Almost eighty years ago, economist and philosopher Friedrich Hayek published what is now considered to be one of the most important essays in all of economics, “The Use of Knowledge in Society.” In it, he detailed what is known as “the knowledge problem,” which he describes as, “a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know.”
In other words, the knowledge problem is the problem of how to ensure the most productive and efficient use of society’s resources, when the sum total of knowledge of what the most efficient and cost-effective resources, methods, and products to use and create is fragmented among an entire population with highly specialized and localized knowledge, instead of being possessed by a single mind or group.
What’s important to know about the knowledge problem is that it shows why central planning is a poor alternative to the free market. That’s because in a market, changes in the efficiency of different resources, methods, and processes as well as changes in the demand for different products are all reflected through changes in prices. In turn, because individuals want to maximize profits and minimize costs, changes in prices will guide individuals toward choosing efficient alternatives and producing more valued products, an optimal use of resources.
Contrast this with a centrally planned economy, where the state replaces prices and property to determine economic outcomes. Yet without private property, there are no prices to convey changes in the efficiency and scarcity of resources and methods or their demand. Instead, central planners must blindly choose between a limitless number of options with no way of determining the most efficient inputs and outputs. Whereas the market draws on the dispersed nature of knowledge through prices, central planning simply ignores this and thus finds its task impossible.
With this in mind, fast-forward to the present day, a moment of unprecedented inflation, broken supply chains, and the looming prospect of a recession. Preceding this crisis, however, was an equally unprecedented expansion of the money supply by the US’s central bank, the Fed. Yet while the Fed’s role in current inflation is steadily becoming more recognized, the world nonetheless remains faithful that Fed chair Jerome Powell can, through monetary policy, rescue the world from a crisis it sizably caused.
The fact of the matter is, however, that the Fed cannot rescue the global economy from the embroiling crisis for much the same reason why it helped to cause this crisis in the first place; that is, as the governmental monopoly over the supply of money, the Fed also suffers from the knowledge problem that Hayek described. Just as central planners are unable to compute the efficiency of competing resources because of the abolition of property and thus prices, we’ll see that the central bank is just as incompetent in computing the ideal money supply because of the dispersed knowledge it does not possess.
This is because central banks like the Fed are actually an example of central planning, as they’re the state monopoly over the production and supply of a certain good, in this case money. While the central planner is tasked with finding the demand for different products and adjusting their supply accordingly, it’s the role of the central bank to match the supply of money with the demand for money, which in turn allows inflation to be minimal and for prices to coordinate the economy into full capacity.
The problem is, however, that the Fed or any central bank is unable to rationally calculate the demand for money, as it’s, in the words of economist Alexander William Salter, “the kind of information that cannot be harnessed in top-down fashion” but rather “can only be generated bottom-up.” Money is one half of all economic exchanges, so finding its demand would require impossibly detailed insight into a limitless number of factors, including changes in specific incomes, inequalities, prices of different goods, different interest rates, market expectations, and fluctuations in a boundless number of markets.
Often behind changes in money demand are supply shocks and demand shocks. While inflation in the short run can be caused by a decrease in aggregate supply or an increase in aggregate demand, deflation can be caused by an increase in aggregate supply or a decrease in aggregate demand. In order to effectively counteract inflation or deflation, the Fed has to know whether it’s being caused by a supply shock or a demand shock, but from its position as a central bank it’s unable to do so in real time.
Behind changes in “aggregate demand” and “aggregate supply” are the combined changes of a multitude of different markets, prices, and expectations. While monetary systems devoid of central planning such as free banking or a full-reserve system may allow these factors to naturally determine interest rates and the value of money, a central bank must sort through this seemingly endless list of factors and guess their impact on inflation or deflation.
For example, the years following the early 2000s recession saw the United States experience both sluggish economic growth, a sign of a decrease in aggregate demand, and a productivity boom, an increase in aggregate supply. The Fed understood the risk of deflation during this time, but while a demand decrease would prescribe loosening monetary policy, a supply increase usually doesn’t change the central bank’s course of action.
Unable to distinguish between catalysts, the Fed opted to address the former and slash interest rates to unprecedentedly low levels. This proved to be the wrong decision, however, as such unnaturally low rates began to fuel a massive housing bubble whose subsequent burst helped to trigger the Great Recession.
In the end, while it may seem like a relic from foreign times and countries, the centrally planned economy and its fatal shortcomings live on in the institution of the central bank. As the Fed continues in its struggle to reign in high inflation alongside a faltering economy, another idea of Friedrich Hayek’s remains prescient as ever, that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
About the Author
Nathaniel Brown is a high school senior living in northern New Jersey interested in economics, political theory, and history. Article cross-posted from Mises.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
