Principles of Business and Economics 1 - Hayek essay
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Course
Principles Of Business And Economics
Institution
Universiteit Van Amsterdam (UvA)
Essay on "Application of concepts from “The Use of Knowledge in Society” by F. Hayek to the Internet" for the subject of Principles of Business and Economics 1, Business Administration at UvA. Was graded a "pass".
Application of concepts from “The Use of Knowledge in Society” by F. Hayek to the Internet
In this essay I will discuss the concept of the use of dispersed knowledge in decentralized
planning system in the context of the internet, based on the Friderich Hayek’s article “The Use of
Knowledge in Society” (1945). Although the work was written more than seventy years ago, it is still
a relevant topic in modern economics, as the world has yet not reached a consensus on which
economic and political system is more effective for all the sectors of the population.
In his paper, Hayek defends the idea of free market economy without central planning to be
more effective than the one with a single central authority. He states that this is because knowledge is
dispersed among all the people and is incomplete, and introduces the concept of knowledge of
circumstances of time and place, that is unique for each person. Because centralised planning system
relies on statistical aggregate information, it cannot include the circumstances of time and place.
Therefore, decentralization of control is the best planning system. It, however, cannot exist without a
functioning price mechanism. Hayek states that price for the products itself already includes all
relevant information of time and place. Consumers will economize on it accordingly, without knowing
why the price is as it is, or what caused its changes. Therefore, price system helps people to
coordinate plans, provides them with the right incentives and makes decentralized planning possible.
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