Hayek's The Constitution of Liberty - Institute of Economic Affairs

h ay e k ’ s t h e c o n s t i t u t i o n o f l i b e r t y
t h e u s e a n d l i m i t s o f k n o w l e d g e
Hayek had long been interested in the way prices convey information.
In writings dating back to the 1930s, he had emphasised
the indispensability of prices to economic life (see 1948: 33–56).
The most influential of these writings is his 1945 essay ‘The Use
of Knowledge in Society.’ This essay takes up ‘the economic
problem of society’ and argues that it ‘can be solved, and in fact
is being solved, by the price system’ (ibid.: 77, 85). Hayek points
out that rapid adaptation to social change requires knowledge
of the particular circumstances of time and place; but this knowledge,
which is dispersed among countless individuals, cannot be
concentrated in a single mind or planning board. The problem
then is to find a way to put dispersed knowledge to use for everyone’s
advantage. In a free society, the price system solves this
problem by ensuring ‘that the knowledge of the particular circumstances
of time and place will be promptly utilized.’ Moreover, it
communicates to the individual ‘such further information as he
needs to fit his decisions into the whole pattern of changes of the
larger economic system’ (83–4). Hayek concludes by observing
that the economic problem is but part of a broader one, i.e. the
need for processes to overcome ‘the unavoidable imperfection of
man’s knowledge’ (91). Indeed, this broader problem ‘arises in
connection with nearly all truly social phenomena, with language
and most of our cultural inheritance, and constitutes really the
central theoretical problem of all social science’ (88).
Hayek here anticipates the more comprehensive treatment of
the use of knowledge that he offers in The Constitution of Liberty
(see 4). As it turns out, attentiveness to prices is one way, but not
the only way, that we overcome the imperfection of our knowledge
by making use of what others know. In fact, The Constitution
of Liberty has much more to say about imitation and about the
salience of moral approval and disapproval than about the price
mechanism.
In the 1945 essay, and sometimes also in The Constitution of
Liberty, Hayek employs this interesting formulation: the price
system allows the individual to use knowledge that he does not
possess; prices signal what countless individuals know of their
own local situations; and I can use them in my own calculations
without actually possessing the dispersed knowledge that they
reflect. Whether this formulation would also cover our use of
traditional rules as well as instances of communication other than
the price system (imitation, responding to signs of approval and
disapproval) is uncertain. In conforming to tradition, arguably
we would possess the rule either as a subconscious habit or as a
conscious precept, although the reasons for the rule – the experiences
from which it originated and through which it survived a
long process of cultural selection – are unknown to us and therefore
not in our possession. For the most part rules are followed
blindly, without consideration of the reasons for them. The same
may be largely true of our responses to approval and disapproval.
Hayek does indicate, however, that as social evolution advances,
imitation may come to have an element of deliberation and choice.
Knowledge and social order
In daily life we rely on rules and signs and take for granted the
knowledge they make available for our use. By acting on such
knowledge, we are able to carry out our own plans and to anticipate
what to expect from others. All of this is to assume that the
social world is orderly, but where does this order come from and
what is its character?
58
59