Hayek, Big Data, and the price system
Some thoughts about Hayek, the price system, and the Big Data revolution.
In “The Use of Knowledge in Society”, Hayek’s asks what would be more efficient: that decisions that involve allocating available resources would be concentrated in a central authority (central planning) or dispersed among many individuals (market liberalism). Hayek argues that to answer this question should look at the existing knowledge. He says that, in central planning, it’s impossible that a single mind can use all the knowledge needed to decide how resources can be best allocated. Millions of changes occur every day in the economy. Companies close, consumers’ tastes change, new technologies appear … no central authority would be able to collect, transform, and make sense of these knowledge and take the right decisions.
He points out that “this problem can be solved, and in fact is being solved, by the price system.” If the knowledge is dispersed among many people, the price would contain all the relevant knowledge to allocate available resources. To the individual, he argues, “all that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are alternative things he produces or uses”. In consequence, “the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement”. In other words, the price system becomes a mechanism for communicating information.
Admittedly, the argument was very elegant. But he missed important points that some economists replied afterwards. Public goods do not have entirely a price. Nor have moral issues such as the cost of life or organ donations.
Importantly, in the paper Hayek argues that knowledge may depend on the particular circumstances of time and place. Notice that the article was written in 1945! Many things have happened since then. The most important one, in terms of “the use of knowledge in society”, is Big Data. The debate is served. Would it be possible nowadays that “that a single mind can use all the knowledge needed to decide how resources can be best allocated”? This might seem terrifying. And dystopian. But here it goes some articles about this. Food for thought.
https://www.ft.com/content/6250e4ec-8e68-11e7-9084-d0c17942ba93 https://www.opendemocracy.net/en/oureconomy/economic-planning-back/ https://www.economist.com/christmas-specials/2019/12/18/can-technology-plan-economies-and-destroy-democracy