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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