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1 N.Y.U. J.L. & Liberty 205 (2005)
The Uses and Limits of Local Knowledge: A Cautionary Note on Hayek

handle is hein.journals/nyujlawlb1 and id is 217 raw text is: NYU JOURNAL OF LAW & LIBERTY THE USES AND LIMITS OF LOCAL KNOWLEDGE: A CAUTIONARY NOTE ON HAYEK Richard A. Epstein* One of Hayek's great intellectual achievements stems from his appreciation of the quiet virtues of the price system. At a time when everyone was clamoring for central planning, Hayek, writing in his classic article, The Use of Knowledge in Society,' understood the unsurpassed ability of the price system to coordinate the activities of myriads of separate individuals. Each person, in Hayek's view, pos- sesses local knowledge of his own situation, which gives him a clear sense of the costs of his factor inputs and the prices that he hopes to obtain by selling the out- puts of their deployment. The strength of the individual's convictions can be com- municated to the world by a single number-the price that is bid or asked for cer- tain commodities. These prices are, of course, not randomly generated but depend on accurate estimates of both benefits and costs. Yet no market participant has any incentive to inflate or deflate the relevant figures, because the only person who will be deceived by this action is himself. The system, moreover, is easily expandable across different markets, even when their participants operate in different lan- guages and under different cultural norms. The thicker the market, and the greater the apparent disorder, the fuller the range of options from which everyone may choose. The very informational complexity that strengthens a price system simul- taneously makes any administrative system of resource allocation balky and inef- fective. In that latter setting, parties have the great temptation to tell the tribunal just what its members want to hear, knowing that an immediate falsification of any predictions or figures is difficult if not impossible to detect. The upshot is long, tendentious, and convoluted regulatory proceedings that as often as not assign James Parker Hall Distinguished Service Professor of Law, The University of Chicago; Peter and Kirsten Bedford Senior Fellow, The Hoover Institution. 1 Friedrich A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519 (1945).

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