seminar: Ransom on Hayek 3

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.

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Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for individual’s actions. — F. A. Hayek

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