There is an important new book on some of the theorists who helped inspire and deeply influenced Hayek’s work in the theory of mind, knowledge and brain:
By the happenstance of family, Hayek became one of the first ever to read Ludwig Wittgestein’s landmark Tractatus Logico-Philosophicus. Wittgenstein manages to tie the phenomenological positivism of Ernst Mach and Bertrand Russell to the new logic of Gottlob Frege using a procedure which isolates the purely formal and logical from the domain of the empirical or psychological in a manner that the neo-Kantian’s like Hermann Cohen could only have dreamed. In the process, Wittgenstein manages to distinguish between the realm of the tautological and realm of the contingent in precise and formal terms.
We have something new here. Curiously enough, Wittgenstein’s technique is very similar to that of Friedrich Wieser. Wittgenstein takes a God’s Eye View of the realm of logical relations and the realm of the empirically contingent. From this God’s Eye View, truth values determined by the empirically contingent are “given” to one mind, stipulated by the logician laying out logical relations before his mind’s eye. Hayek, working with Wieser’s Dictator model of perfectly coordinated economic relations, was doing essentially the same in attempting to work out the logic of marginal valuation, not only as it applies to a given set of consumer goods at one moment in time, but as that logic applies to dynamic alternative production and consumption plans and possibilities across time.
When we point out the truth that, “if A implies B and B implies C, then A implies C” we are not saying anything about the contingent arrangement of the world, we are stating a fact about conceptual relationships, as our mind orders them. When we lay out the logic of marginal valuation, in conceiving choices between alternative uses of a basket of goods like apples, we are not saying anything about the contingent arrangement of the world, we are stating a fact about conceptual relationships, as our mind orders them. Our last use of a apple we can imagine as less valuable than the first use, and the loss of any particular apple means giving up that last and least valuable use, and not the first and most valuable use. Whether we are right in imagining the apples to actually exist in the form and for the utility we take them to have is irrelevant to the logic of the situation. (See Carl Menger, Principles of Economics).
Hayek’s work isolating the nature and dimensions of the purely logical helped to him to identify a number of other elements — the multiple dimensions of the domain of the empirical and the causal. What Hayek discovered was that there were several different and important types of problem-raising empirical problems in economics, and several different dimensions to the causal and empirical domains of economic explanation.
Hayek first begins to run into these insights in his 1929 book and his solution crystallized in 1936 while listening to Frederic Benham make fun of how economists reassured themselves with the pleonasm “given data” which translating the Latin in effect is saying nothing but the “given given”. It is important the emphasize that this insight is already contained in Hayek’s 1929 book, complete with discussion of the difference between the fictional “data” of the pure logic of choice and the empirical patterns and prices signals in the real world.
Hayek’s idea of prices conveying information, and prices as imperfect communicators of market conditions can already be found in the work of Charles Hardy, 1923, and quoted by Hayek in his 1929 book.
Here is the passage from Hayek’s book:
“[Hardy] states that all those theories which are based on the length of the production-period under modern technical conditions agree in regarding these conditions as a source of difficulty to producers in adjusting production to the state of the market — producing, as they must, for a future period, the market possibilities of which are necessarily unknown to them. He then emphasizes that in general it is the task of the price-mechanism to adjust supply to demand; he thinks, however, that this mechanism is imperfect, if a long period has to lapse between production and the arrival of the product at market, because “prices and order give information concerning the prospective state of demand compared with the known facts of the present and future supply, but they give no clue to the changes in supply which they themselves are likely to cause.”” (Hayek, 1929/2012, 86)
Hayek in 1929 is already highlighting the insight of Mises on the guide function of profit calculation and is already bringing attention to the guide function of relative prices, and he is already pointing out that economists are being misled by their formal constructions, misunderstanding what is logically “given” in their formal constructions is not and can never by “given” to entrepreneurs adjusting there plans in the market:
“But the entrepreneur in a capitalist economy is not — as many economists seem to assume — in the same situation as the dictator of a Socialist economy. The protagonists of this [dictator]. The protagonists of this view seem to overlook the fact that production is generally guided no by any knowledge of the actual size of the total demand — even if that phrase is sometimes used — but on the basis of a calculation of profitability; and it is just that calculation which will equilibrate supply and demand. ” (Hayek, 1929/2012, p. 87)
Hayek in this same discussion also identifies one of his key empirical problems — what mechanism could possible generate systematic discoordination across market via systematically erroneous plans and anticipations:
“None of these theories under discussion [eg Hardy’s] explains why why these expectations should generally prove incorrect.” (Hayek, 1929/2012, p. 87)
Hayek’s memory in the 1970s: “One of my colleagues at the London School of Economics used to make fun of the use of ‘data’ by economists, who were so anxious to assure themselves that there were data that the were talking about ‘given’ data. This talk of about ‘data’ made me aware, of course, that they are completely fictitious; that we are assuming that these facts are ‘given’, but never say to home they are ‘given’. This made it clear to me that the whole economic problem is a problem of the utilization of knowledge which nobody possesses as a whole, and that determined my outlook on economics and proved extremely fertile.” (Hayek, 1983, p. 274)
“I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the action of a single person.” (F. Hayek, “Economics and Knowledge” 2014, p. 59, see also F. Hayek, The Pure Theory of Capital, 2007, pp. 49-50).
“But the entrepreneur in a capitalist economy is not — as many economists seem to assume — in the same situation as the dictator of a Socialist economy. The protagonists of this view seem to overlook the fact that production is generally guided not by any knowledge of the size of the total demand, but by the price to be obtained in the market. In the modern exchange economy, the entrepreneur does not produce with a view to satisfy a certain demand … but on the basis of a calculation of profitability; and it is just that calculation which will equilibrate supply and demand.” (Hayek, 1929/2012, p. 87))
An empirical pattern needing explanation — systematically misallocated goods and systematically discoordinated relative prices and production structures.
“None of the theories under discussion explains why these [price and profit] expectations should generally prove incorrect. (Hayek, 1929/2012, p. 87))
“the problem of the division of knowledge .. seems to me to be the really central problem of economics as a science” (Hayek, 1937/2014, p. 72)
“the economic calculus which we have developed to solve this logical problem [assuming we have all of the relevant information required to construct a rational economic order] does not provide an answer to [the economic problem which society faces]” (Hayek, 1945/2014, p. 93)
Empirical task of trade cycle theory to explain systematic deviations from pure coordination of equilibrium theory/logic of choice
“It is .. the task of Trade Cycle theory to show under what conditions a break may occur in that tendency towards equilibrium which is described in pure analysis — i.e., why prices, in contradiction to the conclusions of static theory, do not bring about such changes in the quantities produced as would correspond to an equilibrium situation.” (Hayek, 1929/2012, p. 88)
Earlier I outlined Hayek’s normal science research program and I began to suggest how anomalies developed in that program, conflicts arose with others working on those same normal science puzzles, and how these anomalies and conflicts set Hayek on the path toward his Copernican Revolution in the explanatory strategy of economics, first described in his 1936 essay “Economics and Knowledge” and then continually developed across the length of Hayek’s long life.
There are a number of ways in which Hayek’s background was unique, differences in his background which prepared Hayek for his Copernican Revolution which was missing in the background of other economists working on Hayek’s normal science puzzles.
Among these differences are:
1. As a young somewhat Fabian socialist once enchanted by technocratic War Socialism, Hayek was exposed to and was profoundly changed by Ludwig Mises’ argument exposing the impossibility of economically relevant calculation within an extended socialist society.
2. Hayek was mentored by the great Viennese economist Friedrich Wieser, and was deeply steeped in Wieser’s Dictator conception of a perfectly coordinated extended economy, using the logical assumptions of the 1870 marginalist revolution in economic valuation theory.
3. Hayek had been soaking for years in the problem of making sense of the logic of choice applied to production goods, especially in the the work of Bohm-Bawerk, Wieser and their students on this problem. It was a research program essentially absent in the rest of the world.
4. Hayek had a sophisticated and indeed revolutionary grasp of the new epistemology and logic descending from the neo-Kantians, positivists, and Fregean logicians, which was shaping the imagination of everyone working in the fields of history, social science, and economics (within economics, see for example, the work of Weber, Pareto, Schumpeter, Wald, Mises, Hutchison, Samuelson, among endless others).
5. The origin of Hayek’s understanding of economic science came via his study of the work of Carl Menger including Menger’s work on the scientific character of the domain, and during the period of Hayek’s normal science problem difficulties Hayek just happened to be editing Menger’s Collected Works.
Let me say more about each of these elements and how each of them are implicated in Hayek’s Copernican Revolution.
When Hayek was working on the problem of integrating the logic of marginal valuation into the explanation of business cycle fluctuations, while at the same time vindicating the scientific status of this endeavor, what Hayek ran into was the fact that deviations from economic coordination seem by necessity to be the produce of systematically misleading price signals, patterns outside of a perfectly coordinated system of marginal valuation mapped by a pure logic of choice.
It’s important for us to see how Hayek’s insight here hooks up with his normal science research program and with Hayek’s unique background outlined just above. The insight contained in Mises’ work on socialism and calculation is the insight that our ability to calculate money costs and adjust our affairs in terms of money profits and loses is a calculation process that would be absent from an extended global socialist society, and in no way could we replace that money calculation system with any sort of calculation system using magnitudes available in the world of physical, chemical or biological quantities or properties, and the pure logic of marginal valuation can not be made to step in to replace the system of monetary calculation.
What Hayek began to develop in his 1929 book on business cycles and monetary economics is the coming together of the insight that market coordination is made possible by coordination in terms of price signals, and that signals that can sometimes be systematically misleading. But the added element found in Hayek’s work and missing in the work of most others is that fact that this coordination process works through the structure of inter-related production processes taking more or less time, and that this coordination process can by systematically misdirected in vectors of discoordination related to changes in the supply and liquidity of money, credit, financial instruments and their complex value interrelations with production goods and processes across time.
But there is an added element here in Hayek’s work which is absent from that of other economists working on the problem of explaining the business cycle and hooking that explanation up with the rest of economics. Hayek had a grasp of the logic of choice over production goods missing from the work of others. There is a time coordination problem related to the fact that extending or shortening production processes can change the valuational outcome of those processes, allowing a choice between superior or inferior output alternatives, e.g. you can have bitter grape juice now or excellent wine later.
Hayek’s clash of ideas with Keynes, Knight, and endless others begins and largely ends right here, in a clash of visions which has gone over the heads of most economists for generations. But we will get down into weeds of the details further on in our investigation.
In Hayek’s 1929 he is struggling with the normal science problem of fitting together the standard equilibrium plus valuation logic approach to explaining economic patterns with the demands of what those in the post Hume and Kant era took science to be. Central here are two neo-Kantian insights into the nature of science, experience and human understanding, first, Hermann Cohen’s neo-Kantian conception of strict division between the realm of the formal, the deductive and the logical, and the realm of the psychological and the contents of experience, and, second, Wilhelm Windelband’s distinction between the realm of the nomological and the realm of the historical, interpretive, and the ethical, which is to say the realm of human culture and individual doings. The neo-Kantian picture of science, which shaped the understanding even of the various schools of empiricism, was the idea that science was the realm of laws, necessity, and formal concepts, while society and the human and interpretive domain was a kind of unfolding biological growth.
No one had yet successfully connected together what might be called the deductive ideal conception of science with the domain of empirical experience — and Hayek in 1920 had already refuted what would become in the first half of the 20th century the leading philosophy of science research program, the Recieved View of Theories combining the logic of Ludwig Wittgenstein’s Tractatus with the predictive phenomenalism of Ernst Mach’s positivism. And matters were even worse in economics and the social sciences. Joseph Schumpeter was attempting to combine Mach’s positivism with the mathematization of the logic marginal valuation and the new statistics of what would become econometrics and national income accounting, a program continued by Schumpeter’s student Paul Samuelson, in a project even Samuelson admitted completely failed on its own terms as a normal science research program.
What Hayek had done in 1920 was use his experience in the brain lab of Constantin von Monakow to rethink the connection between realm of the phenomenal and the real of physical things outside ourselves as outlined in the work of Alois Riehl, in light of the fact that that connection must be a product of the network of neuronal cells Hayek had been staining in Monakow’s research lab.
Hayek’s insight looking at the problem from the bottom-up in the network of neuronal connections, rather than from the top-down in the relations between phenomenal particulars, was the Mach and the positivists have everything precisely backwards, and that our empirical grasp of the world outside ourselves could not be modeled as no more than and economical function fitting nomological laws to connected relations between phenomenal “givens”. And Hayek connected his insight together with the research coming out of the psychology labs showing that perception was theory-laden and our understanding of the world was shaped by our expectations, by our sensory mechanisms, and by our biological and even cultural backgrounds.
What Hayek came to see via his background in biology, brain science, psychology and the work of Carl Menger — plus his work on the empirical problem of business cycles — was that problems generated by empirical patterns in our experience could be explained by underlying causal mechanisms that did not fit the conceptual demands for ‘science” stipulated by the neo-Kantians and the empiricists working within the legacy of Hume, Kant, Cohen and Windelband.
As Hayek would explain decades later, the empirical pattern of the origin of species with adaptive features gives us a problem raising empirical pattern with multiple possible explanatory solutions, including the top-down causal mechanism of special creation by a designer and the bottom-up mechanisms of natural selection. Similarly the patterned structure of our sensory perceptions and our ability to learn across time presents an empirical problem with a bottom-up solution in the connections made and broken, and strengthened and weakened between neuronal cells, a program laid out and advanced over the past decades by Hebb, Hayek, Fuster, and Edelman, among many others.
What Hayek has acquired via multiple channels is a grasp of the inadequacy of a top-down, God’s Eye View approach to understanding and explaining the problems we confront and develop in our attempt to make sense of the world. A grasp of the inadequacy of what Larry Wright calls The Deductive Ideal, an inadequacy later developed in the work of Ludwig Wittgenstein, Thomas Kuhn and by Larry Wright himself.
Hayek 1936 paper “Economics and Knowledge” is all about the escape from the neo-Kantian legacy and deductive ideal, and the re-casting of economic science into the sort of explanatory paradigm already pioneered in brain science, Darwinian biology, psychology and other complex sciences.
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 phenomena like business cycle which are 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’s original background was in brain science, botany, evolutionary biology, experimental psychology, neo-Kantian epistemology and the new logic of Frege as presented by Hayek’s cousin Ludwig Wittgenstein. Hayek was an instinctive empiricist with a conception of theoretical science as a formal system, as prescribed by the neo-Kantian consensus and as suggested by the growing logical empiricist movement inspired by Frege and Wittgenstein. Hayek’s mentor Friedrich Wieser conceived of economics as an empirical discipline, but Hayek was far to sophisticated in the literatures of experimental psychology, neo-Kantian epistemology and the work of Wittgenstein to be satisfied with Wieser’s crude psychologistic account of the empirical content of economic science. Hayek’s own approach was to assume that the scientific status of economics was assured by the fact of its theoretical structure i.e. adherence to neo-Kantian dictates for scientific status, with its empirical status merely assumed rather than explained or shown.
So in the 1920s we have the young scientist Friedrich Hayek working on several difficult but rather well defined normal science puzzles, as Thomas Kuhn would describe them.
1. Hayek is working on extending the new logic of marginal valuation from consumer goods at a simple moment in time to production goods across time.
2. Hayek is working on extending the new logic of marginal valuation from the problem of explaining of the determination of relative prices to the old Ricardian problem of explaining the distribution of income shares between land, labor and capital goods, e.g. rent, wages, and profits.
3. Hayek is working to square the new logic of marginal valuation with the old problem of characterizing of the overall coordination of production plans and market trades as an perfectly balanced equilibrium system.
4. Hayek is working to square the new logic of marginal valuation with the old problem of explaining the phenomena of interest income on production goods.
5. Hayek is working on using the new logic of marginal valuation and its formalization into an equilibrium system to explain the old problem of systematic business cycle disruptions.
6. Hayek is working on showing how the new logic of marginal valuation can be used in a fashion which meets the dictates of science as pressumed in the wake of the neo-Kantian revolution in epistemology, which was sweeping all before it, especially as its core precepts were taken up by the logical empiricists using the work of Frege and Wittgenstein.
Hayek’s 1936 Copernican Revolution in economics can be shown to be the outcome of specific intractable anomalies which Hayek uncovered in the course of attempting to solve the normal science puzzles identified above. But it also came in the midst of a clash of competing ideas between rival approaches to resolving the outstanding normal science problem confronting economics.
These clashes of ideas include the following.
1. The clash between Hayek, Joseph Schumpeter, Frank Knight, Ludwig Mises, A. C. Pigou and others an how to square the new marginalist valuation construction with the problems of making sense of equilibrium theory and production valuation.
2. The clash between Hayek and John M. Keynes on how to make sense of the relation savings, investment, interest rates, the demand for consumer goods, and the demand for production goods, when explaining the business cycle.
3. The clash between Hayek and Fred Taylor, Maurice Dobb, Oskar Lange, and Henry Dickinson on the possibility of economic calculation in a socialist society.
And there is one final element we should note, whose significance will be explained later. All during this period when Hayek was clashing with British and American economists over how to proceed with the 1870 marginalist revolution, Hayek was editing the collected works of one of the founders of that revolution, Carl Menger.
Hayek’s various normal science puzzles and Hayek’s clashes with economists on how to think about production goods, interest, socialist calculation, business cycles, interest, and market discoordination all turned in various ways on the proper way to make use of the logic of valuation when moving beyond the simple case of consumption choice over the uses to be made of a given basket of apples — and how to think about continuing to use the logic of marginalist choice when turning to economic categories which violate the basic logical demands of marginalist thinking.
What Hayek repeatedly ran into were economists using the pre-marginalist categories of pre-marginalist Ricardian or classical economics, categories which had no foundation whatever in the logic of marginal choice, and who were then tying these categories to the logic of marginal choice in ways that made an illogical, incoherent hash of the logic marginalist choice. Hayek also found economists assuming as “given” elements which could never be given to anyone adjusting their affairs within an economy. And Hayek found economists assuming causal relations between presumed economic categories and entities which could never possibly interact in any economic system.
What is interesting here is that the model for thinking about a coordinated economic community which Hayek had inherited from Wieser come together with what Hayek had learned from Wittgenstein and the logical empiricists about logic to focus Hayek’s attention and what could be assumed to be “given” to a single mind in a formal construct versus what could not be given to any single mind in a great and extended global community.
The other thing which Hayek had which distinguished him from most other economists was a firm grasp on an crucial element of choice theory found in the pioneering work of Bohm-Bawerk on production goods, the insight that no one would ever choose extend the length of an individual production process unless that extension across time promised a superior output over the choice of a shorter production process (consider aging grape juice to make wine).
Wieser gave Hayek the model for a Dictator economy, where all supplies and demands within an economy are “given” to one mind. This model focused Hayek’s attention on the fact that this construct is indeed made up of assumed informational “givens”. But when thinking about the business cycle and when thinking about the problem of calculation in a socialist economic, Hayek was acutely aware that the information needed by folks in the economy to coordinate the lengthening and shortening of the structure of production to adapt to changing productivity advances, monetary changes, consumer preferences, time preference changes, and credit price and supply changes was information that simply was not given to anyone and could not be given to any one mind.
What other economists were doing in the case of the normal science problem Hayek was attempting to address was simply assuming “given” information which could never be given to anyone in the real world, and they were also assuming “given” relations between economic categories which did not and could not exist in any real community of individuals coordinating their individual plans in an extended global economic system. Most importantly, economists were leaving out the whole realm of choice over alternative production plans, including crucially the choice at any given moment in time between longer production plans which promised superior output versus shorter production processes which offered inferior output later yet a bit better consumption in the mean time.
Hayek’s great Copernican Revolution come just here when Mises’ work on the impossibility of socialist calculation comes together with the editorial work Hayek was doing on Carl Menger’s Collected Works.
What Carl Menger gave Hayek was a new vision of what explanatory science could be, one that fit with Hayek’s prior background in the biological sciences. Menger did this by giving Hayek as explanatory paradigm, an explanatory problem paired with a causal mechanism to account for problem. After producing his breakthrough paper of 1936 Hayek would spend decades fleshing out various aspects of this Menger explanatory paradigm, and fitting it in with the findings of the philosophy of science, the history of social science, the advances in neurosciences, complexity theory, and other branches of science and human thought.
Menger’s explanatory paradigm was this. Menger identified an empirical phenomena, the origin of money and money exchange, and he asked for a causal process which could account for that empirical phenomena. And Menger identified a possible causal mechanism to account for that origin in the learning by individuals about the ever increasing exchangeablility of a good, a good which over time would be universally demanded simply because of its ease of use as a widely demanded good that could substituted as an easily traded means of exchange. Hayek in his work had always been looking for problems, here Hayek has in Menger an empirical problem, one that describes a coordination problem across time and one that requires an empirical causal process of learning in order to effectuate.
Hayek had already been thinking about the problem-raising empirical patterns in our experience when working on the problem of business cycles. The boom and bust cycle of business fluctuations presented a set of patterns across time and across sectors of the economy that demanded explanation. The great question was how to account for them and what elements when into such an explanation. What Hayek ran into was in inadequacy of the logic of marginal valuation to account for these patterns, and what Hayek’s work exposed was the importance of false price signals in systematically misdirecting production in patterns which were unsustainable, generating patterns of boom and bust, and implicating systematic discoordination in the markets for money and credit.
Hayek could see this were others could not because of Hayek’s grasp of the central Bohm-Bawerkian insight into choice concerning production goods, the fact that no one would chose a longer production process unless in promised superior output, and the fact than when confronted with a new choice between rival production processes choices between longer and shorter production processes was always a part of the deliberative choice process.
Friedrich Hayek’s work opens a world of ideas and historical events. Read more:
The Road to Serfdom / Stalin, Hitler / Totalitarian Societies
- The Road to Serfdom: Text and Documents by F. A. Hayek
- Iron Curtain: The Crushing of Eastern Europe, 1944-1956 by Anne Applebaum
- Why Progressive Institutions are Unsustainable by Richard Epstein
- Liberty and Tyranny by Mark Levin
- The New Road to Serfdom: A Letter of Warning to America by Daniel Hannan
- 1984 by George Orwell
- The Coming of the Third Reich by Richard Evans
- Nothing to Envy: Ordinary Lives in North Korea by Barbara Demick
- Goebbels: A Biography by Peter Longerich
- Stalin: Vol. 1: Paradoxes of Power, 1878-1928 by Stephen Kotkin
- Ameritopia: The Unmaking of America by Mark Levin
- Why Nations Fail: The Origins of Power, Prosperity & Poverty by Daron Acemoglu & James Robinson
- Hitler: A Biography by Ian Kershaw
- The Pope & Mussolini: The Secret History of Pius XI & the Rise of Fascism in Europe by David Kertzer
- Berlin Diary by William Shirer
- The Third Reich in Power by Richard Evans
Institutions / Culture / Evolution / Competition
- The Fatal Conceit: The Errors of Socialism by F. A. Hayek
- The Rational Optimist: How Prosperity Evolves by Matt Ridley
- Living Economics by Peter Boettke
- Adapt: Why Success Always Begins with Failure by Tim Harford
- The Evolution of Everything: How New Ideas Emerge by Matt Ridley
- Does Altruism Exist?: Culture, Genes & the Welfare of Others by David Sloan Wilson
- Why Nations Fail: The Origins of Power, Prosperity & Poverty by Daron Acemoglu & James Robinson
- Darwin’s Cathedral: Evolution, Religion, and the Nature of Society by David Sloan Wilson
Intellectuals / Economists / Experts
- Socialism and War: Essays, Documents, Reviews by F. A. Hayek
- Intellectuals: From Marx and Tolstoy to Sartre and Chomsky by Paul Johnson
- The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly
- The Idealist: Jeffrey Sachs & the Quest to End Poverty by Nina Munk
- Intellectuals and Society by Thomas Sowell
- The Making of an Economist, Redux by David Colander
- The Vision of the Anointed by Thomas Sowell
History of Ideas / Philosophy
- The Constitution of Liberty: The Definitive Edition by F. A. Hayek
- Inventing Freedom: How the English-Speaking Peoples Made the Modern World by Daniel Hannan
- The Genesis of Neo-Kantianism, 1796-1880 by Frederick Beiser
- The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years by Lawrence White
- The German Historicist Tradition by Frederich Beiser
- After Hegel: German Philosophy, 1840-1900 Frederich Beiser
- Living Economics by Peter Boettke
Britain / British Labour / Thatcher
- Seasons in the Sun: The Battle for Bitain, 1974-1979 by Dominic Sandbrook
- Margaret Thatcher: The Autobiographyby Margaret Thatcher
- Harold Laski: A Life on the Left by Isaac Kramnick & Barry Sheerman
- LSE: A History of the London School of Economics and Political Science, 1895-1995 by Ralf Dahrendorf
- State of Emergency: The Way We Were: 1970-1974 by Dominic Sandbrook
Mont Pelerin Society / Revival of Liberalism
- A History of the Mont Pelerin Society by Max Hartwell
- The Great Persuasion: Reinventing Free Markets since the Depression by Angus Burgin
- The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years by Lawrence White
- Masters of the Universe: Hayek, Friedman & the Birth of Neoliberal Politics Daniel Jones
Vienna / Austria
- Thunder at Twilight: Vienna 1913/1914 by Frederic Morton
- Wittgenstein’s Vienna by Allan Janik & Stephen Toulmin
- Fin-De-Siecle Vienna: Politics and Culture by Carl Schorske
- A Nervous Splendor: Vienna 1888-1889 by Frederic Morton
Business Cycles / Financial Crisis / Monetary Policy
- Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked & Government Bailouts Will Make Things Worse by Thomas Woods
- The Big Short: Inside the Doomsday Machine by Michael Lewis
- The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil
- The Forgotten Depression: 1921: The Crash That Cured Itself by James Grant
- The Politically Incorrect Guide to the Great Depression & the New Deal by Robert Murphy
- The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years by Lawrence White
- All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany MacLean & Joe Nocera
- The Summit: Bretton Woods, 1944: J. M. Keynes and the Reshaping of the Global Economy by Ed Conway
- The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History by Kristen Grind
- Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
- Other People’s Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business by Jennifer Taub
- Shaky Ground: The Strange Saga of the U.S. Mortgage Giants by Bethany MacLean
Liberalism / Conservativism / Classical Liberalism
- The Constitution of Liberty: The Definitive Edition by F. A. Hayek
- The Classical Liberal Constitution: The Uncertain Quest for Limited Government by Richard Epstein
- Restoring the Lost Constitution: The Presumption of Liberty by Randy Barnett
- Simple Rules for a Complex World by Richard Epstein
- The Structure of Liberty: Justice and the Rule of Law by Randy Barnett
- Principles For A Free Society: Reconciling Individual Liberty With The Common Good by Richard Epstein
Socialism / Central Planning
- The Fatal Conceit: The Errors of Socialism by F. A. Hayek
- The Politically Incorrect Guide to Socialism by Kevin Williamson
- Socialism: An Economic and Sociological Analysis by Ludwig Mises
- Frank Knight and the Chicago School in American Economics by Ross Emmett
- Mises: The Last Knight of Liberalism by Jorg Hulsmann
- Economic Doctrines of Knut Wicksell by Carl Uhr
- Theory & Measurement: Causality Issues in Milton Friedman’s Monetary Economics by Daniel Hammond
Neuroscience / Mind & Brain
- The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology by F. A. Hayek
- A Universe Of Consciousness: How Matter Becomes Imagination by Gerald Edelman
- The Organization of Behavior: A Neuropsychological Theory by D. O. Hebb
- Bright Air, Brilliant Fire: On The Matter Of The Mind by Gerald Edelman
- Cortex and Mind: Unifying Cognition by Joaquin Fuster
- The Neuroscience of Freedom and Creativity: Our Predictive Brain by Joaquin Fuster
- Neural Darwinism: The Theory Of Neuronal Group Selection by Gerald Edelman
- Networks of the Brain by Olaf Sporns
- The Prefrontal Cortex by Joaquin Fuster
- The Remembered Present: A Biological Theory of Consciousness by Gerald Edelman
Prices / Market Mechanism / Competition
- Market Theory and the Price System by Israel Kirzner
- Perfect Competition and the Transformation of Economics by Frank Machovec
- Edmund Burke: The First Conservative by Jesse Norman
- Karl Popper – The Formative Years, 1902-1945 by Malachi Hacohen
- Karl Marx: A Ninteenth-Century Life by Jonathan Sperber
- The Intellectual Life of Edmund Burke: From the Sublime and Beautiful to American Independence by David Bromwich
European History 1900-1950
Marginal Valuation Applied to Production Goods
When we get ourselves into conceptual trouble or when we find ourselves in contentious disagreement with our colleagues it serves us well to locate and articulate where the trouble spots are, and perhaps also doing a bit of reconsideration of what the project at hand is about. This is exactly what Hayek did in the fields of economics, neuroscience, epistemology and the fields of morals and law, undertaking an interdisciplinary rethinking which has played a remarkably profound but little understood role in the remaking our understanding of each of these fields. And I will contend here that our rethinking has still a way to go in directions that will further recast our understanding of explanation, argument, science and knowledge building on themes explored earlier by writers like Larry Wright, Thomas Kuhn, and Ludwig Wittgenstein, among others.
Hayek famously engaged in a series of debates on essentials in the fields of economics, while simultaneously reworking his own explanatory program in the context of a fundamental rethinking of the nature of science, mind, explanation, human morality, and the nature of human leaning. What Hayek discovered as he attempted to tease out fundamental differences with scientific peers, while struggling to fit his explanatory enterprise within the reigning scientific paradigm, is that a fundamental rethinking and re-articulation of the explanatory enterprise of economics was required, along with an articulation of the relation of that explanatory enterprise to our most basic human capacities.
Larry Wright has produced a profound set of papers on the relation of our capacities for perceiving, evaluating and providing explanations and the relation of those capacities to our practices of articulation and reason giving. I will exploit some of those insights and findings in making a case for Hayek’s project as a grand surfacing and articulation of the unarticulated background understandings that can ground our explanatory practices in economics, and and which fundamentally shifts our appreciation for where explanatory objectivity and justificatory satisfaction actually lie in economics, re-ordering our understanding of the nature of empirical problems and causal-explanatory mechanisms in economics and their relation to the pure formalisms of math and the logic of choice, as well as to the constructed data of the statistical economists.
As we go about this project we will learn something about the role of conceptual and problem etiologies in setting the context for explanatory progress in not only economics but also philosophy, and about the importance of setting up common frameworks of understanding as starting points for making progress in grasping the wider problems at hand and the ways in which old frames of thinking have blocked progress in grasping empirical problems and their causal solution. We will also landmark a set of results which can be classified either as within economics or philosophy depending on our focus, interest or linguistic purpose.
Among the results are these:
I will show how Hayek has solved the cognitive status problem of economics, that is, I will locate and articulate the cognitive status of the central problems of economics and the cognitive status of its principle explanatory components, and the relation of these components to logic of choice, economic math, and the constructed data of statistical economists.
I will show how how Hayek’s multi-dimensional project across the fields of economics, neuroscience, jurisprudence and several fields of philosophy was articulated and recast to arrange the elements allowing Hayek to escape conceptual categories and approaches the led to dead-ends blocking conceptual coherence and explanatory success in economics and other fields.
I will show that Hayek has effected a kind of Copernican Revolution which which has turned on its head the relation of formal constructions to the task of advancing our understanding in a direction that in embedded in our most fundamental objective handles on our world.
I will show how Hayek’s Copernican Revolution fits within the skills and capacities revolution in the literatures of the philosophy of argument, language, explanation and science developed by Larry Wright, Thomas Kuhn and Ludwig Wittgenstein, and I will explain how Hayek has been a key pioneer in his own right in this literature, not only developing insights derived from Wittgenstein and the Wittgensteinians, but independently developing these insights in the fields of law, neuroscience, explanation, morals and human institutions more generally.
Where to begin?
Let’s list a few of Hayek’s accomplishments, insights and results, and then provide a bit of context for how these achievements came about and their relative place in Hayek’s larger project — and in our understanding of economic phenomena and our human explanatory capacities more generally. We can then pick up and explore any number of particular themes and their significance in greater detail later.
In an number of different papers Hayek reworked the explanatory task of economics and did so in a frame which also included a re-working of the explanatory elements of economics and the relation of our basic human capacities for teleological perception, problem formation, and the relation of these to formal and mathematical constructs, and our basic capacities for learning, judgment and rule following. These are some of the most famous and influential papers in the history of economic science, including Hayek’s well known papers “Economics and Knowledge” and “The Use of Knowledge in Society”. There is a complicated story about how all of this came about, and the details are interesting and provide some part of what we will learn from Hayek, but lets skip ahead here and briefly state Hayek’s reformulation of the problem of economics and its relation to the explanatory strategy of the science.
What is economics about, what is its task, that does economics do, what does it explain? It’s important for our project to discuss how economics has arrived at these questions and how it fell into particular answers to them, but we will start first with Hayek’s own answer, and we will address later how it was derived, how it fits into our perceptual and explanatory capacities, and why that fit makes Hayek’s answer so much more compelling than all other rivals.
Hayek’s casting of the task of economics.
From a variety of different angles, Hayek explains how economics presents us with an problem of design-like order without a designer, and Hayek then gives greater meaning to that problem by showing how individuals following basic rules of property and individual learning in the context of changing local conditions and relative prices can give rise to that design-like order via a mechanism lacking any top-down central director or dictator.
We can go further than Hayek, exploiting more general ideas developed by Hayek to account for specific cases like this, to characterize this as a problem as a problem-raising empirical pattern arising in our experience but brought to our awareness by a constellation of more particular empirical and conceptual puzzles, along with formal constructions developed to think about these more particular problems and puzzles. Among these problems and puzzles are: What is the just price of a good? Where does money come from and what is this thing called interest, and can we do away with them? What makes relatively useless diamonds more valuable than something as important as water? How do we go about valuing something like a box of apples or a herd of cows? What if we get rid of private property and prices, won’t that make things better? Where does wealth come from and why are some countries more prosperous than others. And so on.
Each of these particular puzzles has a conceptual and sometimes practical history, one usually buried in time, and sometimes dramatically evolved over the course of intellectual inquiry. What we will find is that Hayek found it useful and even necessary to resurface these puzzles and problems and the reconceptualize them within a much wider frame in order to address irreconcilable conceptual and explanatory roadblocks within the explanatory project of economics, both within his own work and, nearly as significantly, within the projects of economists grappling with the problems and conceptual apparatus being developed in Hayek’s close community of inquirers.
There are a famous set of conceptual puzzles and explanatory perplexities that Hayek found himself embroiled within among his peers, students and rivals in Britain, America and on the Continent, and I will list them here and begin to suggest their wider significance for Hayek’s reconceptualization of economics, human understanding, and scientific explanation itself. But I will also briefly introduces the deeper background problems embedded in Hayek’s own personal project launched under the supervision of his adviser Friedrich Wieser and expanded into a particular empirical and theoretical project in the field of business cycle theory. It was the collision and interplay of these multiple concerns in the context of Hayek’s long-standing project of resurfacing prior fundamental developments in economic science which bore the fruit of Hayek’s rethinking of economics and the practice of explanation itself.
The three great and intertwined puzzles which dominated Hayek’s early career where: 1) making coherent sense of the extension of the marginal valuation logic pioneered by Carl Menger to multiple production goods and processes taking rival lengths of time and producing goods of rival superiority; 2) explaining the empirical pattern of booms and busts using the marginalist valuation logic to produce an explanation of those patterns; 3) figuring out how to produce such an explanation while adhering to the presumed conceptual necessities for providing a valid scientific explanation, rather than a mere historical description fatally relative to particular historical periods of time.
Hayek’s personal project bore fruit which has gone into the heart of contemporary economics practice, eg Hayek pioneered the dating of goods and the intertemporaral equilibrium concept which is now part of the basic tool-kit of economics, part of work which played in role in the Hickian revolution in micro and macro economics. This early work also represents the first beginnings of Hayek’s conception of prices as signals, signals which could be incomplete or distorted, work which in time would spawn the vast literature of the economics of information. But what is most of interest for us here is that this project generated internal difficulties which forced Hayek out of old boxes and sent him on his project to remake economics, our understanding of explanation itself, and much else as well.
What were these problems?
Hayek was among the first to read his cousin Ludwig Wittgenstein’s Tratacus, in its original 1921 German edition. Hayek was also schooled in the controversies of post-Kantian philosophy, positivism, the “method wars” between German historicism and the Austrian economists, the various philosophers of mind, society and culture such as Windelband, Dilthey, Husserl and Weber, and the new advocates of formal, scientific philosophy within the Vienna Circle, including such figures as Schlick, Carnap, Neurath, Mises & Menger. And Hayek had already refuted and turned on its head the relational and phenomenological positivism of Ernst Mach, work which would become Hayek’s landmark recasting of our capacity for learning at the neurological level via what is now known as the Hebbian synapse.
The lesson Hayek derived from the background of study was the conviction that a valid scientific theory must conform to that Larry Wright has described as “the deductive idea”. Now there is a massive scientific and philosophical background to this conviction and stipulation, one which we will tease out at length below. It will be shown just how important this background has been in determining the shape of contemporary economics across the last 100 years — and how Hayek’s escape from it remakes our understanding of economic explanation and much else. But for now the important point is to identify the deductive nomological model of scientific knowledge and economic understanding as one that failed to make sense of the explanatory problem and the causal explanatory elements available and required to account for that problem.
There were multiple aspects to the problem embedded in the attempt to vindicate a purely deductive and formal model of economic science, the first among these recognized by Hayek was difference in cognitive status and explanatory role of prices in the real world and the valuation relations in the pure logic of choice identified as “prices” in the mathematical constructs of the economist.
Hayek first flagged the difference in cognitive status and explanatory role of what he called real world “price signals” in contrast to the things economists called “prices” in their mathematical constructions in his 1929 book Monetary Theory and the Trade Cycle. Why Hayek saw this difference and its significance, and other economists did not see it, matters and is intimately related to the difference between Hayek’s conceptual and explanatory project and the constellation of similar frameworks in which most all other economists were working.
And here what matters is that Hayek was working on and grappling with the closely interrelated problems of how the logic of marginal valuation can be extended to valuation of rival production process lengths and outputs, and the nature of informational discoordination across the structure of production processes and price relations. And other economists didn’t have these things in the inventory of things they were worrying about. Why? We have to go to the history of the development of economic science for this explanation, again highlighting the role of conceptual etiologies is the surfacing and articulation of alternative conceptual and explanatory “adaptive spaces” which explain why some groups of scientists see a significant consideration, and others do not. What most all other economists had continued to work with were pre-marginalist valuation constructions when the topic of deliberation turned to such things as production goods, money, interest, and labor. We will flesh out later why the difference between real world price signals and “prices” modeled in pure math constructions is not popped-out to one’s attention when using these pre-marginalist valuation constructions directly relating the whole class “production goods” to the whole class “labor”. And we will discuss why the relation of the deductive model to the real world of imperfect informational relations between actual marketplace prices doesn’t pop-out as problematic when building deductive value relations between whole classes such as “capital”, “interest”, and “labor”.
To quickly reiterate, deductive constructions mapping out valuation relations across rival production goods don’t and can’t be made to map up with the imperfect and sometimes systematically distorted relational matrix of the price signal system out in the real world. And Hayek gradually and in the context of other developments and debates began to grasp the profound meaning for economics of this fact. We will engage the seminal importance of this insight further below, and in particular we will tie this insight into controversies and developments in the literatures on socialist planning, trade cycle theory, the theory of capital goods, and the interrelations of these important debates.
So that is the first of the internal puzzles generated by Hayek’s project, the puzzle of squaring the demand for deductive nomological structure as the sine qua non of scientific practice with the reality of — and for Hayek the causal-explanatory importance of — the messy and imperfect world of price signal relations in the actual marketplace.
The second internal puzzle
As a graduate student working under Friedrich Wieser, Hayek struggled with the problem of completing the Marginalist Revolution, the central problem left unsolved was the extension of the the logic of marginalist relationalist valuation from consumables to the production goods which made consumable goods possible. This puzzle came with an old framework and an old puzzle specified in the concepts of the old framework.