Dispersed knowledge

Dispersed knowledge in economics is the notion that no single agent has information as to all of the factors which influence prices and production throughout the system. The term has been both expanded upon and popularized by American economist Thomas Sowell. Each agent in a market for assets, goods, or services possesses incomplete knowledge as to most of the factors which affect prices in that market. For example, no agent has full information as to other agents' budgets, preferences, resources or technologies, not to mention their plans for the future and numerous other factors which affect prices in those markets. Market prices are the result of price discovery, in which each agent participating in the market makes use of its current knowledge and plans to decide on the prices and quantities at which it chooses to transact. The resulting prices and quantities of transactions may be said to reflect the current state of knowledge of the agents currently in the market, even though no single agent commands information as to the entire set of such knowledge. Some economists believe that market transactions provide the basis for a society to benefit from the knowledge that is dispersed among its constituent agents. For example, in his Principles of Political Economy, John Stuart Mill states that one of the justifications for a laissez faire government policy is his belief that self-interested individuals throughout the economy, acting independently, can make better use of dispersed knowledge than could the best possible government agency. Friedrich Hayek claimed that "dispersed knowledge is essentially dispersed, and cannot possibly be gathered together and conveyed to an authority charged with the task of deliberately creating order". Today, the best and most comprehensive book on dispersed knowledge is Knowledge and Decisions by Thomas Sowell, which Hayek called "the best book on general economics in many a year." "Dispersed knowledge will give rise to genuine uncertainty, which necessitates the contractual structure that we recognize as a firm.