The Use of Knowledge in Society - Essay Example

?The use of knowledge in society “Productive work in today's society and economy is work that applies vision, knowledge, and concepts - work that is based on the mind rather than the hand” Peter Drucker “Everybody is ignorant, only on different subjects” Will Rogers Introduction: Knowledge, or the lack of it, regarding factors such as laws and socio-economic policies as well as programs are likely to result in far reaching counterproductive consequences. The performance of complicated functions in our everyday lives is guided by knowledge which when applied to a range of social, political, legal as well as economic processes helps in the development of the society as a whole (Sowell, 1996). The production and application of knowledge in society is hence one of the most crucial aspects of our being since it assists in construction of a 'rational economic order' and resolving the economic challenges faced by the society in the most logical way possible (Hayek, 1945). Since the process of decision making process is heavily influenced by the type of knowledge possessed and the type of organizations involved, the motivation for decision making i.e. the type and level of knowledge possessed by them, is of crucial significance. This essay on ‘Use of knowledge in Society’ aims to discuss, analyse, and assess the views put forward by the author, F. A. Hayek (1945) and ascertain the implications of the claims made in view of various micro-economic theories and concepts. Summary: The article by Hayek (1945) on the use of knowledge in society discusses the various merits and influence of price mechanisms on the decision making process and role of specific knowledge as a decision-making mechanism. He states that “The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess (p. 519)." He implies that that it is humanly impossible for a single individual to possess all the relevant information to arrive at a favourable decision. The quest of individuals with regard to addressing the economic problem is hence not about applying the available information or knowledge for optimum utilization of resources but rather on the manner in which the best possible resources can be acquired by means of the limited knowledge available at our disposal. Merits of the argument: Product specific or consumer specific knowledge is known to help firms / organizations in maximizing their profits and sustaining their competitive positioning in the industry. The application of market oriented specific knowledge by the organizations helps firms in warding off competition and in developing effective strategies. Critical information or knowledge regarding one's competitors such as products, prices, or policies adopted by them etc., plays a key role in producing market/ consumer oriented ideas/ products thus helping organizations in effectively catering to their target consumer/ market segment (Glazer, 1991). Such market / consumer oriented strategies developed based specific knowledge provides organizations with a competitive advantage (Barney, 1991) and helps them in succeeding regardless of the presence of negative influences / obstacles in the external environment (Jaworski and Kohli, 1993; Narver and Slater, 1990). Hayek has stressed the relevance and significance of knowledge in the development of society stating that awareness and application of specific knowledge is likely to contribute towards the overall development of the society and it is hence vital for individuals and societies to acquire and apply such knowledge for generating and maximizing their profits. Since capital is by far the most critical input of production in an industrial society, possession of appropriate knowledge is inevitable for enabling effective decision making in order to achieve economic progress. Lack of adequate knowledge and/ or failure to apply relevant knowledge would hence result in disastrous consequences, not only for the organizations in question but on the society at large, as well. Hayek states that individuals or organizations that are capable of effectively regulating the use of knowledge such as property rights and knowledge regarding dealing with public goods would benefit significantly in the long run (Raven, 2000). Merits of the argument: Most of the successful and dynamic sectors of the world today are knowledge intensive economies, as opposed to capital or resource intensive ones. This is evident from the fact that some of the most successful sectors in present times include the ICT industries (software and hardware production) and bio-technology (Raven, 2000). The significance of knowledge and information is apparent from growing consensus on knowledge as an important facilitator of economic development of societies, particularly in the post-industrial society (Castells, 2000; Huber, 2004; Powell and Snellman, 2004; Teece, 2003). This new knowledge oriented perspective hence entails a new form of production which is market-oriented and based on property rights and market based mechanisms (Benkler, 2006). The growing body of literature indicate a clear shift from firm-based to community based models of knowledge creation (Weber, 2004; Lee and Cole, 2003). Hayek stresses the importance of different types of knowledge (apart from the apparently significant ‘scientific knowledge’) and its significance in overcoming routine economic problems faced by organizations (521-22). Knowledge is an intangible resource and intellectual capital is of crucial significance for all organizations since it helps in enhancing the balance sheet of firms (Shih-Wei, 2005). All forms of knowledge or intellectual capital in general, helps the society immensely by improving productivity and facilitating innovation at workplaces which in turn results in an increase in the economic value of organizations (Harris, 2001). Theoretical perspectives: Behavioural theory of the firm: According to Hayek, planning is central for decision making process and that it is one of the most effective ways of communicating knowledge based on which major decisions critical for organizational success are taken. Planning makes the economic decision making process easier and enables the effective diffusion of knowledge to resolve any or all problems related to the economic policies (520). Decision making, especially with the very little information available at the disposal of firms, is perhaps one of the most critical challenges faced by decision makers. The challenge is magnified in a highly dynamic external environment which is subject to constant change. Decision making and planning helps in avoiding and averting routine problems faced by firms, since the decision makers are equipped adequately with all the required information to deal with such problems. However it does not offer any protection against problems caused on account of sudden changes in the external environment such as change in technology, tastes and preferences of the consumers, or innovation by rival firms etc (Frame, 2012: 42). The theory of firm suggests that the basic underlying function or objective of any firm is profit-maximization. In order to maximize their profits, they must be equipped with all the required information and knowledge, which is usually available to them by studying market behaviour. However at times, markets often fail to act as one of the most cost-effective means of communicating production related information to the firms. The producer/firms are hence at a great disadvantage due to the limited availability of information. This problem is further multiplied due to the fact that they have limited financial resources at their disposal or due to the informational unevenness present (Milgrom and Roberts, 1988). Evolutionary theories of economic change: Economic problems arise as a consequence to change (p. 523) and decentralization alone can facilitate effective application of knowledge in particular circumstances of time and place and can be used promptly in times of change. It is beyond the power of a single individual or organizations to make 'on the spot decisions' as an immediate response to change, based on the limited knowledge available to them. He further states that the individual is bound to consider the quantitative indices or values wherein all relevant information is concentrated and utilize the same by rearranging it appropriately (525). The evolutionary theories of economic change are a relatively new branch of theories which refer to the Schumpeterian ideologies whereby factors such as technological innovation and change assume a central role in growth and development of firms. Economic agents are compelled to act under conditions of constant change and are required to arrive at economically viable decisions armed with imperfect or inadequate information. Such decisions are often based on the rule of the thumb due to lack of availability of adequate knowledge about change (Szirmai, 2005: 87). According to the Schumpterian legacy in a capitalist society the organizations are constantly exposed to an environment of rapid changes. This entails that the very concept of capitalism is hence associated with a nature of change, and is evolutionary in nature; hence it can never be static. Such changes in the social and economic environment of firms leads to a significant alteration in the data / information / knowledge available at the disposal of firms, thus affecting their process of decision making and economic action (Himmelweit, Simonetti, and Trigg, 2001). Production and cost theory, marginal rate of technical substitution and information: The production of goods and services entail transformation of available resources such as labour, power, raw materials etc into finished products. These goods and services utilized by firms for production are referred to as 'inputs' or 'factors of production'. The production function is highly dependent on the external environment and is likely to change with the change in technological environment over a period of time. Such changes further lead to a direct impact on the firm’s productivity (Besanko and Braeutigam, 2011: 202). According to Hayek, it is crucial for firms to have adequate information regarding the market dynamics and changes taking place in the organization’s external environment since it has a direct bearing on the production process of the firm and ultimately on the productivity. Marginal rate of technical substitution refers to the "The rate at which the quantity of capital can be reduced for every one-unit increase in the quantity of labour, holding the quantity of output constant" (Besanko and Braeutigam, 2011: 217). The production process is highly complex and require knowledge regarding the investor trade-offs i.e. the marginal rate of substitution between the expected return and the degree of variability, since such information would then be used to ascertain the risk-return tradeoffs for the organization. Conclusion: The arguments put forward by Hayek in the article in favour of information and knowledge in the growth and development of society are highly influential and provoke plausible responses. His arguments criticizing the role of a 'central planner' rightly points out the flaws in the said theory by stating that it is humanly impossible for any firm or individual to possess all requisite information and that individuals or firms are often in possession of specific information, which proves to be inadequate when faced with a challenging situation such as change in the external environment. The arguments put forward by Hayek, categorically bring out the contrast in socio-economic theories and highlight the role of human action and knowledge on economic decision making process. Hayek's perspectives on knowledge and information in modern day knowledge-economy helps in addressing the key problem - that of enabling the optimum utilization of limited resources by effective application of available knowledge and avoiding erroneous transfer of information. References: Barney, J., (1991). Firm resources and sustained competitive advantage. 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