The core idea of Hayek’s famous “The Use of Knowledge in Society” is the claim that prices act as signals that compress vast amounts of dispersed, rapidly-changing information into something that ground-level decisions-makers can use without knowing the underlying details. You don’t have to know anything about oil or gas production to know how much gasoline you can afford to put in your car, or how much driving you should do between paychecks, etc. Likewise, a gas station manager doesn’t have to know anything about geopolitics or warfare strategy or the Strait of Hormuz to know that a shortage is coming, and that he has to up the price of gas at his tank. The resulting reduction in epistemic burdens is supposed to be the great virtue of the free market pricing system.

Applied to the closure of the Strait of Hormuz, we get the following result. Iran’s closure of the Strait of Hormuz closes down close to 20% of global oil flow. No matter how many adjustments are made for this magnitude of reduction, there will be an across-the-board shortage of available oil, and a series of concomitant adverse results connected with this shortage. There’s also a series of intangible but real risks, involving phenomena inchoately out there, and potentially adverse, but hard to foresee. 

No single actor has an Olympian vantage on all of the relevant facts (or their underlying explanations), but prices convey the gist of it. An increase in the price of oil per barrel, or of gasoline per gallon, encodes all of the relevant information by summarizing it in simple quantitative form. A change in price at the gas pump from, say, $3.00 before the Hormuz crisis to $3.50 during March, to $4.00 (or higher) throughout much of April summarizes, at a minimum: that there is a disruption in supply; that it is likely to be relatively severe and long-lasting; that there are no good work-arounds; and that any feasible work-arounds will involve their own costs. All of that is true, all of it is relevant, all of it useful. Fair enough.

Hayek

Here, however, is the problem. Since the “ceasefire,” the price of oil has dropped from highs of $120/barrel to just under $100/barrel, and the retail price of gas at the pump has dropped slightly as well, and is predicted to drop further. The drop involved is not big, more discernible for crude oil than for retail gasoline, but it is a drop.  What information does it convey?

What it seems to convey is that the situation is improving. It suggests that the supply problem posed by the closure of the Strait of Hormuz is now finding its way toward a modest resolution. Or more cautiously, it suggests that there is some modest likelihood that the problem is finding its way toward resolution. Or yet more cautiously, it suggests that there is some modest likelihood that the problem is finding its way toward some modest resolution.

The problem is, there is no reason whatsoever to believe any of these things. The dip in prices preceded the peace talks in Pakistan. The peace talks (predictably) failed, and have led to Trump’s somewhat ludicrous threat of a naval blockade against the closure of the Strait. Those developments might well push prices back up by the time you read this during the week of April 13th. But the fact remains: though nothing of substance in the geostrategic situation changed, prices went down. Prices conveyed information as though something of substance had changed, when in fact nothing of substance did. Put another way, there was no reason for prices to go down from the peak they hit. The peak should have become a plateau, not a dip. But a dip is what we got. 

The Islamabad peace talks are a confounding factor here, but they’re also a red herring. As a political matter, there was no reason for thinking that the talks would succeed, or that anything of economic significance would change with respect to the Strait.  The Iranians have no motivation for opening the Strait unless their demands are met, and the Americans and Israelis seem unlikely (if that) to meet those demands. Since there is no viable military option for opening the Strait (see 1, 2, 3), there is no reason for thinking that it will be opened any time soon. Even if a military option is used, the option is likely to be so violent and chaotic as to produce a supply shock, not an easy opening or increased flow. Those possibilities all point to either a steady increase in prices or a plateau without a dip, not the dip we’ve seen. So the decrease in prices remains a mystery. It’s a mystery why it happened, and also a mystery what “dispersed information” it conveys.

Hormuz

It’s hard to avoid the inference that all that the price decrease really conveys is wishful thinking and a susceptibility to believing whatever Donald Trump says or suggests. If the closure of the Strait suggested a decrease in supply, then the cease fire, the peace talks, and Trump’s rhetoric all gave the illusion that the Straits crisis would be resolved in a happy-ending way. The decrease in prices, then, doesn’t so much reflect “dispersed information,” as the illusion of information, where the illusion is controlled, not by dispersed information on the ground, but by propagandists in Washington and Jerusalem. 

That, it seems to me, is a real objection to Hayek’s thesis. The thesis holds that prices reflect dispersed, decentralized information that no centralized government planner could have. It also claims to convey factual information without conveying the underlying causal structure of that information. The person-on-the-ground knows that something is the case, and that something is about to happen, without having to know anything about why. All that’s asked of him, or her, or us, is knowledge of the arithmetic of pricing and budgeting, nothing more: no knowledge of causes, whether material or otherwise, political or otherwise. No need for understanding. All of that is treated as dispensable, and regarded as reducible to dollars and cents.

The Strait crisis implies that, but also implies the reverse. Prices sometimes reflect facts that can be grasped in simple arithmetical terms, but sometimes also reflect the wishful thinking demanded by centralized planners in the Pentagon and the Kirya. If those planners want you to believe that a crisis is on its way to resolution, then if prices seem to confirm that, people come en masse to believe it, start to act as though it’s true, and thereby “confirm” to themselves that it must be true. Since prices are going down (it’s thought), a resolution of the Straits crisis must be on the horizon–even if we’re all sitting around in the fog with zero visibility of any horizon.

What Hayek missed is what Aristotle got (in Metaphysics I.5-6, in his critique of the Pythagoreans): grasping the world in simple arithmetical terms is a heuristic short-cut that bypasses the need for knowledge of how and why things work. Like all short-cuts, it can be misused, and once misused, can backfire. The epistemic equivalent of backfiring is delusion, which is what pricing can and often does become. Prices can convey information, but can also reproduce delusions. Prices by themselves don’t tell you which thing they’re doing. You have to figure that out. 

That’s not what Hayek said, but it’s something that, writing in September 1945, he probably should have thought of. But if he didn’t say it or think of it, maybe it’s time that we did.  

Thanks to Suleman Khawaja for the conversation that inspired this post.