The particular occasion of this lecture, combined with the chief practical problem which economists have to face today, have made the choice of its topic almost inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude - an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."1I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.
The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.
This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.
for full text, click here: http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html--
I found an interesting video. I really pray that in 2010, we get to see the Fed audited so that America could save itself. If America could not save itself, she'll take the world down as well. I'm not American, but whatever happens there will certainly affect me and you.
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The fallacy of current Environmentalism as opposed to Market-based environmentalism is its delusional hope in the state government to solve environmental problems
A guy named Bob May, depressed and brokenhearted, stared out his drafty apartment window into the chilling December night. His 4-year-old daughter, Barbara, sat on his lap quietly sobbing. Bobs wife, Evelyn, was dying of cancer. Little Barbara couldn't understand why her mommy could never come home. Barbara looked up into her dads eyes and asked, "Why isn't Mommy just like everybody else's Mommy?" Bob's jaw tightened and his eyes welled with tears. Her question brought waves of grief, but also of anger. It had been the story of Bob's life. Life always had to be different for Bob. Being small when he was a kid, Bob was often bullied by other boys. He was too little at the time to compete in sports. He was often called names he'd rather not remember.
From childhood, Bob was different and never seemed to fit in. Bob did complete college, married his loving wife and was grateful to get his job as a copywriter at Montgomery Ward during the Great Depression. Then he was blessed with his little girl. But it was all short-lived. Evelyn's bout with cancer stripped them of all their savings and now Bob and his daughter were forced to live in a two-room apartment in the Chicago slums. Evelyn died just days before Christmas in 1938. Bob struggled to give hope to his child, for whom he couldn't even afford to buy a Christmas gift. But if he couldn't buy a gift, he was determined a make one - a storybook!
Bob had created an animal character in his own mind and told the animal's story to little Barbara to give her comfort and hope. Again and again Bob told the story, embellishing it more with each telling. Who was the character? What was the story all about? The story Bob May created was his own autobiography in fable form. The character he created was a misfit outcast like he was. The name of the character? A little reindeer named Rudolph, with a big shiny nose.
Bob finished the book just in time to give it to his little girl on Christmas Day. But the story doesn't end there. The general manager of Montgomery Ward caught wind of the little storybook and offered Bob May a nominal fee to purchase the rights to print the book. Wards went on to print Rudolph the Red-Nosed Reindeer and distribute it to children visiting Santa Claus in their stores. By 1946 Wards had printed and distributed more than six million copies of Rudolph. That same year, a major publisher wanted to purchase the rights from Wards to print an updated version of the book. In an unprecedented gesture of kindness, the CEO of Wards returned all rights back to Bob May. The book became a best seller. Many toy and marketing deals followed and Bob May, now remarried with a growing family, became wealthy from the story he created to comfort his grieving daughter.
But the story doesn't end there either. Bob's brother-in-law, Johnny Marks, made a song adaptation to Rudolph. Though the song was turned down by such popular vocalists as Bing Crosby and Dinah Shore, it was recorded by the singing cowboy, Gene Autry. "Rudolph the Red-Nosed Reindeer" was released in 1949 and became a phenomenal success, selling more records than any other Christmas song, with the exception of "White Christmas." The gift of love that Bob May created for his daughter so long ago kept on returning to bless him again and again. And Bob May learned the lesson, just like his dear friend Rudolph, that being different isn't so bad. In fact, being different can be a blessing!
But, all libertarians, by definition, at least oppose the initiatory use of coercion. They support the rational principle of the individual human rights of life, liberty, property, and the pursuit of happiness. This means that each individual has the right to keep what he earns for himself and his family, and this includes the right to use, trade, sell, give away, or dispose of his property as he sees fit. A person who violates the rights of others by initiating coercion, violence, or fraud against them forfeits his right to be left alone by government and may be arrested, charged, tried, and imprisoned, deported or executed if convicted (depending on the nature of his or her crimes). The basic, proper function of lawful government is therefore limited to protecting these rights of the peaceful individual from criminals and foreign aggression, and in not violating these rights itself, for if government is allowed to go beyond this legitimate function and itself initiates force in violation of the rights of peaceful citizens, it necessarily contradicts the only rational justification for its own existence by acting criminally itself.
Real libertarians take individual rights seriously - seriously enough to consistently uphold them against the initiation of the use of force by anyone (including government) for any reason. This means that government must be bound by the policy of "laissez faire" - which means that government has no business coercively interfering with the lives of peaceful (non-coercive) citizens in their private affairs and voluntary (market) relationships.
Libertarians may or may not approve of some of the things that some people may do in private or in voluntary relations, but whatever their own code of personal moral conduct is, they do not seek to ban any private or voluntary activities by the use of force, including the force of government action. To do so would be to violate the very principle of individual rights of person and property, and thereby undercut any rational argument in favor of freedom or defense of the free-market system. Those exception makers and outright coercive busy-bodies in our midst (referred to as "interventionists" or "statists" by libertarians) who do want to abandon government by principle and instead put Whim in charge of the use of legal coercion are the people who help set the stage for arbitrary and capricious governmental tyranny - leading in the direction of totalitarian dictatorship.
Libertarians Are Not Conservatives
Libertarians are not "conservatives"; libertarians are radicals (principled advocates) for individual freedom and responsibility - and the pure free-market private-enterprise economic system which would result from a consistent application of that principle. A "conservative" on the other hand is one who wishes to preserve the status quo. The status quo in America today is the semi-socialist, semi-fascist mixed-economy welfare-state - a system inimical to personal freedom and responsibility. Libertarians do not support such a system, and oppose any and all measures to expand it while favoring the total repeal of interventionist laws and regulatory agencies.
Conservatives of the William F. Buckley or William Bennett variety are generally more concerned with imposing "order" than with allowing freedom. Although they often (and rightly) complain that government has got "too big" and too meddlesome in our lives, on some specific issues they themselves favor using the political power of government to legislate and enforce their view of morality upon the populace in "the national interest" or for the "social good." William Bennett, for example, opposes the legalization and/or decriminalization of the sale and use of heroin and cocaine, and he continues to support the no-win "War on Drugs" which is causing violence to escalate in our society. Libertarians, on the other hand, realize that "enforced morality" (in such personal matters) is a contradiction in terms; without freedom of choice there can be no moral responsibility and personal growth.
Libertarians also perceive that freedom brings about a more complex, dynamic and harmonious order in society (co-ordinated by the market price mechanism) than any static view of order imposed by central political planning and regulations of our non-coercive behaviors.
Libertarians are for individual freedom - and this includes the freedom of people to do some things that we and other people may disapprove of. A person should be free (from coercive interference) to do what he pleases with his own life and property, as long as he does not violate (through coercive interference) the same right of other peaceful persons to do what they want with their lives and properties. (The second clause is logically implied in the first.) Libertarians do not oppose non-coercive persuasion, educational efforts, private advertising campaigns, organized boycotts, or even social ostracism as means of trying to effect changes in the private behavior of others. (Many people have stopped smoking tobacco in recent years partly as a result of education and persuasion by friends and family members.) What libertarians do oppose is the attempt by anyone (individuals or government officials) to impose their own views of "fairness" or personal morality on others through the initiation of the use of coercion, by either personal violence or political legislation and governmental action. This principled position sets libertarians apart from conservatives as well as other non-libertarians.
Libertarians Are Not Welfare-State "Liberals"
Libertarians are not to be confused with the so-called "civil libertarians" which typify the membership and leadership of the American Civil Liberties Union. It is true that the ACLU has come to the defense of freedom of speech for certain minorities (e.g., nazis, communists, and anarchists) and this is commendable - but the podium has often been at taxpayers' expense, which is a "no-no" from the real libertarian perspective. Many "civil libertarians" believe that some people have a "right" to violate the rights of others; they claim there is a "right to a job" or a "right" to welfare payments or a "right" to "free education" or a "right" to free child care - all at the expense of the people (usually the taxpayers) who are forced to pay for these so-called "rights." Real libertarians are for true freedom, not "freedom" at the forced expense of others. The only obligation that true rights impose on persons is of a negative kind: not to interfere with the rights of other people - i.e., to refrain from the initiation of the use of coercion. This is the core principle of libertarianism and is sometimes called the 'Non-Aggression Axiom'.
Welfare-state "liberals" and "civil libertarians" speak of "rights" of people as members of specially privileged groups, such as "women's rights" or "gay rights" or "rights of the handicapped" or even so-called "animal rights"! Real libertarians know that there are only individual rights, not group rights. There is no such thing as "gay rights" or "black rights" or "white rights" or left-handed Martian rights. Government must not be used to dish out special privileges to any group for any reason, since government cannot give anyone anything unless it takes it away from others by force, thereby violating their rights. There can be no such thing as a "right" to violate the rights of others.
No doubt there are some well-intentioned ACLU members who do promote true civil liberties and uphold human rights; however, the ACLU has not come to the defense of the rights of school children whose freedom is being violated daily by compulsory attendance laws and the tyranny of Federally-ordered forced busing. Nor do I know of any case in which the ACLU has defended the constitutional rights of businessmen who are being harassed by OSHA agents and other bureaucrats, or hounded by such arbitrary and subjective laws as the antitrust acts. Indeed, many "civil libertarians" seem callously insensitive to the victims of crime and legal plunder - while they defend known criminals from justice.
Because of their consistent adherence to the principle of individual rights, libertarians are the only true defenders of liberty -- civil or otherwise. Real libertarians understand that freedom of speech and other civil liberties depend on the sanctity of private property - not its violation by anti-discrimination laws and other forms of government intervention.
Libertarians Are Not for Unlimited Majority Rule
Libertarians are not democrats. While majority rule may or may not be as good as any other mechanism for selecting the men and women who administer the offices of government, libertarians deny that anyone or any group has a right to rule over other peaceful (non-coercive) citizens - whether they are in the majority or minority at any given time. If stealing is wrong for an individual to do, it is still wrong when conducted by a large group or by a majority vote. The number of people involved in an act does not change the rightness or wrongness of the act. There is no magic number that turns an individual wrong into a collective right. In a libertarian republic, the basic policy of government (i.e., laissez faire) is set by reference to fundamental principle -- the principle of individual rights -- and not determined by a show of hands. Libertarians uphold the right of the peaceful individual to self-ownership and private property against any who would violate this right - even a majority.
Libertarians Are Not Anarchists
Libertarians are not anarchists. While it is true that some individuals favor a political system of competing vigilante committees, and refer to this position as "anarcho-capitalism" (a view formerly held by libertarian economist Murray Rothbard), this is a confusing misnomer based on an apparent failure to clearly distinguish between the nature of market institutions (which do not involve the use of coercion at all, either initiatory or retaliatory) and the nature of coercive entities (criminal or legal). Actually, libertarianism rests on the concepts of individualism, self-ownership, private property, & voluntary (market) exchange. Classical anarchism not only opposed the political state, but also some voluntary organizations of which it disapproved. Most importantly, true anarchists opposed private property - without which no voluntary relationships are possible. Today's libertarians are in the classical liberal tradition of Algernon Sidney, John Locke, Adam Smith, Thomas Jefferson, James Madison, Edmund Burke, Herbert Spencer, and Frederic Bastiat -not the anarchist tradition of Proudhon, Kropotkin, and Bakunin.
Libertarians Are Not Pragmatists
Libertarians do not advocate freedom or the free-market economy merely because "it works" (which it does better than any other system); they support it as the only non-coercive and just system - the system in which people are free to deal with one another on a voluntary basis as traders (exchangers of goods and services) instead of as masters and slaves - or as privileged class and exploited host. Others advocate government by whim. Libertarians adhere to certain principles, and without the guidance of principles and standards, all that is left is pragmatic expediency and the tyranny of government by whim. One might say that libertarians are "idealists" in the popular sense of that word; after all, libertarians stand for certain ideals - goals to strive for (e.g., less government intervention, more individual freedom and moral responsibility, free markets, etc.). Because libertarianism is based on man's nature and the nature of reality, it is the most practicable social system. Libertarians are practical idealists.
The Austrian Business Cycle Theory (ABC) provides a qualitative explanation of why economies go through ups and downs in terms of national income, production output and labor employment. The theory states that interest and money supply policy distort the time preferences of economic agents. If the monetary authority reduces the interest rate through artificial credit expansion the new economic conditions induce both increased production and consumption. The framework of the Austrian theory depends on savings to fuel investments, i.e. reduced consumption in order to create increased future consumption. Artificially induced expansions create a wedge between these producer and consumer preferences, and prolonging of the process widens the gap between the economic state and the free market equilibrium which is long-term sustainable. When the financial system eventually is unable to maintain inflation of credit to uphold the economy, there will be abandonment of capital investments, resulting in an unavoidable recession. The purpose of this thesis is to analyze the theory from a short run perspective, using data from the United Kingdom economy. The theory has previously primarily been tested in long run perspectives and mainly on the American economy. To achieve the noted a model was constructed based on the description of the theory by economists Hayek and Garrison, members of the Austrian school of economics. To empirically model the ABC theory the ratio between consumption and investment, the intertemporal resource allocation, was calculated and used as a dependent variable in regressions with money aggregates, credit and interest rate gap as independent variables. The empirical findings give some support to the theory, with a number of those findings directly in favor of the theory. Credit was shown to better explain changes in the C/I ratio than money aggregates, indicating that credit is more directly suited for investments. The coefficient for the interest rate gap, the difference between the natural interest rate and the market interest rate, showed strong significance.
http://www.cooperativeindividualism.org/hayek_knowledge.html
The Use of Knowledge in Society
Freidrich von Hayek
from the American Economic Review, XXXV, No.4; September, 1945, pp.519-30]
What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.
This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the "data" from which the economic calculus starts are.never for the whole society "given" to a single mind which could work out the implications and can never be so given.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources--if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But, as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.
In ordinary language we describe by the word "planning" the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy-or of designing an efficient economic system.
The answer to this question is closely connected with that other question which arises here, that of who is to do the ;planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning--direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopolies.
Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. This, in turn, depends on whether we are more likely to succeeding putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to dovetail their plans with those of others.
It will at once be evident that on this point the position will be different with respect to different kinds of knowledge. The answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge: those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts. If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available--though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active co-operation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. 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. 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.
It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crud ematerialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned--apparently because in their scheme of things all such knowledge is supposed to be "given." The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.
If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the "planners" differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.
It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. As long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no n ed to form a new plan. The belief that changes, or at least*-day adjustments* have become less important in modern times implies the contention- that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.
Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as whcn a new factory is to be erected or a new process to be introduced ? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever changing circumstances of the moment?
The fairly widespread belief in the affirmative is not, as far as I can ascertain, borne out by the practical experience of the businessman. In a competitive industry at any rate--and such an industry alone can serve as a test--the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an ineflicient manager to dissipate the differentials on which profitability rests and that it is possible, with the same technical facilities, to produce with a great variety of costs are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be allowed to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work.
One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for--as the statisticians occasionally seem to be inclined to do--by the "law of large numbers" or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs: tiles for its roof, stationery or its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.
This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping togcther, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."
If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the "man on the spot" cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.
How much knowledge does he need to do so successfully ? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?
There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. 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 the alternative things he produces or uses. 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.
It is in this connection that what I have called the "economic calculus" (or the Pure Logic of (Choice) helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not-- every time some small adjustment in the allocation of resources had to be made--go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the Pure Logic of Choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or "values," or "marginal rates of substitution"), that is, by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.
Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the.individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose--and it is significant that it does not matter--which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity--or rather that local prices are connected in a manner determined by the cost of transport, etc.--brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.
We must look at the price system as such a mechanism for communicating information if we want to understand its real function-- a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe 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.
Of course, these adjustments are probably never "perfect" in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same even or "normal" level.
I have deliberately used the word"marvel" to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for "conscious direction"--and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously--should remember this: 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.
The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case.
Civilization advances by extending the number of important operations which we can perform without thinking about them.." This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.
The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a co-ordinated utilization of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization. It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type. All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it--such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill.
It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views. The thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by Von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion. When we find Leon Trotsky arguing that "economic accounting is unthinkable without market relations"; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice. The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences.
A recent statement by Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist "from the elementary proposition that consumers in evaluating ('demanding') consumers' goods ipso facto also evaluate the means of production which enter into the production of these goods." [1] Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter's "ipso facto" presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers' goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers' goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.
The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.
That an economist of Professor Schumpeter's standing should thus have fallen into a trap which the ambiguity of the term "datum" sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem.
[1] Capitalism, Socialism, and Democracy (New York; Harper & Bros., 1942), p. 175. Professor Schumpeter is, l believe, also the original author of the myth that Pareto and Barone have "solved-- the problem of socialist calculation. What they, and many others dld was merely to state the conditions which a rational allocation of resources would have to satisfy and to point out that these were essentially the same as the conditions of equilibrium of a competitive market. This is something altogether different from s owing how the allocation of resources satisfying these conditions can be found in practice. Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical problem, in fact explicitly denies that it can be solved without the help of the market. See his Manuel d'economie pure (2d ed., 1927), pp. 233-34. The relevant passage is quoted in an English translation at the beginning of my article on "Socialist Calculation: The Competitive 'Solution,' " in Economica,VIII, No. 26 (new ser., 1940), 125; reprinted below as chapter viii.
The use of climate to frighten people is hardly new: The Bible does so,
and the New York Times has issued such warmings at least a half dozen times over the past century.
However, it is crucial to understand that there is no consensus for such alarm, and indeed the science
often points in the opposite direction. Current climate hysteria simply represents the scientific illiteracy
of much of the educated public (interestingly, most polls in the US and UK show that working people
remain largely unconcerned), the susceptibility of the public to the substitution of repetition for truth,
and the exploitation of these weaknesses by politicians, environmental promoters, and, after 20 years
of media exploitation, many others as well.
The dangers of some of their agendas are likely to be far greater than the dangers of man- made climate change.
