The Economic Man

This paper questions how economic systems are using knowledge to support economic decision making. Scientific knowledge collected by centralized planners is not the right type of information to base economic decisions on since it does not have the capacity to consider local opportunity factors. These concerns, originally espoused by Frederick Hayek when analyzing the economy as a whole, can be decomposed to focus on individual businesses. A large corporation, encumbered with a traditional vertical organizational structure, typically has an executive management team taking on the role of the centralized planners in Hayek’s model, and is forced to make decisions without the local opportunity knowledge that may be available in their low-level business units. Economic decisions must fundamentally be based on accurate information that considers local opportunities, and must be made rapidly in today’s dynamic market place. To get access to local knowledge from their low-level business units, executive management teams should consider implementing learning organizations with horizontal management structures that encourage collaboration. Companies with centralized organizational structures simply move too slowly to be competitive. The “Economic Man” is an economist’s creation designed by Mr. Hayek to show how unlikely it is that economic decision makers could ever accurately predict future economic conditions. A hypothetical “Economic Man” with “perfect foresight” was described, in essence, to allow readers to visualize the futility of the assumptions underlying our current economic theories. Yet in today’s competitive business environment, perfect foresight is precisely the standard we impose on our executive managers. The perfect knowledge assumption is said to mislead these economic decision makers into a false believe the problem is simpler, from the perspective of the information needed to support such decisions, than it actually is. This results in poor investment decisions by managers that collect the wrong economic data. The division of labor concept notices that complex jobs can be more efficiently completed by a number of workers performing specialized tasks, than by one worker trying to complete the entire job. By dividing up the required skills on complex tasks across multiple workers, they can become specialists and work their assigned area more efficiently. The level of knowledge required to make workers skilled specialists is essential for the division of labor concept to be effective. Further knowledge is required to quantify economic input variables to the extent that decision makers in executive management can accurately predict how the marketplace will unfold and, in so doing, achieve an "economic man" like stature. No matter how we materialize or describe the problem; it seems the effective acquisition and use of knowledge is the correct answer. Peter Drucker relates the economic successes a corporation has with their ability to create “core competencies” that lead to market leadership positions. He begins to abstractly define the type of data that should be collected to help managers of these corporations monitor the strength and relative position of their core competencies. This relates to Mr. Hayek’s concern that managers need accurate, but relevant, information to base their decisions on. Just when things were looking bleak for our hypothetical “Economic Man,” these important steps define feasible types of real time information processing that can support economic decision makers monitoring the strength and position of core competencies. While it’s not quite as good as the perfect foresight imposed on our “Economic Man,” relevant, near real time economic data is a giant leap forward.