The work of Bruce Caldwell and others on nature and significance of Hayek’s solution to the explanatory problem of economics outlined in his 1936 paper “Economics and Knowledge” and developed thereafter has been deeply flawed because because these account grasp neither Hayek original problem situation nor the nature and scope of Hayek’s revolutionary solution to that problem.
Here I’d like to outline Hayek’s original problem situation and the roots of Hayek’s solution to that problem in the work of Friedrich Wieser, Ludwig Wittgenstein, and others. And then I will explain the nature and content of Hayek’s solution, and explain how Caldwell and others have failed to accurately grasp the character of that solution.
Hayek’s original problem has a double source in two different academic literatures — economics and philosophy — and multiple roots within each of these two literatures, as I will explain.
The background of Hayek’s problem situation and revolutionary solution can be found in the collision between old and new ways of conceiving such fundamental problems as how knowledge is gained and how economic goods get their value. The first problem involves the collision between Kantian and empiricist conceptions of how knowledge is produced and what Hayek was learning in the brain lab of Constantin von Monakow, thinking about how the brain and its neurological cell structure could produce knowledge. The second problem involves the collision between the old problem of distribution theory conceived by Ricardo and the new way of explaining the determination of prices conceived by Menger, Walras and Jevons.
These two separate trains of problems and ideas had been knocking heads for decades but fortuitously managed to collide together in the 1920s and 1930s in the economic literature on business cycles and socialist planning in way which to Hayek’s breakthrough of 1936, which Hayek always identifies as among the greatest of his career.
The problem of the epistemic or logical character of economic science had been brewing for decades when Hayek first began butting heads with it in the 1920s. Menger, Wieser, Bohm-Bawer, Schumpeter, Mises and others had all attempted address the problem in the period between 1870 and 1925 under the challenge of German economists and philosophers who disputed the very conception of social science outside of mere history.
The neo-Kantians, Hegelians, and British empiricists by the end of the 19th century had convinced everyone that knowledge of the world came either in the form of nomological laws or via the growth of national cultures and ways of interpreting the world. The relation of pure logic and phenomenal experience to all this was disputed, but the basic division was part of the background understanding of the age. The task of economists developing the new economics of Jevons, Menger and Walras was to explain the place of economics in this framework.
The ongoing task within economics generated by the new theory of valuation conceived by Walras, Jevons and Menger was to use that new conception to address old problems, including the problem of the determination of the different classes of income stipulated by Ricardo. What did the explanation of price determination using the new theory of valuation have to tell us about the explanation of interest, wages, profit, or rent on land and capital?
Hayek came at each of these problems with a very special background — a background in biological research, neo-Kantian philosophy, theoretical psychology, the new analytical philosophy of Wittgenstein, and the economic research program of Menger, Bohm-Bawerk and Friedrich Wieser.
What we will discover as we proceed is how the conceptual framework developed by Wieser for understanding the elements of economic valuation and their relations runs in parallel with the framework developed by Wittgenstein for understanding the elements of semantic significance and their relations — and how both lead to constructions in which purely logical relations are separated from the world of the causal and the empirical. Hayek will combine these insights to separate out the world of the God’s Eye View and the world of empirical problems and contingent causal explanations.
Hayek began working on the problem of fitting the new findings of biology to dominant post-Kantian conceptions of knowledge in 1920. Hayek’s work staining brain cells convinced him that knowledge was a bottom-up product of neurological connections, rather than a top-down construct of a God’s Eye View mind combining phenomenal ‘givens’ according to purely formal logical rules or in line with a priori nomological structures.
Hayek began working on the problem of fitting the new findings of marginal valuation theory to the dominant conceptions of distribution theory in 1923. Hayek’s work under the influence of Wieser convinced him that the problem was one of pure logic conceived from a God’s Eye View, and conceptually could not be conceived mixing the empirical world of exchange and the logical realm of individual valuation. Hayek began to tackle the problem of attributing income shares to the factors of production using Wieser’s pure logic approach.
Hayek’s problem of the nature and source of knowledge began to collide with Hayek’s problem of the explanation of the distribution of the factors of income when he started thinking about the problem of business cycles as a research assistant collecting data on the Federal Reserve and the American economy. The problem became: (1) What is the relation of economic data to economic theory, and, (2) How do neo-Kantian and empiricist conceptions of how science works apply in the case of explaining business cycles using the new economic of marginal valuation? The problem became one of making sense the relation between empirical patterns and theoretical constructions. The idea that for economics to be properly ‘scientific’ according to the stipulations of the neo-Kantians and the empiricists is must be at once both nomological and grounded upon empirical experience. But how does that work in economics? Hayek would attempt to work out the solution within the domain of explaining the problem of business cycles.
The first hints at Hayek’s revolutionary solution come in his 1929 book Monetary Theory and the Trade Cycle. In that book, two central but conflicting ideas come crashing together, creating an explanatory anomaly at the heart of Hayek’s program of economic science. Hayek is attempting to address the problem of establishing economics as a theoretical science, while at the same time confronting the difficulty of addressing unruly economic which is recalcitrant to being crammed into the confides of the pure logic of coordinated choice, what economists were calling the static theory of market equilibrium.
Germans under the influence of Kant and Hegel insisted that the economists in Britain, France and Austria could not possibly produce science because scientific knowledge took the form of nomological necessity and the world of human life was a world of cultural growth and individual will ungoverned by any law except that imposed by the self or the state. Economists outside of Germany tried to answer these objections through a whole host of strategies, almost all of them attempting to locate scientific law somewhere in the theory or the phenomena, for example, in lawful patterns of the unfolding of cultural history or in lawful patterns in the unfolding of strings of economic or demographic data, or some other stratagem. Because they were most directly pressured by the Germans, economists in Vienna struggled hardest to sort out the connection between the theoretical concepts and logical relations worked out in basic value theory and the Kantian and empiricist demand that the formal constructions limning the nomological structure of reality be connected to empirical experience. Wieser, Bohm-Bawerk, Schumpeter and Mises among others all took different tacks, borrowing largely from alternatives already found in the neo-Kantian heritage, grounding theoretical science and its empirical or explanatory character in psychologism, Kantian formalism, or predictive Machian phenomenalism, among other alternatives.
Hayek took a somewhat different angle.