Tuesday, February 2, 2010

It takes a leap of imagination, or at least a suspension of disbelief, to consider that knowledge passes most freely when unstructured and decentralized. It’s gratifying to think of knowledge as a triumph of structure, organization and canon; the traditional exchange between student and teacher. Yet the astounding majority of our knowledge is not stored in hallowed institutions, it is in the dirty palms of a customer or in the profit margins of a balance sheet, these anti-institutions are the true sum of our parts.

To calculate the price of a good or service is to account for every bit of knowledge that was applied to its existence, from the machines that mined the metal to the factory that stamps the cup, this addition of value is knowledge exchange at its most basic. Hayek pushes this concept further by arguing that supply and demand is in itself a conduit of knowledge, we inherently respond to a changes in price, and thus communication has occurred. As an analogy, Hayek explains that a consumer of tin may see a rise in price, letting her know it has become scarcer or it has found a better use elsewhere, so she must therefore use tin more economically. Even the plainest English could not make it clearer. The exchange of information does not stop there, it spreads through the entire system affecting all the consumers and suppliers of the commodity, and furthermore affects the substitutes, and the substitutes of substitutes. Economic exchanges are communicative, currency and value the universal language.

It is only human nature to want to harness this phenomenal system, to direct it, edify it and wield it. Yet, I can only agree with Hayek, and other free market fanatics that this would simply undo the very stitching holding this radical system together. Peer to peer exchanges (i.e. consumer to producer) decline in efficiency as their path of exchange becomes less direct. In healthy systems, transmission occurs in a series of horizontal exchanges—the most direct path. When the forces of centralization wedge themselves into an exchange, the transmission of knowledge (money or goods and services) no longer travels in a horizontal path, but must travel vertically, up the hierarchy and towards the center axis before trickling back down, and only then is the exchange complete. Additionally, a decentralized system ebbs and flows. New more efficient paths are constantly being formed while less efficient paths are abandoned, this natural selection is something highly centralized, planned and controlled economies cannot replicate. The robust dynamism of the world economic order exists because of, not in spite of, its decentralized nature.

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