The Optimum Use of the Allocation of Resources - Essay Example

? Micro Economics Report Contents Micro Economics Report Introduction 3 The explanation of the article 3 Summary 5 Merits of the argument 7 Conclusion 8 Reference 9 Introduction The optimum use of the allocation of resources is purely based on logic and implicit to the assumptions. The solution to the problem of optimum utilization is marginal rates of substitution being the same for two different factors or commodities that are put into different usages. The particular quality of the problem of cogent economic order is dogged by the reality that the knowledge required to analyze the problem do not exist in the society in integrated appearance but exists solely on the individuals as dispersed bits. It can be said that the economic problem necessarily follows from the valuation of goods bought by the consumers. It again can be argued that the valuation of the consumers goods do not depend solely on the factors of production but also on the supply conditions of the factors of production. The problem cannot be solved is it can be shown that the knowledge were accrued only to a single mind. Instead economists need to show how interaction between persons who possess partial knowledge can lead to a solution. If it is assumed that all knowledge is given of a single mind then all important and significant things on the real world are disregarded. The explanation of the article Analysis made by Professor Schumpeter suggests that there are some problems with the approach used by some researchers which disregards some of the crucial phenomenon with which people have to deal with like unavoidable imperfection in common man’s knowledge as well as consequent requirements for a process by which knowledge is constantly communicated and acquired. It cannot be denied that the equilibrium analysis has some useful function which it can perform. The problem with which the author of the journal wants to deal with is of rational economic organization. Many of the points that the author has tried to discuss in the article revolves around the diverse paths of reasoning that have emerged unexpectedly. The author is of the opinion that that there exists current disputes between economic theory and economic policy. The dispute arises from the misconception about the nature of economic problem that accrues to the society. The reason for the emergence of misconception is the error prone transfer of the habits of thought to social phenomena that were developed with the view to deal with the phenomena of nature. The allocation of the available resources is regarded by the word planning. The economic activities can be treated to be as planning as in any society where many people collaborate it will be based upon knowledge which through some means must be conveyed to the planner. The crucial problem in explaining the economic process for any theory is the various means of communication on which people base their plans. The design of an efficient economic system is the finest method of utilizing the knowledge originally dispersed amongst all people. Hayek questions the argument of how to solve the rational economic order. The author began the article by wondering the possible ways of constructing an economic order. A problem would not arise if there is full transparency and information in the economy. But the author notes that there is no full transparency and information within the society. It is impossible to correctly justify the desires of the neighbours. The problem stated in the article is utilization of knowledge that is partially accrued by persons and they are devoid of gaining the full knowledge. All forms of economic activity which can either be decentralized or centralized involve the term planning. According to Hayek, the system that will lead to optimum utilization of the available knowledge will depend on the expected situation where the knowledge is to be applied. Choosing the right expert is a complicated problem if someone is looking for the experts who might have the capability to use the knowledge. However Hayek stated that this is only a meagre proportion of the wider problem even if it is assumed that the problem of choosing the right expert can be readily solved. The knowledge of experts or that of the scientists will never be at the optimum level. It cannot be possible for a person to have all knowledge required to make maximum utilization. Therefore it can be expected that one expert will have more knowledge than the other expert. It will not be case where one expert has the capability to apply to make maximum utilization of his knowledge under any circumstances irrespective of time and place. There are some kinds of knowledge that goes beyond the professional level. I the words of Hayek such knowledge is applicable to a particular time and space. The scientific knowledge lacks the potential to fully understand the needs or the goals as well as the desires. The issues regarding economic planning will arise when the problems relating to change arise. In this situation the expert must apply his own relevant knowledge and determine the appropriate the course of action. The author claims that the type of knowledge that that can be accessed by the scientists may not be the correct type of knowledge for the situation. A particular individual owns the particular type of knowledge that can be applied to that situation and the decisions on the basis of time and place are correlated with the economic policy. The domain of statistics fails to quantify such knowledge. Hayek showed how entrepreneurs make use of the practical knowledge for the benefit of the society. The article showed that gains in productivity can experience from acquiring the advantage of practical knowledge. Imperfect information is the problem of the economy and the problem is not constraint within a particular system of preferences (Ebenstein, 2003, p. 97). . Summary The articles argues against the setting up of the Central Planning Board and take into account the dynamic as well as the organic nature of the price fluctuations in prices on the market. The author put forwarded his views stating that centrally planned economy lacks the efficiency that of open market as the participants of the society has a bit idea of the knowledge collectively acquired by the society. He asserted that a decentralized economy complements the dispersed nature of information spread throughout the society. The article also discusses the concepts of individual equilibrium as well as the notion of the divide between useful or practical information against the information that is purely scientific or theoretical. The article was met with not a great reception from the other economists as the contemporary political climate along with the perceptions is being inconsequential in its critiques. The results were disappointing and by the end of 1940 Hayek stopped to establish the literature at the economic community. Coase an eminent economist invites the society to consider a world without transaction costs while Hayek invites the society to consider a world where knowledge is known to a single mind. In the article Hayek pointed out rational allocation of resources to be a confined in a math problem. It can be judged that in the real world information is either incomplete or frequently contradictory. The decisions on resource allocation collectively or individually are referred to as planning. Two questions that arise from such conclusions are on how the people who possess limited fragment of information communicate in useful fashion with the planner and what are the processes that will lead to optimum allocation of resources that are dispersed in the society. A major portion of knowledge existing in the society is not universal. It can be accounted that everyone knows something or the other that no one knows (Hayek, 1945, pp. 519-530). If the idea of the society is to make use of resources then it must make out a policy to collect as well as exploit knowledge delimiting the barrier of using only universal knowledge. The method of data collection needs to be flexible so as to accommodate the constant change into the method. The statistical aggregates are not capable enough to account for the small changes in the data collected. Examples that can be cited are as follows. If the demand for eggs for one individual rises while at the same time the demand for eggs of the neighbour of that person falls by the same amount then the demand for eggs for the neighbour has remained unchanged. But the optimal allocation of eggs has changed. The example cites that optimum allocation of resources is not taken care by the statistical aggregates. The economic problem of the society is the adaption of changes in some peculiar circumstances with respect to time and place. Some plan of decentralization is required to solve the economic problem. The actors of the decentralization need to have the capability of exploiting the local knowledge as well as make use of the knowledge that are possessed by others but are relevant to the decision of the economic agent under consideration. The price system is used in transmitting information between the participants of the economy. The author did not assumed the price system to be perfect. It has been regarded as a manner through an economic system can come close to operate efficiently. Merits of the argument The problem that remains is how the person with necessary information communicates regarding the current situation of particular time and space. Hayek likes to pat attention towards the requirements of information by the person and provides the conclusion that the person does not need more information than are provided by the surroundings. The person only needs to have information about the cost of producing something that is insufficient or does not meet the demand. The person also needs to have information regarding the changes in price for various goods as well as the level of the change. The changes in the prices eventually act to be the tool to initiate the process of coordination between people in the market place. The information act to be the catalyst to drive the individuals on the time and space together to make collective decisions (Landsburg, 2010. p. 287). Conclusion Hayek did not ignore the issue of Professor Schumpeter as well. The formulation of market interaction has been taken into account. In the formulation large amounts of knowledge are considered that aims to border on full knowledge. It is important for Hayek to take the assumption that it is not possible to attain full knowledge. He makes use of the assumption that people have different bits of knowledge relating to a certain place or time and large amounts of people gather to make the collective decision. The gathering of the fragmented knowledge takes the shape of bordering full knowledge and the decision can be taken accordingly. He took prices to be the mechanism where the individuals interact and come together in order to attain the socially optimum levels of production as well as consumption. The economic equilibrium is constraint to particular time and place. The distinction made by Hayek between two types of knowledge is artificial. In reality there is no fine distinction between theoretical or scientific knowledge. The forms of knowledge are based on the experience of the real world. The forms of human knowledge are free to share. Hayek images a world where everyone likes to guard their own knowledge and avoids sharing the useful information with others without proper payment and makes use of every opportunity to exploit the gap in knowledge. Reference Hayek, F. 1945. The use of knowledge in society. The American Economic Review. 35. (4). Ebenstein, A. 2003. Friedrich Hayek: A Biography. [online]. University of Chicago Press. UK. Landsburg, S. 2010. Price Theory and Applications (with Economic Applications, Infotrac 2-Semester Printed Access Card). Cengage Learning. USA. Read More