Books — Expand On Your Hayek, Expand On Your World

Friedrich Hayek’s work opens a world of ideas and historical events. Read more:

The Road to Serfdom / Stalin, Hitler / Totalitarian Societies

Institutions / Culture / Evolution / Competition

Intellectuals / Economists / Experts

History of Ideas / Philosophy

Britain / British Labour / Thatcher

Mont Pelerin Society / Revival of Liberalism

Vienna / Austria

Business Cycles / Financial Crisis / Monetary Policy

Liberalism / Conservativism / Classical Liberalism

Socialism / Central Planning 

Economists

Neuroscience / Mind & Brain

Prices / Market Mechanism / Competition

Philosophers

European History 1900-1950

Marginal Valuation Applied to Production Goods

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How economists have blinded themselves with their math constructions

Hayek’s multi-dimensional normal science research project, tackling the relation between the new marginal valuation logic and the old problem 0f distribution theory  (among several other problems) opened Hayek’s eyes to how the math construction of economics had blinded economists to the central problems, structures and causal processes of the market economy.  What I will do here is explicate where and how economists, according to Hayek, have been blinded to the problems, structures and causal processes of the market economy by the formal constructions and the false philosophical pictures which mandate the particular ways that economists feel compelled to think about these constructions.

“there can be no doubt that for the understanding of the dynamic processes [the discussion of ‘capital’ in terms of some single magnitude] was disastrous.” (Hayek, 1941/2007, p. 33)

“the doubtful meaning of equilibrium analysis .. if applied to the conditions of a competitive society.” (Hayek, 1937/2014, p. 61)

“My criticism of the recent tendencies to make economic theory more and more formal is not that they have gone too far but they have not yet been carried far enough to complete the isolation of this branch of logic and to restore to its rightful place the investigation of causal processes.” (Hayek, 1937/2014, p. 59)

“the sense in which we use the concept of equilibrium to describe the interdependence of the different actions of one person does not immediately admit of application to the relations between the actions of different people.” (Hayek, 1937/2014, p. 61)

“What seems so far to have escaped notice is that this whole procedure involves a confusion of a much more general character .. which is due to an equivocation of the term ‘datum.” The data which here are suppose to be objective facts and the same for all people ware evidently no longer transformations of the Pure Logic of Choice. There ‘data’ meant those facts and only those facts, which were present in the mind of the acting person, and only this subjective interpretation of the term ‘datum’ made those propositions necessary truths.” (Hayek, 1937/2014, p. 62)

“‘Datum’ [in the Pure Logic of Choice] meant given, known, to the person under consideration. But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept has undergone an insidious change of meaning.” (Hayek, 1937/2014, p. 62)

“in the usual presentations of equilibrium analysis it is generally made to appear as if these questions of how the equilibrium comes about were solved. But, if we look closer, it soon becomes evident that these apparent demonstrations amount to no more than the apparent proof of what is already assumed.”  (Hayek, 1937.2014, p. 68)

“The assumption of a perfect market [in the sense that if people know everything they are in equilibrium] is just another way of saying that equilibrium exists but does not get us any nearer an explanation of when and how such a state will come about.” (Hayek, 1937/2014, p. 69)

“Thei stateme that, f people know everything, they are in equilibrium is simply true becasue that is how we define equilibrium.” (Hayek, 1937,2014, p. 68-69)

 

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Mach, James and Russell

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:

The Realistic Empiricism of Mach, James, and Russell: Neutral Monism Reconceived by Erik Banks

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Tautologies, empirical problems and causal explanations — Hayek’s 1936 revolution

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)

 

 

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1936 And All That — Hayek’s Copernican Revolution in Economics

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.

 

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How Hayek Made His Way To His Famed 1936 Copernican Revolution in Economics

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.

Continued here.

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