Applying the Local Knowledge Problem

Case studies utilizing decentralized knowledge

In 1945, the economist F.A. Hayek wrote a paper called “The Use of Knowledge in Society.”

In that paper, Hayek explained the nature of knowledge and what that means for how to best structure an economy. By its nature, knowledge is decentralized. It’s not all concentrated in one person or group of people, nor can it be. It is dispersed, existing in “incomplete and frequently contradictory” bits within separate individuals.

Since knowledge is decentralized, centrally planning an economy is doomed to fail. It is impossible for one person or group of people to gather all the knowledge from everyone in an economy and then use that to decide who should make what when and who should get what when.

The price system of market economies is best for utilizing this dispersed knowledge. Prices are signals that give people the information they need to make economic calculations.

While the price system is one way to utilize the decentralized nature of knowledge, there are other ways outside the realm of economics. One such example is Wikipedia. The genius of Wikipedia is that instead of contacting an expert to write each page in the encyclopedia, they allow anyone with an internet connection to contribute to it. This takes advantage of the local knowledge problem, resulting in an impressive and comprehensive encyclopedia.¹

Another real-world application of the knowledge problem is X’s Community Note feature. Instead of a top-down solution like hiring fact-checkers to check people’s posts, Community Notes has a decentralized solution where regular users can write their own notes which are voted on for accuracy by other users.²

While Wikipedia and Community Notes aren’t perfect, they do a pretty good job of working with and not against the decentralized nature of knowledge.