Knowledge problem

The knowledge problem is an argument in economics, developed by Friedrich Hayek in his 1945 essay "The Use of Knowledge in Society," that the information needed to allocate resources efficiently is scattered among millions of people and often tacit or local, so it cannot be collected by any central authority.

According to Hayek, market prices act as signals that summarize that information and coordinate decisions without anyone needing to understand the whole. It built on Ludwig von Mises's 1920 argument that without market prices for capital goods a socialist economy could not calculate costs rationally, in what became the "socialist calculation debate." Economists such as Oskar Lange argued in reply that planners could simulate markets.

Conservatives and libertarians use the point against central planning, price controls and large regulatory programs, and the collapse of the Soviet economy is often cited as evidence. Critics note that modern computing and data may enable better planning, that large firms plan internally and that markets themselves can fail. The idea remains central in austrian economics and to the argument about socialism and spontaneous order.