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<h1 class="title">The Use of Knowledge in Society</h1>
<p>AER, 1945
</p>
<div id="table-of-contents">
<h2>Table of Contents</h2>
<div id="text-table-of-contents">
<ul>
<li><a href="#sec-1">1 I</a></li>
<li><a href="#sec-2">2 II</a></li>
<li><a href="#sec-3">3 III</a></li>
<li><a href="#sec-4">4 IV</a></li>
<li><a href="#sec-5">5 V</a></li>
<li><a href="#sec-6">6 VI</a></li>
<li><a href="#sec-7">7 VII</a></li>
<li><a href="#sec-8">8 Notes for this chapter</a></li>
</ul>
</div>
</div>
<div id="outline-container-1" class="outline-2">
<h2 id="sec-1"><span class="section-number-2">1</span> I</h2>
<div class="outline-text-2" id="text-1">
<p> What is the problem we wish to solve when we try to construct a rational
economic order? On certain familiar assumptions the answer is simple enough.
If we possess all the relevant information, if we can start out from a given
system of preferences, and if we command complete 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 assumptions. The conditions which the solution of this optimum
problem must satisfy have been fully worked out and can be stated best in
mathematical form: put at their briefest, they are that the marginal rates
of substitution between any two commodities or factors must be the same in
all their different uses.
</p>
<p>
This, however, is emphatically not the economic problem which society faces.
And the economic calculus which we have developed to solve this logical
problem, though an important step toward the solution of the economic
problem of society, does not yet provide an answer to it. The reason for
this is that the "data" from which the economic calculus starts are never
for the whole society "given" to a single mind which could work out the
implications and can never be so given.
</p>
<p>
The peculiar character of the problem of a rational economic order is
determined precisely by the fact that the knowledge of the circumstances of
which we must make use never exists in concentrated or integrated form but
solely as the dispersed bits of incomplete and frequently contradictory
knowledge which all the separate individuals possess. The economic problem
of society is thus not merely a problem of how to allocate "given"
resources—if "given" is taken to mean given to a single mind which
deliberately solves the problem set by these "data." It is rather a problem
of how to secure the best use of resources known to any of the members of
society, for ends whose relative importance only these individuals know. Or,
to put it briefly, it is a problem of the utilization of knowledge which is
not given to anyone in its totality.
</p>
<p>
This character of the fundamental problem has, I am afraid, been obscured
rather than illuminated by many of the recent refinements of economic
theory, particularly by many of the uses made of mathematics. Though the
problem with which I want primarily to deal in this paper is the problem of
a rational economic organization, I shall in its course be led again and
again to point to its close connections with certain methodological
questions. Many of the points I wish to make are indeed conclusions toward
which diverse paths of reasoning have unexpectedly converged. But, as I now
see these problems, this is no accident. It seems to me that many of the
current disputes with regard to both economic theory and economic policy
have their common origin in a misconception about the nature of the economic
problem of society. This misconception in turn is due to an erroneous
transfer to social phenomena of the habits of thought we have developed in
dealing with the phenomena of nature.
</p></div>
</div>
<div id="outline-container-2" class="outline-2">
<h2 id="sec-2"><span class="section-number-2">2</span> II</h2>
<div class="outline-text-2" id="text-2">
<p> In ordinary language we describe by the word "planning" the complex of
interrelated decisions about the allocation of our available resources. All
economic activity is in this sense planning; and in any society in which
many people collaborate, this planning, whoever does it, will in some
measure have to be based on knowledge which, in the first instance, is not
given to the planner but to somebody else, which somehow will have to be
conveyed to the planner. The various ways in which the knowledge on which
people base their plans is communicated to them is the crucial problem for
any theory explaining the economic process, and the problem of what is the
best way of utilizing knowledge initially dispersed among all the people is
at least one of the main problems of economic policy—or of designing an
efficient economic system.
</p>
<p>
The answer to this question is closely connected with that other question
which arises here, that of who is to do the planning. It is about this
question that all the dispute about "economic planning" centers. This is not
a dispute about whether planning is to be done or not. It is a dispute as to
whether planning is to be done centrally, by one authority for the whole
economic system, or is to be divided among many individuals. Planning in the
specific sense in which the term is used in contemporary controversy
necessarily means central planning—direction of the whole economic system
according to one unified plan. Competition, on the other hand, means
decentralized planning by many separate persons. The halfway house between
the two, about which many people talk but which few like when they see it,
is the delegation of planning to organized industries, or, in other words,
monopoly.
</p>
<p>
Which of these systems is likely to be more efficient depends mainly on the
question under which of them we can expect that fuller use will be made of
the existing knowledge. And this, in turn, depends on whether we are more
likely to succeed in putting at the disposal of a single central authority
all the knowledge which ought to be used but which is initially dispersed
among many different individuals, or in conveying to the individuals such
additional knowledge as they need in order to enable them to fit their plans
with those of others.
</p></div>
</div>
<div id="outline-container-3" class="outline-2">
<h2 id="sec-3"><span class="section-number-2">3</span> III</h2>
<div class="outline-text-2" id="text-3">
<p> It will at once be evident that on this point the position will be different
with respect to different kinds of knowledge; and the answer to our question
will therefore largely turn on the relative importance of the different
kinds of knowledge; those more likely to be at the disposal of particular
individuals and those which we should with greater confidence expect to find
in the possession of an authority made up of suitably chosen experts. If it
is today so widely assumed that the latter will be in a better position,
this is because one kind of knowledge, namely, scientific knowledge,
occupies now so prominent a place in public imagination that we tend to
forget that it is not the only kind that is relevant. It may be admitted
that, as far as scientific knowledge is concerned, a body of suitably chosen
experts may be in the best position to command all the best knowledge
available—though this is of course merely shifting the difficulty to the
problem of selecting the experts. What I wish to point out is that, even
assuming that this problem can be readily solved, it is only a small part of
the wider problem.
</p>
<p>
Today it is almost heresy to suggest that scientific knowledge is not the
sum of all knowledge. But a little reflection will show that there is beyond
question a body of very important but unorganized knowledge which cannot
possibly be called scientific in the sense of knowledge of general rules:
the knowledge of the particular circumstances of time and place. It is with
respect to this that practically every individual has some advantage over
all others because he possesses unique information of which beneficial use
might be made, but of which use can be made only if the decisions depending
on it are left to him or are made with his active coöperation. We need to
remember only how much we have to learn in any occupation after we have
completed our theoretical training, how big a part of our working life we
spend learning particular jobs, and how valuable an asset in all walks of
life is knowledge of people, of local conditions, and of special
circumstances. To know of and put to use a machine not fully employed, or
somebody's skill which could be better utilized, or to be aware of a surplus
stock which can be drawn upon during an interruption of supplies, is
socially quite as useful as the knowledge of better alternative techniques.
And the shipper who earns his living from using otherwise empty or
half-filled journeys of tramp-steamers, or the estate agent whose whole
knowledge is almost exclusively one of temporary opportunities, or the
arbitrageur who gains from local differences of commodity prices, are all
performing eminently useful functions based on special knowledge of
circumstances of the fleeting moment not known to others.
</p>
<p>
It is a curious fact that this sort of knowledge should today be generally
regarded with a kind of contempt and that anyone who by such knowledge gains
an advantage over somebody better equipped with theoretical or technical
knowledge is thought to have acted almost disreputably. To gain an advantage
from better knowledge of facilities of communication or transport is
sometimes regarded as almost dishonest, although it is quite as important
that society make use of the best opportunities in this respect as in using
the latest scientific discoveries. This prejudice has in a considerable
measure affected the attitude toward commerce in general compared with that
toward production. Even economists who regard themselves as definitely
immune to the crude materialist fallacies of the past constantly commit the
same mistake where activities directed toward the acquisition of such
practical knowledge are concerned—apparently because in their scheme of
things all such knowledge is supposed to be "given." The common idea now
seems to be that all such knowledge should as a matter of course be readily
at the command of everybody, and the reproach of irrationality leveled
against the existing economic order is frequently based on the fact that it
is not so available. This view disregards the fact that the method by which
such knowledge can be made as widely available as possible is precisely the
problem to which we have to find an answer.
</p></div>
</div>
<div id="outline-container-4" class="outline-2">
<h2 id="sec-4"><span class="section-number-2">4</span> IV</h2>
<div class="outline-text-2" id="text-4">
<p> If it is fashionable today to minimize the importance of the knowledge of
the particular circumstances of time and place, this is closely connected
with the smaller importance which is now attached to change as such. Indeed,
there are few points on which the assumptions made (usually only implicitly)
by the "planners" differ from those of their opponents as much as with
regard to the significance and frequency of changes which will make
substantial alterations of production plans necessary. Of course, if
detailed economic plans could be laid down for fairly long periods in
advance and then closely adhered to, so that no further economic decisions
of importance would be required, the task of drawing up a comprehensive plan
governing all economic activity would be much less formidable.
</p>
<p>
It is, perhaps, worth stressing that economic problems arise always and only
in consequence of change. So long as things continue as before, or at least
as they were expected to, there arise no new problems requiring a decision,
no need to form a new plan. The belief that changes, or at least day-to-day
adjustments, have become less important in modern times implies the
contention that economic problems also have become less important. This
belief in the decreasing importance of change is, for that reason, usually
held by the same people who argue that the importance of economic
considerations has been driven into the background by the growing importance
of technological knowledge.
</p>
<p>
Is it true that, with the elaborate apparatus of modern production, economic
decisions are required only at long intervals, as when a new factory is to
be erected or a new process to be introduced? Is it true that, once a plant
has been built, the rest is all more or less mechanical, determined by the
character of the plant, and leaving little to be changed in adapting to the
ever-changing circumstances of the moment?
</p>
<p>
The fairly widespread belief in the affirmative is not, as far as I can
ascertain, borne out by the practical experience of the businessman. In a
competitive industry at any rate—and such an industry alone can serve as a
test—the task of keeping cost from rising requires constant struggle,
absorbing a great part of the energy of the manager. How easy it is for an
inefficient manager to dissipate the differentials on which profitability
rests, and that it is possible, with the same technical facilities, to
produce with a great variety of costs, are among the commonplaces of
business experience which do not seem to be equally familiar in the study of
the economist. The very strength of the desire, constantly voiced by
producers and engineers, to be allowed to proceed untrammeled by
considerations of money costs, is eloquent testimony to the extent to which
these factors enter into their daily work.
</p>
<p>
One reason why economists are increasingly apt to forget about the constant
small changes which make up the whole economic picture is probably their
growing preoccupation with statistical aggregates, which show a very much
greater stability than the movements of the detail. The comparative
stability of the aggregates cannot, however, be accounted for—as the
statisticians occasionally seem to be inclined to do—by the "law of large
numbers" or the mutual compensation of random changes. The number of
elements with which we have to deal is not large enough for such accidental
forces to produce stability. The continuous flow of goods and services is
maintained by constant deliberate adjustments, by new dispositions made
every day in the light of circumstances not known the day before, by B
stepping in at once when A fails to deliver. Even the large and highly
mechanized plant keeps going largely because of an environment upon which it
can draw for all sorts of unexpected needs; tiles for its roof, stationery
for its forms, and all the thousand and one kinds of equipment in which it
cannot be self-contained and which the plans for the operation of the plant
require to be readily available in the market.
</p>
<p>
This is, perhaps, also the point where I should briefly mention the fact
that the sort of knowledge with which I have been concerned is knowledge of
the kind which by its nature cannot enter into statistics and therefore
cannot be conveyed to any central authority in statistical form. The
statistics which such a central authority would have to use would have to be
arrived at precisely by abstracting from minor differences between the
things, by lumping together, as resources of one kind, items which differ as
regards location, quality, and other particulars, in a way which may be very
significant for the specific decision. It follows from this that central
planning based on statistical information by its nature cannot take direct
account of these circumstances of time and place and that the central
planner will have to find some way or other in which the decisions depending
on them can be left to the "man on the spot."
</p></div>
</div>
<div id="outline-container-5" class="outline-2">
<h2 id="sec-5"><span class="section-number-2">5</span> V</h2>
<div class="outline-text-2" id="text-5">
<p> If we can agree that the economic problem of society is mainly one of rapid
adaptation to changes in the particular circumstances of time and place, it
would seem to follow that the ultimate decisions must be left to the people
who are familiar with these circumstances, who know directly of the relevant
changes and of the resources immediately available to meet them. We cannot
expect that this problem will be solved by first communicating all this
knowledge to a central board which, after integrating all knowledge, issues
its orders. We must solve it by some form of decentralization. But this
answers only part of our problem. We need decentralization because only thus
can we insure that the knowledge of the particular circumstances of time and
place will be promptly used. But the "man on the spot" cannot decide solely
on the basis of his limited but intimate knowledge of the facts of his
immediate surroundings. There still remains the problem of communicating to
him such further information as he needs to fit his decisions into the whole
pattern of changes of the larger economic system.
</p>
<p>
How much knowledge does he need to do so successfully? Which of the events
which happen beyond the horizon of his immediate knowledge are of relevance
to his immediate decision, and how much of them need he know?
</p>
<p>
There is hardly anything that happens anywhere in the world that might not
have an effect on the decision he ought to make. But he need not know of
these events as such, nor of all their effects. It does not matter for him
why at the particular moment more screws of one size than of another are
wanted, why paper bags are more readily available than canvas bags, or why
skilled labor, or particular machine tools, have for the moment become more
difficult to obtain. All that is significant for him is how much more or
less difficult to procure they have become compared with other things with
which he is also concerned, or how much more or less urgently wanted are the
alternative things he produces or uses. It is always a question of the
relative importance of the particular things with which he is concerned, and
the causes which alter their relative importance are of no interest to him
beyond the effect on those concrete things of his own environment.
</p>
<p>
It is in this connection that what I have called the "economic calculus"
proper helps us, at least by analogy, to see how this problem can be solved,
and in fact is being solved, by the price system. Even the single
controlling mind, in possession of all the data for some small,
self-contained economic system, would not—every time some small adjustment
in the allocation of resources had to be made—go explicitly through all the
relations between ends and means which might possibly be affected. It is
indeed the great contribution of the pure logic of choice that it has
demonstrated conclusively that even such a single mind could solve this kind
of problem only by constructing and constantly using rates of equivalence
(or "values," or "marginal rates of substitution"), i.e., by attaching to
each kind of scarce resource a numerical index which cannot be derived from
any property possessed by that particular thing, but which reflects, or in
which is condensed, its significance in view of the whole means-end
structure. In any small change he will have to consider only these
quantitative indices (or "values") in which all the relevant information is
concentrated; and, by adjusting the quantities one by one, he can
appropriately rearrange his dispositions without having to solve the whole
puzzle ab initio or without needing at any stage to survey it at once in all
its ramifications.
</p>
<p>
Fundamentally, in a system in which the knowledge of the relevant facts is
dispersed among many people, prices can act to coördinate the separate
actions of different people in the same way as subjective values help the
individual to coördinate the parts of his plan. It is worth contemplating
for a moment a very simple and commonplace instance of the action of the
price system to see what precisely it accomplishes. Assume that somewhere in
the world a new opportunity for the use of some raw material, say, tin, has
arisen, or that one of the sources of supply of tin has been eliminated. It
does not matter for our purpose—and it is very significant that it does not
matter—which of these two causes has made tin more scarce. All that the
users of tin need to know is that some of the tin they used to consume is
now more profitably employed elsewhere and that, in consequence, they must
economize tin. There is no need for the great majority of them even to know
where the more urgent need has arisen, or in favor of what other needs they
ought to husband the supply. If only some of them know directly of the new
demand, and switch resources over to it, and if the people who are aware of
the new gap thus created in turn fill it from still other sources, the
effect will rapidly spread throughout the whole economic system and
influence not only all the uses of tin but also those of its substitutes and
the substitutes of these substitutes, the supply of all the things made of
tin, and their substitutes, and so on; and all this without the great
majority of those instrumental in bringing about these substitutions knowing
anything at all about the original cause of these changes. The whole acts as
one market, not because any of its members survey the whole field, but
because their limited individual fields of vision sufficiently overlap so
that through many intermediaries the relevant information is communicated to
all. The mere fact that there is one price for any commodity—or rather that
local prices are connected in a manner determined by the cost of transport,
etc.—brings about the solution which (it is just conceptually possible)
might have been arrived at by one single mind possessing all the information
which is in fact dispersed among all the people involved in the process.
</p></div>
</div>
<div id="outline-container-6" class="outline-2">
<h2 id="sec-6"><span class="section-number-2">6</span> VI</h2>
<div class="outline-text-2" id="text-6">
<p> We must look at the price system as such a mechanism for communicating
information if we want to understand its real function—a function which, of
course, it fulfils less perfectly as prices grow more rigid. (Even when
quoted prices have become quite rigid, however, the forces which would
operate through changes in price still operate to a considerable extent
through changes in the other terms of the contract.) The most significant
fact about this system is the economy of knowledge with which it operates,
or how little the individual participants need to know in order to be able
to take the right action. In abbreviated form, by a kind of symbol, only the
most essential information is passed on and passed on only to those
concerned. It is more than a metaphor to describe the price system as a kind
of machinery for registering change, or a system of telecommunications which
enables individual producers to watch merely the movement of a few pointers,
as an engineer might watch the hands of a few dials, in order to adjust
their activities to changes of which they may never know more than is
reflected in the price movement.
</p>
<p>
Of course, these adjustments are probably never "perfect" in the sense in
which the economist conceives of them in his equilibrium analysis. But I
fear that our theoretical habits of approaching the problem with the
assumption of more or less perfect knowledge on the part of almost everyone
has made us somewhat blind to the true function of the price mechanism and
led us to apply rather misleading standards in judging its efficiency. The
marvel is that in a case like that of a scarcity of one raw material,
without an order being issued, without more than perhaps a handful of people
knowing the cause, tens of thousands of people whose identity could not be
ascertained by months of investigation, are made to use the material or its
products more sparingly; i.e., they move in the right direction. This is
enough of a marvel even if, in a constantly changing world, not all will hit
it off so perfectly that their profit rates will always be maintained at the
same constant or "normal" level.
</p>
<p>
I have deliberately used the word "marvel" to shock the reader out of the
complacency with which we often take the working of this mechanism for
granted. I am convinced that if it were the result of deliberate human
design, and if the people guided by the price changes understood that their
decisions have significance far beyond their immediate aim, this mechanism
would have been acclaimed as one of the greatest triumphs of the human mind.
Its misfortune is the double one that it is not the product of human design
and that the people guided by it usually do not know why they are made to do
what they do. But those who clamor for "conscious direction"—and who cannot
believe that anything which has evolved without design (and even without our
understanding it) should solve problems which we should not be able to solve
consciously—should remember this: The problem is precisely how to extend the
span of our utilization of resources beyond the span of the control of any
one mind; and therefore, how to dispense with the need of conscious control,
and how to provide inducements which will make the individuals do the
desirable things without anyone having to tell them what to do.
</p>
<p>
The problem which we meet here is by no means peculiar to economics but
arises in connection with nearly all truly social phenomena, with language
and with most of our cultural inheritance, and constitutes really the
central theoretical problem of all social science. As Alfred Whitehead has
said in another connection, "It is a profoundly erroneous truism, repeated
by all copy-books and by eminent people when they are making speeches, that
we should cultivate the habit of thinking what we are doing. The precise
opposite is the case. Civilization advances by extending the number of
important operations which we can perform without thinking about them." This
is of profound significance in the social field. We make constant use of
formulas, symbols, and rules whose meaning we do not understand and through
the use of which we avail ourselves of the assistance of knowledge which
individually we do not possess. We have developed these practices and
institutions by building upon habits and institutions which have proved
successful in their own sphere and which have in turn become the foundation
of the civilization we have built up.
</p>
<p>
The price system is just one of those formations which man has learned to
use (though he is still very far from having learned to make the best use of
it) after he had stumbled upon it without understanding it. Through it not
only a division of labor but also a coördinated utilization of resources
based on an equally divided knowledge has become possible. The people who
like to deride any suggestion that this may be so usually distort the
argument by insinuating that it asserts that by some miracle just that sort
of system has spontaneously grown up which is best suited to modern
civilization. It is the other way round: man has been able to develop that
division of labor on which our civilization is based because he happened to
stumble upon a method which made it possible. Had he not done so, he might
still have developed some other, altogether different, type of civilization,
something like the "state" of the termite ants, or some other altogether
unimaginable type. All that we can say is that nobody has yet succeeded in
designing an alternative system in which certain features of the existing
one can be preserved which are dear even to those who most violently assail
it—such as particularly the extent to which the individual can choose his
pursuits and consequently freely use his own knowledge and skill.
</p></div>
</div>
<div id="outline-container-7" class="outline-2">
<h2 id="sec-7"><span class="section-number-2">7</span> VII</h2>
<div class="outline-text-2" id="text-7">
<p> It is in many ways fortunate that the dispute about the indispensability of
the price system for any rational calculation in a complex society is now no
longer conducted entirely between camps holding different political views.
The thesis that without the price system we could not preserve a society
based on such extensive division of labor as ours was greeted with a howl of
derision when it was first advanced by von Mises twenty-five years ago.
Today the difficulties which some still find in accepting it are no longer
mainly political, and this makes for an atmosphere much more conducive to
reasonable discussion. When we find Leon Trotsky arguing that "economic
accounting is unthinkable without market relations"; when Professor Oscar
Lange promises Professor von Mises a statue in the marble halls of the
future Central Planning Board; and when Professor Abba P. Lerner rediscovers
Adam Smith and emphasizes that the essential utility of the price system
consists in inducing the individual, while seeking his own interest, to do
what is in the general interest, the differences can indeed no longer be
ascribed to political prejudice. The remaining dissent seems clearly to be
due to purely intellectual, and more particularly methodological,
differences.
</p>
<p>
A recent statement by Professor Joseph Schumpeter in his Capitalism,
Socialism, and Democracy provides a clear illustration of one of the
methodological differences which I have in mind. Its author is pre-eminent
among those economists who approach economic phenomena in the light of a
certain branch of positivism. To him these phenomena accordingly appear as
objectively given quantities of commodities impinging directly upon each
other, almost, it would seem, without any intervention of human minds. Only
against this background can I account for the following (to me startling)
pronouncement. Professor Schumpeter argues that the possibility of a
rational calculation in the absence of markets for the factors of production
follows for the theorist "from the elementary proposition that consumers in
evaluating ('demanding') consumers' goods ipso facto also evaluate the means
of production which enter into the production of these goods."*1
</p>
<p>
Taken literally, this statement is simply untrue. The consumers do nothing
of the kind. What Professor Schumpeter's "ipso facto" presumably means is
that the valuation of the factors of production is implied in, or follows
necessarily from, the valuation of consumers' goods. But this, too, is not
correct. Implication is a logical relationship which can be meaningfully
asserted only of propositions simultaneously present to one and the same
mind. It is evident, however, that the values of the factors of production
do not depend solely on the valuation of the consumers' goods but also on
the conditions of supply of the various factors of production. Only to a
mind to which all these facts were simultaneously known would the answer
necessarily follow from the facts given to it. The practical problem,
however, arises precisely because these facts are never so given to a single
mind, and because, in consequence, it is necessary that in the solution of
the problem knowledge should be used that is dispersed among many people.
</p>
<p>
The problem is thus in no way solved if we can show that all the facts, if
they were known to a single mind (as we hypothetically assume them to be
given to the observing economist), would uniquely determine the solution;
instead we must show how a solution is produced by the interactions of
people each of whom possesses only partial knowledge. To assume all the
knowledge to be given to a single mind in the same manner in which we assume
it to be given to us as the explaining economists is to assume the problem
away and to disregard everything that is important and significant in the
real world.
</p>
<p>
That an economist of Professor Schumpeter's standing should thus have fallen
into a trap which the ambiguity of the term "datum" sets to the unwary can
hardly be explained as a simple error. It suggests rather that there is
something fundamentally wrong with an approach which habitually disregards
an essential part of the phenomena with which we have to deal: the
unavoidable imperfection of man's knowledge and the consequent need for a
process by which knowledge is constantly communicated and acquired. Any
approach, such as that of much of mathematical economics with its
simultaneous equations, which in effect starts from the assumption that
people's knowledge corresponds with the objective facts of the situation,
systematically leaves out what is our main task to explain. I am far from
denying that in our system equilibrium analysis has a useful function to
perform. But when it comes to the point where it misleads some of our
leading thinkers into believing that the situation which it describes has
direct relevance to the solution of practical problems, it is high time that
we remember that it does not deal with the social process at all and that it
is no more than a useful preliminary to the study of the main problem.
</p>
</div>
</div>
<div id="outline-container-8" class="outline-2">
<h2 id="sec-8"><span class="section-number-2">8</span> Notes for this chapter</h2>
<div class="outline-text-2" id="text-8">
<ol>
<li>
</li>
</ol>
<p>J. Schumpeter, Capitalism, Socialism, and Democracy (New York; Harper, 1942), p. 175. Professor Schumpeter is, I believe, also the original author of the myth that Pareto and Barone have "solved" the problem of socialist calculation. What they, and many others, did was merely to state the conditions which a rational allocation of resources would have to satisfy and to point out that these were essentially the same as the conditions of equilibrium of a competitive market. This is something altogether different from knowing how the allocation of resources satisfying these conditions can be found in practice. Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical problem, in fact explicitly denies that it can be solved without the help of the market. See his Manuel d'économie pure (2d ed., 1927), pp. 233-34. The relevant passage is quoted in an English translation at the beginning of my article on "Socialist Calculation: The Competitive 'Solution,' " in Economica, New Series, Vol. VIII, No. 26 (May, 1940), p. 125.
</p>
</div>
</div>
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<p class="date">Date: 2011-11-27 13:38:45 </p>
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