On knowing what we don't know

Friedrich von Hayek receives his Nobel Prize in Economy from Swedish King Carl Gustaf in December 1974.

Ever wander around Google and marvel about how issue-proponents from everywhere on the spectrum (but especially housing advocates) find data to support any conclusion they want? Opp Now's guiding light, Austrian economist Friedrich Hayek, had the same concern in the mid-20th Century. He held that excessive reliance upon what is supposedly measurable will produce misleading conclusions when applied to the human interactions and knowledge that comprise economics. Samuel Gregg explores the great man's thinking in Law & Liberty.

A common theme marking Hayek’s exploration of subjects like psychology, political science, and law was the conviction that the social sciences, including economics, had taken a wrong turn when they sought to follow as closely as possible the methods employed in the natural sciences. What Hayek called “scientism” had subsequently distorted economics by narrowly focusing it on what is measurable and observable. While that might work in the physical sciences, Hayek held that excessive reliance upon this methodology was bound to produce misleading conclusions when applied to the type of human interactions and knowledge that is the subject matter of economics. It was a theme to which Hayek would continually return, not least because it went to the heart of the nature of economics and its potential to contribute to human well-being.

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“Old” versus “New” Economics

Hayek was not the only economist to lament postwar economics’ scientistic turn following efforts by Keynes’s disciples to concentrate the discipline upon quantifiable macro-aggregates that, many postwar economists believed, could provide them with the information that governments and technocrats needed to direct and manage the economy. Hayek’s fellow market liberal Wilhelm Röpke wrote at length on the same topic. In a 1952 essay, “Keynes and the Revolution in Economics,” Röpke observed that the “new economics” embodied an entirely different logic to that of (pre-Keynesian) “old economics.” It was, however, Hayek who most systematically explored the philosophical origins of this shift and its political and economic consequences.

The most famous of Hayek’s ventures into this area was his 1945 American Economic Review article “The Use of Knowledge in Society.” Its immediate target was the thesis of left-leaning economists like the Polish socialist Oskar Lange that economic planning was compatible with the price mechanism’s workings. To this extent, Hayek’s article formed part of the socialist calculation debate that had been litigated since the 1920s. What made Hayek’s 1945 article distinct was that it addressed some of the underlying epistemological questions driving this debate: most notably, the perennial question of what human reason can really know. In Hayek’s view, this was the decisive point that made economic planning a generally ineffectual and potentially dangerous exercise.

“Today,” Hayek stated in 1945, “it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge.” Yet, he stressed, there are other types of information, much of which is specific to individuals. These include “knowledge of the particular circumstances of time and place.” Possession of such tacit and thus largely unmeasurable information gives, Hayek observed, “practically every individual … some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or made with his active cooperation.”

This article originally appeared in Law & Liberty. Read the whole thing here.

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