A fun detour through World War II era economics

Soldiers at the Battle of OkinawaI too often take Google down the rabbit hole. On one of my recent such trips, I came across the seminal 1945 paper by F.A. Hayek titled “The Use of Knowledge in Society”.

F.A. Hayek was a world-renowned economist. He shared the 1974 Nobel prize in economics. According to Hayek’s Wikipedia page,

In 2011, his article “The Use of Knowledge in Society” was selected as one of the top 20 articles published in The American Economic Review during its first 100 years.

The guy had some chops. And the 1945 paper was one of his most highly-regarded. It seemed worth reading.

A defense of the market economy

I wasn’t disappointed. Hayek’s main point is that we can have a perfectly efficient economic system, even if no single economic actor has a whole lot of information about the economy as a whole. His argument is a push back against central planning, which often supports the various forms of socialism.

How does a market economy achieve its efficiency? Pricing. Hayen gives an example of tin. Say the supply of tin was disrupted, or a new use for tin was found. It doesn’t matter which. The point is we’ll see a relative shortage of tin.

What happens? The price of tin goes up. Why? Because the few actors that are aware of what happened make different decisions. The remaining tin suppliers realize they can charge more. The new tin users realize they have to outbid existing tin consumers. Regardless, it takes only a few knowledgeable actors to change the course of the market. Prices rise, and everyone responds the way they should.

Here’s how Hayek summarizes the effect:

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 power of freeing yourself from thought

The bit about tin was standard economic fare. It’s a good example. It shows that only a few actors require only a little information to drive efficiency in a market economy.

What got really interesting for me, though, was Hayek’s rumination on the power of the price system. He gives a quote from Alfred Whitehead that I had never heard before:

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.”

Wow. Powerful stuff.

It dovetails with the notion of core competency. In that case, as a business, you want to focus on where you provide unique value. You want to outsource, or spend as few resources on, the things that make the least difference.

That’s the motivation behind not thinking about what you do. When you zoom out to the level of society, we all win if we can automate things that used to consume our energy. Because our time and mental cycles are finite, all tasks have an opportunity cost. If we can stop thinking about one thing, we can start thinking about another thing. And as long as we trade up, thinking about more important things, society progresses.

Some fuel for your confidence

Near the beginning of the paper, Hayek argues how society mistakenly values scientific knowledge above more practical knowledge. It’s another manifestation of the classic debate about theory versus practice. I suppose around World War II, given the boom in scientific discovery, people were more inclined to believe that knowing theory, or basic principles, was most important.

Hayek does a good job of combating that assertion. Here’s part of what he says, with my emphasis added:

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 special circumstance.

That line hit me pretty hard. I’m quick to recognize that I’m not as good of an engineer as this person or that person. I’m not as good of a manger as some other person. I’m not as good of a strategic business thinker as yet another person.

That’s really a bummer. But it’s not the point. It’s not what’s important.

What is important, according to Hayek, is the “knowledge of people, of local conditions, and special circumstance”. Take that to its extreme, and he’s saying, you’re valuable because you’re you. You’re the only one that has access to your knowledge, your experiences, your immediate surroundings. And those assets are incredibly important.

It’s a Nobel prize-winning economist giving you the same woo-woo advice that self-help gurus shout from the mountain tops. But the advance is written in the context of economics, specifically a defense of market economies.

I really like that. It feels good to know that we all bring unique value, even if we’re not A+ players across the board. It’s the cumulative effect that matters.

That’s fine to say. It’s more important to act on it. One lesson is that the economy depends on all of us. We’re all actors, in different ways.

Don’t let yourself off the hook, thinking you don’t know enough about any particular topic to contribute. You do know enough. I know enough. We need to speak up, to act, to make a difference. And that’s not coming from a hippy self-help guru. That’s coming from a Nobel prize-winning economist.

Leave a Reply

Your email address will not be published. Required fields are marked *