Montreal, February 15, 2005 • No 151

  

CAPITALISM & COMMERCE

 

Dr. Edward W. Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia. He is the author of Capitalism and Commerce.
 
 

THE ROAD TO OBJECTIVE ECONOMICS: HAYEK TAKES A WRONG TURN
 

by Edward W. Younkins

 

          Carl Menger (1840-1921) took the first steps on the road toward objective economics with his Aristotelian approach to metaphysics and epistemology and his relational theory of value. Ludwig von Mises (1881-1973) took a few more steps down that road but got off the path with his neo-Kantian aprioristic perspective on epistemology. Murray Rothbard (1926-1995) put economists back on track when he explained that a realist natural-law-oriented approach could provide a better underpinning for Misesian praxeology. Unfortunately, Friedrich A. Hayek (1899-1992), 1974 Nobel prize winner and the most well known of the Austrian economists, took a wrong turn by ignoring the foundations provided by natural law and the praxeological method and drifted further and further into error.
 

Critique of Human Reason

          Hayek is primarily concerned with the nature, scope, limits, use, and abuse of reason in human life. For Hayek, a man's knowledge of the world and himself is at best limited, incomplete, and uncertain. Viewing the task of philosophy as the investigation of the limits of reason, he said that men needed to be aware of the limits of one's knowledge and that each of us should take our ignorance seriously. Analogously, the function of economics is to show men how little they know about what they presume that they design. He emphasized the extent of human ignorance with regard to the decisions of particular individuals. Hayek explained that the fatal conceit was man's undue faith in the power of reason. Speaking of man's inevitable ignorance, he says that a person should be cognitively humble and should not exhibit the pretense of knowledge. Hayek is particularly concerned with the hubris of reason that distinguishes constructivist rationalism. According to Hayek, if people are to understand how society works, they must try to define the nature and extent of their ignorance regarding it. It is important for social scientists to "know" that they are ignorant and that they can never know or act in total consideration of all the facts relevant to a particular situation. It follows that social order cannot be the product of a directing intelligence.

          A critic of political utopianism, Hayek argues that there is no way for bureaucrats to make intelligent decisions to deliberately plan or design an economy because it is impossible for them to gain and possess sufficient knowledge. Individuals act on the basis of local knowledge and their dispositions and preferences that they can not totally express to themselves, let alone communicate them to some central authority. In other words, social arrangements cannot be products of deliberate calculations by social engineers. He explains that it is man's fallibility together with the limits of reason that mitigate against a designed utopian order. Centrally-directed economies are therefore bound to fail because they rely upon the limited knowledge of those who give the orders. Hayek explains that the proper role of the state is to create general rules which facilitate mutually beneficial interactions rather than to prescribe specific outcomes. It follows that by not interfering in the spontaneous social order, concrete practical knowledge can most effectively be employed.
 

Spontaneous Social Order

          Hayek rejects central social planning as a solution to the problem of attaining social order. Instead, he emphasizes the importance of decentralized decision making in the achievement of spontaneous social order. Hayek described and expanded the idea of spontaneous order first articulated by Adam Ferguson and Adam Smith. His notion of spontaneous order refers to social institutions and practices that are the products of human action but not of human design. Hayek argues that many forms of social interaction are coordinated through institutions that are unplanned and part of a far-ranging spontaneous order. Spontaneous orders include language, markets, money, customs, traditions, and rules of conduct as exhibited in moral systems and systems of law. These have evolved without any conscious designer guiding them. The convergence of numerous rule-following people on one system of rules constructs social objects such as markets, money, language, law and morality which themselves are models of a spontaneous social order. Hayek maintains that institutions and values are determined as a part of a process of unconscious self-organization of a pattern or structure.

          Hayek emphasizes the division of labor and its analogue, the division of knowledge. He explains that a spontaneous order can use fragmented knowledge that is dispersed among people. He says that each individual possesses specialized and local knowledge and that all the bits of specialized knowledge contribute to overall social order. Based on their local knowledge, people adapt to changing circumstances, pursue individual objectives, and engage in voluntary exchanges and cooperative relationships. It follows that civilization is founded on the use of much more knowledge than any one person is aware of or is capable of being aware of.

          The division of knowledge increases the ignorance of any one person with respect to most of the knowledge. Hayek points out that the knowledge of which an individual is explicitly aware when engaged in some activity is only a small fraction of the knowledge necessary to successfully engage in that action. People cannot know nor articulate the full context of their decisions. Hayek contends that because it is undesigned, rather than being the product of rational thought, the spontaneous order of society can accommodate the ignorance we all share of the many bits of knowledge on which society depends. He says that the structure of human activities constantly adapts itself to a multitude of facts which in their entirety are not known to any one person.

          Hayek explains that markets make use of knowledge that goes beyond what could be obtained by a central authority intent on instituting a consciously ordered pattern. The market via the competitive price system is able to coordinate the activities of the participants in the market. He goes on to say that the price system is undesigned and not intended to fulfill the various purposes that it actually serves.

          According to Hayek, the rule of law underpins the idea of spontaneous order. As explained by Hayek, the rule of law requires law to be: (1) general and abstract, (2) known and certain, and (3) equally applicable to all people. The rule of law is concerned with property, contracts, and torts and supplies a system of impartial rules that serve as a framework within which individuals and voluntary associations can seek their own diverse purposes and ends. When a free society is ordered through the rule of law it does not require a hierarchy of purposes or ends.
 

Evolutionary Epistemology and Ethics

          Knowledge, for Hayek, is a product of trial and error learning. It is an accumulation of functional and beneficial responses to the demands of man's survival. Hayek explains cultural evolution with his thesis of the natural selection of competitive traditions in which traditions and social systems compete to filter our errors. Knowledge and rules are tested out by people in both the physical and social environments and are selected via competition based on their value to human survival. It is through unplanned evolutionary progress with incremental alterations that human beings adapt themselves to life's contingencies. For Hayek, evolution simply means adaptation to changing environmental contexts. All rules governing social life are viewed as the products of evolutionary selection and modification. Social rules embody the knowledge of a given period. Hayek contends that systems of social rules providing successful behavior are adopted by others without conscious reflection.

          Hayek's evolutionary perspective on human survival included an evolutionary theory of ethics. For Hayek, moral conventions are part of the evolving and spontaneous social order. He explains that values are relative to particular historical circumstances and that people accept the values for which critics cannot find a reason to reject them. These unplanned moral conventions are neither invariant nor immutable. They change in accordance with the circumstances and needs of people who sanction them. According to Hayek, evolved moral traditions surpass the capacities of reason. Like Hume, Hayek views morals as a presupposition of, rather than as a product of, reason.
 

"For Hayek, moral principles are not objective and frequently are unable to be articulated. He rejects teleology and the possibility that a system of objective morality can be developed."


          For Hayek, moral principles are not objective and frequently are unable to be articulated. He rejects teleology and the possibility that a system of objective morality can be developed. According to his evolutionary and emotive theory of ethics, values are not absolute and are based on one's feelings and convictions. Values are ends that reason serve but which reason cannot determine.
 

Hayek as Communitarian

          Hayek explains that social institutions and rules of conduct act as vehicles of knowledge regarding human beings and the world. Social norms, customs, mores, folkways, taboos, habits, and other rules build up over time and are learned through imitation. Rules are discovered when people interact through speech and example. These rules are accumulated, adapted, sometimes eliminated, and transmitted from person to person and from one generation to another. It is through emulation and mimetic contagion that rules conferring successful behavior replace rules that are misappropriate for the environment.

          For Hayek, all knowledge is, at the core, tacit or practical knowledge that exists in the dispositions or habits of people to act in a rule-governed manner. This tacit knowledge is embedded in social rules internalized by one's personality. Know-how refers to one's capacity to act according to rules in concrete situations. He explains that doing something always involves a practical knowing-how that tends to be tacit or inarticulate and not susceptible to explicit formulation. Such knowledge is first embodied in practices and skills rather than in theories.

          Hayek emphasized the socially-constituted nature of man. He says that society defines the individual and that the self or human personality is made by social rules. Man's nature, character, and awareness of moral duty derive from man's social-embeddedness. Hayek explains that inherited social rules of perception and action form a person's goals and construct his deliberative capacities. Social structure is a precondition of social agency, and shared values delineate the ends and set the bounds to such agency. According to Hayek, rules, traditions, folkways, customs, mores, and so on of a culture establish habits of thought and restrain people's actions.

          According to Hayek, customs and conventions supply the template for the orderliness of the world including our shared moral values. These rules help people to know what to do in various situations. Actions of others are predictable to the degree that a person shares with them a common framework of perception and action. It is because of the existence of such a framework, built up through trial and error, that an individual is not totally disoriented when he enters unfamiliar circumstances. Hayek is very interested in studying the patterns of communication through which a person understands others and anticipates their behavior.
 

Cultural and Biological Factors

          Hayek maintains that a person obeys social norms because he feels that he must obey them. These norms, ingrained in biological and/or cultural structures, are transmitted through birth or education. Because they interact in complicated ways, Hayek says that we cannot precisely differentiate between instinct and habit as they affect norms. Such norms embody the experience gained through trial and error of many generations. Individuals pursuing their own goals learn to conform with shared norms and constraints so that their exchanges and interactions will be orderly and favorable.

          Viewing man's reason as very limited, Hayek explains that a person develops "ideas" intuitively and passively. In fact, he says that a man's senses alone are able to discern recurring patterns or order in events without resorting to mental operations. According to Hayek, the capacity of a man's senses for spontaneous pattern recognition exceeds the ability of his mind to specify such patterns. He contends that somehow a man's senses are able to theorize and to react to unconscious inferences in his perceptions. Hayek acknowledges the inability of the human mind to grasp the basic rules that govern its operations. He explains that conscious thought is governed by a supraconscious mechanism, which itself cannot be conscious, that operates on the contents of consciousness. This supraconscious or metaconscious mechanism is the sensory order.
 

Hayek's Philosophical Influences: Kant, Popper, and Wittgenstein

          Hayek is a post-Kantian critical thinker. Like Kant, he disclaims a man's ability to know things as they are or the world as it is. For both Hayek and Kant, the world we see, the phenomenal world, is the product of the creative activity of our minds as they interact with the world. Any order a person finds in his experiences is the product of the organizing structure of his mind. In other words, man's mind is impotent to know true reality (i.e., the noumenal world). This led Hayek to proclaim that the concept of "things in themselves" served no purpose and thus could be omitted. Accordingly, he rejects the Aristotelian method of searching for the essences or natures of things. This leaves Hayek with the purely concrete-bound knowledge of the phenomenal world.

          Hayek states that a person cannot step out of his human point of view as to obtain a presuppositionless perspective on the world in its entirety and as it is in itself. As an element of the world, man does not have a privileged position that would permit him to stand outside and see objectively how reality and all of its laws go together. A person can never achieve a synoptic view of the world as a whole or of the workings of his own mind. Hayek says that it is impossible for a person's brain to produce a complete explanation of the specific ways which the brain itself classifies stimuli because any such device would necessarily have to possess a degree of complexity greater than that which is classifies. In other words, to fully explain a man's knowledge, he would have to know more than he actually knows or that he is able to know.

          Unlike Kant, Hayek contends that the mind is subject to evolution and is constantly changing. Like Karl Popper, Hayek has championed an evolutionary epistemology which holds that the fundamental categories and structural principles of men's minds comprise evolutionary adaptations of human beings to the world. He explains that the mind categorizes phenomena which it uses to refine further its own categories. According to Hayek, because the mind's categories are changeable, logical reasoning may differ according to time, place, and person. Hayek's evolutionary epistemology, which includes the notion of the mind as consisting of matter and its relations, leads to the conclusion that there is no free will. He states that the controversy about free will is a "phantom problem" but he does accept that each person has a unique personal subjective will. By this vague statement he seems to mean that a person's "choices" are determined by the interaction of the material that makes up the specific person and the material that constitutes the rest of the world. Hayek maintains that the causal determination of human action is compatible with assigning responsibility to human agents for what they do.

          Hayek, like Popper, views human beings as fallible and science as the product of a process of conjecture and refutation. Hayek adopted Popper's idea that it is the falsifiability of a proposal, rather than its verifiability, that makes knowledge empirically testable. Both held a critical polemical approach to theory formulation contending that no knowledge can be verified. At best we can say that it has not yet been falsified but that is falsifiable.

          The writings of Ludwig Wittengstein, the philosopher and linguist, influenced Hayek's contention that the study of language is a necessary precondition to the study of human thought. Wittengstein maintained that philosophy cannot get beyond the limits of language. He and the other logical positivists explained that the purpose of philosophy is to analyze and clarify the meaning of words. They also held that the only road to knowledge was through controlled experiments employing quantitative and scientific methods. It was Wittengstein primarily who prompted Hayek's interest in the way language influences a person's thoughts and creates his picture of the world. Hayek also followed Wittengstein with respect to his emphasis on the important role of social rules in the transmission of tacit or practical knowledge.

          For Hayek, as for the logical positivists, words, rather than reality, became the starting point of analysis. Hayek engages in deconstruction by breaking down words and language to find their meaning which for him was determined by agreement among minds. He was interested in studying the interaction between minds in which individuals' definitions and ideas are tested and corrected by other people. Hayek saw linguistics as a coherent body of theory with which to begin his study of the social world.
 

Getting Back on the Road to Objective Economics

          Whereas Hayek exhibited breadth as an eclectic and intuitive scholar, he does not present a logical and coherent philosophical system. Moreover, he saw himself as a dissector, analyzer, puzzler, and muddler and certainly not as a master of his subject or as a systems-builder. His skeptical approach is grounded on a view of the limits of human reason. Hayek is certainly correct in arguing for the impossibility of using a particular understanding of reasoning (i.e., deliberative reasoning) to engage in central social planning. Unfortunately, Hayek equates individual human reasoning with the deliberative reasoning used by social designers and engineers. An individual uses his practical reason to identify his needs, wants, and constraints and to choose, create, and integrate all the values, virtues, and goods that comprise his personal flourishing. By disparaging reason in general, Hayek sanctions a type of spontaneous order that implies the unimportance and inadequacy of individual rationality. He would have been much wiser to have rejected state planning on the moral grounds that such planning would frustrate individual sovereignty.

          Although Ayn Rand (1905-1982) was not an economist, her rational epistemology and Objectivist ethics not only bring us back on the road to objective economics traveled by Austrians such as Menger and Rothbard, her ideas move us further down that road. Her epistemology transcends both Mises' rationalism and Hayek's empiricism. In addition, Objectivism's Aristotelian perspective on the nature of man and the world and on the need to exercise one's virtues can be viewed as compatible with Austrian economics. Ayn Rand's Objectivist worldview can provide a context to the economic insights of Menger, Mises, and Rothbard. Unfortunately, as detailed in this essay, Friedrich Hayek is probably not even on the same road, but if he is on the same road he is traveling in the wrong direction.
 
 

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