The Knowledge Problem

F. A. Hayek, in his Nobel speech, famously talked about what is frequently called “the knowledge problem.”  Essentially, Hayek argues that there is no way for a person, or group of people, to collect, analyze, and interpret all the information necessary to make economic choices for an entire group.  Hayek talks about the “knowledge of the particular circumstances of time and place.”  In other words, only I (or you, dear reader) have the information necessary to make decisions affecting you.  A central planner wouldn’t have the information needed.  Any decision he makes may help some, may hurt others.

The legislator (assuming he is acting not in his own self-interest but for some higher purpose) must rely upon averages. The average citizen, or the average laborer, or the average firm. The problem with this, of course, is that averages do not account for individual details; in fact, they deliberately factor them out.

Let’s assume we have a society where there are 10 people who wear size XL shirts and 10 who wear size M. The average shirt size, then, is size L. If some busybody came along and decreed some shirt legislation based upon average size, then all manufacturers would have to make size L shirts. For half the population, the shirt is too big. For the other half, it is too small.

This is why legislation often fails in its stated goals: it cannot take into account the “particular knowledge of time and place.” The legislation is either too much or too little, and thus it creates the very failures it was supposed to prevent.

2 thoughts on “The Knowledge Problem

  1. Great summary of the knowledge problem!

    And a good metaphor too. This one-size-fits-all approach (pun intended) also makes me think of the minimum wage issue. Of course, there are a lot of problems with minimum wage. But at the very least, I think most people can see that arbitrarily determining a single minimum wage for all companies — from Walmart to Apple to your local coffee shop — makes some pretty wild assumptions about productivity, revenue, etc.

    Liked by 1 person

Comments are closed.