What Hayek Can Teach Us About the Nature of Science, Argument, Economics and Knowledge

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.

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