What is Hayek’s ‘knowledge problem’ and to what extent, if at all, does it lend itself to a defence of private property?

Friedrich Hayek

Any attempt to unpack Hayek’s ‘knowledge problem’ and its implications requires a clear and concise understanding of the unique epistemological position from which originates. Pessimism is a fundamental trait of Hayek’s thought. As a critical rationalist, he believed the capacity of the human mind is inherently limited. “No mind can take account of all the particular facts which are known to some men” (Hayek, 1982, p. 16). Popper reinforced Hayek’s scepticism in the empirical world through the idea that the complex nature of phenomena studied by social scientists means what we can learn about society is extremely limited (Shearmur, 2016, 359–60). This lead Hayek to reject the positivist and rationalist bias held by economists. This draws on Hayek’s emphasis on ‘verstehen’ (understanding) over ‘erklären’ (explaining) (Gamble, 2007, p.116–9). Therefore two important aspects of knowledge emerge from Hayek’s epistemological position. Knowledge is fragmented because the human mind is limited and inference is biased. Secondly, knowledge is dispersed among individuals and cannot be centralised (Gamble, 2007, p. 111). These aspects form the foundation of Hayek’s knowledge problem. In this essay, I shall explore how the knowledge problem lends itself to a defence of private property through two veins. The first shall be tradition, more specifically a reverence of tradition and the importance of the rule of law. Second shall be the market order and the role that private property plays in the price mechanism.

The knowledge problem lends itself as a defence of private property through Hayek’s reverence of tradition. He adopts the view that private property is part of the inherited wisdom of tradition. This emerges organically over millennia within society (Gamble, 2007, pp. 125–6). Hayek is not concerned with moral justifications of private property such as those offered by Locke’s labour mixing argument. For this attempt to justify man’s possessions through the mixing of his labour with the common resources (Ryan, 1984, p. 17) undermines the importance of tacit, incomprehensible knowledge embedded in the idea of private property. Simple and easily falsifiable arguments (see Nozick’s tomato juice objection (1974, p. 175)) do not aide the defence of private property. Rather, Hayek follows in the empiricist tradition of Scottish Enlightenment thinkers such as Hume. In Individualism: True and False (1948), Hayek makes the case that human achievements and the functioning of society do not operate on the command of a single mind. Rather, the collaboration of free men unintentionally leads to great achievements and spontaneous orders, such as the market order (p. 7). Hayek draws on the observation of Adam Ferguson; “nations stumble upon establishments, which are indeed the result of human action but not the result of human design” (1767, p. 187). Private property is therefore not the result of the rational construction of an individual actor. It has emerged organically out of human tradition. Hayek views private property as one of the “abstract rules of conduct” that governs our interactions as humans in society (Gamble, 2007, p. 126). As an abstract rule, it is important because it carries tacit knowledge. This cannot be explained or replicated by the design of a rational thinker because inherited “methods of ordering human economic cooperation… exceed the limits of our knowledge and perception” (Hayek, 1988, p. 14). This reinforces the emphasis on ‘verstehen’ over ‘erklären’. As individuals with limited knowledge and capacity to understand, we must prioritise understanding tradition rather than attempt to explain it. The centuries of wisdom embodied in the tradition of private property cannot be explained. Although we can understand how the free exchange of private property leads us to the spontaneous marker order. This aspect of the knowledge problem lends itself to a defence of private property.

Furthermore, Hayek’s reverence of traditions rests on an emphasis on the importance of the rule of law. In Law, Legislation and Liberty (1982) Hayek’s conception of the rule of law, drawing from the Rechtsstaat tradition (Allan, 1988, p.1), entails a system of governance guided by tradition and legal precedents (Shearmur, 2007, p. 163). Such a system reinforces Popper’s epistemological position of scepticism through a preference for incremental reform, over large scale legal reform. Private property rights are protected by a system of common law that evolves on a case-by-case basis. This constrains the power of the state over the property rights of individuals by claiming that every entity, whether state or individual, is equal before the law. The state has a duty, Hayek would argue, to protect and enhance the abstract rules of society that guide the interactions of individuals. Due to the imperfection knowledge possessed by authorities and the delicate nature of spontaneous orders, this must be achieved through “piecemeal social engineering” (Shearmur, 2007, p. 155). Although states must tread carefully when attempting to intervene in the organism of society. The state’s priority should be to minimise the harm it is capable of inflicting (Gamble, 2007, p. 129). A reverence for tradition and an understanding of the inherited wisdom of private property should therefore be reflected in the way mediates among entities. It is in this practical sense that Hayek’s knowledge problem lends itself as a defence of private property

In The Road to Serfdom (1999) Hayek was fiercely critical of social scientists attempting to act beyond the capacity of their knowledge. Social planning in market societies, in Hayek’s view, violates the abstract rules of conduct by overlooking or ridiculing the importance of inherited wisdom. For example, the communist desire to abolish private property should be considered not just an affront to tradition but an undermining of the importance of the tacit knowledge embedded in the system of private property. Attempts to restructure society on a rational blueprint grossly overlook the limited capacity of human knowledge and ability to explain the functioning of human society. For the state to abolish private property would violate the rule of law because it neglects the precedents set by common law that constrain the authority of the state over the property of individuals. These misguided and over-ambitious reforms can only lead to the impairment of freedom because they require the coercion of individuals to be implemented (Shearmur, 2007, p. 149). By contrast, a system that embraces the wisdom of private property and attempts to enhance private property rights, within the remits of the rule of law, leads to a better framework for the interaction of individuals within a society.

The knowledge problem lends itself to a defence of private property by way of the market order. The uninhibited exchange of private property acts as the foundation for the functioning of the price mechanism within the market order. This is Hayek’s amoral variant of Smith’s invisible hand (Gamble, 2007, p. 126). In The Use of Knowledge in Society, Hayek (1945) explains how the market order is a product of the unintended result of individuals actors, each acting on unique pieces of knowledge of their desires and constraints. This division of knowledge means that information is dispersed and sometimes tacit — it cannot be codified or formally articulated by the holder (Gamble, 2007, p.115). As a result, it is inconceivable that one individual or authority should be able to comprehend or centralise all the information in the market at any point in time. This creates a knowledge problem for participants. Private property is used to overcome this knowledge problem among participants in the market. Individuals that bear exclusive ownership over their possessions can facilitate a system of exchange. Individuals engage in trade of their possessions (transfer of ownership) underpinned by a medium of exchange: money. Price signals occur as a result of this trading system. Prices are not determined by a sole actor but rather they are a reflection of preferences held by participants and their information on market conditions. This is known as the price mechanism (Hayek, 1945, 526–30) I shall illustrate this system using a hypothetical example. An individual that wants to purchase oranges from the market finds that the price of oranges has increased overnight. Although he is unaware of the storm that has lead to a shortage in oranges, this information is reflected in the doubled prices of oranges. The individual, aware of both his preference for oranges, over other fruit, and the constraints of his wallet, can determine whether to purchase those oranges or switch to another fruit. Thus the oranges, being the private property of the vendor, can be exchanged for a price that reflects both the preference of consumer and the supply of oranges. The price of oranges is therefore not the intended consequence of any individual or authority. Although it can lead to a change in the behaviour of consumers and producers. This example aims to convey the point that the price mechanism is able to aggregate information unaware to participants (i.e, the occurrence of the storm to the consumer) and tacit information (i.e, the preference of oranges of the consumer) through price signals (Hayek, 1945, Quarels, 2019, p. 4–5). It is evident that private property is crucial for the price mechanism to generate an efficient allocation of resources based on participants preferences and the background conditions of the market.

To illustrate this point further, imagine the same hypothetical scenario minus private property. In this case, price signals cannot because a price cannot be generated via the market that reflects the preferences of market participants. The orange vendor cannot exchange his oranges because they are not his property. Rather, a central authority is required to intervene and generate an artificial price. This requires taking into account the multitude of factors, such as; a fall in the supply of oranges and preferences of each individual for oranges over other fruit). Such a process consolidates the fragmented information aspect of the knowledge problem. No single individual or authority has the capacity to gather or ability to explain the multitude of factors that determine the price of oranges. An attempt to do so would distortions of the market price. This system is inefficient and useless compared to the price mechanism in free markets and can only lead to the misallocation of resources. Therefore, private property is essential for the spontaneous market order to efficiently allocate resources according to the price mechanism. Furthermore, private property allows for the expression of tacit knowledge within the market. The individual consumer may not be able to formally articulate his preference for oranges over other fruit, yet he is still willing to pay the premium on oranges following the storm. Thus communicating the tacit knowledge through the exchange. No central authority would be able to factor this information into a calculation of an artificial price. Therefore a market mechanism, underpinned by the free exchange of private property, can make “fuller use… of existing knowledge” (Hayek, 1945, p. 521; Quarels, 2019, p. 4) It is in this sense the Hayek’s knowledge problem lends itself to a defence of private property.

On the other hand, advancements in technology made possible through data collection are reshaping the conventional interactions between participants in the market. Behavioural economics is enhanced by data collection on group behaviour patterns. This means that establishments such as the government are given a more in-depth analysis of human behaviour. In Nudge, Thaler et al., make the case that, whilst no organisation can be omniscient, technological data can be used to nudge groups to make better decisions in the market (2008). This means that information on individual preferences and market conditions can be more efficiently acted on via a rapid data processing machine. Therefore conventional interactions in the market using private property to generate price signals may be improved upon using a centralised information system.

In conclusion, Hayek’s knowledge problem characterised by fragmented and dispersed knowledge lends itself to a defence of private property via the market order and reverence of tradition. The most important aspect of Hayek’s defence of private property is the fact that it is not a static justification of private property. Rather it is rooted in untold wisdom of the tradition of private property that humanity has inherited over centuries. Private property lays the foundation for the market system that governs the interactions of individuals in free societies (Gamble, 2007, p. 115). This is not to say that the tradition of private property cannot be enhanced to the benefit of society. In fact, Hayek makes the case that the state is responsible for the enhancement and protection of private property rights through upholding the rule of law (Shearmur, 2007, p. 149). This makes Hayek’s defence adaptable to changing circumstances, whilst also providing a word of caution for those attempting to interfere with the abstract rules of conduct.


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