This Week’s Applied Hayek: Why Sound Economics, Like Political Philosophy, Begins with Socratic Ignorance

Hard to believe, but my fall course for the Ashbrook Center at Ashland University on the political economy of a free society held its last class session last night.  Where did the semester go?  Over the course of the semester the class dilated four core concepts, and related derivatives, over a wide variety of case studies and circumstances: Hayek’s “knowledge problem”; Bastiat’s “broken window fallacy”—or the importance of having an intuition for “what is unseen” in economic matters; the crucial role of property rights and incentives; and the several postulates of public choice theory.

The main “takeaway” is simple, however, and is lifted straight from Hayek’s last book, The Fatal Conceit:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

A good axiom to recall in the age of Obamacare, Dodd-Frank, etc.

We spent time in the last class session on Hayek’s Nobel Prize lecture from 1974, “The Pretense of Knowledge.”  A close reading of some key passages shows that Hayek’s insights really apply to the social sciences as a whole, and especially to political science, perhaps the most pretentious but paradoxically the least applicable of all the social sciences.  In this first excerpt, Hayek makes reference to one of his classic underappreciated books, The Counter-Revolution of Science:

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error.  It is an approach which has come to be described as the “scientistic” attitude—an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”

Hayek goes on to observe that the phenomena studied by the physical sciences are comparatively simple compared to social phenomena.  This might seem bizarre to people who try to follow the difficult mathematics of quantum mechanics, or who puzzle over string theory or dark matter.  Here’s Hayek’s presentation:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.  While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all of the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.

Perhaps a simple example may suffice: we can build the Large Hadron Collider to smash up some atoms to observe whether the Higgs Boson particle exists or not, but we can’t, despite all our cleverness, build an observation machine that can accurately simulate the economy or validate any predictive models of future economic performance.  Physics and chemistry are simpler than economics—or politics—even if the math is harder.

One of the insights of the Austrian school, especially Von Mises work, is that the main study of economics is human behavior—Human Action, as Von Mises called it in his largest and most famous title—and although some aspects of human behavior can be quantified objectively, there is simply too much of human behavior that is “irrational” or “subjective,” which the classical authors understood as the passions.

And so here is Hayek’s all-important conclusion to his Nobel lecture:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. . .  The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson in humility, which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Behold, the concept of Socratic ignorance—“I know that I know nothing”—the beginning of philosophical wisdom, applied to economics, perhaps the best and certainly the most practical of the social sciences, but still vulnerable to the defects of all social science.  One can read this dominant strain of Hayek’s work as a close analogue to Allan Bloom’s teaching about Socrates’ message of moderation in The Republic.  But as you step back, you can see that Hayek’s body of thought transcends mere economics, and why he deserves to be regarded as a political philosopher.

Parting thoughts: Perhaps it’s not a mere coincidence that I have learned that Hayek served with Leo Strauss on at least one dissertation committee (for Eugene Miller) while he was at the University of Chicago, though I’ve never heard anyone remark on a possible overlap in their perspectives.  And though this semester’s class is over, I’ll probably keep posting more Hayek gems here, as I’ve recently ordered several volumes of Hayek’s collected works and am making my way through some of his more obscure or overlooked writings.