How Do People Read Hayek?

|Peter Boettke|

 

Often very differently!!!  But also very interestingly!!!  Embrace the opportunity to learn from those who look through a 'different window' and seek refinements of the analytical and institutional argument and historical understanding.  What all is entailed if we take the epistemic turn seriously in the social and policy sciences?

Volume 25 | No3. 3-4
Hayek: The Good, the Bad, the Ugly

Introduction
HAYEK’S TWO EPISTEMOLOGIES AND THE PARADOXES OF HIS THOUGHT
Jeffrey Friedman
ABSTRACT: Hayek developed two contradictory epistemologies. The epistemology for which he is famous attributed dispersed knowledge to economic actors and credited the price system with aggregating and communicating this knowledge. The other epistemology attributed to human and non-human organisms alike the error- prone interpretation of stimuli, which could never truly be said to be “knowledge.” Several of the paradoxes of Hayek’s economic and political thought that are explored in this symposium can be explained by the triumph of the first epistemology over the second, including his historical interpretation of socialism as a planning mentality; his tendentious definitions of “liberty” and “justice”; and his opposition to economic redistribution even as he endorsed all manner of economic and social regulations.

THE FAILED APPROPRIATION OF F. A. HAYEK BY FORMALIST ECONOMICS
Peter J. Boettke and Kyle W. O’Donnell
ABSTRACT: Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors’ subjective data are coordinated in a way that enables them to dovetail their plans and activities successfully? In attempting to solve this problem, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge. Despite purporting to have appropriated Hayek’s thought by acknowledging the information-transmitting role of prices, mainstream economists have missed Hayek’s point. The predominant tool of formal economics—equilibrium analysis—begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis, such as the economics of information, assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate).

HAYEK AND LIBERTY
Andrew Gamble
ABSTRACT: Hayek’s political theory is directed against coercion, which he defines as the intentional control of one person by another. The element of personal intention ensures a clear conceptual distinction between the freedom from coercion— i.e., the “liberty”—that is exercised in the private sphere, and the freedom of choice and opportunity that may be severely constrained by the impersonal, unintentional operation of market forces. Hayek’s narrow definitions of coercion and liberty therefore suggest that he was more intent on defending the benefits conferred on us by market forces than on affirming any value intrinsic in freedom—a suggestion confirmed by his lack of interest in species of freedom, such as autonomy, that might conceivably be fostered by state coercion. Hayek’s consequentialist defense of liberty, however, was grounded in economic doctrines such as his own view that prices served a vital epistemic function. Given his strictures against the ignorance of modern electorates, Hayek was driven to propose extravagant limits on democracy and to embrace traditionalism; a different Hayekianism might limit inequalities of wealth and encourage the ability to learn from experimentation.

THE ROAD TO SERFDOM’S ECONOMISTIC WORLDVIEW
François Godard
ABSTRACT: At the end of World War II, F. A. Hayek denounced the then-popular idea of central planning by arguing that, if pursued to its logical conclusion, it would entail totalitarianism. But there were at least two problems. First, judging by his example of Nazi Germany, state control over the economy appears to be a consequence, not a cause, of the monopolization of political power. Second, Hayek conflated socialism and mere interference in the market with central planning. Therefore, history did not so much falsify Hayek’s prediction as bypass it: Once the vogue for central planning faded in the West, Hayek’s book became irrelevant— except, ironically, in Germany. There, it was read as a manifesto for “good planning” through the rule of law. Alongside other “neoliberal” writers, Hayek had a profound (if little acknowledged) influence on the shape of the emerging Federal Republic and, through it, on the whole European institutional framework.

HAYEK’S BUSINESS-CYCLE THEORY: HALF RIGHT
Daniel Kuehn
ABSTRACT: The Great Recession has brought with it a renewed interest in Hayek’s business-cycle theory, which holds that loose monetary policy generates an unsustainable boom characterized by a lengthening of the capital structure. Hayek’s theory has received robust criticism for decades, although the criticisms have varied in quality. Various empirical disconfirmations pose the most serious challenge. The small empirical literature on the subject generally confirms Hayek’s predictions about variations in the capital structure, but has not persuasively linked the capital structure to the business cycle. A better option, then, may be to abandon Hayek’s business-cycle theory, preserve his capital theory, and graft it onto a Keynesian or monetarist understanding of the business cycle that is more consistent with modern macroeconomics.

HAYEK, SOCIAL THEORY, AND THE CONTRASTIVE EXPLANATION OF SOCIO-ECONOMIC ORDER
Paul Lewis
ABSTRACT: Hayek’s later work on the possibility of socio-economic order in decentralized market economies is an exercise in contrastive causal explanation as conceptualized by realist social theorists and philosophers. This interpretation of Hayek’s work lends support to the view that Hayek’s post-1960 writings can be thought of as an example of comparative institutional analysis. It also provides a means of reinforcing Hayek’s own efforts to establish the scientific credentials of his work.

THE “MIRAGE” OF SOCIAL JUSTICE: HAYEK AGAINST (AND FOR) RAWLS
Andrew Lister
ABSTRACT: There is an odd proximity between Hayek, hero of the libertarian right, and Rawls, theorist of social justice, because, at the level of principle, Hayek was in some important respects a Rawlsian. Although Hayek said that the idea of social justice was nonsense, he argued against only a particular principle of social justice, one that Rawls too rejected, namely distribution according to individual merit. Any attempt to make reward and merit coincide, Hayek argued, would undermine the market’s price system, leaving us all poorer and less free. Like Rawls, Hayek held that we should assess social institutions from behind a veil of ignorance, and he thought that doing so pushed us toward egalitarianism. Most of the distance between Hayek and Rawls at the level of policy stems from Hayek’s optimism about the operation of markets, his equivocation about the meaning of central concepts, and his appeal to under-argued slippery slopes. Hayek wavered, however, between claiming that private property and markets benefit everyone, compared to the feasible alternatives, and the principle that they maximize the opportunities of a randomly selected member of society, i.e., aggregate opportunity. Contemporary Hayekians claim that capitalism raises the position of the worst off in the long run, in future generations, whereas Rawlsians insist that inequalities between social positions should benefit the worst off now.

THE PLANNERS AND THE PLANNED
Alan Ryan
ABSTRACT: Much of what makes Hayek so controversial can be found in The Road to Serfdom, the theoretical basis of which is provided by The Counter-Revolution of Science. The Road to Serfdom, a polemic against the “planning mentality,” did not defend complete laissez faire, but argued that planning disrupts the coordination between prices and supply and demand; that effective planning is thus impossible in a modern industrial society; that it is coercive; and, of course, that it leads to totalitarianism. In The Counter-Revolution of Science, Hayek argued that the “planning mentality” is the result of the hubristic attempt to reconstruct society along scientific lines. But the likes of Edward Bellamy envisioned a planned but free society, while John Dewey contrasted planning, where people collectively choose their goals, against a planned economy that is coercively imposed. Hayek’s welcome strictures against a scientistic society and an overly ambitious social science aside, his binary approach to intellectual history distorted through oversimplification.

SOME IMPLICATIONS OF HAYEK’S COGNITIVE THEORY
Michael Strong
ABSTRACT: Hayek’s oft-neglected cognitive theory, articulated in The Sensory Order, provides a foundation for a theory of innovation that integrates cognition, experience, and the importance of freedom for the creation of entirely new conceptual categories and fundamentally innovative entrepreneurial endeavors. For Hayek, one sees only what one is prepared to see; that is, we can notice sensory and other phenomena only after we have classified the data into often-implicit abstract categories that are mediated to us physiologically. Learning takes places by using received categories while innovation takes place by creating new categories or moving data from one category to another, which is often an attempt to resolve anomalies. The new perceptual awareness required for discovery leads, in turn, to new categorizing and new perceptual horizons. Such innovation often requires not just freedom of imagination, but freedom of action, for one has to be able to try out many different perceptual possibilities.

HAYEK, EQUILIBRIUM, AND THE ROLE OF INSTITUTIONS IN ECONOMIC ORDER
Karen I. Vaughn
ABSTRACT: Inthe1930s, socialist economists used the assumptions of equilibrium theory to argue that a central planner could coordinate supply and demand from above. This argument led Hayek, over the years, to try to explain the limitations of equilibrium theory and, conversely, to explain how capitalism functioned without the assumptions of equilibrium being met. In a changing world of agents who are ignorant of the future, how is a functioning market “order” possible? One answer can be found in Hayek’s argument that evolved rules make people’s future behavior more predictable and, more to the point, that they contain previously accumulated knowledge that provides the building blocks for future economic growth. Hayek’s evolutionary theory was flawed, however, in failing to explain how people can know which rules are responsible for their success or failure so that they persist in using those rules and pass them forward in time. However, markets provide immediate feedback about success and failure through profits and losses. An evolutionary explanation of the economy would have permitted Hayek to dispense with the metaphor of general equilibrium, which was increasingly irrelevant to his understanding of economic order.

Comments

[Roger McKinney]

No comments yet? Here are some on Kuehn's article off the top of my head. I refuse to put too much into critiques of Hayek when it's obvious the critics have put so little effort into understanding Hayek.

Hayek’s critics tried to understand his theory through the lense of equilibrium analysis. Clearly that is not possible. I have read a great deal of criticism of Hayek and for the most part my impression is that the critics may have “read” Hayek but never understood him.

Kuehn: “Hayek’s macroeconomic dynamics are evocative of a Rube Goldberg contraption…”

Milton Friedman called Hayek’s “Pure Theory of Capital” incomprehensible. I thought it was brilliant. I have often said the ABCT is too difficult for most PhD economists. I have to agree with Mises who said Friedman was a good statistician but he was not an economist.

Tullock: “I cannot recall the interest rate even being mentioned in any of our discussions of production matters.”

Hayek makes clear in “Profits, Interest and Investment” that businessmen do not pay attention to interest rates. I’m surprised Kuehn never sees that after citing the book. Businessmen follow profits. Hayek shows that reducing interest rates increases profits to be made in longer term investments, such as fixed equipment.

However, one of Hayek’s main points in PII was that the Ricardo Effect would happen even if the banks or central bank did not raise interest rates. Consumer price inflation would make labor cheaper relative to the sales of the company that employed them, not to other consumer goods as Hayek’s critics wrote. The cheaper labor would make investment in short term, labor intensive projects far more profitable. Businessmen would put off buying capital equipment in favor of labor intensive methods. The Ricardo Effect is little more than the capital/labor production possibility frontier taught in standard micro.

Kuehn: “So why are they fooled into building an unsustainable, distorted capital structure in the first place?”

Very few are fooled. Hayek’s point is that the profits available because of low interest rates are too tempting. Some cannot resist the temptation and will assume they can dodge the bullet. If none succumb to temptation, banks will keep reducing rates until someone takes the bait. Several papers have been done on the fact that low interest rates encourage greater risk taking.

And Hayek’s theory does not require every last businessman to do the same thing. Most businessmen weather recessions very well. But it only takes a few, and only in a few industries to cause a recession.

“Cowen notes that since the economy is operating at capacity any increase in capital goods production has to come at the expense of consumer goods production.”

Cowen just demonstrates his ignorance of Hayek. Hayek and all Austrian economists insist that even at full employment greater consumption and investment take place at the same time. That becomes possible because of capital consumption, a well established phenomenon during the boom. However, in PII Hayek shows how the theory works with high unemployment as well.

“Recall that the upper turning point occurred precisely because of this tension between consumption and investment.”

No, not at all. The upper turning point happens because of the Ricardo Effect, the trade off between capital and labor investment, not because of the “tension between consumption and investment.”

“A correlation between the depth of a recession and the height of the subsequent boom would strongly imply that recessions are the consequence of a shock that had nothing to do with the preceding growth period, and that the recovery was just a reversion of the economy back to its stable growth path.”

Keynes assumed that recessions are random events and all his followers have done the same with no evidence to back it up. Friedman’s little regression trick may imply what he suggests, or it may imply a lot of other things. He just lacked imagination.

“Friedman’s simple empirical exercise offers the greatest blow to Hayek of all the criticisms discussed here.”

As I pointed out above, Friedman admitted that he could not understand Hayek’s theory. I fail to see why Friedman’s regression is so devastating. If I remember correctly, Hayek proposed proportionality between the boom and bust based on the size of the expansion of the money supply during the boom, but ceteris paribus. Since ceteris paribus never holds, many things can distort that proportionality in the data. And I wonder if Friedman was a victim of what McCloskey calls the tyranny of statistical significance?

As for the empirical research, the work of Borio at the BIS provides empirical confirmation of Hayek’s work and the ABCT in general. Borio was among a list of prominent, non-Austrian economists provided by Boettke on his blog who offer empirical support for the ABCT. I’m surprised Kuehn didn’t consider them at all.

The interesting thing about the ABCT is that it began with the observations of Cantillon about money, investment and business cycles. The Manchester school and other classical economists noticed the same things. When credit expands, businesses in the capital goods sector invest more than those in consumer goods. Unemployment and business losses are higher among capital goods industries in recessions than in consumer goods. As Hayek wrote, the data may not be available, but some things are too obvious to require data as support.

I would like to see a similar treatment of the empirical evidence for Keynesian econ. I have seen a lot of studies that assume their conclusion, but no real test of the empirical data.

“Although a large recession did occur in 1980, it is widely acknowledged that this downturn was deliberately (i.e., exogenously) caused by Paul Volcker at the Federal Reserve, and that it was not the result of any endogenous tendencies in the economy.”

This is clear evidence of Kuehn’s lack of understanding of the ABCT. Hayek wrote in “Monetary Theory and the Trade Cycle” that the boom may end because banks fear rising inflation and raise their rates. Austrians have always insisted that this is a frequent cause of the turning point. But if the Fed doesn’t raise rates the recession will happen anyway because of the shift in profits to the consumer goods industries.

“Determining the real value of federal funds rate is trivial…”

No it isn’t. Of course one can subtract the cpi from the nominal rate. That is trivial. But the cpi tells us very little. Rapid increases in productivity can prevent cpi increases in the face of rapid monetary expansion. Hayek et al mentioned that as a feature of the roaring 20’s. That makes the calculations of real rates meaningless unless one wants to adjust for productivity increases as well.

“…who use data on inflation and output to determine the interest rate consistent with stable prices and the economy operating at its full potential.”

I doubt seriously that Hayek or Mises would accept that as a proxy for the natural rate of interest. In Hayek’s mind the natural rate had no connection to price inflation. In fact, many Austrians and critics are guilty of taking the quantity theory of money too literally, as Mises wrote.

“Low interest rates do not always indicate loose monetary policy if they are consistent with time preferences.”

I’m not sure where Kuehn gets this obsession with comparing monetary policy with time preference. I haven’t seen it in Hayek and Mises. Time preference is nothing but an explanation for the origins of interest. It is only a component of market rates and the natural rate. Other components include risk, profit and productivity.