The Nobel prize winning economist Friedrich von Hayek is mainly known for his influence on right-wing politicians like Margaret Thatcher. This politicization of Hayek is unfortunate because he was also an economist and philosopher who produced insightful academic work. Most notably in this regard is his identification of what he calls "The Knowledge Problem," the argument of which was published in the American Economic Review in 1948. The article is titled "The Use of Knowledge in Society," and it is worth reading because in it he highlights an important element in the economy that is relevant to all forms of social activity, including the area that interests me, international relations.
My summary of his insight is the following. If all the dispersed information of economic actors could be known to one mind, that is, if it was aggregated and centralized, this mind would in principle be able to allocate the goods and services that we produce and consume in a way that would take account of all the dispersed knowledge of actors. If, for example, wood suddenly became scarce, this all-knowing mind would quantify and formulaically encode all the implications of the sudden scarcity of wood, namely, people's willingness to pay more for it, the search for, and production of, substitutes, the increase in the cost of all the products made with wood, and actors' changing preferences in response to these changes. With all this knowledge, the central mind would then allocate the goods that are affected by this change--houses, boats, chairs, tables, books, etc.--in a way that reflects a) the new scarcity, b) the changes in the value of wood and all the goods made with it, c) actors' subjective reactions to this change, including the desire for substitutes, and actors' responses to these substitutes, and d) the effect of the new substitute on all the goods that are implicated by this new resource.
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| The balance of power |
My summary of his insight is the following. If all the dispersed information of economic actors could be known to one mind, that is, if it was aggregated and centralized, this mind would in principle be able to allocate the goods and services that we produce and consume in a way that would take account of all the dispersed knowledge of actors. If, for example, wood suddenly became scarce, this all-knowing mind would quantify and formulaically encode all the implications of the sudden scarcity of wood, namely, people's willingness to pay more for it, the search for, and production of, substitutes, the increase in the cost of all the products made with wood, and actors' changing preferences in response to these changes. With all this knowledge, the central mind would then allocate the goods that are affected by this change--houses, boats, chairs, tables, books, etc.--in a way that reflects a) the new scarcity, b) the changes in the value of wood and all the goods made with it, c) actors' subjective reactions to this change, including the desire for substitutes, and actors' responses to these substitutes, and d) the effect of the new substitute on all the goods that are implicated by this new resource.
Of course, there is no single mind that could aggregate all this knowledge. And even if computers could somehow statistically represent the data implied above, it is hard to see how even the most powerful ones could register and predict the subjective changes that determine the different valuations of substitutes, or the creative process whereby substitutes are imagined and produced. This is the meaning of what Hayek calls the "Knowledge Problem". He adds that, in the economic sphere, this problem is at least partially resolved by the price mechanism, and this can be illustrated by continuing the example in the previous paragraph. If there suddenly occurred a scarcity of wood while demand for it remained unchanged, the price for it and all the goods that are made of wood would increase. If this increase was significant, those who depend on wood would economize it, and search for substitutes. The price system registers all this information of economic change in the form of a price, which is a signaling device that encapsulates the relative values of all the goods and services that are implicated in the original change. Actors would adjust in response to the changes in this signaling device--that is, the price--in a way that would restore some sort of equilibrium. The important point here is that this would happen even though the actors are mostly ignorant of the original change (a sudden scarcity of wood), and are mostly unaware of how the millions affected by the change are acting. All they need to know is that wood is now more expensive, and that they will have to adjust in one of the ways mentioned above. Thus the price system, for Hayek, helps to solve the knowledge problem because it aggregates dispersed information and, by transforming it into a signaling device (the price), induces others to adjust even though the said actors are mostly unaware of the causes of the changing prices. No all-knowing mind, or all-powerful computer, can carry out this function because the information that is represented in the price is the aggregation of millions of subjective preferences which are dispersed, local, implicit, tacit, fluctuating, contradictory, and circumstantial. And yet the price system transforms these bits of data into a single number that helps to coordinate the activities of millions who are mostly unaware of each other.
Even more remarkably, this is a form of organization that is the product of human action and not human design. It is a macro-structural mechanism that humans create without intention or purpose. In this sense, the price mechanism is similar to evolved forms in the natural world: both emerge spontaneously and through chance and are selected because of some adaptive value. The final outcome is a complex organization without an organizer.
Even more remarkably, this is a form of organization that is the product of human action and not human design. It is a macro-structural mechanism that humans create without intention or purpose. In this sense, the price mechanism is similar to evolved forms in the natural world: both emerge spontaneously and through chance and are selected because of some adaptive value. The final outcome is a complex organization without an organizer.
The implications of this are huge for all sorts of human behaviour, but here I will focus on international politics. The knowledge problem that afflicts the economy that Hayek identified also characterizes the international system. In both there are actors pursuing their goals (although in the economy it is mainly producers and consumers, and in the international arena it is states). Both are complex systems of fluctuating parts, where the knowledge of the totality of dispersed knowledge cannot possibly be known to a single mind. According to Hayek, in the economy the price system helps to solve this problem. This raises the question of whether there is any analogous mechanism in the international system that also solves the knowledge problem.
At first glance, it seems like there is no exact equivalent. The reason for this absence is the nature of the goods that actors pursue in each sphere of human action. In the economy, actors pursue economic gain of some sort--consumers want to consume, and producers want to profit. In the international system, actors pursue security and sovereignty. Since there is no open market where security and sovereignty are openly exchanged, there is no mechanism to determine their relative values. And yet actors still pursue these goods.
But further inquiry suggests that there is a macro-structural process in the international system which, like the price system, coordinates the activities of actors by concentrating and signaling dispersed knowledge. The candidate for this is the balance of power, which, like the price system, might be a mechanism which is an adaptation to the absence of a central mind or authority. To see how, consider what the balance power is: the distribution and asymmetrical possession of military and economic force in the system. State actors observe the balance of power similarly to how economic actors observe the price. They look for movements, and adjust their behaviour in light of the changes. If the change is favourable--that is, if a rival experiences a real reduction in power--this represents an opportunity for the pursuit of advantage. In the economy, the corresponding behaviour would be the profit maximizing opportunity that would accrue to some actors if the price of an important resource suddenly declined.
Thus both the price system and the balance of power are signaling devices that facilitate and coordinate decision making between actors pursuing some material advantage. Both are spontaneous evolutionary adaptations to the absence of an all knowing mind which can value and allocate goods according to their relative values. The main, and fundamental, difference, is the goods that are produced and exchanged. Despite this difference, the international system has a market-like quality, but rather than operating like a domestic economy, it more closely resembles a territory infested with gangs, as the following example will suggest.
Let us presume that there are 200 gangs in a city, and all are pursuing similar things like territory to pursue their illicit activities, like drug dealing and gambling. These gangs compete with each other for territory, and the security to control it. But they cannot all have the same areas. This is where force comes into the picture. In order for a gang to protect what it has, or to gain more, it needs instruments of violence. If it lacks this, it can ally with a stronger gang--for a price. The stronger party may demand some sort of payment, or some contribution to the alliance. The realization of the objectives of the gang's leaders depends on the amount of force it has, and is willing to use, and, most importantly, the extent to which it is constrained by the force possessed by other gangs. The relative distribution of forces is the main determinant of whether a gang achieves its objectives. If the gangs are roughly similar, there will be a regular shifting of constellations as they compete with each other. If, however, one gang is 20 times stronger than the rest, its objectives are not constrained by others, and it will obtain domination over most or all of the territory. Other gangs must submit or be crushed.
The similarity between gangs and states arises from the fact that both depend on instruments of violence which are used to procure goods that are exclusive: more territory and security for X means less of both for Y. Meanwhile, in the economy, actors use money to pursue goods that in principle are not exclusive: more computers for me does not mean there are fewer for you. Despite these differences, both are composed of actors pursuing material advantage in systems where the totality of the dispersed knowledge cannot be known to an all-knowing mind (the knowledge problem), and both have developed spontaneously generated adaptive mechanisms that help to turn the dispersed knowledge into a single value that is also a signaling device which coordinates the activities of actors. For the economy, it is the price; for the international system, it is the balance of power.
But further inquiry suggests that there is a macro-structural process in the international system which, like the price system, coordinates the activities of actors by concentrating and signaling dispersed knowledge. The candidate for this is the balance of power, which, like the price system, might be a mechanism which is an adaptation to the absence of a central mind or authority. To see how, consider what the balance power is: the distribution and asymmetrical possession of military and economic force in the system. State actors observe the balance of power similarly to how economic actors observe the price. They look for movements, and adjust their behaviour in light of the changes. If the change is favourable--that is, if a rival experiences a real reduction in power--this represents an opportunity for the pursuit of advantage. In the economy, the corresponding behaviour would be the profit maximizing opportunity that would accrue to some actors if the price of an important resource suddenly declined.
Thus both the price system and the balance of power are signaling devices that facilitate and coordinate decision making between actors pursuing some material advantage. Both are spontaneous evolutionary adaptations to the absence of an all knowing mind which can value and allocate goods according to their relative values. The main, and fundamental, difference, is the goods that are produced and exchanged. Despite this difference, the international system has a market-like quality, but rather than operating like a domestic economy, it more closely resembles a territory infested with gangs, as the following example will suggest.
Let us presume that there are 200 gangs in a city, and all are pursuing similar things like territory to pursue their illicit activities, like drug dealing and gambling. These gangs compete with each other for territory, and the security to control it. But they cannot all have the same areas. This is where force comes into the picture. In order for a gang to protect what it has, or to gain more, it needs instruments of violence. If it lacks this, it can ally with a stronger gang--for a price. The stronger party may demand some sort of payment, or some contribution to the alliance. The realization of the objectives of the gang's leaders depends on the amount of force it has, and is willing to use, and, most importantly, the extent to which it is constrained by the force possessed by other gangs. The relative distribution of forces is the main determinant of whether a gang achieves its objectives. If the gangs are roughly similar, there will be a regular shifting of constellations as they compete with each other. If, however, one gang is 20 times stronger than the rest, its objectives are not constrained by others, and it will obtain domination over most or all of the territory. Other gangs must submit or be crushed.
The similarity between gangs and states arises from the fact that both depend on instruments of violence which are used to procure goods that are exclusive: more territory and security for X means less of both for Y. Meanwhile, in the economy, actors use money to pursue goods that in principle are not exclusive: more computers for me does not mean there are fewer for you. Despite these differences, both are composed of actors pursuing material advantage in systems where the totality of the dispersed knowledge cannot be known to an all-knowing mind (the knowledge problem), and both have developed spontaneously generated adaptive mechanisms that help to turn the dispersed knowledge into a single value that is also a signaling device which coordinates the activities of actors. For the economy, it is the price; for the international system, it is the balance of power.
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