FA Hayek: Price Whisperer

The Answer Is Transaction Costs

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The price system solves a profound coordination problem by communicating dispersed knowledge that no central planner could ever fully access or comprehend. We explore Hayek's insight about how prices serve as both information and incentives, allowing self-interested actions to inadvertently benefit society.
• The "knowledge problem" – why information needed for economic decisions is dispersed among millions of individuals
• Tale of two farmers – how profit-seeking Mo unknowingly serves society better than altruistic Al
• Markets generate information through commercial processes that otherwise wouldn't exist
• Goodhart's Law – when measures become targets, they cease to be good measures
• Soviet planning failures – absurd outcomes like factories producing single giant nails to meet weight quotas
• Recycling pennies – potential approaches as the US phases out penny production
Mentioned in the podcast:

• FA Hayek, "Use of Knowledge in Society" (AER, 1945)
• Michael Munger, Socialist Generation Debate
• "Goodhart's Law"
• "What Do Prices Know That You Don't?"

Ross Kaminsky, of KOA:

• iHeart Radio
• Segments with Ross
• Ross on X (@rossputin)

Book'o'da'week! Three suggestions (but mostly Red Plenty!)

• Paul Craig Roberts' "Alienation and the Soviet Economy"
• Alec Nove's "The Economics of Feasible Socialism"
• Francis Spufford's "Red Plenty"

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz

Chapters

1. Technical Note and Introduction (00:00:00)

2. Hayek's Knowledge Problem (00:01:41)

3. Tale of Two Farmers: Al and Mo (00:03:25)

4. Markets vs. Central Planning Debate (00:06:32)

5. Goodhart's Law and Soviet Quotas (00:10:52)

6. Letter on Pennies and Book Recommendations (00:14:26)