I surveyed F. A. Hayek’s “The use of knowledge in society” during the Thanksgiving break. (See here, here, and here.) Below, I identify four possible objections to Hayek’s defense of the price system:
- What about law? First off, for markets (i.e. the price system) to work, there must be rules, and rules by definition require some form of coercion, but Hayek doesn’t talk about about the role of institutions (i.e. courts, custom, law, etc.) in his knowledge paper.
- What is “knowledge”? Alas, Hayek never defines the term “knowledge”; why not? Also, according to the post-modern school, knowledge is “socially-constructed”. If so, how does post-modernism affect Hayek’s analysis of the price system?
- What about the self-reference problem? Hayek’s argument is that market-determined prices reflect the fragmentary bits of local knowledge held by many dispersed individuals and firms, but what happens when some forms of knowledge are themselves a privately-owned commodity (like tin to borrow Hayek’s own example)? Think of trade secrets, for example.
- Lastly (for now), what about beliefs and emotions? If knowledge refers to facts about the world or to reliable theories about how the world works, beliefs by comparison are subjectively-held or probabilistic states of mind about those same facts or theories. Could beliefs play an important role in market systems? Also, what role do emotions (or what John Maynard Keynes called “animal spirits“) play?
Can you think of any other potential objections to Hayek’s analysis; e.g. wealth effects, “market failures”, public goods, etc.? In the meantime, I will address each of the above points in my next few blog posts.