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The Knowledge Problem

Fredrick Hayek is justly lauded for his many achievements, but one of the simplest revelations he shared with the world is the Knowledge Problem. This simple thesis conveyed how there were not merely incidental benefits attached to free markets but systemic ones as well.

The flaw of the central planner lay not only in the individual or group of individuals, but in the method of attempting large-scale knowledge aggregations.

These aggregations would then be dispersed to the producers in the economy where they would be told how much of what products should be made. Prices could be set at uniform and “fair” rates so that no “excess charges” or profits were extracted.

Hayek masterfully showed how flawed this economic arrangement was in theory while the disastrous decay of actual countries operating under this system vindicated his argument in the years after he first expounded it.

He demonstrated how the price mechanism was not a means of exploitation; rather, it was a rapid and efficient way of conveying the relative scarcity of goods and services. Decades before the full scale collapse of the Soviet Union testified to Hayek’s notion, Hayek foresaw this calamity.

The reason why an iPhone is $400 rather than $4 is not reducible to the whims of an executive. The price of an item, in most cases, is a means of communicating the cost of its production, the demand for it, and the availability of substitute items.

This greatest of innovations, brought about through the free exchange of goods and services, has the beneficent result of both freeing the individual from the tyranny of location and freeing the society from chronic shortages.

Location is reduced in importance by the fact that a shift in supply or demand in one area is transmitted rapidly to other locations which can then equalize the situation by the provision of their own goods.

Without this knowledge of the need of one area coupled with the prospective benefit of another, people are reduced to the natural state of the caprice of proximity. The true benefactor of the poorest among us is the incentivizing power of free markets.


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