Peter J. Boettke, Professor of Economics and Philosophy at George Mason University, argues that is a common trope to claim that F. A. Hayek experienced a crushing defeat in technical economics during the 1930s. At the beginning of the decade, Hayek emerged in the British scientific community as a leading economic theorist. Yet by the end of the decade Hayek was supposedly defeated in his debate both with Keynes and with Oskar Lange and Abba Lerner over market socialism. However, this narrative reflects a fundamental misunderstanding of the teachings of economics from the classical to the early neoclassical economists. Economic life from Adam Smith to J. S. Mill never was treated as taking place in an institutional vacuum. Instead, law, politics, and social mores all constituted the institutional background against which economic life played out. As Boettke argues in the Lead Essay, Hayek’s epistemic institutionalism, as articulated in the 1930s and 1940s, provided the foundation for his own reconstruction and restatement of liberal political economy as evidenced in The Constitution of Liberty (1960) and Law, Legislation and Liberty (1973-79). Recognizing this aspect of Hayek’s thought is a first step to recognizing his broader contributions to economic science and the art of political economy. Boettke is joined in this discussion by Steven Horwitz, the John H. Schnatter Distinguished Professor of Free Enterprise in the department of economics at Ball State University, Roger Koppl, professor of finance in the Whitman School of Management of Syracuse University, and Adam Martin is a Political Economy Research Fellow at the Free Market Institute and an assistant professor in the department of Agricultural and Applied Economics at Texas Tech University.

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Peter Boettke, "Hayek's Epistemic Liberalism" [September, 2017]

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The Debate

Lead Essay: Peter Boettke, "Hayek's Epistemic Liberalism" [Posted: September 2, 2017]

Responses and Critiques

The Conversation

About the Authors

Peter J. Boettke is a University Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is the current president of the Mont Pelerin Society and the Southern Economics Association. He is the author of Applied Mainline Economics: Bridging the Gap between Theory and Public Policy and is currently completing a book on F. A. Hayek for the "Great Thinkers in Political Economy" series with Palgrave Macmillan.

Steven Horwitz is the John H. Schnatter Distinguished Professor of Free Enterprise in the department of economics at Ball State University in Muncie, IN. A member of the Mont Pelerin Society, he has a PhD in economics from George Mason University and an AB in economics and philosophy from the University of Michigan. Horwitz is the author of three books, Monetary Evolution, Free Banking, and Economic Order (Westview, 1992), Microfoundations and Macroeconomics: An Austrian Perspective (Routledge, 2000), and Hayek's Modern Family: Classical Liberalism and the Evolution of Social Institutions (Palgrave Macmillan, 2015). He has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and American economic history. His work has been published in professional journals such as History of Political Economy, Southern Economic Journal, and The Cambridge Journal of Economics.

Roger Koppl is professor of finance in the Whitman School of Management of Syracuse University and a faculty fellow in the University's Forensic and National Security Sciences Institute. Koppl has served on the faculty of the Copenhagen Business School, Auburn University, Fairleigh Dickinson University, and Auburn University at Montgomery. He has held visiting positions with New York University, George Mason University, University of Vassa, and the Max Planck Institute of Economics. Professor Koppl is a past president of the Society for the Development of Austrian Economics and a former editor of Advances in Austrian Economics. Koppl's research interests include the economic theory of experts, complexity theory, and the production and distribution of knowledge in society. His work on forensic science reform has been featured in Forbes magazine, The Washington Post, The Atlantic, Reason magazine, Slate, and The Huffington Post.



Adam Martin is a Political Economy Research Fellow at the Free Market Institute and an assistant professor in the department of Agricultural and Applied Economics at Texas Tech University. His research interests focus on the intersection of philosophy, politics and economics and include Austrian economics, economic methodology, economic development, and public choice. For more information about his work, please visit <www.adamgmartin.com>.

Additional Reading

LEAD ESSAY: Peter Boettke, "Hayek's Epistemic Liberalism" [Posted: September 2, 2017]↩

It is a common trope to claim that F. A. Hayek experienced a crushing defeat in technical economics during the 1930s. At the beginning of the decade, Hayek emerged in the British scientific community as a leading economic theorist. From 1932 to 1950, Hayek was the Tooke Professor of Economic Science and Statistics at the London School of Economics (LSE), and along with Lionel Robbins spearheaded a perspective in economic science that challenged the dominance of economic thinking at Cambridge. Not only was the Marshall-Pigou hegemony challenged by the LSE economists, but the emerging new economics of John Maynard Keynes and his colleagues such as Joan Robinson and Richard Kahn was subjected to fundamental critique. Yet by the end of the decade Hayek was supposedly defeated in his debate both with Keynes and with Oskar Lange and Abba Lerner over market socialism.

As the Great Depression lingered throughout the decade and World War II broke out, Hayek lost his important ally Robbins to government work, and even his best students and his former junior colleagues, such as Lerner, G. L. S. Shackle, John Hicks and Nicholas Kaldor, all abandoned him intellectually. So the common trope of the "Hayek story" begins.

His crushing defeat was then followed by his abandoning technical economics and spending the rest of his career -- post-The Pure Theory of Capital (1941) – on philosophical speculations, political theory, psychology, law, history, and an ideologically inspired social theory. It's true that colleagues and former students increasingly distanced themselves from Hayek's ideas in economics – so much so, in fact, that Hayek within a short time was almost forgotten as an economic thinker – and he did devote his writing primarily to those other areas. Compare the titles of his books in 1920s and 1930s – Monetary Theory and the Trade Cycle (1929), Prices and Production (1931), and Profits, Interest and Investment (1939) – to the titles from 1950 and forward – The Counter-Revolution of Science (1952a), The Sensory Order (1952b), Capitalism and the Historians (1954), The Constitution of Liberty (1960), Law, Legislation, and Liberty (1973, 1976, 1979), and The Fatal Conceit (1988). This does tell a story, as does Hayek's own repeated statement that while his interests were once purely technical, he was now drawn to broader questions in philosophy and social theory during the preparation of Collectivist Economic Planning (1935) and his subsequent debate with his colleagues at the LSE over socialist economic planning and market socialism.

However, this narrative reflects a fundamental misunderstanding of the teachings of economics from the classical to the early neoclassical economists. Economic life from Adam Smith to J. S. Mill never was treated as taking place in an institutional vacuum. Instead, law, politics, and social mores all constituted the institutional background against which economic life played out. Consider Adam Smith's analysis of the behavior of professors in Oxford, who were paid from an endowment, and those in Glasgow who were paid from student fees. The professors' attentiveness to students differed dramatically not because – Smith postulated – the professors' character was different, but because of the incentives they faced under alternative institutional arrangements. "Incentives matter" has been a mantra of economists since the first systematic treatments in the discipline, and the structure of incentives that economic actors face is a byproduct of different institutional contexts. We must always remember that Smith argued that the only difference between the street porter and the philosopher resided in the mind of the philosopher. As my colleague David Levy likes to say, Smith was an analytical egalitarian. The basic approach of the analytic egalitarian is to insist on the symmetry of behavioral assumptions across institutional contexts, and to study the impact on human behavior of variations in that context. Same players under different rules produce different games.

Economic analysis flows from the recognition of scarcity and the fact that all choices are made within given constraints. For analytical tractability, the institutional context can be taken as part of the background constraints. Thus, during the first decades of the neoclassical refinements of economic theory, the analysis proceeded against a given institutional environment of fully defined and strictly enforced private property rights and freedom of contract embodied in the rule of law.

My point is simple: the classical political economists and the early heirs to that intellectual tradition saw economic activity as embedded within an institutional context and never as acontextual. In fact, it shouldn't have to be pointed out that Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations was an exercise in comparative institutional analysis of economic development, with the main contrast being between the mercantilist system of state-led development versus the system of natural liberty with its more trade-led model of development. Smith "derived" his famous "invisible hand" theorem from the self-interest postulate via institutional analysis.

It is relatively easy to see why, as economic theory went through technical refinements in the early 20th century and its critics tended to target the historical and institutional context, theorists sought to strive for an institutionally antiseptic theory. Math is math, after all. The relationship between averages and the marginal is true independent of whether we are talking about student test scores or the costs a factory faces. That relationship also holds whether we are talking about students and factories in China or in the United States. And it is true independent of the motivation of the different actors. The static optimality conditions of a competitive equilibrium possess this math quality. Profit-maximizing requires MR = MC; cost-minimizing requires production at the minimum point on the average cost curve, etc. All least-cost technologies must be deployed, and all opportunity costs in production and consumption must be taken into account. If so, all the opportunities for mutually beneficial exchange that could be pursued will have been pursued, and all technological efficiencies will have been realized. As the terms imply, the pattern of resource utilization will be optimal. Logic conquers historical context, and economic theory is indeed a science on par ontologically with any of the hard sciences, including physics. This understanding of economic theory transformed it from a branch of social philosophy to a new social physics, and the epistemological claims about economics transformed as well.

Mises had first issued the challenge that, due to the inability to engage in rational economic calculation, socialist planning could not deliver on its stated goals of rationalizing production and producing both a burst of productivity and harmony among the classes. What economic calculation achieves is the system's ability to sort out from an array of technologically feasible production projects those which are economically viable from those that are not. Economic calculation is a waste-identifier and -eliminator. By definition, the rationalization of production requires that the waste of resources be eliminated, and the consequences of rationalization of production in terms of a burst of productivity that will deliver man from the Kingdom of Necessity to the Kingdom of Freedom -- such that class distinctions will disappear and harmony between men will reign -- also necessitates the elimination of waste and errors in the pattern of resource use. So Mises's criticism was decisive and cut to the core of the promise of socialism.

This was also purely a point of positive economics. Mises did not question the socialists' ends. Socialism meant something at the time of his original article (1920) – the rationalization of production through the abolition of private property and commodity production. So Mises simply asked if abolition of private property and commodity production was coherent with respect to the rationalization of production, and he demonstrated it was not. Without private ownership in the means of production, there will be no market in those means, and without a market, no exchange ratios, or relative prices, will be established. Therefore, without relative prices, decision makers will be unable to engage in rational economic calculation. In short, decision makers will not know whether to build railroad tracks out of steel or platinum. Technological efficiency is not enough to answer the economic question of the efficiency of resource use. Prices without property are an illusion.

In an ironic twist of argument, Oskar Lange actually accused Mises of being an institutionalist for making this point. But the fact that Lange said this should alert you to the changes that were taking place in the economic theorist's self-understanding from 1900 to 1930. Since math is math and institutions don't matter, if someone invokes institutional differences to explain comparative performance, then he has failed to appreciate the universal nature of economic theory. But to Mises, it was precisely the universality of economic theory that enabled him to understand why institutions matter for economic performance. In addition to Mises's strict adherence to an analysis of the efficiency of chosen means to given ends in his analysis of socialism, he also assumed the best intentions on the part of all actors. This was necessitated by the dialogue at the time and also demonstrated the decisiveness of his critique. One of the oldest arguments in all of intellectual history, dating from at least Aristotle's critique of Plato, is that collective ownership will have perverse incentive effects on individuals in their decision making. Economists had made this incentive-based argument against various proposals for socialism for decades before Mises, and he was clearly aware of them, as any close reading of his 1920 article and 1922 book will reveal. But socialist thinkers had put forth a proposition that man's spirit would be transformed by the transformation of the material conditions of economic life. Man's more cooperative nature would emerge, and his base self-interested perspective would be pushed aside. To a socialist thinker who was working from this assumption, the old incentive-based argument would have no impact. That might have been true, they could reason, in a world of private property and commodity production, but in the world of collective ownership and rational economic planning, such questions of initiative can be dismissed. So Mises met his intellectual opponents on their turf and granted for sake of argument the assumption that these questions of motivation are irrelevant. The question Mises emphasized was how even the most-motivated and best-intentioned planners would be able to rationally plan the economy if they were unable to engage in rational economic calculation. They couldn't, he argued, and so they couldn't achieve what the advocates of socialism desired. They would have to abandon either their ends or their means to make the socialist project coherent. But if they abandoned their ends, then what appeal would their social movement have? If they abandoned their means, then what would the term socialism mean? Either Marx's aspiration or his analysis must be abandoned, and perhaps both; but if both, then we are back to the aspirations and analysis of the classical political economists from Smith to Mill.

Hayek had a different set of arguments to contend with in the English-language debate of the 1930s than Mises had in the German-language debates of the 1920s. But they both faced the challenge of granting for sake of argument as much ground to their intellectual opponents as possible to show that the supposed answer to Mises's challenge was no answer at all. Like Mises before him, Hayek certainly was aware of and agreed with the incentive-based argument against socialist arrangements of economic affairs. But as with Mises, Hayek's intellectual opponents merely dismissed such criticisms as "psychological" concerns. Leaving aside the confusion in these thinkers between individual motivation and systemic incentives, the point for Mises and Hayek was to demonstrate to their opponents that even if one were to assume that economic planners were motivated only by the public interest and workers were willing to work for the good of society rather than their own narrow self-interest, rational economic planning would be impossible under socialism.

To counter the Mises-Hayek position, socialist economists attributed not only a sort of moral perfection to state actors (the public-interest assumption), but also an intellectual perfection. Economic planners were not just benevolent, but omniscient, and once these two assumptions were made, then clearly state planners could outperform erring entrepreneurs in the market. Planning would be the essence of rationality in the economic policy sphere. Mises and Hayek quickly responded in Human Action (1949) and Individualism and Economic Order (1948), respectively, but the main argumentative burden now fell more or less on Hayek in the eyes of his professional peers. Thus Hayek, beginning in the late 1930s, began to articulate his knowledge-problem critique of an array of policy proposals for social betterment. Unique to his approach was the close connection he drew between the institutional context of economic activity and the knowledge that economic actors could discover, utilize, and communicate to others.

In "Economics and Knowledge" (1937), Hayek argued that while the pure logic of choice was a necessary component of any explanation of market clearing, it was not sufficient. What was required was an examination of how economic actors learn the relevant knowledge so they may coordinate their plans with one another and realize the gains from trade and innovation through the market. Hayek argued that this required an examination of how alternative institutional arrangements impact the social learning that constitutes the market and that ultimately this is an empirical project rather than a purely theoretical exercise.

In short, Hayek reasserted the basic claim that context matters. If you can imagine economic explanations as scissors, Hayek was claiming that one blade was the pure logic of choice and the other the circumstances of that choice. The explanation constitutes the logic of situational analysis. And since Hayek did not relax the public-interest assumption, the situational analysis had to focus on learning, or epistemics.

Whereas subsequent developments in the 1950s and beyond, such as law and economics, property-rights economics, and public-choice analysis, would emphasize the incentive issues associated with alternative institutional arrangements, Hayek focused on the knowledge issues. Once this is understood, we see that Hayek didn't move away from economics in the decades after his disputes with Keynes and the market socialists. He was instead delving deeper into the institutional conditions that would permit the sort of mutual learning required for social cooperation under the division of labor and the complex coordination which constitutes a modern economy. The devil is always in the institutional details, and the mechanism is the mutual learning of opportunities for gains from trade and innovation, as well as the discovery of best ways to pursue those opportunities. Economic actors in the private sector as well as the public sector face a knowledge problem, and the institutional framework in each respective arena of social interaction provides answers to what we can learn, how we will learn, and who will learn. The market economy based on property, prices, and profit-and-loss solves the knowledge problem by alerting individuals to profit opportunities by guiding them in decisions through relative price adjustments and disciplining them through the penalty of loss. The underlying pattern of resource ownership provides the background, but it constantly changes as a reflection of the process of learning or failing to learn through market competition.

Politics is an entirely different learning mechanism, and to study politics from this knowledge-problem perspective requires that the theorist examine the how, what, and who within a context different from property, prices and profit and loss. Instead, we have voting, campaign contributions, bureaucracies, budgets, etc. Learning no doubt takes place, but what is learned, how it is learned, and who is learning are significantly different in politics than in the market.

The problem for economic policy that Hayek's challenge presented is that for the policy intervention to be "rational," it should achieve what the market could achieve if it operated ideally. We should be able to see some sort of "invisible hand" process at work in politics that will transform voter preferences into policy outcomes that serve the best interest of society as a whole. But if what is learned is not what would be required for such an exercise in social alchemy, then the process will fall short on its own terms. Hayek gives us a tragic tale of government failure in his story of unintended and undesirable consequences in public policy. Of course, in the 1950s and 1960s the theory of government failure developed in public-choice analysis would stress the incentives faced by voters, politicians, bureaucracies, etc. But Hayek stood fast with the assumption of public interest and sought to demonstrate that the public interest could not be realized because the economic actors would lack the requisite knowledge to pursue the public interest even if they wanted to do so.

Liberalism to Hayek, therefore, must provide an institutional environment that unleashes the creative powers of individuals. He clearly understood this required that their initiative and ambitions be marshalled so that they would benefit the most by best satisfying the demands of others. But his challenge was to demonstrate that the institutions of governance in a liberal order could both provide the stable and predictable framework within which economic activity transpired and permit the adaptability and adjustments to constantly changing circumstances. It is this environment of constant learning that is the source of human improvement and flourishing. Adam Smith famously argued that the greatest improvements in the productive capacity of mankind were due to the expansion and ever-greater refinements in the division of labor. Hayek simply pointed out that the division of labor implies also a division of knowledge. Just as the private-property market economy provides the mechanism through which individuals realize productive specialization and peaceful social cooperation, this economy, with its constellation of relative prices and profit-and-loss accounting, guides decision makers, lures them in certain productive directions, and disciplines them when they go in other less-productive directions.

Hayek never abandoned economics. He simply returned to his roots. Economic education in Vienna was situated within the law-school faculty. Hayek had the good fortune to study economic theory at one of the leading centers of economic theory of its time, and he began his career understandably working on technical economic problems. But the institutional framework was never far behind – whether that be law, politics, or social mores. Unfortunately, as economics evolved in the first half of the 20th century, this institutional background was forgotten and economists postulated theoretical worlds which left unexamined the institutional context of economic behavior and the administration of economic affairs in the public sector. Hayek's epistemic institutionalism, as articulated in the 1930s and 1940s, provided the foundation for his own reconstruction and restatement of liberal political economy as evidenced in The Constitution of Liberty and Law, Legislation and Liberty. Recognizing this aspect of Hayek's thought is a first step to recognizing his broader contributions to economic science and the art of political economy.

References

Hayek, F.A. 1929 (1933). Monetary Theory and the Trade Cycle. London: Jonathan Cape.

_________. 1931. Prices and Production. London: Routledge & Kegan Paul.

_________, ed. 1935. Collectivist Economic Planning. London: Routledge & Kegan Paul.

_________. 1937. "Economics and Knowledge." Economica 4: 33-54

_________. 1939. Profits, Interest, and Investment. London: Routledge & Kegan Paul.

_________. 1941. The Pure Theory of Capital. London: Macmillan.

_________. 1948. Individualism and Economic Order.Chicago: University of Chicago Press.

_________. 1952a. The Counter-Revolution of Science. Glencoe: Free Press.

_________. 1952b. The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology.Chicago: University of Chicago Press.

_________., ed. 1954. Capitalism and the Historians. Chicago: University of Chicago Press.

_________. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.

_________. 1973. Law, Legislation and Liberty Volume 1: Rules and Order. Chicago, IL: University of Chicago Press.

_________. 1976. Law, Legislation and Liberty Volume 2: The Mirage of Social Justice. Chicago: University of Chicago Press.

_________. 1979. Law, Legislation and Liberty Volume 3: The Political Order of a Free People. Chicago: University of Chicago Press.

_________. 1988. The Fatal Conceit: The Errors of Socialism. Edited by W.W. Bartley III.Chicago: University of Chicago Press.

Mises, Ludwig von. 1920. "Economic Calculation in the Socialist Commonwealth," Archiv für Sozialwissenschaften 47. Reprinted in F. A. Hayek, ed., Collectivist Economic Planning.London: Kegan & Paul, 1935.

_________. 1922 (1936). Socialism: An Economic and Sociological Analysis. London: Jonathan Cape.

_________. 1934 (1912). The Theory of Money and Credit. London: Jonathan Cape.

_________. 1949. Human Action: A Treatise on Economics. New Haven: Yale University Press.

RESPONSES AND CRITIQUES↩

1. Steven Horwitz, "Minds and Markets" [Posted: September 5, 2017]↩

Perhaps unsurprisingly, I find little to disagree with in Pete Boettke's summary of Hayek's "epistemic liberalism." I think Pete is correct to emphasize the role of knowledge in Hayek's version of liberalism, especially as it contrasts with the centrality of incentives in many other discussions of the advantages of the market and the liberal order more broadly. How Hayekians talk about prices and profits differs from many other economists' and liberals' emphasis on the role of prices and profits as surrogates for knowledge that enable us to coordinate our behavior. Prices and profits don't just serve as incentives to elicit the "right" choices. Moreover, prices are not valuable because they capture all of the relevant information that enables market actors to maximize utility or profits. Rather, prices are important because they serve as surrogates for the imperfect, contextual, and often unarticulated knowledge of other market actors. Prices are necessary not because they solve coordination problems by enabling everyone to know everything, but because they make possible more economic coordination than would take place in their absence. That is, rather than enabling us to reach the state of being in which we are able to access everyone else's knowledge, prices enable us to engage in the process of learning through their ability to both inform our choices ex ante and provide us feedback about those choices ex post.

This emphasis on learning in Hayek is a theme that permeates his whole career. He grew up in a family of scientists, and one of his first, and eventually lifelong, fascinations was with psychology and the human brain. That interest was fully realized in The Sensory Order, his 1952 book on theoretical psychology (or the theory of cognition). However, that book's roots were in a 1920 paper in which he outlined many of the ideas that would form the core of his book 32 years later. And even after the publication of The Sensory Order (hereafter, TSO), Hayek continued to write about the issues it raised and their relevance for the liberal order. The lasting importance for Hayek of these questions about the brain, the mind, and how humans learn can help us see why his liberalism would have a distinct epistemic flavor.

There is much that could be said about the role of TSO in Hayek's system. Viktor Vanberg's long introductory essay (2017) to the Collected Works edition of the book does a masterful job in covering that ground. I want to focus on two points here that relate to Pete's argument, especially what he has elsewhere called Hayek's "epistemic institutionalism." The question concerns the role TSO might play in understanding how Hayek's social theory came to differ from the direction mainstream economics began to take between the world wars. The growing focus on equilibrium rather than market processes, and the increasingly behavioristic and positivistic method that came to define mainstream economics, were strongly at odds with Hayek's thought. His cognitive theory can help us understand the particular positions he took on both the substance of economics and the appropriate method for studying human action.

Summarizing the contribution of TSO is a challenging task. In short, Hayek argued that what we call mind is a system for classifying the external world in such a way that we are able to construct a model of that world which enables us to form reasonably reliable expectations about the way in which the world actually works. Although all human beings are born with some common biological features and dispositions from our evolutionary past, much of the structure of our brains comes from our specific interactions with the world. The people we interact with, the languages we speak, and the situations we find ourselves in all contribute to forming the neural connections that determine how the brain classifies incoming sensory data and creates the model of the world that guides our expectations and actions. Hayek is clear to argue that those connections are contingent and therefore can change as we learn from experience what works and what does not. In this way, Hayek's theory of mind is a spontaneous order story: our minds are the unintended outcome of our interactions in the world, guided by the "profit and loss" signals of success and failure in accomplishing our goals. Importantly, Hayek argues that the mind can never fully understand itself, as understanding any classifying system requires a classifying system more complex than the one being understood. Therefore we are limited in our ability to understand the mind. At best we can offer an "explanation of the principles" by which mind operates, much in the same way that we cannot make specific predictions about events in the market, but only broad causal statements of the underlying laws by which it functions.

As Pete notes in his opening piece, it is in Hayek's 1937 article "Economics and Knowledge" that he first truly describes the market as a learning process. He asks the empirical question about how humans come to learn what others want and how best to provide it for them such that our expectations can become more consistent with each other. He also notes that this consistency of expectations includes not just our knowledge of "external events" but also of other actors' expectations.

Within economics, this Hayekian question has been answered by Israel Kirzner's theory of the entrepreneur. Kirzner took the theory of the entrepreneur developed by Ludwig von Mises and demonstrated how it could answer this Hayekian question. The entrepreneur is alert to opportunities for profit and acts to exploit them. Having noticed that apples are selling for $2 on one side of the street and $4 on the other, the entrepreneur expects she can profit by buying them for $2.50 and selling them for $3.50. Trying out this set of expectations informs the $2 sellers that their expectations about much they could get for their apples were mistaken, and it informs those buying at $4 of their mistaken expectations about how little they had to spend to get apples. Entrepreneurs spread knowledge and, when they are successful, thereby correct errors and enable people to have more accurate expectations about the actions of others. This is how economics can describe the learning process of the market.

Within that emergent order of the marketplace is the emergent order of the minds that are engaged in this learning process. Hayek's cognitive theory (2017 [1952]: 240) stresses that we "live as much in a world of expectation as in a world of 'fact,' and most responses to a given stimulus are probably determined only via fairly complex processes of 'trying out' on the model the effects to be expected from alternative courses of action." Note the parallel to what the entrepreneur does. For Hayek, it's learning and expectation formation and correction all the way down. His view that markets are learning processes rests on a foundation about how humans learn in all of the situations in which we find ourselves.

Where the liberal order comes in, as Pete rightly notes, is with respect to what sorts of institutions best facilitate the formation of these emergent orders in such as way as to promote human progress. That is, what sorts of economic, political, and social institutions give maximum scope to entrepreneurial alertness to discovery and error-correction? What sorts of institutions ensure that errors are knowable and that actors have at least partial information to correct them? What sorts of institutions reward error-correction that better coordinates expectations? What sorts of institutions give humans the ability to deploy their own knowledge in ways that are accessible to others? The institutional context matters for learning, and therefore for economic coordination and social progress. From minds to markets, epistemic questions are central for Hayek.

But there's a second element to his cognitive theory that's relevant for his epistemic liberalism. Hayek's theory of mind also provides, as Bruce Caldwell (1994) has noted, a scientific foundation for his subjectivism. In the last chapter of TSO, Hayek discusses the philosophical implications of his theory. There he says (2017 [1952]: 303), in response to the behaviorists, "The recognition of the fact that for our understanding of human action familiar mental entities must always remain the last determinants to which we can penetrate, and that we cannot hope to replace them by physical facts, is, of course, of the greatest importance for all of the disciplines which aim at an understanding and interpretation of human action." We cannot understand the social world without making use of concepts of perception, intention, goals, and preferences. That is, we must start our analysis with the subject's perceptions of the world. As Hayek says in The Counter-Revolution of Science, also published in 1952 (44, emphasis in the original): "So far as human action is concerned the things are what the acting people think they are."

It is not mere coincidence that Hayek published a book on theoretical psychology and a book on the method of the social sciences in the same year and in the wake of his perceived defeat in the debates with the market socialists and Keynes. In both debates it became clear to Hayek that his differences with his interlocutors were primarily epistemological and methodological. They had a different view of the nature of knowledge and how to engage in social science. TSO and Counter-Revolution constitute a two-pronged epistemic response to those debates. As Hayek reported in his 1977 retrospective on TSO (2017 [1977]: 384-5), it was during his work in the early 1940s on the essays that eventually became Counter-Revolution that he "had been driven both to rely in some measure on the results of my unpublished work in psychology and to think further about some of the problems with which I had dealt in it." That in turn led him to revisit those issues while writing TSO. The importance of TSO is that it provided a scientific response to those, such as the behaviorists and positivists, who said subjectivist approaches to the social sciences were unscientific. A correct understanding of human cognition indicates that we must make use of the "familiar mental entities" and take human perceptions and intentions as the starting point of our analysis.

To get people to grasp that markets are a learning process and that understanding markets requires a subjectivist economics, Hayek had to make this stronger epistemic turn in the 1940s. "The Use of Knowledge in Society" (1945) was the first step, as he made the case that key function of prices was epistemic. But that was not enough. TSO, along with Counter-Revolution, enabled him to make a more comprehensive argument for the nature of human learning and what that means for the doing of economics. Those projects also led to the institutional questions that are at the heart of Pete's opening essay.

If the twin processes of evolution and spontaneous order are learning processes, and if they are at work at every level, from the molecular to the mental to the market to large-scale biological evolution, then it is incumbent upon us to understand the conditions under which the evolutionary processes at work in the social world are best able to contribute to human progress. That requires we recognize that these are, in fact, epistemic processes and that we must study them through the lens of social theories that start from the perceptions of individuals and how the institutional contexts in which humans choose determine the consequences of those choices. As Pete rightly notes, this is what pushed Hayek towards his study of the liberal order in his work in the 1960s and 70s. If human society is an emergent order of learning that rests on the emergent order we call mind, and if human progress depends upon maximizing that capacity to learn, under what institutional conditions will that potential best be realized? The answer to that epistemic question is the set of institutions that comprise the liberal order.

References

Caldwell, Bruce. 1994. "Hayek's Scientific Subjectivism," Economics and Philosophy 10: 305-13.

Hayek, F. A. 1937. "Economics and Knowledge," in Individualism and Economic Order, Chicago: University of Chicago Press.

__________. 1945. F. A. Hayek. "The Use of Knowledge in Society," American Economic Review, 35(4): 519–30. Reprinted in Individualism and Economic Order,(Chicago: University of Chicago Press, 1948).

__________. 1952. The Counter-Revolution of Science, Indianapolis, IN: Liberty Press.

__________. 2017 [1952]. The Sensory Order, reprinted in The Collected Works of F. A. Hayek Volume 14: The Sensory Order and other Writings on the Foundations of Theoretical Psychology, Viktor J. Vanberg, ed., Chicago: University of Chicago Press, 2017.

__________. 2017 [1977]. "The Sensory Order after 25 Years," reprinted in The Collected Works of F. A. Hayek Volume 14: The Sensory Order and other Writings on the Foundations of Theoretical Psychology, Viktor J. Vanberg, ed., Chicago: University of Chicago Press, 2017.

Vanberg, Viktor J. 2017. "The 'Knowledge Problem' as the Integrating Theme of F. A. Hayek's Oeuvre: An Introduction to The Sensory Order," editor's introduction to The Collected Works of F. A. Hayek Volume 14: The Sensory Order and other Writings on the Foundations of Theoretical Psychology, Viktor J. Vanberg, ed., Chicago: University of Chicago Press, 2017.

2. Adam Martin, "Defeating Hayek" [Posted: September 6, 2017]↩

Peter Boettke's essay provides vital logical and historical context for appreciating Hayek's contribution. Hayek's epistemic project led him to consider the institutional background of economic activity, not to abandon economics. And the project remains incomplete. The most popular contemporary economics textbook, Greg Mankiw's Principles of Microeconomics, only has three index entries for "property rights," each pointing to a brief passage: one arguing that government is necessary to provide them (pp. 10-11), another about patents in industrial policy (p. 209), and the last at the end of his discussion of common-pool resources (p. 237). While Mankiw's textbook is quite good overall, it gives short shrift to the very rules that constitute markets. Until the institutional setting of market activity again occupies the foreground of economics research and education, Hayek's counter-revolution remains incomplete.

Since Boettke's essay is not only correct but also important, I want to examine two argumentative strategies against Hayek's approach that are common in the literature. The particular works I have chosen are exemplary both in that they embody these anti-Hayekian arguments and that they are sophisticated and powerful pieces. Nonetheless, as is clear from the groundwork Boettke lays out in his essay, they both fail in their attempt to defeat Hayek.

Strategy 1: Defeating "Arrow"

First, consider Jack Knight and Samuel Johnson's The Priority of Democracy (2011). The main thrust of their book is that democratic institutions deserve prima facie priority over other types of institutions because they are reflexive. Democratic debate allows us to critically examine the quality of the institutions that shape the various spheres of our social lives and to reform those institutions deliberately. Because of this possibility, there is a presumption in favor of democracy over other institutional forms, including markets. Not everything should be democratic, but democracy should determine its own boundaries. Along they way they offer some compelling arguments. But early in the text, Knight and Johnson recognize that they have to grapple with Hayek (pp. 52-55). Hayek's work seems to create a presumption in favor of decentralized institutions (such as markets and federalism) rather than mass deliberation.

Unfortunately, they don't actually grapple with Hayek. Instead, they grapple with (a caricature of) Kenneth Arrow (pp. 55-61). Their argument against the priority of markets is simply a rehash of the possibility of market failure in standard neoclassical theory. In neoclassical theory, markets "work"—they achieve efficiency—under certain conditions, such as (but not limited to) the perfectly competitive equilibrium that market socialists appealed to. The classic treatment of these conditions is in Arrow's work. And it is easy to imagine deviations from these conditions that generate inefficiency.

Formally, these claims are correct. But they are irrelevant as a critique of Hayek, because his theory of markets is not the same as that of neoclassical economists. In fact, Hayek strongly criticizes using perfect competition as a benchmark for understanding how real markets operate. Though the name comes later, the "market process theory" of Menger, Mises, Hayek, and later Kirzner differs in crucial respects from the standard neoclassical theory. Market-process theorists tend to focus on the dynamic coordination of economic activity through time rather than the static efficiency of snapshot equilibria. And the economic problem is understood as discovering new knowledge and adapting to change rather than allocating given means among given ends. So a critique of Hayek based on the possibility market failure misunderstands both (a) how he thinks markets work and (b) why he thinks they are valuable.

Strategy 2: The Nirvana Fallacy

More recently, Samuel Bowles, Alan Kirman, and Rajiv Sethi (2017) have recently taken issue with Hayek's general policy stance in the Journal of Economic Perspectives. They are not wholly critical: they sympathize with and offer additional support for Hayek's critique of equilibrium theory. Bowles et al. are careful to distinguish Hayek's market-process theory from a standard neoclassical approach and relate it to various advances in agent-based modeling and information economics. But they argue that Hayek's theory, while powerful, does not justify his defense of "laissez-faire" policies. Markets operating in an open-ended, dynamic theory can internally generate bubbles and economic crises. Individuals acting on their own peculiar knowledge of time and place may contribute to chaos rather than coordination.

A deeper dive into the particular models and experiments that Bowles et al. cite might reveal some important differences with Hayek's approach. But the general trajectory of their argument in fact provides some Hayekian reasons to doubt the efficacy of markets for securing coordination. It is a strong piece that merits careful reading. Nonetheless, their critique fails because it offers only a cursory nod to the institutional setting of market activity.

Hayek's argument in favor of a strong presumption for market institutions is both epistemic and comparative, as Boettke's essay makes clear. These two features of Hayek's vision go together. "The mind can never foresee its own advance" (Hayek 1960, p. 75). How can a social scientist understand a process of social learning, since by definition learning means uncovering hitherto unknown knowledge? Just as we study choice: by analyzing its institutional antecedents and social consequences. But by refusing to treat human action and imagination as mechanistic, a market-process approach loses the ability to posit a definite optimum outcome against which the real world can be compared.

Instead, we are left only with comparative institutional analysis. We cannot judge whether a market outcome is the best outcome. All we can do is make reasonable guesses—Hayek called them pattern predictions—about how such outcomes stack up against those that would likely occur under alternative rules. Knight and Johnson, to their credit, are thoroughly comparative (see especially chapter 6). Ultimately their comparative analysis does not defeat Hayek, but they have the standard of proof right. They need to show that democracy outperforms markets in some specific and important way. But they only offer a convincing case that deliberation can outperform static models of markets.

Bowles et al. suffer from a different problem. They aim at the right target, but misunderstand what would count as a fatal blow. Dynamic markets are susceptible to the problems they cite. But they do not examine whether (a) alternative institutional arrangements do any better in avoiding crises or (b) whether political agents are more likely than market agents to design rules that avoid the potential crises they are rightly concerned about. Their argument largely amounts to a Nirvana Fallacy, finding markets wanting and calling for government regulation because they are not perfect. Hayek's claim is not that markets are sufficient to avoid bad outcomes, but that in practice they usually do a better job than the alternatives. So while they are right to note that market-process theory does not necessarily lead to a laissez-faire policy prescriptions, they fail to defeat Hayek's strong, comparative presumption in favor of market institutions.

The point of the above is not to immunize Hayek from criticism, but to point out why certain common arguments against his positions fail. Defeating Hayek would require explaining either (a) why his theory of markets is unsatisfactory, (b) why standard market-failure arguments do in fact apply to market-process theory, or (c) why, even according to Hayek's approach, nonmarket institutions can predictably do a better job than market institutions in some definite sphere. When such challenges materialize, they can provide both defenders and detractors of Hayek's ideas with a valuable opportunity to engage in constructive debate.

References

Bowles, Samuel, Alan Kirman, and Rajiv Sethi. 2017. "Retrospectives: Friedrich Hayek and the Market Algorithm." Journal of Economic Perspectives Vol. 31, No. 3: 215-230.

Demsetz, Harold. 1969. "Information and Efficiency: Another Viewpoint." The Journal of Law and Economics, Vol. 12, No. 1: 1-22.

Hayek, F.A. 1948. Individualism and Economic Order. Chicago: University of Chicago Press.

Hayek, F.A. 1960 [2011]. The Constitution of Liberty: The Definitive Edition. Ed. Ronald Hamowy. Chicago: University of Chicago Press.

Knight, Jack and James Johnson, 2011. The Priority of Democracy: Political Consequences of Pragmatism. Princeton: Princeton University Press.

Mankiw, N. Gregory. 2008. Principles of Microeconomics, 5th ed. Mason, OH: South-Western Cengage Learning.

Endnotes

See especially "The Meaning of Competition" in Hayek (1948).

The only evidence they offer in favor of intervention is to (a) point out the relatively strong performance of Nordic social democracies and (b) argue that the mix of state and market institutions probably represents evolutionary fitness. This is a far-too-casual treatment of institutions to merit much response, but (a) it is not obvious that Nordic countries are less market-oriented than the United States (the Doing Business Index ranks Denmark and Norway higher than the United States), and (b) there is no hint in Hayek that evolutionary pressures are strong enough to favor the most effective institutions over a time scale of few decades, especially when the relevant countries are all relatively market-friendly.

See Demsetz (1969) for a fuller explanation of this point. While his argument is couched in terms of efficiency, the same basic point holds for a market-process approach concerned with coordination.

3. Roger Koppl, "SELECT Knowledge" [Posted: September 7, 2017]↩

Peter Boettke makes a fundamental point about Hayek's supposed movement away from economics. "Hayek didn't move away from economics in the decades after his disputes with Keynes and the market socialists. He was instead delving deeper into the institutional conditions that would permit the sort of mutual learning required for social cooperation under the division of labor and the complex coordination which constitutes a modern economy." The key word here is "learning." In his famous 1937 article on "Economics and Knowledge," Hayek identified learning as a problem of economic theory. "Clearly," Hayek said, "there is here a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labor." If Hayek was right about the division of knowledge in society, then economics is at least as much about how economizers learn as it is about how they allocate resources. Economics is – or at least should be – largely about how people acquire the knowledge that guides and informs their concrete choices as participants in the division of labor. The theory of such knowledge acquisition processes is a kind economic theory of learning that Boettke has dubbed "epistemic institutionalism."

Epistemic institutionalism is quite distinct from the sort of thing many readers may think of as a "theory of learning." The issue is not what's going on in one person's head when "learning" occurs. That sort of question is important in general, and it can be important in economics too as McCabe et al. (2001) nicely illustrates. But epistemic institutionalism is more often concerned with processes that are robust to particular models of individual cognition. Israel Kirzner's theory of entrepreneurship illustrates this property of epistemic institutionalism.

Kirzner (1973) has shown that entrepreneurial discovery drives equilibration in more or less competitive markets. It is a story about learning. But it requires essentially no cognitive psychology. All we need assume is a general propensity to discover and act on opportunities. This assumption is empirical. As Hayek notes in "Economics and Knowledge," the "empirical element in economic theory -- the only part which is concerned not merely with implications but with causes and effects and which leads therefore to conclusions which, at any rate in principle, are capable of verification -- consists of propositions about the acquisition of knowledge." Presumably, we could imagine a world with people who have zero "alertness" in Kirzner's sense without thereby falling into logical contradictions. Such a world would be so different from that of our ordinary experience, however, that we would have to doubt our guesses about what it would look like. Thus, while the existence of Kirznerian alertness is an empirical assumption, Kirzner's arguments are robust across models of human cognition. And that robustness is characteristic of epistemic institutionalism.

The issue in epistemic institutionalism is how different social arrangements (institutions) affect the way dispersed knowledge is used, what sorts of facts people are likely to discover, and so on. How do alternative institutions influence the epistemic performance of the social system? Boettke discussed the salient example of socialism. Without a stock market, the economy cannot allocate capital well and things will go badly. Socialism is perfectly possible, but rational economic calculation under socialism is quite impossible. So-called capitalism, on the other hand, has a stock market. It has, therefore, market prices for capital goods and capital combinations. Rational economic calculation is therefore possible under "capitalism." Under "capitalism" people can learn which capital combinations have greater value and which have less value. Capital therefore tends to move toward higher valued used and away from lower valued uses.

Hayek seems to have only slowly arrived at a full understanding of the importance of epistemic institutionalism. Late in his career he said, "Together with some later related papers reprinted with it in Individualism and Economic Order, ['Economics and Knowledge'] seems to me in retrospect the most original contribution I have made to the theory of economics (Hayek 1994, p. 68)." But in his 1937 paper he says, curiously, "I do not mean to suggest that there opens here and now a wide field for empirical research. I very much doubt whether such investigation would teach us anything new." I think, instead, that his insights into dispersed knowledge open many wide fields for empirical research. Any of the standard sub-disciplines within economics can be studied from the perspective of epistemic institutionalism. The Mises-Hayek argument on socialist calculation should be at the center of comparative systems theory (Boettke 2001). Easterly (2013) has brought Hayekian epistemics to development economics. Kirzner (1973) showed the centrality of epistemic institutionalism to the core of microeconomic theory. And so on. Coyne (2008) studies war from just this perspective. Horwitz (2015) has brought this perspective to the study of the family. My coauthors and I have looked at criminal justice (Koppl and Sacks 2013), forensic science (Koppl 2005, 2010) and experts (Koppl 2012, 2015, 2018) as problems in epistemic institutionalism. We should be bold and creative in applying Austrian epistemics to diverse topics such as art history, the administrative state, child protective services, medicine, and espionage.

For such empirical research to teach us anything new, however, we need a reasonable idea of what "dispersed knowledge" means. The business and economics literature is thick with references to Hayek and dispersed knowledge. But it seems to me that relatively few of these references get beyond the banality that different people know different things. This rather obvious fact is understood by children as young as three or four (Lutz and Keil 2003, Keil et al. 2008). Hayek's insight was not just that different people know different things, but that this humble fact is of central importance to social science.

Hayek also gave us some insight into the nature of the knowledge that is dispersed in the economy. Rather than citing chapter and verse, I will offer my own description without worrying if I have, perhaps, deviated in some way from Hayek's own vision.

The knowledge guiding economizers is embedded in the system and in practice. Such "knowledge" is not necessarily justified or even true in some philosophical sense. It may be flat wrong, demonstrably false. But if it in fact guides action, then is it "knowledge" in the sense of epistemic institutionalism. It is knowledge existing within the division of knowledge and emergent from the division of labor. The knowledge guiding the actions of participants in the division of labor co-evolved with the division of labor. Each refinement in the division of labor produces new specialized knowledge that, in turn, enables further changes and refinements in the division of knowledge propelling the co-evolutionary process forward. The division of knowledge co-evolves with the division of labor such that each enables the other.

Such knowledge is "constitutive" in more or less Hayek's sense (1952 pp. 36-37). It is "constitutive" because it constitutes a part of the phenomenon. The fisher's knowledge is constitutive of fishing, for example, no matter how much or little of it can be found in books propounding theories of fishing. Constitutive knowledge is often tacit, because it exists in our habits and practices rather than in any formula or recipe. We "know how" to ride a bicycle without "knowing that" we are following this or that rule to keep our balance. We often use external objects to help us "know" what to do and when to do it. The indicators on an automobile's dashboard tell us when to change the oil, get gas, or slow down. I don't know when to remove the eggs from the boiling pot. That knowledge exists "exosomatically" in the egg timer. Finally, knowledge is synecological if the knowing unit is not an individual, but a collection of interacting individuals. As Leonard Read (1958) taught us, no one person knows how to make a pencil. The pencil-making knowledge exists in the system; it is synecological. I borrow the term "synecological" from ecology, where "synecology" means "The study of the relationships between the environment and a community of organisms occupying it. Also: the relationships themselves." (That's from the OED.) Etymologically, the root "syn" means "same." Thus, etymologically, the word means "same ecology." The interacting elements are in the same ecology. The term "synecological" is meant to suggest that knowledge is generated by the interactions of elements in an environment and is not separable from these elements, their interactions, or their environment.

The knowledge corresponding to the division of labor is evolutionary and "constitutive." It may also be tacit, exosomatic, and synecological. When put in the right order these labels give us the acronym SELECT, which represents the idea that knowledge may be Synecological, EvoLutionary, Exosomatic, Constitutive, and Tacit.

The epistemic institutionalism Boettke advocates should, of course, build on Hayek's notion of "dispersed knowledge." But this notion should not be restricted to the rather obvious idea that different people know different things. Rather, we should embrace the larger vision of Austrian epistemics, which includes the idea of SELECT knowledge. This bottom-up model of knowledge contrasts with the top-down epistemics of so many of today's scholars and intellectuals. This bottom-up epistemics supports the view that knowledge should emerge from the system. If knowledge is imposed on the system, it is imposed by someone who thereby imposes upon and dominates others. The persons imposed upon are not in a relation of equality with those imposing a knowledge scheme on society. The view of emergent knowledge I develop in Expert Failure (Koppl 2018) shows, I think, that we need not impose a unitary scheme of knowledge on society. We can let knowledge emerge and flourish without attempting to control or systematize it. If we are to be free, we must let knowledge emerge freely. And we cannot be free unless we are free of the domination and tyrannizing of those who would impose a uniform system of knowledge on others. In other words, we cannot be free unless we are equal.

References

Boettke, Peter J. 2001. Calculation and Coordination: Essays on Socialism and Transitional Political Economy, London: Routledge.

Coyne, Christopher. 2008. After War: The Political Economy of Exporting Democracy. Stanford: Stanford University Press.

Easterly, William. 2013. The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor. New York: Basic Books.

Hayek, F.A. 1952. The Counter Revolution of Science: Studies in the Abuse of Reason, Chicago: University of Chicago Press.

_________. 1937 [1948]. "Economics and Knowledge," in Hayek, F. A. Individualism and Economic Order. Chicago: The University of Chicago Press, pp. 33-56.

Horwitz, Steven. 2015. Hayek's Modern Family: Classical Liberalism and the Evolution of Social Institutions, New York: Palgrave Macmillan.

Keil, Frank C., Courtney Stein, Lisa Webb, Van Dyke Billings, and Leonid Rozenblit. 2008. "Discerning the Division of Cognitive Labor: An Emerging Understanding of How Knowledge Is Clustered in Other Minds," Cognitive Science, 32(2): 259-300.

Kirzner, I. M. 1973. Competition and entrepreneurship. Chicago: University of Chicago Press.

Koppl, Roger. 2018. Expert Failure, Cambridge, UK: Cambridge University Press, forthcoming.

_________. 2015. "The Rule of Experts," in Boettke, Peter and Christopher Coyne (eds.) Oxford Handbook of Austrian Economics, Oxford: Oxford University Press.

_________. 2012. "Information Choice Theory," Advances in Austrian Economics, 17: 171-202.

_________. 2010. "Organization economics explains many forensic science errors," Journal of Institutional Economics, 2010, 6(1): 71-81.

_________. 2005. "How to Improve Forensic Science," European Journal of Law and Economics, 20(3): 255-86.

Koppl, Roger and Meghan Sacks. 2013. "The Criminal Justice System Creates Incentives for False Convictions," Criminal Justice Ethics, 32(2): 126-162.

Lutz, Donna J. and Frank C. Keil. 2003. "Early Understanding of the Division of Cognitive Labor," Child Development 73(4): 1073-84.

McCabe, Kevin, Daniel Houser, Lee Ryan, Vernon Smith, and Theodore Trouard. 2001. "A functional imaging study of cooperation in two-person reciprocal exchange," Proceedings of the National Academy of Sciences, 98(20): 11832-35.

Read, Leonard E. [1958] 1999. I, Pencil: My Family Tree as told to Leonard. E. Read, Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc. Online version: Leonard E. Read, I Pencil: My Family Tree as told to Leonard E. Reed (Irvington-on-Hudson, New York: Foundation for Economic Education, Inc., 1999). </titles/112>.

THE CONVERSATION↩

1. Peter Boettke, "Knowledge Lost in Information" [Posted: September 10, 2017]↩

My title is a play on the title of a new book by Philip Mirowski and Edward Nik-Khah, The Knowledge We Have Lost in Information (2017). Their book is a social history of the concept of information in the evolution of modern economics, and, of course, Hayek plays a central role in their narrative. But a subtle reading of Hayek both drives their narrative and complicates it. There should be little doubt that the challenge Mises and Hayek put forth in the socialist-calculation debate inspired much of the original research on information economics as seen in Leonid Hurwicz's mechanism design theory, Joseph Stiglitz's comparative institutional analysis, and all the technical work in between. For tractability reasons, though, when Mises's and Hayek's ideas were translated into modern models of the communicative properties of decentralized markets, the "Hayek hypothesis" was understood as positing prices as sufficient statistics to ensure a competitive equilibrium outcome.

This is not the right place to work through the problems with this argument with the analytical rigor required, but suffice it to say it is precisely with this intellectual move that the knowledge Hayek talked about was lost in the models of information. Our professional understanding of the price system has been significantly distorted ever since. In Hayek's "The Use of Knowledge in Society" (1945) he described as a "marvel" the continuous adaptation and adjustments in the market due to changing circumstances guided by price movements. As he says, "I have deliberately used the word 'marvel' to shock the reader out of the complacency with which we often take the working of this mechanism for granted." (101) It is important to remember this paper wasn't published in the New York Times or Reader's Digest, but in one of the leading specialized journal in the scientific field of economics – The American Economic Review. In other words, the readers were his peers. Yet he had to shock them out of complacency so they would appreciate the price system's role in coordinating plans of demanders and suppliers, enabling the gains from trade and innovation to be realized. As he not-so-subtlety concluded, an approach to economic theory "such as that of much of mathematical economics with its simultaneous equations" (104) systematically distorts our understanding of the basic task of economic science. It does so by assuming that the knowledge people hold corresponds perfectly with the objective facts and that the unique price and quantity vector that clears the market already has been determined.

What's lost are the learning by economic actors, the multiple margins of adaptation and adjustment guided by relative prices, and the market process. By squeezing out the social process of learning, mid-20th-century equilibrium economics misled economic thinkers and policymakers into falsely believing the equilibrium model could serve as a normative benchmark and planning guide for practical affairs – from comprehensive central planning to regulation of industry to price controls. From Adam Smith to Hayek, it was understood that political economy and economics studied exchange relationships and the institutions within which those exchange relationships are formed and transactions take place. This emphasis was also lost in the system of simultaneous equations, where pre-reconciliation of all plans was required by model construction. Not only the market process, but also the institutions that framed the market process, were lost. So the knowledge lost in information was significant and, I would argue, devastating for science.

Hayek argued in his Nobel Prize address, "The Pretense of Knowledge" (1974) that in the study of man, the approaches that appear to be the most scientific are in fact the least scientific and that to demand of a science more than it is capable of achieving leads to "charlatanism and worse." (371) The student of society, Hayek argued, must resist the urge to commit the error of scientism and instead adopt a more humble stance, eschewing the social-engineering mindset. If not, the student runs the risk of "becoming an accomplice in men's fatal striving to control society," a "tyrant" over fellow citizens, and a "destroyer" of civilization. (372)

The stakes, as Hayek saw it, involved in the knowledge lost in information are not trivial scientifically or socially.

Steve Horwitz, Adam Martin, Roger Koppl, and I are all in essential agreement with Hayek on these arguments. We each have our own unique points of emphasis, but if we keep the conversation at an abstract level we are in agreement.

Horwitz's calling our attention to The Sensory Order is both expected and critically correct. Hayek's challenge to central planning is often taken to be merely one of computational complexity – that the objective information was "out there" but too difficult to collect and marshall effectively. This is precisely not Hayek's argument. The Sensory Order describes the operation of the mind, but from a social-science perspective we learn much about human decision-making. Hayek can be read as making an argument that aligns with ideas later developed by thinkers such as Gerd Gigerenzer (2008), the rules of thumb or heuristics in decision-making, and what has been dubbed "ecological rationality." As Hayek stressed in a variety of his writings, man has reason because he followed rules; he has not designed rules because he has reason. What this implies for decision-making is that our choices are best understood as the play between our cognitive capabilities and the circumstances in which we choose. We rely on evolved rules to enable us to cope with our cognitive limitations and our ignorance as well as to navigate the vagaries of changing circumstances. Again, the link between Hayek's "knowledge problem" and the institutional ecology within which we act and learn permeates his work, from theoretical psychology to philosophical anthropology, and it reflects his economics as well. Perhaps one of the discussions we can have is whether -- given the nature of Hayek's enterprise in the social sciences and the humanities, and the way economics evolved in the 20th century and now in the 21st century -- economics is the right scientific community for Hayekians.

Adam Martin insightfully raises the spectre of "defeating Hayek" that permeates the literature and is reflected in two areas --- democratic theory and economic theory. He concisely argues that the arguments in neither democratic theory nor economic theory effectively meet Hayek on his own terms and thus ultimately miss their target. I agree with Martin that, to effectively critique Hayek, this literature needs to address his epistemic arguments about the limits of agreement in democratic decision-making and the nature of the price system and market economy on his own terms. Hopefully, a conversation that addresses Hayek's epistemic institutionalism can take place in the leading political science and economics journals. Until that happens, the knowledge lost in information will again be illustrated.

Roger Koppl makes the important distinction between learning by individuals -- the cognitive processes going on in their own heads -- and the sort of social learning on which epistemic institutionalism strives to focus analytical attention. Of course, as I just discussed with respect to Horwitz's comments, I believe one can see a connection between these two aspects of social ordering, but Koppl is right to stress their distinctiveness. A promising direction for research that follows from Koppl's comment is a more-detailed articulation of the knowledge assumptions used in economic theory. In The Counter-Revolution of Science (1952, 99) Hayek distinguished between the knowledge used within a system and the knowledge we develop about a system. Knowledge within the system is constitutive of the phenomena, while our theoretical exercises result in our knowledge about the system.

Consider what I would argue is the subtle but important difference between Hayek and Robert Lucas, who revolutionized economic theory in the 1970s and 1980s with his demand for a shift in economists' assumptions about knowledge. Lucas in effect argued that economic actors within a system had to be assumed to have knowledge of the theories that economists were deploying to explain the operation of the system (and its control). The Keynesian policy agenda had assumed that the economic-policy expert could stand outside of the system and know how actors within the system would behave if they had the theorists' knowledge, and thus the expert could manipulate policy variables to get the passive actors to behave in ways that would improve the operation of the system. Lucas countered that the actors within the system are neither passive nor ignorant, that they were instead rational actors who could anticipate the consequences of policy changes and act strategically to position themselves for the best response. This was a particularly powerful corrective with respect to policies that were directed at addressing unemployment through inflation. Lucas's rational-expectations revolution transformed the discipline, even after the initial invariance proposition in public policy was no longer widely accepted. (This is the proposition that rational actors fully anticipate the effects of public policy and orient their behavior accordingly in such a way that policy becomes ineffective. <https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposition>) From the 1970s onward, economic modeling insisted on rational-actor microfoundations and equilibrium theorizing in macroeconomics. For our purpose, the key issue is how Lucas used the knowledge assumptions to constrain the modeling exercise.

A generation earlier Hayek had sought to get his fellow economist to also accept a constraint on their theorizing about knowledge within and about systems. The theorist could never be assumed to be in possession of the contextual knowledge of time and place that actors within the system were using in their decisions, discovering in their interactions, and learning from in their competitive experimentation to improve their lot in life. The theorist can obtain abstract knowledge of the patterns about the system and can cultivate in others an appreciation of the spontaneous order that emerges in the market as individuals strive for productive specialization and peaceful social cooperation. But a theorist is never in the position of the entrepreneur within the system. Mises made a significant point along these lines when in his original article on the problems of socialist economic calculation he stated: "It is not a knowledge of bookkeeping, of business organization, or of the style of commercial correspondence, or even a dispensation from a commercial high-school, which makes the merchant, but his characteristic position in the production process, which allows of the identification of the firm's and his own interests." (1920, 121)

The Mises-Hayek knowledge problem is characterized, as Koppl points out, by SELECT knowledge, and is grounded in the recognition that alternative institutional arrangements not only structure incentives differently, but also generate different types of knowledge, lead to different discoveries, and shape the environment of learning. The question that I hope we can explore with Koppl is what forms of empirical investigation are appropriate to the discovery and use of SELECT knowledge.

References

Gigerenzer, Gerd. Rationality for Mortals. New York: Oxford University Press, 2008.

Friedrich August von Hayek, "The Use of Knowledge in Society," American Economic Review, XXXV, No. 4; September, 1945, pp. 519–30. </titles/92>.

Hayek, F.A. 1974. "The Pretense of Knowledge," reprinted in The Collected Works of F. A. Hayek. Vol. 15: The Market and Other Orders, ed. by Bruce Caldwell. Chicago: University of Chicago Press, 2014, 362-72. <https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-lecture.html>.

Mirowski, Philip and Edward Nik-Khah. 2017. The Knowledge We Have Lost Lost in Information. New York: Oxford University Press.

[Wikipedia], "Policy-ineffectiveness proposition," Wikipedia, <https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposition>.

2. Roger Koppl, "No Methodological Holds Barred" [Posted: Sept. 11, 2017]↩



Boettke asks what "forms of empirical investigation" are best suited to understanding a social world in which SELECT knowledge guides and shapes human action. I am tempted to merely invite readers to decide for themselves and leave it at that. Two of my most beloved graduate professors, Fritz Machlup and Leland Yeager, used to quote Percy Bridgman. "The scientific method, as far as it is a method, is nothing more than doing one's damnedest with one's mind, no holds barred." (Apparently, this quote can be found in Bridgman 1955, p. 535.) You, the reader, may successfully employ a form of empirical investigation that the rest of us mistakenly "know" to be inappropriate. Hayek thought that experimental economics would be useless to test the theory of competitive markets. "We can test it on the conceptual models, and we might conceivably test it in artificially created real situations, where the facts which competition is intended to discover are already known to the observer. But in such cases it is of no practical value, so that to carry out the experiment would hardly be worth the expense." (Hayek, 1968 [2014], p. 305) Vernon Smith and others have shown, however, that experimental economics can test market theory and, indeed, support a very Hayekian research program. Let that be an object lesson to those who would limit the methods used by other souls wrestling with the truth. I would not declare any ethical method of inquiry taboo. I will, however, say a few words about complexity, verstehen, and bounded rationality.

Boettke criticized "mid-20th-century equilibrium economics" rather than complexity economics. Complexity theory gives us economics with heterogeneous agents, bounded rationality, and local knowledge, which is far more Hayekian than mid-20th-century equilibrium economics. As Vriend (2002), Colander and Kupers (2014), and Arthur (2015) illustrate, serious engagement with complexity theory tends to move economists closer to Hayek. (People who like to represent intellectual history as a Manichean struggle between good guys and bad guys must deal with the fact that Kenneth Arrow was an important figure at the founding of the Santa Fe Institute who suggested Brian Arthur be named a visiting fellow at the nascent institute. See Waldrop 1992.) Rosser (1999, p. 185, n. 11) recognized Hayek as "an early and independent developer of complexity theory in something resembling its current form." Vried (2002) has asked whether Hayek was an agent-based computational economist. I have described Hayek as a complexity theorist (Koppl 2000, 2009). If Hayek was a complexity theorist, then those of us who admire his ideas should engage modern complexity theory seriously.

At least one important modern complexity theorist has built on the listing problem (O'Driscoll and Rizzo 1985) to conjecture that we will never be able to fully mathematize social evolution. Stuart Kauffman and his coauthors (Felin et al. 2014, Koppl et al. 2015) have drawn on recent developments in the theory of biological evolution (Longo et al. 2012, Kauffman 2014) to show that the "phase space" of evolutionary systems is not generally stable and that, consequentially, they are "lawless" in a specific sense. They are "lawless" because there are no fixed "laws of evolution" for the system such that the future is entailed (up to a stochastic error term, perhaps) in some initial moment. Rather, evolution is "creative" in the sense that over time it generates new forms. It generates innovations that cannot be anticipated. Thus, modern complexity theory seems to imply limits to the power of mathematics to describe or predict the evolution of complex adaptive systems. It shows that evolutionary systems are creative is a sense close to that of Henri Bergson, but reaches this result by a very different path, one that may seem more "scientific" and less "philosophical" than that of Bergson.

Kauffman and his coauthors emphasize the difference between algorithmic and non-algorithmic choice. In my view, Kirzner's theory of entrepreneurship is "really" a theory of non-algorithmic choice. If "learning" is frame change, if it is the acquisition of new knowledge rather than new information, then there can be no learning in algorithmic choice, whereas learning is entrepreneurial discovery.

Whatever other limits mathematics may or may not have, we cannot apply it to social theory without "interpretation" in the sense of the old verstehen, or "understanding," tradition of Dilthey, Weber, Schutz, and Mises (Koppl 2010). Mathematics itself is always an empty calculus, pure syntax. To use it in social theory, we must give its terms meanings. We need semantics. We must "interpret" the calculus. For the social sciences (with the partial exception of demographics) such interpretation is the understanding of what Schutz and Machlup called "meant meanings." Thus, even on the most optimistic view of the role of mathematics in economics and other social sciences, we must preserve a role for "interpretation" in the sense of classical hermeneutics. (See Albert 1985 on the difference between classical and universal hermeneutics.) This is not the place to express my dissatisfaction with the "universal hermeneutics" of Heidegger and his followers. I will merely record my opinion that Alfred Schutz has given us the best available account of "understanding" in the classical hermeneutic tradition. We can find, in my opinion, incoherent statements in hermeneutics figures coming both before and after Schutz, whereas Schutz always maintains clarity, coherence, and scientific rigor. Even Weber and Mises, though free of absurdities and gross incoherence, are not as clear, thorough, or deep as Schutz on the understanding of meant meanings.

If I celebrate Schutz on interpretation, I would not wish to suggest that we can stop there and rest contented. We must continually connect our existing tradition and framework to recent developments and current science. I have attempted to link hermeneutics to modern cognitive psychology (Koppl 2010). Felin, Koenderink, and Krueger (2016) draw on both the 19th-century biologist Jakob von Uexküll and modern psychology (Koenderink 2014) to criticize standard models of "bounded rationality" for assuming an "all-seeing eye."

When we consider what "forms of empirical investigation" to use, we should not be tyrants. It's no holds barred, and let a hundred flowers bloom. This open attitude does not alter the fact, however, that any method has its limits. Nor does it disbar us from challenging implicit assumptions or calling out over-claiming by others.

References

Albert, Hans. 1988. "Hermeneutics and economics – A criticism of hermeneutical thinking in the social sciences," Kyklos, 41: 573–602.

Arthur, Brian W. 2015. "All Systems Will Be Gamed: Exploitative Behavior in Economic and Social Systems," in Arthur, Brian W., Complexity and the Economy, Oxford University Press, pp. 103-18.

Bridgman, Percy. 1955. Reflections of a Physicist. New York: Philosophical Library.

Colander, David and Roland Kupers. 2014. Complexity and the Art of Public Policy: Solving Society's Problems from the Bottom Up. Princeton and Oxford: Princeton University Press.

Felin, Teppo, Jan Koenderink, and Joachim I Krueger. 2016. "Rationality, Perception and the All-Seeing Eye," Psychonomic Bulletin & Review pp. 1-20.

Hayek, F. A. 1968 [2014]. "Competition as a Discovery Procedure," in Caldwell, Bruce, ed. The Market and Other Orders, vol. 15 of The Collected Works of F. A. Hayek, Chicago and London: The University of Chicago Press, pp. 304-13.

Kauffman, Stuart. 2014. "Prolegomenon to Patterns in Evolution," BioSystems, 123: 3-8.

Koenderink, J. 2014. The All Seeing eye? Perception 43: 1-6.

Koppl, Roger. 2010. "Some Epistemological Implications of Economic Complexity," Journal of Economic Behavior and Organization, 76: 859-72.

_________. 2009. "Complexity and Austrian Economics," in J. Barkley Rosser, Jr, ed. Handbook on Complexity Research. Cheltenham, UK: Edward Elgar.

_________. 2000. "Teaching Complexity: An Austrian Approach," in Colander, David, ed. The Complexity Vision and the Teaching of Economics, Edward Elgar.

Longo, Giuseppe, Maël Montévil, and Stuart Kauffman. 2012. "No Entailing Laws, But Enablement in the Evolution of the Biosphere," arXiv:1201.2069 http://arxiv.org/abs/1201.2069.

O'Driscoll, Gerald and Mario Rizzo. 1985. The Economics of Time and Ignorance, Oxford: Basil Blackwell.

Rosser Jr., J.B., 1999. On the Complexities of Complex Economic Dynamics. Journal of Economic Perspectives 13, 169–92.

Vriend, N.J., 2002. Was Hayek an ACE? Southern Economic Journal 68, 811–40.

Waldrop, M. Mitchell. 1992. Complexity: The Emerging Science at the Edge of Chaos, New York: Simon & Schuster.

3. Steven Horwitz, "Liberal Institutions as Nodal Points of Plan Coordination" [Posted: September 13, 2017]↩

As the four of us do seem to agree on the fundamental issues that Pete's opening essay raised, it seems most valuable to continue to do what we have already started to do, which is to explore some of its implications. In this comment, I want to revisit some ideas I explored in an earlier paper in which I compared Hayek's theory of mind with the Austrian theory of capital. Here, I want to emphasize the idea of "the plan" that was so central to Ludwig Lachmann's 1956 book Capital and its Structure. I then want to argue that liberal institutions are crucial for the ability to formulate, execute, and coordinate human plans in the way Lachmann discusses them.

In Lachmann's account, entrepreneurs formulate a production plan by bringing together physical capital goods and human capital that they think will complement each other in executing the plan. For Lachmann, "the plan" is the fundamental unit of human action, and it rests on the underlying expectations of the plan formulators. As actors attempt to execute those plans, some will succeed and others will fail. Those plans that fail, as measured by profit and loss, will have to be revised in light of that information. Entrepreneurs will substitute other physical and human capital for pieces of the old plan, formulating a new plan that they believe will now succeed. Even successful plans might undergo a process of revision if entrepreneurs believe that the underlying data have changed.

This, of course, is a learning process not unlike how individual human actors learn in Hayek's cognitive theory. The argument in The Sensory Order (2017 [1952]) is that humans act based on a "model" of the world which is used to "try out" various courses of action to imagine their consequences before action is taken. Hayek proposed that we then act based on which of those possibilities appears to best accomplish our goals. This is akin to a firm's budgeting process. This is the source of his argument that we live as much in a world of expectation as a world of fact. Our actions are based on the expectations produced by the implicit theories that are embedded in the model.

In addition, the success or failure of our individual actions feeds back in ways that change the model as we come to learn more about the causal structure of the world and our role in it. This is the individual analogue to profit and loss. Though the process that happens within the brain is not something we can consciously control in the way an entrepreneur can with a production plan, both seem to be examples of the twin processes of evolution and spontaneous order at the heart of Hayek's social theory. Hayek (2017 [1977]) himself recognized this when he pointed to his work on capital as prompting him to think about the mind as a similarly structured spontaneous order.

Hayek too emphasized the importance of the plan, especially in his 1937 paper "Economics and Knowledge," which put the coordination of plans at the center of what market processes do. In "The Use of Knowledge in Society," Hayek (1945) emphasized that his criticisms of planning are not criticisms of any or all planning, just the idea of one centralized plan. What the market price system does is to enable us to coordinate decentralized plans and thereby make more complete use of the various kinds of knowledge people possess.

And it is here that liberal institutions matter. As Lachmann pointed out in his 1971 book The Legacy of Max Weber, social institutions are nodal points for plan coordination. Their stability enables us to have more certainty about the accuracy of our expectations and thereby formulate better plans. This applies both to the plans of entrepreneurs and the models we all make use of in all of our action. The rule of law, well-defined and enforced property rights, and sound money, perhaps the three core liberal framing institutions, all provide the stability necessary for better plan formulation and the increased likelihood of successful plan execution.

Put differently: for Hayek's twin processes of evolution and spontaneous order to work successfully at the level of the individual, the firm, and society as a whole, they have to be embedded in institutions that work as knowledge surrogates to both facilitate more successful plan formulation and provide feedback when those plans fail. Liberal institutions do so at all three levels far better than any alternatives.

References

Hayek, F. A. 1937. "Economics and Knowledge," in Individualism and Economic Order, Chicago: University of Chicago Press.

__________. 1945. "The Use of Knowledge in Society," in Individualism and Economic Order, Chicago: University of Chicago Press.



__________. 2017 [1952]. The Sensory Order, reprinted in The Collected Works of F. A. Hayek Volume 14: The Sensory Order and other Writings on theFoundations of Theoretical Psychology, Viktor J. Vanberg, ed., Chicago: University of Chicago Press, 2017.

__________. 2017 [1977]. "The Sensory Order after 25 Years," reprinted in The Collected Works of F. A. Hayek Volume 14: The Sensory Order and other Writings on the Foundations of Theoretical Psychology, Viktor J. Vanberg, ed., Chicago: University of Chicago Press, 2017.

Horwitz, Steven. 2008. "Analogous Models of Complexity: The Austrian Theory of Capital and Hayek's Theory of Cognition as Adaptive Classifying Systems," Explorations in Austrian Economics, Roger Koppl, ed., volume 11 of Advances in Austrian Economics, Bingley, UK: Emerald Publishing, 143-66.

Lachmann, Ludwig M. 1956. Capital and its Structure, Kansas City: Sheed Andrews and McMeel. Online version: Ludwig M. Lachmann, Capital and its Structure (Kansas City: Sheed Andrews and McMeel, 1978). </titles/96>

___________________. 1971. The Legacy of Max Weber, Berkeley: The Glendessary Press.

4. Peter Boettke, "How Misesian is the Hayekian Epistemic Turn?" [Posted: September 129, 2017]↩

Hayek often said his 1937 paper – "Economics and Knowledge" -- was a subtle rebuke of Mises's apriorism. It was not, as many might want to believe, a root and-branch rejection, but one only in the realm of applied theory, which included the study of the market economy. The realm of pure theory – or what Hayek calls the "Pure Logic of Choice" or in other places "The Economic Calculus" – the essential Misesian position on the epistemological status of praxeology was upheld. And remember, Mises did not claim he was unique:

In asserting the a priori character of praxeology we are not drafting a plan for a future new science different from the traditional sciences of human action. We do not maintain that the theoretical science of human action should be aprioristic, but that this it is, and always has been so. (1949, 40; 2007, vol. 1, p. 40)

I believe the most scientifically productive reading of Hayek's 1937 paper is as a clarification of the Misesian project with respect to the study of the market economy – or what both Mises and Hayek called "catallactics." In catallactics the pure logic of choice is a necessary, but not a sufficient, component for a full explanation. We must, in our quest for a full explanation, explore how alternative institutional arrangements impact the learning of individuals. In this way we move from the pure logic of choice to the situational logic of organizations to the study of the exchange order, with its productive specialization and peaceful social cooperation, and the entrepreneurial function as an agent of change. This is how I would read the passages in Hayek (1937 34ff) where he argues that the pure logic of choice is not directly applicable to the explanation of social relations. Equilibrium for individual choosers, in other words, is quite different from equilibrium achieved by dispersed and diverse individuals. The first is a necessary part of the explanation, but to achieve the sort of dovetailing of plans that defines the equilibrium state in the social relations of the market, we must be able to explore how "under certain conditions, the knowledge and intentions of the different members of society are supposed to come more and more into agreement, or, to put the same thing in less general and less exact but more concrete terms, that the expectations of the people and particularly of the entrepreneurs will become more and more correct." (1937, 45)

It is in this manner that economics, Hayek argues, ceases to become purely an exercise in pure logic and becomes in a sense an empirical science. It is the study of how alternative institutional environments influence the behavior of individuals and how that in turn impacts the ability of these individuals to realize the gains from social cooperation under the division of labor. And what we must focus our analytical attention on is how they acquire and utilize the knowledge dispersed throughout the system; in other words, how they learn how best to orient their actions with others so as to achieve a coordination of plans that defines the equilibrium of the system.

Mises, not Hayek, was the first to argue that socialism would have to forgo the intellectual division of labor in society and that this was the decisive objection to socialism. (See 1927, 50) Consider the following lengthy passages from Human Action (1949, 692; 2007, vol. 3, pp. 691-92):

All older social reformers wanted to realize the good society by a confiscation of all private property and its subsequent redistribution; each man's share should be equal to that of every other, and continuous vigilance by the authorities should safeguard the preservation of this equalitarian system. These plans became unrealizable when the large-scale enterprises in manufacturing, mining, and transportation appeared. There cannot be any question of splitting up large-scale business units and distributing the fragments in equal shares. The age-old program of redistribution was superseded by the idea of socialization. The means of production were to be expropriated, but no redistribution was to be resorted to. The state itself was to run all the plants and farms. This inference became logically inescapable as soon as people began to ascribe to the state not only moral but also intellectual perfection. The liberal philosophers had described their imaginary state as an unselfish entity, exclusively committed to the best possible improvement of its subjects' welfare. They had discovered that in the frame of a market society the citizens' selfishness must bring about the same results that this unselfish state would seek to realize; it was precisely this fact that justified the preservation of the market economy in their eyes. But things became different as soon as people began to ascribe to the state not only the best intentions but also omniscience. Then one could not help concluding that the infallible state was in a position to succeed in the conduct of production activities better than erring individuals. It would avoid all those errors that often frustrate the actions of entrepreneurs and capitalists. There would no longer be malinvestment or squandering of scarce factors of production; wealth would multiply. The "anarchy" of production appears wasteful when contrasted with the planning of the omniscient state. The socialist mode of production then appears to be the only reasonable system, and the market economy seems the incarnation of unreason. In the eyes of the rationalist advocates of socialism, the market economy is simply an incomprehensible aberration of mankind. In the eyes of those influenced by historicism, the market economy is the social order of an inferior stage of human evolution which the inescapable process of progressive perfection will eliminate in order to establish the more adequate system of socialism. Both lines of thought agree that reason itself postulates the transition to socialism.

It is important to note a few themes in this passage. First is the for-the-sake-of-argument assumption of benevolence. This actually follows from a strict adherence to Weberian value-free analysis: assuming the proponent of reforms X, Y, Z only intends to promote the general welfare, not their individual or group interest. Second is the damage done positively and normatively by assuming omniscience in economic and political economic analysis. Third is the necessity to challenge the "abuse of reason" by way of rational analysis.

There is no gaping divide between Mises and Hayek methodologically, analytically, or ideologically. Hayek is simply the most talented Misesian thinker we have seen, and in developing that Misesian system he pushed in creative and productive ways that Mises may not have been able to see during his scientific era. But it is not as though Hayek hasn't told us this in private and public pronouncements. In a letter to Mises in 1931, as Hayek was being well received at the London School of Economics, Hayek wrote (Hülsmann, 635):

Some of the junior (rank-wise, not age-wise!) colleagues—in particular Hicks, Benham, or Toysonby —are excellent, too. There is much opportunity for me to learn, and I am hindered in doing so only because Robbins presented me as an eminent authority, so that people always want to hear my opinion on all matters. I am aware, for the first time, that I owe to you virtually everything that gives me an advantage as compared to my colleagues here and to most economists even outside my narrow field of research (here my indebtedness to you g