Economist Friedrich Hayek is one of the true heavy weights in the Austrian school of economics, and his work garnered him the Nobel Memorial Prize in Economic Sciences in 1974. In 2011, his article “The Use of Knowledge in Society” was selected as one of the top 20 articles published in The American Economic Review during its first 100 years.

Since the article was first published in 1945, it has had a deep influence reaching far outside the field of economics. For example, it has been cited by Jimmy Wales as important to his thinking on how to manage the Wikipedia project. What is it then about, and how is it relevant for modern IT organisations?

The Use of Knowledge in Society

The subject matter of the article is how to rationally organise decision making processes in a system with only partial information available to the actors.

“If we possess all the relevant information,
if we can start out from a given system of preferences, and
if we command complete knowledge of available means, the problem which remains is purely one of logic. […]

This, however, is emphatically not the economic problem which society faces.”

What Hayek points out is that for complex real world problems such as the economy, it is not possible to gather all relevant information in a central actor. Even while trying to collect and centralise all relevant data, it will fast become outdated as the world is constantly changing.

This is the deathblow to the idea of central planning the economy. What is suggested instead is that we must look for an organisation of the economy that optimises the possibility for decentralised actors with only partial information to act efficiently using the information they have available.

Nuancing the Claim

Before we proceed, let’s clarify what Hayek is not saying. It is not an argument that no centralised decision making can ever outperform decentralisation. Rather, it’s a question of how the total information known by the actors in the system can most efficiently be used.

For simple systems and decisions requiring information that is slow to change or not changing at all (such as laws of physics), central decision making might prove the more efficient way to utilise the information. In most cases in complex systems though, the feedback loop needed to gather all relevant information with a central decision maker will be too slow or is not realistic at all.

The alternative then is to empower the decentralised actors by providing them with whatever additional knowledge they need in order to fit their plans together with those of others.

“But the ‘man on the spot’ cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.

How much knowledge does he need to do so successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?”

Applied in a Modern Context

What really stands out about this article is how easily the framework for analysis can be applied within a modern IT organisation, and how well it aligns with what is considered best practices for modern product development.

When discussing Agile vs. Waterfall as development methodologies, we can see that Hayek informed us half a century before the agile manifesto that empowering autonomous agents to be able to autonomously make decisions will outperform centralised planning, while making the system more robust and able to adapt to change at the same time.

Further, it highlights the important part of Product Management that is transferring business knowledge as well as a Product Vision and Strategy to the development teams, and why this has such high leverage.

As a Product Manager making good decisions is important, but what is even more important is to be able to distill out and communicate the relevant knowledge that your team need in order to make good decisions on their own.