Friedrich A. von Hayek, “Economics and Knowledge” (1937)

This file is a single-author journal article, originally a presidential address. Across ten sections Hayek reorients equilibrium theory around a neglected question: what must be assumed about the knowledge of separate persons for formal economic analysis to say anything causal about the world? His thesis is methodological and substantive at once: pure equilibrium analysis is a “Pure Logic of Choice,” but it becomes empirical economics only when joined to propositions about how knowledge is acquired, corrected, and communicated.

The situation seems here to be that before we can explain why people commit mistakes, we must first explain why they should ever be right.

Hayek begins from the rising importance of foresight in risk, imperfect competition, money, and fluctuations. The issue is not merely prediction but the meaning of equilibrium itself. For a single person, equilibrium is intelligible because actions can be related as parts of one plan, formed on the basis of what that person believes to be the facts.

Actions of a person can be said to be in equilibrium in so far as they can be understood as part of one plan.

This move lets Hayek separate subjective “data” from objective facts. In individual choice theory, data are not facts as known by the economist but facts as known or believed by the acting person. Once analysis shifts from one mind to many, this distinction becomes decisive: different persons’ plans must not only be individually coherent but mutually compatible, since one person’s intended action often functions as another person’s datum.

Datum means of course something given, but the question which is left open, and which in the social sciences is capable of two different answers, is to whom the facts are supposed to be given.

The central conceptual reconstruction comes when Hayek defines social equilibrium not as timeless rest or stationarity, but as plan-compatibility through time. A society is in equilibrium when individuals’ plans can all be executed without mutual disappointment, and when expectations about external facts are sufficiently shared and borne out.

For a society then we can speak of a state of equilibrium at a point of time—but it means only that compatibility exists between the different plans which the individuals composing it have made for action in time.

This makes “correct foresight” not an external assumption added to equilibrium but part of what equilibrium means. Yet Hayek’s point is also critical: traditional theory often avoids the problem by assuming a perfect market in which relevant facts are instantly known. That, he argues, only disguises omniscience as market form.

The assumption of a perfect market in this sense is just another way of saying that equilibrium exists, but does not get us any nearer an explanation of when and how such a state will come about.

The later sections therefore ask what kind and amount of knowledge must be dispersed among agents for coordination to occur. “Constancy of data” is too vague, because data may mean either objective facts or subjective expectations. The real economic problem is how partial, situated knowledge becomes sufficiently aligned for prices, costs, and plans to fit together.

Clearly there is here a problem of the Division of Knowledge which is quite analogous to, and at least as important as, the problem of the division of labour.

Hayek’s relevance lies here: the article anticipates his later theory of dispersed knowledge and the coordinating function of markets. Equilibrium analysis remains useful, but only if treated as a formal tool whose empirical force depends on learning processes, communication, institutions, and the limits of what individuals can know. The essay closes not by offering a full empirical theory, but by identifying the point at which economic reasoning must become testable.

The important point is rather that we should become clear about what the questions of fact are on which the applicability of our argument to the real world depends, or, to put the same thing in other words, at what point our argument, when it is applied to phenomena of the real world, becomes subject to verification.