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In Hayek’s classic, The Use of Knowledge in Society, he discusses how prices alone have the ability to both capture and reveal information that is particular to time and place, and that no centralized institution could possibly accumulate or act upon. At dinner the other night, one of my companions (I do not believe I am at liberty to discuss who it was) was describing to me an exchange he had when he moved out to Arizona during the gasoline market price controls and rationing in the 1970s.

Upon driving into a gas station at the end of the month of April he found that the station had already run out of its monthly allocation of gasoline. At the time, the way gas stations obtained their gasoline rations was based on how much gasoline they sold in the same month one year earlier. For example, for this station, if they sold 20,000 gallons of gasoline in April 1974, then this is what they would receive (or some fixed percentage based on this number) in April 1975 per the directives of the gasoline czars in DC. This would seem to be a reasonable way to allocate gas, right? My companion queried the station owner who said despondently that he would not get more gas for several more days, why he ran out so fast this year as opposed to last, and he quickly quipped, “they just built a new condo down the street, and a business opened right near that too.”

This is exactly what Hayek was arguing when he invoked the idea that prices capture the particular circumstances of time and place. Our service station owner clearly grasped this. It was probably also the case that some other gas station in town, from where the new condo residents may have come from, found itself with more than enough gasoline to sell by the end of that April. The magic, yes I said magic, of prices is that they change almost instantaneously to direct consumers and producers to do what the planners in DC would want them to do if only they had this “real time” information. In this case, we wanted more gas allocated to the station near the condos (or allow him to charge higher prices) and less gas allocated to the other station. And the beauty of prices is that no one needs to know WHY we need more gas at one location or less gas at another – thereby allowing us to focus our energy and brainpower on producing goods, comparison shopping, and so forth and not spending our time acquiring the information one might need to make decisions. The time spent acquiring this information is pure waste in a world where there are other mechanisms for acquiring it. And this is for one street corner in one city in Arizona for one good – gasoline – and the planners could not even do a decent job at getting these allocations right, even though they employed scientific methods for determining the right allocations. Some folks argue that if only we had a good enough supercomputer then this problem could be solved. Hayek’s point, and one that the gas station owner in the story illustrates, is that a computer does not merely need to solve this problem once and tell everyone how to behave, but that it has to solve this problem infinitely many times, all day long, every day, and get this information out to the market participants efficiently. It would be impossible to do even if we had information about changing preferences and demands. But of course, it is a farce to think that we could ever collect that kind of information in the first place.

2 Responses to “The Particular Circumstances of Time and Place”

  1. Harry says:

    During that time I was traveling all over the country, a lot in Texas and Oklahoma, as well as in the northeast. There were no gas lines in Texas or North Carolina or Georgia. The lines were longest in Maryland, where many DOE people lived.

    Those were the days of Old (natural) Gas and New Gas, and one could see the brakes being applied to exploration.

  2. Arthur Dashan says:

    I’ve tried to explain this same fact to people (that prices have the ability to capture and reveal information that is particular to time and place), but usually, for some reason they just don’t want to believe it. It’s nice to see an example of just how much information prices reveal.

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