We are all experts of some kind. I know this sounds like fortune cookie philosophy, but it’s founded on an important economic insight: local knowledge.
F. A. Hayek wrote extensively on the use of knowledge in society, even awarding one of his most famous papers that very title. Why can’t a single group of really smart individuals simply set up and run an entire economy? Hayek wrestled with this question when he considered the idea of local knowledge.
Let’s consider a specific part of the economy: restaurants.
Guy Fieri travels from city to city reviewing local restaurants and finding hidden gems. If he were to travel to every restaurant in the U.S., would he have enough local knowledge to control the whole restaurant industry to do as well or better than the market does today?
Guy Fieri might be brilliant. He can even hire Gordon Ramsay to make sure that all food is the best quality. He can gather all the best chefs in the world under the Flavortown division of the government, but it would still be impossible for them to capture all of our local knowledge. To show why it’s impossible to gather local knowledge, let’s think about where we’re going for dinner.
I’m typing this at 5 PM, and I honestly couldn’t tell you what I want for dinner right now. If a Flavortown representative were to show up at my front door right now and ask me what food I would like for the rest of the week, I could offer some rough guesses, at best. Don’t even try asking the exact price for I value those different kinds of foods!
This is because a lot of our knowledge is difficult to put into words. Have you ever gotten frustrated trying to explain how to do something to a friend and giving up by saying, “Gosh, just let me show you!”? This can be like trying to teach someone how to ride a bike, or Kevin trying to teach me how to cook his famous rice. You can give basic directions such as “put these spices in” or “make sure to balance”, but you’re still missing something. There’s a hidden knowledge that we only know the instant we do something. Often, the same is true of when we go to a restaurant and choose the food we want.
Local knowledge is also constantly changing. The instant I answered those questions, some of my preferences would have changed. I might have said I preferred home cooked meals and fancy sit down restaurants. However, tomorrow when I’m frantically finishing up another blog post my demand for Chinese take out suddenly increases drastically. What’s more, most days I might value eggs and pancakes in the morning, but what about those breakfast cravings for dinner? You know what I’m talking about.
Sadly, this all adds up to failure for Fieri. He can visit all the diners, drive-ins, and dives he wants and poll every person in the U.S., but he won’t get all the local knowledge he needs to make the right decisions. Not only that, but all of his information on what restaurants would work would be significantly outdated by the time he finishes his examinations. The Flavortown division of government would be a massive failure that simply guesses (and misses) at local knowledge.
Regardless, Hayek’s contribution on the importance of local knowledge is incredible and revolutionary. The idea of local knowledge has changed how we view any big picture economic moves, and makes us more skeptical of a single move towards widespread change. Next time you’re eating the meal you want at the price you’re happy with, be thankful that Guy Fieri isn’t in charge of it all.