Knowledge and Coordination

When individuals interact to draw on the specialized knowledge of their fellows to satisfy their aspirations (or, for that matter, to find out whether their aspirations are at all feasible), they are uncertain about how others will respond to their initiatives.

They may, in the first instance, not even know whom to approach as potential partners and how. What material conditions are important to meeting their own aspirations and those of others?

At the same time, they are uncertain as to who will approach them, with what demands and how. They will also be unclear how they themselves might respond to new demands made by others. In other words, they face strategic uncertainty.

In this context, we have to distinguish between two different types of knowledge, or rather ignorance:

  1. Economic actors may lack certain kinds of supplementary knowledge, but be roughly aware of the character and content of the information they still need. For example, suppose that I told you in which suburb I live, but not in which house. In trying to find me, there are more or less effective search processes — for instance referring to a map, using a tom-tom, driving around, asking people.
    Institutional arrangements can help in the search process, for example the rule that houses should be numbered sequentially. In these cases it is appropriate to speak of information search.
  2. A totally different type of ignorance exists when we do not even have an inkling of what we do not know. When such knowledge is discovered the discovery is totally surprised. In retrospect, the new idea is obvious. Indeed, we are often surprised that, prior to the discovery, we did not know.

    Since people do not know what to search for, they cannot go about this in rational ways, for example by trying to minimize the costs of finding out (about something which they cannot know). An example of this was Columbus changing upon the New World Opens in new window. He (probably) had no prior knowledge that America existed.

    Often people are convinced that they have the complete knowledge and then, one day, have to learn that they have been totally ignorant of pertinent facts. In such cases, it is appropriate to speak of a discovery (Kirzner, 1997; Popper, 1959).
  • We speak of information search, when the general context is known and details have to be found out. This is, for example, done by software developers who want to improve a computer program.
  • By contrast, we speak of discovery when totally new knowledge is found and the discoverer is genuinely surprised. It takes good luck and a certain quality of enterprise to make such discoveries.

The knowledge-search-and-coordination problem is complicated by the fact that the knowledge we carry in our heads is the result of evolutionary selection.

People (other than new-born babies) possess knowledge that they have acquired and validated by subsequent experience. If old knowledge is not useful or turns out to be counter-productive because circumstances have changed, it will be forgotten or revised.

The world changes all the time: people’s tastes change, different and more people are born, resources become scarce or are newly discovered, new production technologies are put in place, and so on.

In the process, everyone has to cope with uncertainty about how the world will change and how others will react to new circumstances.

Most relevant knowledge is thus the result of learning by doing and is acquired by innumerable different human beings in a decentralized selection process of trial and error.

It is therefore crucial that we keep an open mind to new developments and opportunities.

Even facts that have been verified thousands of times should not be taken as the eternal, unchallengeable truth. For thousands of years, Europeans knew that all swans are white — until the first black swans were brought back from Australia (Taleb, 2010)! Whether for reasons of mental inertia or fatalism, it behooves to reject a closed mindset and sacrosanct doctrines.

A central tenet of epistemology Opens in new window—and of Western civilization—is that knowledge is not static. It is always specific to a particular time. People acquire most of their knowledge by a process of catallaxis, that is, by interacting with others and exchanging ides and assets.

This concept was probably first explicitly formulated by British economists Richard Whately (1787 – 1863) and has more recently been revived by Ludwig von Mises. These scholars were able to draw on the pioneering work of British social philosophers John Locke (1632 – 1704) and David Hume (1711 – 1776) who had analyzed the problems of human cognition Opens in new window, that is, how human senses receive impressions (sensation) and digest them through processes of internal relation-building (reflection).

They investigated how a person’s ideas are developed by the digestion of impressions in the brain to generate that person’s body of knowledge. When people interact and cooperate, they continually discover new sensations.

They will be torn between a conservative instinct to retain familiar knowledge, which they share with others, and an experimental instinct to explore new ideas and overturn what is familiar to them and others. Thus, producers of a certain good or service have an interest in replicating what they have been producing in the past. That saves effort. But this conservative interest may be challenged by the need to take account of customer feedback about deficiencies and hence the need to redesign the product.

The wish to beat the competition drives producers, time and again, to yield to the experimental urge and modify their existing knowledge. Thus, they keep learning.

Personal preferences and real-life circumstances of course play a key role in what knowledge is being selected and retained in individuals’ minds. As a result, different people possess different knowledge. It is a fundamental mistake to assume that everyone knows the same.

New knowledge often comes about by marginal adaptations and variations of existing knowledge.

As people interact, marginal tinkering and small creative steps occur here and there, so that stepwise improvements accumulate over time. Thus, much of the improvement in aircraft design since the Wright brothers took off in 1903 is owed to numerous small improvements in aeronautic technology, propulsion and management, and much of it emerged in the interaction between aircraft users and aircraft builders.

The broad stream of such steady, adaptive improvements is sometimes over-shadowed by major breakthroughs when completely new concepts emerge. Thus, the emergence of electronic data processing and communications technology has revolutionized many fields of computation, management and entertainment.

Such creative breakthroughs capture the imagination and are recorded in the history books, but their contribution to economic progress has been much less than the broad, gradual adaptive advancement of knowledge across the many areas of human endeavor (Schmpeter 1961/1908).

Knowledge may emerge either in a creative act, out of curiosity and inspiration when people spontaneously try out a new idea or when they engage in systematic research and design to find something new.

An example of planned knowledge search is the invention and commercial utilization of nuclear power; an example of a spontaneous act of creativity, which was not planned by a designer, was the painting of the Mona Lisa, which probably reflected how Europeans viewed the human condition in the Renaissance.

Much knowledge has been uncovered serendipitously, that is, by chance, by sheer inspiration or as by-product of a search for something else. Thus, the modern lifestyle drug Viagra was not discovered because the pharmaceutical company wanted to find something like it, but as a fortuitous by-product of other research.

What is important is that people are alert, open-minded and prepared to make discoveries. This is even true in the modern world in which much research and development is organized and conducted by research professionals. Thus, much progress is owed not to an emergent, major breakthrough, but to adaptive change, to creativity by trial and error, by tinkering and improvement in response to new demands and changing conditions.

Adaptive tinkering is often underrated or even overlooked by general observers, who tend to be fascinated by the more conspicuous big innovations.

The far-distant ancestor who invented the wheel changed human knowledge by a big and creative step. However, since then, that basic idea has been improved upon by millions of users of wheels in thousands of adaptive changes — from tiny wheels in watches to giant wheels on huge dump trucks in mining.

Of course, in the process of ceaseless trial and error, numerous ideas fail and are abandoned. For every successful oil well, there are, for example, probably dozens of ‘dry holes’. Exploring the unknown and widening our stock of useful knowledge is risky. But it may often turn out to be profitable business (Boulding 1968/1962).