Wednesday, February 9, 2011

Hayek Makes the All-Time Top 20

The American Economic Review is celebrating its 100th anniversary with a special issue commemorating the top 20 papers of the past century.

Friedrich Hayek's 1945 article, The Use of Knowledge in Society, was among those chosen. In this article, Hayek explains the importance of price signals in making economic decisions. Hayek considered prices signals as the solution to the problem of the allocation of resources when knowledge is not given to anyone in its totality.

For example, you don't need to know the exact amount of caviar in the world to know that it is a very scarce item. The price tells you that. In the same way, prices signal that sugar is not as scarce a commodity, even if you don't the exact amount of sugar in the world. The price of a candy bar will tell you that. Consequently, your economic allocation decisions will be based on these signals. Though, in some abstract absolute sense, you might "prefer" caviar to a candy bar on a daily basis, prices direct your decision making toward the candy bar.

Hayek's article is here. The full list of the top 20 is here.


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