Kenneth Arrow on Friedrich Hayek

“Yes. I read that paper carefully a few years ago and think it is incoherent because he stresses the idea people can only know their local thing. He doesn’t ever answer why the system’s price conveys the correct global information. In the Walras/Pareto story you do wind up with the correct information—subject to the appropriate assumptions—but Hayek doesn’t like that story. There are cases in game theory where local connections can actually cause a faster diffusion of ideas, and a faster convergence to Nash equilibrium than reactions to the population as a whole, but that’s not in Hayek.”

“People sometimes say that they don’t know what they think until they’ve said it, you know. But mind you, even as a graduate student, I’ve never thought that utility theory implies consciousness. Of course you discover things and learn about your own preferences. This is a point that I haven’t explored and that I probably should study more. It seems especially important from the point of view of innovation. By the way, what has always bothered me about Hayek is that all this local knowledge has to be transmitted before the process of social interaction can generate any new knowledge, but he doesn’t show us how that is going to happen.”