The main economic problem which society faces is formulated as follows: how to allocate given resources for the attainment of desired ends. Let us say that data and a function are given and what we need to do is to find the optimum solution. Is this a task to be solved by the economic science?

F. Hayek believes that it is critically important to take into account the assumptions based on which the task has been formulated, that is, that both the ends and the resources necessary to attain these ends are "given" or, in other words, known to the individual who is seeking a solution.

According to F. Hayek, however, the problem of the optimum use of given resources for known ends is emphatically not the problem to be solved by economists. The reason for this is that nothing - neither resources nor ends - are given. Knowledge exists in a dispersed and disintegrated form. This is an axiom. So if nothing is given, there is no point in solving the task of ensuring the optimum allocation of resources. The fundamental economic problem is thus related to the question of what is known. This problem may be formulated as follows:

How to secure the best use of resources known to any of the members of society for ends whose relative importance only these individuals know? In what ways is the knowledge on which people base their plans communicated to them? What is the best way of utilising knowledge initially dispersed among all the people?

The complex of decisions about the allocation of available resources is defined by the word "planning." Every rational individual does some planning in pursuing his ends. Plans may be outlined in programmes or in timetables or they may not be articulated at all, but they are of paramount importance for a consistent pursuit of one's ends. All economic activity is in this sense planning, F. Hayek claims. The only question is that of who is to do the planning.

If planning is done by one authority or individual, we have a centrally planned economy. Competition, on its part, implies decentralised planning by many separate individuals. Market participants draw up plans and adjust them while competing in the market. The answer to the question about which of these systems is more efficient was afforded by a real life experiment. Millions of people witnessed the inefficiency of directing the whole economic system according to a unified plan. What had F. Hayek said about this before the great experiment of the Soviet Union? He wrote:

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge.

Let me digress a little bit at this point. Many officials and entrepreneurs believe that it is essential to implement economic development programmes, to single out priority sectors, to decide whether to produce computers or to raise chicken, from whom to buy oil or to whom to sell electricity. These plans, they argue, should be laid down by economic experts. According to F. Hayek, such plans are unthinkable for it is not only, and not so much, scientific knowledge that is needed to draw them but all the knowledge which is dispersed among many different individuals. Not to mention that every plan needs renewing and cannot be formulated once and for all, or for a fairly long period, without making any alterations at later stages.

In economic activity, it is essential to have knowledge of the particular circumstances of time and place, knowledge which is inseparable from practical experience. It is with respect to this, according to F. Hayek, that "practically every individual has some advantage over all others." He possesses unique information of which beneficial use might be made: "to know of and put to use a machine not fully employed, […] or to be aware of a surplus stock which can be drawn upon during an interruption of supplies […]". The latter type of knowledge is well known although it is not always considered to be as useful as scientific knowledge.

The value of the knowledge of particular circumstances is evident not only in business but also in managing private affairs. Drivers tend to know which of the nearby petrol stations offer the cheapest petrol. Equally valued is the knowledge about cheap and good plumbers, builders or hairdressers. For many small-scale merchants in Lithuania, opportunities to find additional resources are particularly important, as resources are being limited by political levers. Every new regulation imposed by the government reveals people's abilities to find ways of dodging them, or to devise alternative means of attaining their desired ends. As the authorities tighten up on regulations, the knowledge of particular circumstances becomes ever-more useful.

Speaking about economic models, I would like to reflect a little bit on the application of equilibrium models. This concept is used both by neo-classicists and representatives of the Austrian School: equilibrium is used as a starting point for analysing all other states. Yet, their original premises are different. F. Hayek analysed equilibrium with respect to an individual but not the whole economy (from the point of view of the effect of new knowledge on one's action plan) and, what is equally important, on a time scale. This scheme rejects the assumption that knowledge and resources are given. The equilibrium models currently used in Lithuania are based precisely on the same assumptions which F. Hayek criticised. External changes are regarded as accidental and autonomous interruptions of equilibrium. Of all correlations between variables the complex ones are eliminated and only the prevailing functions are taken into account. Time in these models is not considered as a variable.

Let us go back to the main economic question formulated by F. Hayek: How to utilise knowledge which is not given to anyone in its totality? F. Hayek himself gives the following answer to this question:

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances […].

If this knowledge is communicated to a central body, it loses precision, accuracy and relevance. As a result, the orders that the central authority issues based on this knowledge cannot be correct. This problem must be solved by decentralisation. But a man cannot decide solely on the basis of his limited knowledge of the facts of his immediate circumstances. There still remains the problem of communicating to him the knowledge given to others, without knowing who these others are (this refers not to all the knowledge but to the information regarding the conditions of obtaining necessary resources and the demand for the goods he produces).

The solution to this problem is the price system. The mechanism of communicating knowledge through prices was not created by men, therefore many people who lean on pre-arranged controls regard this mechanism as paradoxical and unreliable. However, it functions and provides a solution to the main economic problem of how to exchange knowledge which is not given to anyone in its totality.

The intellect does not allow one to fully comprehend how relevant information which is in possession of some absolutely unknown people is communicated to others without the knowledge of where these people live or why they behave in one way or another.

Let us take, as an example, a petrol-price hike. The reasons for the price increase may be manifold, but they do not bother the consumers. What matters to the consumers is not "why" but "how much," as only then is it worth considering how to reduce the consumption of petrol or whether to switch to another type of fuel. For the owner of a petrol station, the price hike gives a signal that the demand for other types of fuel should increase and that it may be well worth investing in the supply of the other products or bolstering imports. As the prices of goods change, people are compelled to alter their plans.

Another remarkable characteristic of the mechanism of communicating information through prices is clarity. But there is one condition that should be met if the system is to function properly: Prices must be free. Any price controls imposed by the government ruin the system. Naturally, prices which form outside the market cannot say much about the market, and information thus communicated does not facilitate an efficient allocation of resources. But in this case it is not the price mechanism but intervention that is at fault.

As F. Hayek put it, nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it - such as the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill. "[…] in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan," F. Hayek claims.

The indispensability of the price system for a rational economic order was recognised by many of F. Hayek's contemporaries, even from camps holding different political views. Later on many ideas advanced by F. Hayek were implemented by the Thatcher administration in Great Britain, thus bringing not only concrete reforms but also changes in people's thinking.

In today's Lithuania F. Hayek's ideas are particularly topical. The essay on the use of knowledge in society could help many people engaged in economic activities to systematise their knowledge. It would prevent them from making fallacious assumptions which, on the one hand, lead to erroneous conclusions and, on the other hand, distract them from getting to grips with genuine problems. The ideas advanced by F. Hayek are as fresh today as they were half a century ago. What we need is only people who would be able to discover and rely on them in their practical work. It would be delightful if such people happened to be among politicians, too.