From the Wikipedia entry for “Pigovian Tax”:

A Pigovian tax is considered one of the “traditional” means of bringing a modicum of market forces, and thus better market efficiency, to economic situations where externality problems exist. More recently, particularly in the United States since the late 1970s, and in other developed nations since the 1980s, an alternative to Pigovian taxation has arisen: the creation of a market for “pollution rights.” Pollution rights markets are not generally more efficient than Pigovian taxes but are often more appealing to policy makers because giving out the rights for free (or at less than market price) allows polluters to lose less profits or even gain profits (by selling their rights) relative to the unaltered market case. Markets for emissions trading have been set up to bring better allocative efficiency and improved information sharing to the pollution externality problem. Pollution rights markets are a part of the field of Environmental Economics generally, and Free-market environmentalism specifically.

One difficulty with Pigovian tax is calculating what level of tax will counterbalance the negative externality. Political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax; lobbying of government by special interests who calculate the negative utility of the externality higher than others may also tend to increase the level of the tax levied, which will tend to result in a sub-optimal level of production ..

A key problem with the Pigovian tax is the “knowledge problem” suggested in Pigou’s essay “Some Aspects of the Welfare State” (1954) where he writes, “It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of [the gaps between private and public costs] could interfere with individual choice.” In other words, the economist’s blackboard “model” assumes knowledge we don’t possess — it’s a model with assumed “givens” which are in fact not given to anyone. Friedrich Hayek would argue that this is knowledge which could not be provided as a “given” by any “method” yet discovered, due to insuperable cognitive limits; chaos theory argues for other cognitive limitations.

A counter-argument is that perfect knowledge of the gaps between private and public costs is not necessary: So long as a tax level reflects a negative externality better than no tax, it should increase efficiency. Sometimes these differences are obvious – for example the effect of petroleum use on pollution, global warming and traffic congestion. In such a case, the levying of a Pigovian tax approximating such costs would be better than no tax at all.

Aside from efficiency, Pigovian taxes may increase the equity or fairness of how costs of negative externalities are borne. For example, even if a tax on air pollution is not at the perfect level to achieve optimal efficiency, it transfers cost associated with pollution from the public (e.g., via reduction of other taxes or benefit from public spending of the pollution tax proceeds) to the polluter.

In my first two Hayek Seminar postings I highlighted the fact that for Hayek the empirical character of economics science begins with empirical problems in our experience. We witness a constantly repeated pattern in which prices “tend” toward costs. Alternatively, we attempt to impose a system of “just prices” and our attempts to empirical control the world continually end in empirical failures, producing repeated typical patterns of unintended empirical consequences. We begin to ask why, and our efforts to understand inspire us to created logical constructions whose parts a single mind can manipulate and observe as if from a God like perch, constructions which mimic aspects of the prices -> cost pattern, first for an isolated part of the system and then for the whole global system.

Ultimately, in the 20th century, with the work of Wieser or Lerner or Debreu, we reach the point were a pure apriori, logical system of perfect economic order — or “equilibrium” — is created, a system knowable by a single mind, and hypothetically manipulated by a single mind.

We are focusing here on the empirical character of economic science, and Hayek’s point here is that this tautological logical system gives us a window on global economic order — it gives us a “frame” or “lens” that enables us to “see” or imagine global economic order as we never before were able to “picture” it. But Hayek’s more significant point is that this apriori “God’s eye” or “Dictator’s plaything” construction, which it gives us a window into a similar but imperfect global empirical pattern before us; this tautological construction does not provide us with an explanation of what produced this now more fully perceptible order. And most certainly it does not provide us with a causal empirical explanation of that order.

Here’s Hayek:

“In distilling from our reasoning about the facts of economic life those parts which are truly a priori, we not only isolate one element of our reasoning as a sort of Pure Logic of Choice, but we also isolate, and emphasize the importance of, another element which has been too much neglected.” (1937, p. 35)

“. . the tautological propositions of pure equilibrium analysis as such are not directly applicable to the explanation of social relations . . ” (1937, p. 35)

“The fundamental problem of all economic theory, that is to the question of the significance of the concept of equilibrium and its relevance to the explanation of a process which takes place in time.” (1935, p. 138)

“It was only the modern development of equilibrium analysis together with the increasing awareness of the conditions and limitations of the applicability of the equilibrium concept which has taught us to recognize the nature of the problems existing in this field [i.e. industrial fluctuations] and which has indicated the paths towards their solution.” (1935, p. 137)

” . . though the discussion of moral and social problems based on the assumption of perfect knowledge may occasionally be useful as a preliminary exercise in logic, they are of little use in an attempt to explain the real world.” (1960, pp. 22-23)

I’ll pick up the topic of what does provide a causal explanation of that order in an upcoming Hayek Seminar posting — and I’ll explain the role of the tautological construct of equilibrium in the discovery and perception of that causal explanatory element.

What I’m probing right now is Hayek on the spurs to inquiry in economics. One insight I’d like to suggest is the fact that over time the human race loses track of the problems which originally provoked inquiry — and the loss of this original sprur to inquiry can have detrimental and even pathological effects on the evolution of a discipline. I’d point to some of the pathologies of mathematical Darwianian biology highlighted by Alex Roseberg, Ernst Mayr and others, where the mathematicians have seemed to have forgotten the original gross teleological adaptations which originally provided part of the patterns in our experience which demand explanation.

In economics many mathematical economists seem to have become so focused on their math constructions that they have completely lost sight of the empirical patterns and spurs to inquiry which gave rise and justification to their mathematical endevours.

“Explanation by elimination” is typically a fallacy in both science and philosophy, and one of the mistakes characteristic of this fallacy is the error of presuming that the phenomena and the questions generating the problems to be explain are done away with by the constructs developed to explain them.

To recover the empirical and conceptual richness of the science of economics, it is necessary to bring the tacit and unspoken elements of both the explanadum and the explanans in economics out into the open — the full empirical and conceptual nature of the science of economics is hidden by the fact that much of what needs to be explained is unspoken and hidden in the shadows.

Hayek implicitly suggests that to get our grips on the empirical problem that the science of economics provides explanations for it helps to dig back to a time when human ignorance of the economic sphere was much more extensive, an effort that can help us re-imagine our ignorance, and thereby articulate explanatory problems we no longer even recognize or think about due to hard won achievements of understanding.

In the last seminar posting I quoted Hayek on the empirical pattern in which prices tend toward costs of production, a pattern which Hayek suggests both justifies and helped inspire the equilibrium construct in economics.

But what provoked men to take notice of this pattern and most especially what provoked people to worry about it enough to bother transforming patterns of this kind into theoretical constructs and eventually equilibrium constucts?

In part, Hayek suggests, people were inspired to worry about such things and grapple with such problems because of their desire to empirically control the world as a means of making the world better fit to their moral convictions and desires. In particular, the effort to intervene in the world in order to make the world fit an image of a just order — and the continual failure to succeed in that effort, gave rise to theoretical efforts to achieve what had yet to be achieved, and ultimately to theoretical efforts to explain why what hadn’t been achieved perhaps couldn’t be achieved.

Here’s Hayek:

“.. a thousand years of vain efforts to discover substantively just prices or wages ..” (1976, p. 73)

“The futile medieval search for the just price and just wage .. was not the end of the search for that philosopher’s stone. It was revived in modern times, not only by the general demand for ‘social justice’, but also by the long and equally abortive efforts to discover criteria of justice in connection with the the procedures for reconciliation of arbitration in wage disputes. Nearly a century of endeavors by public spirited men and women in many parts of the world to discover principles by which just wage rates could be determined .. ” ” (1976, p. 75)

“.. the general problem of remuneration according to merit .. “ (1976, p. 179)

“.. the late schoolmen recognized [just prices and wages] to be empty formulae ..” (1976, p. 73)

“.. man’s inability to determine beforehand what a just price would be .. “ (1976, p. 178)

I’m going to start using this space to teach some Hayek — and perhaps generate a conversation. Please feel welcome to add your own thoughts in the comments section below.

Today’s seminar topic is the empirical nature of economics science.

Hayek in many places talks about how science begins with problems in our experience. Hayek is explicit in saying that economic science is not any different — economic science begins with problems raised in our experience. Hayek repeatedly describes these problems of science as question raising patterns in our empirical experience. In the case of economics, the most central problem raising pattern in our experence according to Hayek is the pattern in which prices repeatedly tend toward costs of production. The take away point here is that the empirical and scientific nature of economics starts with the empirical and scientific nature of its problems — questions raised by problem posing patterns observed in our experience. In later seminar postings I will discuss Hayek on the fuller context in which these patterns originally give rise to questions, and the relation of these questions to the formal and mathematical constructions which these patterns inspire.

Here’s Hayek — the comments section is open:

“It should be remembered that nearly the whole of economic science is based on the empirical observation that prices ‘tend’ to correspond to costs of production, and that it was this observation which led to the construction of a hypothetical state in which this ‘tendency’ was fully realized.” (1941, p. 27)

“And expericence shows us that something of this sort does happen, since the empirical observation that prices do tend to correspond to costs was the beginning of our science.” (1937, p. 49)

“..there seems to be no possible doubt that the only justification for this [concern with the admittedly fictitious stae of equilibrium] is the supposed existence of a tendency towards equilibrium.” (1937, pp. 43-44)

“Yet the concept of equilibrium is just as indespensable a tool for the analysis of temporal differences in prices as it is for any other investigation in economic theory. Strictly speaking, its field of application is identical with that of economic theory, since only with its assistance is it possible to give a summary depiction of the very great number of different tendencies of movement which are operative in every economic system at very point in time.” (1928/1984, p. 75)

Have at it boys and girls:

When you teach a graduate course in price theory, you typically are teaching solutions to a “constrained optimization” problem.  Thus the calculus along with Lagrangean multipliers and all that.  Those who think there’s too much math in economics don’t deny that this is the problem; they only think that forcing the problem into a calculus form oversimplifies and ignores some real, important issues.

All would agree that part of the problem has to be an agreement on what it is you are trying to maximize or minimize.  You are either maximizing profits subject to some constraints on cost or quantity of inputs, or you are minimizing cost subject to some level of output.  We believe people make decisions this way even if they can’t write a function down on paper.  They’re impelled to do so by the never-ending quest for more.

The Mises Institute has made a free PDF edition of F. A. Hayek’s book Individualism and Economic Order available for download here.  The collection includes some of the most influential articles every written in economics.

Table of Contents:

1. Individualism:  True and False

II. Economics and Knowledge

III.  The Facts of the Social Sciences

IV.  The Use of Knowledge in Society

V.  The Meaning of Competition

VI.  “Free” Enterprise and Competitive Order

VII.  Socialist Calculation I:  The Nature and History of the Problem

VIII.  Socialist Calculation II:  The State of the Debate

IX.   Socialist Calculation II:  The Competitive “Solution”

X.  A Commodity Reserve Currency

XI.  The Ricardo Effect

XII. The Economic Conditions of Interstate Federalism

Friedrich Hayek opposed the view of Lionel Robbins, Ludwig Mises and most textbooks which identifies “human action” or “human behavior” as the subject matter of economic science.  Instead, Hayek shares the view of Carl Menger and Adam Smith which identifies undesigned social order as the object of explanation in social science:

The discovery that there exist in society orders of another kind which have not been designed by men but have resulted from the action of individuals without their intending to create such an order, is the achievement of social theory — or, rather, it was this discovery which has shown that there was an object for social theory. It shook the deeply-ingrained belief of men that where there was an order there must also have been a personal orderer. It had consequences far beyond the field of social theory since it provided the conceptions which made possible a theoretical explanation of the structures of biological phenomena.  And in the social field it provided the foundation for a systematic argument for individual liberty.

From F. A. Hayek, “Kinds of Order in Society”, New Individualist Review.

Nobel Prize winner Edmond Phelps channels Friedrich Hayek and re-introduces Frank Knight in a brutal take-down of a failed generation botching up the works because they are fatally ignorant of how a capitalist economy actually works.  What Phelps is too delicate to say is that the elite have been well schooled in their ignorance by professors of economics who have drilled them in mathematical constructions which can do nothing else but create a deep misunderstand of the market process and the inherent economic uncertainty which exists within that process.

In this section, Phelps contrast the inadequate economic vision of Joseph Schumpeter with the deeper insights of Friedrich Hayek:

Well into the 20th century, scholars viewed economic advances as resulting from commercial innovations enabled by the discoveries of scientists – discoveries that come from outside the economy and out of the blue. Why then did capitalist economies benefit more than others? Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But the idea of all-knowing bankers and unerring entrepreneurs is laughable. Scholars now find that most growth in knowledge is not science-driven. Schumpeterian ­economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

Later, Hayek fleshed out a theory of how capitalism makes “discoveries” on its own. He had no problem with the concept of an innovative idea, for he understood that, even among experts, knowledge is incomplete about most things not yet tried. So he felt free to suppose that, thanks to the specialised insights each acquires, a manager or employee may one day “imagine” (as Hayek’s hero, David Hume, would have put it) a commercial departure – one that could not be inferred or envisioned by people outside the individual’s line of work. Then he portrays a well-functioning capitalist system as a broad-based, bottom-up organism that gives diverse new ideas opportunities to compete for development and, with luck, adoption in the marketplace. That “discovery procedure” makes it far more innovative than the top-down systems of socialism or corporatism. The latter are too bureaucratic to learn about ideas from below and unlikely to obtain approval from all the social partners of the ideas that do get through ..

UPDATE:  See also this related article by Jerry Muller.  [Ht to Alan Furth.]  Here’s Muller:

From the point of view of top management, the diversity of operations means that executives were managing assets and services with which they have little familiarity. This has led to the spread of pseudo-objectivity: the search for standardized measures of achievement across large and disparate organizations. Its implicit premises were these: that information which is numerically measurable is the only sort of knowledge necessary; that numerical data can substitute for other forms of inquiry; and that numerical acumen can substitute for practical knowledge about the underlying assets and services.

A good deal of our current economic travails can be traced to this increasing valuation of purportedly objective criteria, so denoted because they can be expressed and manipulated in mathematical form by people who may be skilled at such manipulation but who lack “concrete” knowledge or experience of the things being made or traded. As Niall Ferguson has put it, “Those whom the gods want to destroy they first teach math.” …

Read the whole thing.

A letter in Monday’s Wall Street Journal:

Mr. Reich mischaracterizes the agendas of Ronald Reagan and Barack Obama. Mr. Reich also demonstrates what Friedrich Hayek once called the “fatal conceit.”

Mr. Reich argues that the primary philosophical difference between Messrs. Reagan and Obama is that Reagan tried to advance economic growth with “top-down” policies, while Mr. Obama is working through the more egalitarian “bottom-up” approach.

However, Reagan understood, as Hayek pointed out, that it is impossible for central planners to possess the necessary knowledge to efficiently allocate economic resources (high IQs and doctoral degrees notwithstanding).

Reagan knew that with less government the market would send unbiased price signals to every consumer. Individuals would take those signals and use their own specialized knowledge — information about what their needs are, what investments make sense — to make economic decisions. Collectively, these decisions reflect extremely diverse knowledge and allocate resources for the whole economy in the best way possible. What could be more “bottom-up” than that?

In fact, it is Messrs. Obama and Reich who are attempting to manipulate from the top down by taking resources from every American and allocating it as they, the central planners, see fit. It is Messrs. Obama and Reich who are disregarding what we the people want. What could be more conceited than that?

Ray Galkowski
Princeton, N.J.

Economist Craig Newmark suggests that the discipline of economics recommends itself over other social sciences on the basis of its better “track record”.

But let’s take a closer look.  What we find is that much of the best economics has been work done by economists attempting to overcome the massively influential fallacies of other economists:  Adam Smith taking on merchantilist economists;  Keynes taking on the “Treasury” economists & A.C. Pigou;  Friedman taking on the Keynesian economists; Bohm-Bawerk taking on the Marxist economists.

You get the idea.

The best economists are constantly savings us from .. the economists.  And things are no different with the economics of Hayek.

Much of Hayek’s best work was exactly the same sort of thing.  Hayek taking on socialist economists — leading to his great papers on the division of knowledge and the price signaling function of relative prices.  Hayek taking on the “perfectly competitive market” economists and the formal equilibrium economists — leading to his great papers on competition as a discovery process.   Hayek taking on the Federal Reserve economists, Fisher, Foster & Catchings, Keynes, and the rest on price stability, monetary and business cycle theory — leading to his many books and papers on the microeconomics of production and consumption coordination across time — as well as those on the very foundations of economic science.

This is the stuff for which Hayek won the Nobel Prize.  And at the end of his career Hayek saw a profession that still “didn’t get it” — and which was still making terrible mess of things (Hayek’s words).

A generation ago Keynesian economics was dead and buried, abandoned even by the most influential Keynesian economist of them all, John Hicks.  It had been killed by the re-discovery of Hayek (by Robert Lucas , Alex Leijonhufvud, and John Hicks, among others), by Milton Friedman — and by stagflation.  Keynesian economics was rejected by the great political figures of the time.  By Thatcher and Reagan who looked to Hayek, not Keynes.   And by the leaders of the states of the former Russian Empire, by the Chinese, and across the European continent, who again looked to Hayek (and Friedman), and not Keynes.

But today the free market and the ideas of Friedrich Hayek are under massive assault.  The Keynesians are again in the saddle, riding the whipping horses of “crisis”, “deflation” and “stimulus” to the largest takeover of the free economy in the nation’s history.

How did this happen?

Let’s go back to the collapse of Keynes.  In the wider world, Keynesianism was in disrepute, but in the universities, the tenured clerisy remained — a  guild of modern day astrologers wedded to the ancient and failed cargo cult pseud-science of “Keynesian macroeconomics”.   But all was not perfectly well, even in the commanding heights of the Ivory Tower.  The economists, somewhat uncomfortably, taught an IS-LM  version of Keynesian economics to undergraduates which they laughed at in the graduate seminar room.   In the graduate seminars they oohed and aahed instead at “New” versions of Keynesian economics, given “equilibrium” foundations inspired in the first instance by Hayek (via Lucas), but having little to do with genuine microeconomic foundations.   Only problem?  There existed an unending number of these models — incompatible in various ways, and so different from “Keynes” that many of them went by names other than “Keynesian economics”.  But a new, naive, and politically polarized generation was coming on the scene, both in economics and in politics.  And the new order of the day was old time Keynesian economics, with “stimulus” and “deflation” the watchwords of the age.  First with George W. Bush [see links below], and Bush economists such as Greg Mankiw, Alan Greenspan, and Ben Bernanke.  And now with the arrival to dominance of Paul Krugman, Timothy Geithner and Barack Obama, things have really gone over the cliff.  A new age of Keynes is upon us.

Call it the Counter-Revolution of the Keynesian Pseudo-Science.

So the time is now for executives and college students and small business owners and journalists and the general public to intellectually arm up — and participate in the beating back of the Cargo Cult science of the new Keynesians.

Here’s your ammo.   All freely available on the internet.

Blogs:  EconLog, Cafe Hayek, Mish’s Trend Analysis, Mises Economics Blog, ThinkMarkets, The Austrian Economists.

Web Sites:  CATO Institute, Mises Institute, Library of Econ & Liberty, The Bailout Reader, Roger Garrison’s article archive.

Books:  Gerald O’Driscoll, Jr, Economics as a Coordination Problem:  The Contribution of Friedrich A. Hayek; Roger Garrison, Time and Money:  The Macroeconomics of the Capital Structure, David Laidler, Fabricating the Keynesian Revolution; F. A. Hayek, Prices and Production and Other Works; F. A. Hayek, Monetary Theory and the Trade Cycle.

Macroeconomists:  Roger Garrison, Gerald O’Driscoll, Jr., Lawrence White.

Video:   CNBC “House of Cards”,  The Crisis of Credit Visualized.

Finally, a collection of contemporary articles explaining the current economic bust:

• Mark Thornton, “The Housing Bubble in 4 Easy Steps”
• Gerald O’Driscoll, Jr.  “To Prevent Bubbles, Restrain the Fed”
• John Taylor, “How the Government Created the Financial Crisis”
• James Gwartney, “On The Fed and Greenspan”
• Michael Lewis, “Inside the Wall Street Doomsday Machine”
• John Taylor, “An Empirical Analysis of What Went Wrong” (pdf)
• Peter Wallison, “Goverment Policies and the Financial Crisis”
• David Beckworth, “No, Greenspan Was Not Right”
• Jim Grant, “Is the Medicine Worse Than the Illness?”
• David Rose & Larry White, “We Can’t Spend Our Way Out of This Quagmire”
• Arnold Kling, “Why Credit Default Swaps?”
• Seattle P-I, “FBI Saw Mortgage Fraud Early”
• OC Register, “How Subprime Lending All Started in OC”
• Mike Shedlock, “Krugman Still Wrong After All These Years”
• Steve Sailer, “Predatory Mortgage Lenders”
• The Wall Street Journal, “Lender Lobbying Blitz Abetted Mortgage Mess”
• Russ Roberts — “How the Government Stoked the Mania”
• Anonymous, “A Worm’s-Eye View of Wall Street”
• The NY Times, “Inside Washington Mutual”
• Steve Sailer, “Washington Mutual and the CRA”
• Mike Shedlock, “Time to Break Up the Credit Rating Cartel”
• William Black, “Fiddling While Rome Burns”
• Steve Sailer, “BofA’s $1.5 Trillion CRA Pledge”
• Felix Salmon, “Recipe for Disaster:  The Formula That Killed Wall Street”
• The Washington Post, “The Crash:  What Went Wrong”
• Lawrence White, “What Really Happened”
• The NY Times, “White House Philosophy Stoked Mortgage Bonfire”
• Martin Baily, et al, “The Origins of the Financial Crisis”
• Steve Sailer, “The Diversity Recession”
• Richard Wagner, “A Remarkable Question”
• George Selgin, “Guilty as Charged”
• Gerald O’Driscoll, Jr. — “Subprime Monetary Policy”
• Steve Sailer, “Karl Rove — Architect of the Minority Mortgage Meltdown”
• Lawrence White, “How Did We Get Into This Financial Mess?”
• Steven Horwitz, “An Open Letter to My Friends on the Left”
• Warren Coats, “The D E Fs of the Financial Markets Crisis”
• Arnold Kling, “My Planned Oral Remarks on Freddie & Fannie”
• Mike Shedlock, “Time to Break Up the Credit Rating Cartel”
• John Cassidy, “Anatomy of a Meltdown”
• William Black, “Adam Smith Was Right About CEO Incentives”
• Sebastian Mallaby, “Blaming Deregulation”
• The WSJ, “The Weekend That Wall Street Died”
• Michael Lewis, “Meltdown in Iceland”
• BusinessWeek, “Nightmare Mortgages”
• Steve Sailter, “A How-To Guide to Being a CRA Shakedown Artist”
• Tyler Cowen, “Bailout of Long-Term Capital”
• Arnold Kling, “Testimony on the Collapse of Fannie Mae & Freddie Mac” (pdf)
• Robert Higgs, “Lucas and the Fed”
• Eric Falkenstein, “WaMu and the Big Effects of Big Government”
• Lawrence White, “The Bungled Bailout”
• Wikipedia, “The Greenspan Put”
• Brian Riedl, “The Case for No Stimulus”
• John Cochrane, “Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?”

Find additional links and resources here.

UPDATE:  Read more about Bush’s consistently Keynesian approach to the economy here, here, here, and here.  On Bernanke and the mid 2000′s “deflation” scare read this and this and this.

As an introduction to his new EconTalk discussion with Robin Hansen, George Mason University economists Russ Roberts writes the following:

As far as I know, no prominent market-oriented economist has come out in favor of a trillion dollar increase in government spending as a way to improve the economy. Every market-skeptical economist that I have heard is in favor of it on the grounds that it will improve the economy. Each side claims to have empirical support for its position.

What does this tell you about economics as a science? What should a non-economist conclude?

I replied in his comments section as follows:

Hayek’s point is that economists are looking in exactly the _wrong_ place for the empirical facts grounding the explanatory power of economics.

Empirical fact:

individual knowledge is limited

Empirical fact:

the world presents us with a place in which economic efforts are massively coordinated

Empirical fact:

there is a logic of valuation, which human beings use to order their affairs.

Empirical fact:

This logic of valuation extends to production resources

Empirical fact:

Most production resources are non-permanent

Empirical fact:

Relative prices transmit knowledge beyond that known to a single mind

Etc.

From these empirical facts, you get Hayek’s enormously powerful empirical explanation of the trade cycle.

Most of the “data” you find in “macroeconomics” is trace data which needs to be explained.

It isn’t stuff governed by simple two-variable “laws”, or a law-governed piece of statistical mathematics.

And these socially constructed data points are _not_ governed by the pseudo-science of “Keynesian economics”.

Quotable:

“The 1926 article does, however, take a different view from the 1945 article with regard to the explanatory sufficiency of equilibrium theory. The two sides the socialist calculation debate also differed on how much relevance the general-equilibrium approach has for understanding the factor pricing of a real-world market economy. In 1926 Hayek in Wieserian fashion saw “subjective value theory as a satisfactory explanation for economic processes”. But by 1945, as noted already, Hayek cautioned that a GE model “does not deal with the social process at all”.

If GE theory is insufficient for understanding the market process, then it needs to be supplemented (or partly replaced) by a theory of price and quantity adjustment through entrepreneurial competition (or something like it). Hayek would contribute to such a theory in his later essays “The Meaning of Competition” (1946) and “Competition as a Discovery Procedure” (1968).”

More:

“Hayek emphasized the point that in equilibrium there is a tradeoff between more consumption and more investment: “the physical quantity of consumer goods per capita can only be increased by consistently devoting a larger part of productive resources to capitalistic investment rather than to immediate consumption.” One can illustrate the tradeoff by drawing a production possibilities frontier between consumption and investment, as Roger Garrison does in his book restating Hayekian macroeconomics, Time and Money. Although the point is simple, Hayek noted that it is implicitly denied by all those economists who “assume that the demand for capital goods changes in proportion to the demand for consumer goods”. The ranks of such economists in 1932 included “underconsumption” theorists of economic depressions, like John Maynard Keynes in his Treatise on Money (1930), which Hayek cited in this connection. Keynes amplified the underconsumption theme in his General Theory (1936). The assumption that consumption and investment move in the same direction has since been taken for granted by Keynesian macroeconomists up to the present day.”

pdf:  “Editor’s Introduction” by Lawrence H. White, Duke U. workshop paper, for the forthcoming volume:  F. A. Hayek, Capital and Interest, Vol. 11 of The Collected Works of F. A. Hayek.

Planned Contents of the Volume

1926 “Some Remarks on the Problem of Imputation”
1927 “On the Problem of the Theory of Interest”
1932 “Capital Consumption”
1934 “Saving”
1934 “On the Relationship between Investment and Output”
1935 “The Maintenance of Capital”
1936 “Technical Progress and Excess Capacity”
1936 “The Mythology of Capital”
1936 “Utility Analysis and Interest”
1941 “Maintaining Capital Intact: A Reply to Professor Pigou”