This week’s assigned readings focused around the basics of
economic, and the process of valuation, and the identification of cost in the
economy. This essay reviews those points
that were written about by Hayek, and Alchian.
Hayek defines the economic problem of society as, “…one of rapid
adaptation to changes in the particular circumstances of time and place…” (1954,p.
524). Those are broad strokes, but he later
narrows it down to who has and needs certain knowledge and information at a
given point in time to make a decision. He refers to this as the, “man on the
spot”. No one person holds, and or knows,
all information pertaining to a certain resource. This information is dispersed over several
individuals who have the “know how”, the knowledge of experiences, and learned
skills that are not easily communicated.
Hayek delves into the issue of planning, by promoting the idea of
decentralization. It is foolish to think
that as he states, “… communicating all this knowledge to a central board…”(1945,p.
524) would solve this issue. This kind
of knowledge referred to as scientific knowledge ignores the nuances of skills
and experience learned on the job that create tacit knowledge. The amount of
time that it would take to accumulate, prioritize, and then distribute; (but
not before adding value to the accumulated data through computation or
filtering the information) to the individuals who need to make this decision, is a monumental task to complete in the time
frame that would make the information relevant and useful.
The knowledge of “time and place” is an important one. The “man on
the spot”, who is making decisions, needs the relevant information in order to
make the best possible decision. In the excerpt from the reading, this
knowledge is referred to as the knowledge of circumstance, one that is
“unorganized”. Previously mentioned,
this knowledge of experience, ideas, and skills is tacit and is not easily
transferrable between individuals. It is
this kind of knowledge that could be used to arbitrage a situation as Hayek
describes it, “…whose whole knowledge is almost exclusively one of temporary
opportunities…all performing eminently useful functions based on special
knowledge of circumstances of the fleeting moment not know by others.”(1945,p.
522). With this more intimate knowledge
of a situation, these people are better suited to make value based decisions,
knowing more than just the fact based scientific knowledge.
Tacit knowledge is “know how”, and is hard to explain, or pass on
explicitly. It is this kind of knowledge
that was reviewed in Klein’s research, that people go through previous memories
to find similar situations that resemble the one that is in front of them. People use these banked memories to develop expectations
of how the situation should unfold and then act accordingly to take advantage
of the situation. If one would be able
to draw on a previous experience, then they would be able to quickly assess the
value of a given situation and or commodity. Then, they could use that
information to capitalize on a price point to minimalize the opportunity cost
and maximize value of a situation.
An old adage that I remember from my undergraduate days, “the
dollar votes” it is this concept that helps to make our system work by the
consumer provided as Hayek say “data”.
When individuals participate in the market, they aid in the creation of
scarcity through consumption leading to increased prices and the implementation
of alternatives that step in to increase the marginal benefit that collapses
when scarcity decreases the value of options.
This aids in communicating information of what consumers want and the
price point, at which they believe the benefit to be acceptable to pay for.
While assigning value to
options is easy, it is important for information to be disseminated to
individuals who are going to make decisions.
It is also just as important for people to develop alternatives or be
prepared for change in a system where prices fluctuate and can reduce your
marginal benefit, and the cost associated with decisions. If individuals or groups can follow these
fundamentals, they would actively aid in economizing markets and better there
decision making abilities.