Economics and Knowledge Freidrich Hayek

Here’s the presidential address delivered by Hayek before the London Economic Club in 1936.

My favorite quote, ” All I have tried to do has been to find the way back to the common-sense meaning of our analysis, of which, I am afraid, we are likely to lose sight as our analysis becomes more elaborate. You may even feel that most of what I have said has been commonplace. But from time to time it is probably necessary to detach one’s self from the technicalities of the argument and to ask quite naively what it is all about.”

Introduction (Via VirtualSchool)

The ambiguity of the title of this paper is not accidental. Its main subject is, of course, the role which assumptions and propositions about the knowledge possessed by the different members of society play in economic analysis. But this is by no means unconnected with the other question which might be discussed under the same title–the question to what extent formal economic analysis conveys any knowledge about what happens in the real world. Indeed, my main contention will be that the tautologies, of which formal equilibrium analysis in economics essentially consists, can be turned into propositions which tell us anything about causation in the real world only in so far as we are able to fill those formal propositions with definite statements about how knowledge is acquired and communicated. In short, I shall contend that 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 .

Perhaps I should begin by reminding you of the interesting fact that in quite a number of the more recent attempts made in different fields to push theoretical investigation beyond the limits of traditional equilibrium analysis, the answer has soon proved to turn on the assumptions which we make with regard to a point which, if not identical with mine, is at least part of it, namely, with regard to foresight. I think that the field in which, as one would expect, the discussion of the assumptions concerning foresight first attracted wider attention was the theory of risk . The stimulus which was exercised in this connection by the work of Frank H. Knight may yet prove to have a profound influence far beyond its special field. Not much later the assumptions to be made concerning foresight proved to be of fundamental importance for the solution of the puzzles of the theory of imperfect competition, the questions of duopoly and oligopoly. Since then, it has become more and more obvious that, in the treatment of the more “dynamic” questions of money and industrial fluctuations, the assumptions to be made about foresight and “anticipations” play an equally central role and that in particular the concepts which were taken over into these fields from pure equilibrium analysis, like those of an equilibrium rate of interest, could be properly defined only in terms of assumptions concerning foresight. The situation seems here to be that, before we can explain why people commit mistakes, we must first explain why they should ever be right.

Excerpt (Via Virtual School)

The two main conclusions from these considerations are, first, that, since equilibrium relations exist between the successive actions of a person only in so far as they are part of the execution of the same plan, any change in the relevant knowledge of the person, that is, any change which leads him to alter his plan, disrupts the equilibrium relation between his actions taken before and those taken after the change in his knowledge. In other words, the equilibrium relationship comprises only his actions during the period in which his anticipations prove correct. Second, that, since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept of equilibrium any meaning. This deserves mention, since many economists appear to have been unable to find a place for time in equilibrium analysis and consequently have suggested that equilibrium must be conceived as timeless. This seems to me to be a meaningless statement.

The confusion about the concept of a datum is at the bottom of so many of our difficulties in this field that it is necessary to consider it in somewhat more detail. Datum means, of course, something given, but the question which is left open, and which in the social sciences is capable of two different answers, is to whom the facts are supposed to be given. Economists appear subconsciously always to have been somewhat uneasy about this point and to have reassured themselves against the feeling that they did not quite know to whom the facts were given by underlining the fact that they were given, even by using such pleonastic expressions as “given data.” But this does not answer the question whether the facts referred to are supposed to be given to the observing economist or to the persons whose actions he wants to explain,.and, if to the latter, whether it is assumed that the same facts are known to all the different persons in the system or whether the “data” for the different persons may be different.

In general, It seems that we have come to a point where we all realize that the concept of equilibrium itself can be made definite and clear only in terms of assumptions concerning foresight, although we may not yet all agree what exactly these essential assumptions are. This question will occupy me later in this essay. At the moment I am concerned only to show that at the present juncture, whether we want to define the boundaries of economic statics or whether we want to go beyond it, we cannot escape the vexed problem of the exact position which assumptions about foresight are to have in our reasoning. Can this be merely an accident ?

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07. September 2009 by Miguel Barbosa
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