Question

a) According to Hayek, what is the problem we try to solve “to construct a rational economic order”?

b) What does Hayek mean by the knowledge problem?

c) What is the role prices in the market process?

Answer 1

a) According to Hayek, what is the problem we try to solve “to construct a rational economic order”?

According to Hayek if all the relevant information is possessed, then with a provided system of preferences we can start from, and if we command the entire knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumption. The conditions which the solution of this optimum concern needs to satisfy have been fully worked out and should be expressed best in mathematical form

b) What does Hayek mean by the knowledge problem?

As per Hayek, there are two types of knowledge in the world namely - expert knowledge and knowledge of circumstance. Expert knowledge is cultivated by experts and knowledge of circumstance exists in the individuals mind. Hayek believed economics was going astray, as it had overemphasized the significance of expert knowledge and forgotten all about the circumstance knowledge. The method by which such knowledge can be made as widely available as possible is precisely the problem of knowledge which has to be resolved.

c) What is the role prices in the market process?

According to Hayek, the price system is remarkably efficient in communicating an immense quantity of practical knowledge with a way of a set of numbers.