The dispersion of knowledge and its equilibrium

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Many theorists like Hayek wrote interesting concepts about the idea of knowledge dispersion and equilibrium [Hayek 1937]. However, I have noticed the use of words like information and knowledge interchangeably. Data is the raw material of the decision maker: it has no context and thus cannot be used efficiently to take decision. An added value would elevate the data into information and thus including the context, which is a form of organization. If this information has a practical and economical value, it would then and only then be upgraded to the status of Knowledge. Finally the knowledge that has been used many times with success is called wisdom. The Market has dispersed knowledge, it is not controlled by anyone. You cannot plan it since people have independent will altogether [Hayek 1937].

Knowledge does not exist only in a few minds instead it lies in the minds of the many. The knowledge we talk about is the knowledge about a particular resources and a potential opportunity[Hayek 1945]. Hayek was one of the foremost researcher to pinpoint on the concept of tacit knowledge.

Hayek pointed out that the data are not "given." The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have. In short, the

Karym Medhat Metwally The dispersion of knowledge and its equilibrium

market process generates the data. Without markets, data are almost nonexistent[Hayek 1937]. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned- the market was not designed by anyone but evolved slowly as the result of human actions [Hayek 1937].

2 The dispersion of knowledge in the market

Knowledge is not central by nature, it has the tendency of dissipating. Hayek preached that the market is made of dispersed decisions and dispersed competitions [Hayek 1937]. This will be explained using the theory of entropy or the second law of thermodynamics. The knowledge resides not inside the company, but outside in the brain of customers and competitors. Peter Drucker has long ago preached for this concept and have declared at the time that the results lies outside the company[Drucker 1995].

The company must at all time seek the knowledge who lies outside, this is done by asking for the customers and competitors' knowledge contribution. Yes, the competitors, this is because a respected rivalry is very important in each industry.

A monopolistic company like a monopolistic country in the long term would not survive. For example, after the cold war the United States found itself as the only superpower, and it needed badly another country as its business competitor and China was obviously the chosen one. "It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know" Friedrich August von Hayek.

3 The dispersion of Knowledge in the supply chain

The supply chain also witnesses the phenomenon of knowledge dispersion. The longer the supply chain and the more stronger is the dispersion effect. This effect is call the Bullwhip effect, and the effect is that the source company witnesses a dissipation of its knowledge along the supply chain. The longer the supply chain, the less control has the source company in the system and the more variability it encounters [Lee 2010].


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Karym Medhat Metwally The dispersion of knowledge and its equilibrium

4 The Dispersion of knowledge over the timeline

Financial analysts know that securities bonds or stocks in what matters are more sensitive to risk in the long term compared to the short term. This phenomenon happens because knowledge of the future is more variable than it is in the present. This sensitivity is clarified mathematically by the NPV formula:

As we move along in the timeline, the more the Denominator increases and the thus cost of capital increases, this is because of uncertainty. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills [Hayek 1945]. The more we move, the more and more the risk increases. Risk can be defined as a state of uncertainty or in other words as the lack of knowledge. The Risk is divided in sub-factors of risk:


Karym Medhat Metwally The dispersion of knowledge and its equilibrium

Default Risk : The risk that the recipient of the debt is unable to pay the principal along with the interest.

Maturity Risk: The Risk of having a maturity date too far in the timeline

Liquidity Risk: The risk that the recipient of the debt is unable to gather enough liquidity from the sale of its assets.

All the previously stated risks have increased variability with time. Thus, the dispersion increases as we move into the timeline.

5 The dispersion of knowledge in the team

The issue of centralization versus dispersion. Knowledge is also not central inside the team, thus a central decision is not possible on the long run. The leader must always get the knowledge from the team. This does not mean that the decision making must always be made by the group, however the knowledge is extracted from the group. The leader has then the choice to involve the group, take into account their worries, or take the decision himself altogether. It would be impossible for a single mind to secure resources, because each resources value is only known by the beholder of this very knowledge. Thus, the team leader would be better off to provide a productive environment instead [Hayek 1937]. "He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants" Friedrich August von Hayek.

6 The state of equilibrium

Many theories declared that equilibrium is an optimum state, my view is it is quite the contrary. A system in non-equilibrium is the sought-off state. To clarify furthermore, let me explain my view using the theory of entropy. Maximum Entropy was for so long defined as the chaos of the system. This was later on corrected to be more precisely defined as the state of equilibrium. The entropy theory and the information theory took a lot from the second law of thermodynamics.

If I put a hot cup of coffee in a cold room. The energy inside


the cup as the time passes will be insufficient to match the dissipation of energy into the cold room. I didn't say there was a loss of energy, rather a transformation of energy from the hot cup into the cold environment of the room. This is because the first law of thermodynamics states that that energy is not lost it merely changes form.

If we get back to the cup of coffee, what happened is that the cup became cold and reached the state of maximum entropy. In other words, it reached an equilibrium state with the ambient room. This state in physics is called the death of the system. If we apply this phenomenon in Economics, the market is always better off in a state of non-equilibrium. If this phase is reached the leader must engage in a process of destabilizing the system, we call this in management ..Change.

Many theories of economics promote the equilibrium of the supply and the demand, and Theorists like Hayek demonstrate that such equilibrium is achieved if there is the match between the party that offers a product or a service with the user of such a product or service[Hayek 1937]. The entrepreneur job is then to match this particular resource to this potential opportunity[Hayek 1945].

7 Dispersion as uncertainty and Equilibrium

Thus, what we mean by dispersion is the dispersion of knowledge into the environment, and equilibrium is the state where the dispersion of knowledge to the environment has reached its maximum and thus, is equal to the environment. In business, this translates that the enterprise must attempt to manage its knowledge dispersion as to avoid an equilibrium with its environment. This is done by gathering knowledge from the environment which is greater of which is currently dispersed in the environment.

The terms entropy, uncertainty, and information are used more or less interchangeably, but from the perspective of probability, uncertainty is perhaps a more accurate term. The formula for entropy/uncertainty is


Myron Tribus [Tribus 1961]calls the term

the surprisal.

Surprisal is the degree to which you are surprised to see a result. When the probability is 1, there is zero surprise at seeing the result. As the probability gets smaller and smaller, the surprisal goes up with positive infinity as the maximum value.

I would prefer to call it uncertainty and therefore be thought of as a weighted average surprisal.

If the data contains mostly a few events, each with relatively high probability, then you are unlikely to be surprised very often. But if the data contains a large number of rare events, then you are encountering numerous surprises .

Here are an example of entropy calculations. If we return to the concept of the dispersion of knowledge in the team work.

Suppose we have a team with participants: A, B, C, D, and E.

Let's suppose that the team seek the same objective. If everyone agreed on the objective, P is the probability of compliance:

then the entropy would be calculated as,

implying no uncertainty in the domain of team compliance.


As another taken from the field of statistics and the information theory discovered by Claude Shannon [Shanon 1949].

Entropy is a key measure of information, which is usually expressed by the average number of bits needed for storage or communication. Intuitively, entropy quantifies the uncertainty involved when encountering a random variable. For example, a fair coin flip (2 equally likely outcomes) will have less entropy than a roll of a die (6 equally likely outcomes).

8 Conclusion

I believe that equilibrium is not an optimum state and I differ with the notion that the entrepreneur main job is to match the particular resource with the this potential opportunity. Instead should be an agent of change always destabilizing the ratio of resource / opportunity.

Enterprises are not created to earn profit, it is established to create wealth for its shareholders. Although the liquidity test tells us if there is a problem or not, the Eva Test on the other hand states that a business returns a profit that is greater than its cost of capital, then it does not create wealth[Drucker 1995]. In this paper, I have tried to point to the relation between equilibrium, dispersion of energy and foresights. This may open the way for further research in the field of econophysics.