Saturday, April 23, 2011

Hayekian Insights Into Knowledge

"such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable." -- F. A. Hayek

Every company of course has to keep this in mind when dealing with the market. Competition is, of course, a discovery process, so the unknowns eventually become knowns through market competition. Competition creates more opportunities for profit, not less.

At the organizational level, the heads of small firms and their employees may be able to fully know all that is going on in the firm, but the larger the firm grows, the less likely this is to be the case. The larger the firm is, the more one has to rely on employees' local knowledge.

Depending on the size and complexity of the firm, different kinds of organizational structures are needed to facilitate the creation and transmission of knowledge in the firm. Rigid hierarchies are not always best or most efficient. Larger firms, though not themselves spontaneous orders, can nevertheless use some of the lessons learned from understanding spontaneous orders to harness the full potential of each and every employee.

Even so, one cannot expect to accurately measure the degree to which such efficiency develops. There is more and less, but whether perfect efficiency is reached (or can be reached) is impossible to know. What we can know, however, is what kinds of structures work best.

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