The knowledge problem

One thing anti-market types don't seem to get is the importance of being able to coordinate diffuse private knowledge. Markets are surprisingly good at this, governments are not. This is part of what is known as the "Knowledge Problem". The knowledge problem in fact has has two main components:

• Complexity knowledge problem: The difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge
• Contextual knowledge problem: The epistemic fact that some knowledge relevant to such coordination does not exist outside of the market context; such knowledge is either created in the process of market interaction, tacit knowledge that is not consciously known, or inarticulate knowledge that is difficult to express or aggregate.

Lynne Kiesling of Northwestern University and the Knowledge Problem blog has a recent article surveying the literature on the Knowledge Problem. The abstract reads,

Hayek's (1945) elaboration of the difficulty of aggregating diffuse private knowledge is the best-known articulation of the knowledge problem, and is an example of the difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge; prices communicate some of this private knowledge and thus serve as knowledge surrogates. The knowledge problem has a deep provenance in economics and epistemology. Subsequent scholars have also developed the knowledge problem in various directions, and have applied it to areas such as robust political economy. In fact, the knowledge problem is a deep epistemological challenge, one with which several scholars in the Austrian tradition have grappled. This essay analyzes the development of the knowledge problem in its two main categories: the complexity knowledge problem (coordination in the face of diffuse private knowledge) and the contextual knowledge problem (some knowledge relevant to such coordination does not exist outside of the market context). It also provides an overview of the development of the knowledge problem as a concept that has both complexity and epistemic dimensions, the knowledge problemʼs relation to and differences from modern game theory and mechanism design, and its implications for institutional design and robust political economy.