knowledge and information available at the centre for this scattered knowledge.”
Had Bhagwati not dismissed Friedman as an ideologue, maybe his critcism of central planning in India and his conversion to free markets would have taken place earlier.
Why do I mention this? Because you write, David, that you have no axe to grind against Jagdish Bhagwati. Neither do I. He is a great scholar, indeed. My problem with him is the way he dismisses some of the scholars with whom he disagrees by name-calling them. This was the case with Milton Friedman in the 1950s and 1960s and, closer to us, with someone like Dani Rodrik today. I firmly believe in free markets and free trade and disagree with much of what Rodrik writes. Yet, I consider him as a great scholar and respect him a lot contrary to Bhagwati who says even in respected newspapers that Rodrik says “sheer nonsense” and other stuff like that which I shall not repeat here. He even chastized an organization (which I shall not mention here neither) that had published some of his writings for publishing one of Dani Rodrik’s book! The funny thing is that in a video on Youtube (“Jagdish Bhagwati on Milton Friedman”) he now (or rather, a few years ago) says that Milton Friedman (the same Friedman whose ideas he rejected as “ideological” or “conservative”) was right, was ahead of his time in his criticisms of India’s economic policy, and regrets that Friedman’s criticisms were not reported in the Indian press because of “some kind of censorship”! Now, he wishes to do the same thing with Rodrik. (By the way, I agree with Rodrik’s first three sentences in this post on his late blog: https://rodrik.typepad.com/dani_rodriks_weblog/2007/10/bhagwatian-rhet.html). I’m sorry to say that but I really enjoyed Russ Roberts’s EconTalk episode with Dani Rodrik on neoliberalism and Tyler Cowen’s “Conversations with Dani Rodrik.” What a contrast with Milton Friedman who would always remain courteous during debates even when faced with virulent criticisms! And, of course, there is no need to mention the mutual respect between Friedman and Samuelson however much they disagreed with each other.
To come back again to “The Use of Knowledge in Society”, and as Professor Israel Kirzner has often written on this specific point (I alone am responsible for what I wrote above), it was Hayek’s (and, of course, Mises’s) participation in the socialist calculation debate and the criticisms and opposing views of Lange, Barone, and others that led him (and Mises) to refine and improve their arguments, culminating in such a gem of an article as “The Use of Knowledge in Society”. As the French polemist Bastiat once said, “The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended.”
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