---
type: claim
domain: mechanisms
description: "The knowledge required for economic coordination is dispersed, tacit, and contextual -- no central planner can collect it, and no local agent possesses enough of it"
confidence: proven
source: "Hayek 'The Use of Knowledge in Society' (1945), Polanyi 'The Tacit Dimension' (1966)"
created: 2026-04-21
secondary_domains: [internet-finance, collective-intelligence, grand-strategy]
related_claims:
  - "the-efficient-market-hypothesis-fails-because-its-three-core-assumptions-rational-investors-independence-and-normal-distributions-all-fail-empirically"
  - "mechanism-design-changes-the-game-itself-to-produce-better-equilibria-rather-than-expecting-players-to-find-optimal-strategies"
  - "the-vickrey-auction-makes-honesty-the-dominant-strategy-by-paying-winners-the-second-highest-bid-rather-than-their-own"
---

# Hayek's knowledge problem reveals that economic planning requires both local and global information which are never simultaneously available to decision makers

Hayek's 1945 paper identifies the central problem of economic coordination: the knowledge required to make good allocation decisions is not concentrated anywhere. It exists in fragments -- the factory manager knows their machine's quirks, the local merchant knows their customers' habits, the farmer knows their soil. This knowledge is not just dispersed but often tacit: embodied in skills, intuitions, and practices that cannot be articulated, let alone transmitted to a central planner.

The knowledge problem is not a computing problem. It cannot be solved by faster computers or bigger databases, because the knowledge in question changes moment to moment (the "knowledge of the particular circumstances of time and place") and much of it cannot be formalized at all (Polanyi's tacit dimension). A central planner who somehow collected all current knowledge would find it obsolete before they finished collecting it.

Prices are Hayek's proposed solution: they compress dispersed local knowledge into a single number that coordinates behavior without requiring anyone to understand the whole system. When copper becomes scarce, its price rises, and every user of copper economizes -- without knowing why copper is scarce. The price system achieves coordination that central planning cannot because it transmits the relevant summary statistic without requiring transmission of the underlying knowledge.

But prices are lossy. They compress too much. A price rise tells you something is scarce but not why, not for how long, not whether the scarcity reflects genuine resource constraints or speculative manipulation. The price of healthcare doesn't tell you whether high cost reflects genuine complexity or regulatory capture. This is where Hayek's insight becomes a challenge for markets, not just for planning: prices solve the coordination problem approximately, not perfectly, and the approximation fails precisely where the distinction between signal and noise matters most.

The deep implication: any governance system must either (a) centralize and lose local knowledge, or (b) decentralize and lose global coherence. Markets choose (b). Planning chooses (a). Mechanism design attempts to create structures where agents voluntarily reveal local knowledge in service of global coordination -- futarchy, Vickrey auctions, and prediction markets are all attempts to solve Hayek's problem without accepting either horn of the dilemma.

## Evidence
- Hayek (1945) "The Use of Knowledge in Society" -- the foundational statement
- Polanyi (1966) "The Tacit Dimension" -- formalizes why much knowledge cannot be articulated
- Soviet economic planning failure -- the canonical empirical case; Gosplan's inability to set 24 million prices produced systematic misallocation
- Walmart supply chain vs. Soviet planning -- Walmart's decentralized supply chain outperforms centralized alternatives by incorporating local store-level demand signals that central warehouses cannot observe

## Challenges
- Large language models may partially solve the tacit knowledge problem by encoding patterns that humans cannot articulate -- this would narrow (not eliminate) the knowledge gap
- Platform monopolies (Amazon, Google) aggregate more local knowledge than Hayek thought possible, partially centralizing what he argued was uncentralizable
