It’s become fashionable among economists to refer to knowledge as a silver-bullet explanation for all kinds of phenomena and processes. Whereas Hayek (and Hayekians) is known for the “knowledge problem,” mainstreamers, too, rely on a vague conceptualization of knowledge (specifically, the lack thereof) to explain important economic processes. Both exogenous and endogenous growth theories, for example, suggest “knowledge” explains an economy’s growth and, thus, society’s prosperity.
Knowledge is certainly important for all kinds of things. The lack of knowledge, after all, is ignorance—and ignorance is not an appropriate means for anything. However, knowledge is problematic for two main reasons: the concept is poorly (too broadly, meaning indistinctly) defined and it is, from the perspective of value, trivial and insignificant.
There should be no doubt that knowledge of things, such as technological knowledge, is helpful in the production of goods. Knowledge of effective production techniques is greatly expanded through the adoption and intensification of the division of labor. Knowledge is also a necessary component to automate production processes and relieve labor by developing productive capital (tools, machines, etc.).
Similarly with scientific knowledge, which underlies, informs, and inspires technologies used in production. Such knowledge suggests to us—as producers—what is possible and, therefore, what solutions we can reasonably produce.
Mises discusses both scientific and technological knowledge in Human Action. They are certainly important both for the economy and society. In retrospect, it seems society’s prosperity correlates with (or perhaps was caused by) the accumulation of knowledge, especially as “embodied in capital” (as it is commonly expressed). However, correlation, we are often reminded, does not imply causation. This is the case here, which economists should be the first to recognize.
Society (civilization) benefits from—but ultimately does not rest on—knowledge. Whereas there is more knowledge in the world today, and we are overall more civilized than previously, this is mere correlation. What makes society prosperous and civilized is, as Mises reminds us, a matter of production under the division of labor. The division of labor is intensified as entrepreneurs imagine and attempt new ways of producing goods—and new goods to provide consumers. Technological knowledge is here helpful, because it allows the entrepreneur to figure out what is possible. But such knowledge is a matter of cost. The aim of entrepreneurship, and thus what drives the economy, is not cost, but value. Mises notes:
Technology and the considerations derived from it would be of little use for acting man if it were impossible to introduce into their schemes the money prices of goods and services. The projects and designs of engineers would be purely academic if they could not compare input and output on a common basis. The lofty theorist in the seclusion of his laboratory does not bother about such trifling things; what he is searching for is causal relations between various elements of the universe. But the practical man, eager to improve human conditions by removing uneasiness as far as possible, must know whether, under given conditions, what he is planning is the best method, or even a method, to make people less uneasy. He must know whether what he wants to achieve will be an improvement when compared with the present state of affairs and with the advantages to be expected from the execution of other technically realizable projects which cannot be put into execution if the project he has in mind absorbs the available means. Such comparisons can only be made by the use of money prices.
What Mises points to here is that technology—indeed, the knowledge thereof—is not actually helpful in deciding what projects to undergo, what products to produce, or how to best use scarce resources. In fact, more knowledge of what is possible only increases the number of possible ways one can act. But it does not provide any indication of which one is (will be) of greater value. As Mises notes regarding financial reporting, which supports delegated decision-making within firms:
Any assistance given to the entrepreneur in this regard is of ancillary character only; he takes information about the past state of affairs from experts in the fields of law, statistics, and technology; but the final decision implying a judgment about the future state of the market rests with him alone.
It is the entrepreneur’s judgment of value that explains his or her actions. And it is all entrepreneurs’ respective judgments of their projects’ value-creative capacity that justifies their bidding for factors of production and, consequently, determines their market prices. Value, as Menger taught us, is unknown and, therefore, uncertain until a good is used by a consumer. Consequently, knowledge can play little (if any) role in directing the market process, which is motivated, inspired, and directed by expectations of creating value.
Knowledge, we must therefore conclude, is not “the” problem of the economy. Lack of knowledge of course affects actors, much like lack of resources does, but it is actors’ ingenuity and imagination that constructs for them visions of value, which they seek to attain using the knowledge at hand. Technological knowledge does not cause—or even direct—value creation. And knowledge of value is generated through consumption, at which point that particular knowledge is already obsolete—it cannot guide (but may inspire) production efforts.
Value knowledge is only useful in action under static circumstances. That is, in the Evenly Rotating Economy (ERE) or general equilibrium. It is impotent in the real world.
