The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them." This is of profound significance in the social field. We make constant use of formulas, symbols and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up. Hayek (1945) The Use of Knowledge in Society The American Economic Review, 528.
It's a bit surprising, even after repeated re-reading, to see Whitehead show up in Hayek's argument. Whitehead is describing, what in science studies is called 'blackboxing.' (I suspect the idea can be traced back to Leibniz's remarks on the calculus.) Hayek turns it into a broader point -- not just about technologies, scientific and material --, but about norms, habits, and institutions which become the repository of (or are the) means toward effective problem solving (in a limited domain); these means are not really understood by the folk whose problems are thereby solved. It's not a throwaway remark ("profound significance"). But it would be a mistake to see this only as an affirmation of the significance of tradition (a la Hume).
In the article, Hayek makes us think of markets as epistemic devices: "the price system" is a "mechanism for communicating
information." (527) The information is not, as such, available to anybody, but dispersed: "in a system where the knowledge of the, relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people." (526) There is a lot to be said about the contextual knowledge that Hayek thinks is central to the argument, but here I am focused on the issue raised by Whitehead.. I quote an illuminating passage:
There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to acquire. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment. (525)
Prices are effects of what may be totality of human causes that relieve any agent from the need to keep track of all these causes. In fact, on Hayek's account the economic agent need not concern herself with nearly all of these causes; prices (the effects), or even just the change in prices, convey all the relevant information for decision. We can understand the relations among prices and price-changes as the phenomena (in the Kantian sense), and we can discern in their underlying causes the unknown noumenal reality (for the economic agent). Here the market is understood as an epistemic device whose inner mechanical operation is not so much a blackbox, but an enigma.
One last thought on the passage. Prices collapse a rich modal structure of possible causes ("anything that happens anywhere in the world that might not have an effect") into a single coarse-grained dimension. That is, while price formation is an extremely useful epistemic device, we should not ignore the fact that it can also obscure bits of reality to those focused on (changes in relative) prices only. (On this picture you can't even really reverse engineer the causes from the effects.) We can understand bonds, futures, and insurance as ways to recapture some of the information about that modal structure, but they do so as imperfect instruments.
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