Hayek, The Knowledge Problem and the failure of the Welfare State

In preparation for an upcoming Colloquium sponsored by Liberty Fund and Universidad Francisco Marroquín of Guatemala, I am currently reading selections of F.A. Hayek’s Constitution of Liberty. While reading these selections, a particular paragraph caught my attention, which is the following:

    “The enemies of liberty have always based their arguments on the contention that order in human affairs requires that some (central authority) should give orders and others obey. Much of the opposition to a system of freedom under general law arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence. One of the achievements of economic theory has been to explain how such mutual adjustment of the spontaneous activities of individuals is brought about by the market, provided that there is a known delimitation of the sphere of control of each individual. An understanding of that mechanism of mutual adjustment of individuals forms the most important part of the knowledge that ought to enter into the making of general rules limiting individual action”.[1]

              I find this particular paragraph from Hayek extremely relevant today (as it was around the time that this book was written), particularly when it comes to analyzing the failures of state interventions designed to centrally plan the lives of individuals and that of the economic sphere. The lessons from the failures of Socialism, which became all too evident in the social-economic-political sphere of Eastern European nations in the past with the disintegration of the Soviet Union, as well as present day cases such as in Venezuela, have been apprehended by the majority of individuals, nations and governments today’s world. However, in today’s modern economic and political system, the failure of Socialism has been accompanied by the crisis of the Welfare State. The type of interventionism that is the basis of the welfare state and that has extended to western nations suffer from the same intellectual error that eastern nations suffered under Socialism, albeit with a lower degree of coercion. This intellectual error consists essentially in what Hayek describes in the above mentioned paragraph from the Constitution of Liberty, which is what economists today define as “The Knowledge Problem”.


              The “Knowledge Problem” consists in the impossibility that politicians, bureaucrats and social engineers have, albeit their good intentions, to acquire the necessary information and knowledge that is dispersed in the millions of actors and individuals that conform society. The central planner is presented with a situation of “ineradicable ignorance”. This is why it is impossible to improve social coordination and society’s welfare through coercion, which in the end is the basis of the welfare state.

              Just as with socialism, the welfare state represents an intellectual error, because it becomes impossible for the central planner to acquire the necessary information and commands that are necessary to coordinate society. There are four reasons why this is the case:[2]

  1. Volume: It is impossible for the central planner (government, etc), to assimilate consciously all the enormous volume of practical information which is dispersed in the minds of human beings.

  2. This type of information is tacit: It is essentially nontransferable to the government, central planner and to any authority.

  3. Entrepreneurship as a discovery process: It is impossible for this knowledge and information to be transmitted when it has not been discovered previously. Knowledge and information is discovered by entrepreneurs and human actors through the market process guided by the price system.

  4. Coercion: Coercion which is the main characteristic of interventionism impedes the social process of discovery and the creation of necessary information for coordination of society that it is carried out by entrepreneurs in society.

     Just as with socialism, the welfare state suffers from the same flaws, and it is important to recognize it, so that discussions about public policy and reforms to the welfare state become productive not only in the short term but in the long term.

       I finish this post with another paragraph from Hayek’s Constitution of Liberty, which I find fits the analysis written:

       “Such an order involving an adjustment to circumstances, knowledge of which is dispersed among a great many people, cannot be established by central direction. It can arise only from the mutual adjustment of the elements and their response to the events that act immediately upon them. It is what M. Polanyi has called the spontaneous formation of a “polycentric order”: When order is achieved among human beings by allowing them to interact with each other on their own initiative – subject only to the laws which uniformly apply to all of them – we have a system of spontaneous order in society. We may say that the efforts of these individuals are co-ordinated by exercising their individual initiative and that this self-co-ordination justifies this liberty of public grounds. The actions of such individuals are said to be free, for they are not determined by any specific command, whether of a superior of a public authority”[3]

Constitution of Liberty


[1] Hayek, F.A. The Constitution of Liberty. The Collected works of F.A. Hayek. Pages 228-229. Chicago University Press.

[2] For a more detailed explanation of Hayek’s Knowledge Problem, refer to Hayek’s Fatal Conceit and Jesus Huerta de Soto’s Socialismo, Cálculo Económico y Función Empresarial.

[3] Hayek, F.A. The Constitution of Liberty. The Collected works of F.A. Hayek. Page 230. Chicago University Press.



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