The Competitiveness of Nations in a Global Knowledge-Based Economy
F.
A. von Hayek
Economics and Knowledge
1
Content
II – Successive Actions in
Time
VII - Conditions for
Equilibrium
VIII - Acquisition of
Knowledge
Economica, New Series,
4 (13
Feb. 1937, 33-54.
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 2 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 one
question which, if not identical with mine, is at least part of it, namely the
question of foresight. I think the
field where, as one would expect, the discussion of the assumptions concerning
foresight first attracted wider attention was the theory of risk.
3 The stimulus which was exercised in this
connection
1. Presidential Address to the
2. Or rather falsification. Cf. K.
Popper, Logik der Forschung,
3. A more complete survey of the
process by which the significance of anticipations was gradually introduced into
economic analysis would probably have to begin with Professor Irving Fisher’s
Appreciation and Interest (1896).
33
by the work of Professor F. 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. And 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.
In general it seems that we have
come to a point where we all realise 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 paper. At the moment I am
only concerned 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 ?
As I have already suggested, the
reason for this seems to me to be that we have to deal here only with a special
aspect of a much wider question which we ought to have faced at a much earlier
point. Questions essentially
similar to those mentioned arise in fact as soon as we try to apply the system
of tautologies - those series of propositions which are necessarily true because
they are merely transformations of the assumptions from which we start, and
which constitute the main content of equilibrium analysis 1 - to
the
1. I should like to make it clear
from the outset that I use the term “equilibrium analysis” throughout this paper
in the narrower sense in which it is equivalent to what Professor Hans Mayer has
christened the “functional” (as distinguished from the “causal-genetic”)
approach, and to what used to be loosely described as the “mathematical school”.
It is round this approach that most
of the theoretical discussions of the past ten or fifteen years have taken
place. It is true that Professor
Mayer has held out before us the prospect of another, “causal-genetic” approach,
but it can hardly be denied that this is still largely a promise It should, [however, be mentioned here that some of the most
stimulating suggestions on problems closely related to those treated here have
come from his circle. Cf., H. Mayer, “Der
Erkenntniswert der funktionellen Preistheorien,” Die Wirtschaftstheorie der
Gegenwart, Vol. II, 1931; P. N. Rosenstein-Rodan, “Das Zeitmoment in der
mathematischen Theorie des wirtschaftlichen Gleichgewichts,” Zeitschrift fur
Nationalôkonomie, Vol. I, No.1, and “The
Role of Time in Economic Theory,” Economica (N.S.), Vol. I (1),
1934.
34
situation of a society consisting of
several independent persons. I have
long felt that the concept of equilibrium itself and the methods which we employ
in pure analysis, have a clear meaning only when confined to the analysis of the
action of a single person, and that we are really passing into a different
sphere and silently introducing a new element of altogether different character
when we apply it to the explanation of the interactions of a number of different
individuals.
I am certain there are many who
regard with impatience and distrust the whole tendency, which is inherent in all
modern equilibrium analysis, to turn economics into a branch of pure logic, a
set of self-evident propositions which, like mathematics or geometry, are
subject to no other test but internal consistency. But it seems that if only this process is
carried far enough it carries its own remedy with it. In distilling from our reasoning about
the facts of economic life those parts which are truly a priori,
we not only isolate one element of our reasoning as a sort of Pure Logic of
Choice in all its purity, but we also isolate, and emphasise the importance of,
another element which has been too much neglected. My criticism of the recent tendencies to
make economic theory more and more formal is not that they have gone too far,
but that they have not yet been carried far enough to complete the isolation of
this branch of logic and to restore to its rightful place the investigation of
causal processes, using formal economic theory as a tool in the same way as
mathematics.
II – Successive Actions in
Time
But before I can prove my contention
that the tautological propositions of pure equilibrium analysis as such are not
directly applicable to the explanation of social relations, I must first show
that the concept of equilibrium has a clear meaning if applied to the
actions of a single individual, and what this meaning is. Against my contention it might be argued
that it is precisely here that the concept of equilibrium is of no significance,
because, if one
35
wanted to apply it, all one could
say would be that an isolated person was always in equilibrium. But this last statement, although a
truism, shows nothing but the way in which the concept of equilibrium is
typically misused. What is relevant
is not whether a person as such is or is not in equilibrium, but which of his
actions stand in equilibrium relationships to each other. All propositions of equilibrium analysis,
such as the proposition that relative values will correspond to relative costs,
or that a person will equalise the marginal returns of any one factor in its
different uses, are propositions about the relations between actions. Actions of a person can be said to be in
equilibrium in so far as they can be understood as part of one plan. Only if this is the case, only if all
these actions have been decided upon at one and the same moment, and in
consideration of the same set of circumstances, have our statements about their
interconnections, which we deduce from our assumptions about the knowledge and
the preferences of the person, any application. It is important to remember that the
so-called “data”, from which we set out in this sort of analysis, are (apart
from his tastes) all facts given to the person in question, the things as they
are known to (or believed by) him to exist, and not in any sense
objective facts. It is only because
of this that the propositions we deduce are necessarily a priori valid,
and that we preserve the consistency of the argument.
1
The two main conclusions from these
considerations are, firstly, 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
during which his anticipations prove correct. Secondly, 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
1. Cf., on this point particularly L.
Mises, Grundprobleme der Nationalökonomie,
36
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.
Now, in spite of what I have said
before about the doubtful meaning of equilibrium analysis in this sense if
applied to the conditions of a competitive society, I do not of course want to
deny that the concept was originally introduced precisely to describe the idea
of some sort of balance between the actions of different individuals. All I have argued so far is that the
sense in which we use the concept of equilibrium to describe the interdependence
of the different actions of one person does not immediately admit of application
to the relations between actions of different people. The question really is what use we make
of it when we speak of equilibrium with reference to a competitive
system.
The first answer which would seem to
follow from our approach is that equilibrium in this connection exists if the
actions of all members of the society over a period are all executions of their
respective individual plans on which each decided at the beginning of the
period. But when we inquire further
what exactly this implies, it appears that this answer raises more difficulties
than it solves. There is no special
difficulty about the concept of an isolated person (or a group of persons
directed by one of them) acting over a period according to a preconceived plan.
In this case, the execution of the
plan need not satisfy any special criteria in order to be conceivable. It may of course be based on wrong
assumptions concerning the external facts and on this account may have to be
changed. But there will always be a
conceivable set of external events which would make it possible for the plan to
be executed as originally conceived.
The situation is, however, different
with the plans determined upon simultaneously but independently by a number of
persons. In the first instance, in
order that all these plans can be carried out, it is necessary for them to be
based on the expectation of the same set of external events, since, if different
people were to base their plans on conflicting expectations, no set of external
events could make the execution of all these plans possible. And, secondly, in.
37
a society based on exchange their
plans will to a considerable extent refer to actions which require corresponding
actions on the part of other individuals. This means that the plans of different
individuals must in a special sense be compatible if it is to be even
conceivable that they will be able to carry all of them out.
1 Or, to put the same thing in different words, since some
of the “data” on which any one person will base his plans will be the
expectation that other people will act in a particular way, it is essential for
the compatibility of the different plans that the plans of the one contain
exactly those actions which form the data for the plans of the
other.
In the traditional treatment of
equilibrium analysis part of this difficulty is apparently avoided by the
assumption that the data, in the form of demand schedules representing
individual tastes and technical facts, will be equally given to all individuals
and that their acting on the same premises will somehow lead to their plans
becoming adapted to each other. That this does not really overcome the
difficulty created by the fact that one person’s decisions are the other
person’s data, and that it involves to some degree circular reasoning, has often
been pointed out. What, however,
seems so far to have escaped notice is that this whole procedure involves a
confusion of a much more general character, of which the point just mentioned is
just a special instance, and which is due to an equivocation of the term
“datum”. The data which now are
supposed to be objective facts and the same for all people are evidently no
longer the same thing as the data which formed the starting point for the
tautological transformations of the Pure Logic of Choice. There “data” meant all facts, and only
the facts, which were present in the mind of the acting person, and only this
subjective interpretation of the term datum made those propositions necessary
truths. “Datum” meant
given,
1. It has long been a subject of
wonder to me why there should, to my knowledge, have been no systematic attempts
in sociology to analyse social relations in terms of correspondence and
non-correspondence, or compatibility and non-compatibility, of individual aims
and desires. It seems that the
mathematical technique of analysis situs (topology) and particularly such
concepts developed by it as that of homeomorphism might prove very useful
in this connection although it may appear doubtful whether even this technique,
at any rate in the present state of its development, is adequate to the
complexity of the structures with which we have to deal. A first attempt made recently in this
direction by an eminent mathematician (Karl Menger, Moral, Wille und
Weltgestaltung, Vienna, 1934) has so far not yet led to very illuminating
results. But we may look forward
with interest to the treatise on exact sociological theory which Professor
Menger has promised for the near future. (Cf., “Einige neuere Fortschritte
in der exakten Behandlung sozialwissenschaftlicher Probleme,” in Neuere
Fortschritte in den exakeen Wissenscha,ften, Vienna, 1936, p.
532.)
38
known, to the person under consideration. But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept has undergone an insidious change of meaning.
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 solve 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.
There seems to be no possible doubt
that these two concepts of “data”, on the one hand in the sense of the objective
real facts, as the observing economist is supposed to know them, and on the
other in the subjective sense, as things known to the persons whose behaviour we
try to explain, are really fundamentally different and ought to be kept
carefully apart. And, as we shall
see, the question why the data in the subjective sense of the term should ever
come to correspond to the objective data is one of the main problems we have to
answer.
The usefulness of the distinction
becomes immediately apparent when we apply it to the question of what we can
mean by the concept of a society being at any one moment in a state of
equilibrium. There are evidently
two senses in which it can be said that the subjective data, given to the
different persons, and the individual plans, which necessarily follow from them,
are in agreement. We may merely
mean that these plans are mutually compatible and that there is consequently a
conceivable set of external
39
events which will allow all people
to carry out their plans and not cause any disappointments. If this mutual compatibility of
intentions were not given, and if in consequence no set of external events could
satisfy all expectations, we could clearly say that this is not a state of
equilibrium. We have a situation
where a revision of the plans on the part of at least some people is inevitable,
or, to use a phrase which in the past has had a rather vague meaning, but which
seems to fit this case perfectly, where endogenous disturbances are
inevitable.
There is, however, still the other
question of whether the individual subjective sets of data correspond to the
objective data, and whether in consequence the expectations on which plans were
based are borne out by the facts. If correspondence between data in this
sense were required for equilibrium it would never be possible to decide
otherwise than ex post, at the end of the period for which people have
planned, whether at the beginning the society has been in equilibrium. It seems to be more in conformity with
established usage to say in such a case that the equilibrium, as defined in the
first sense, may be disturbed by an unforeseen development of the (objective)
data, and to describe this as an exogenous disturbance. In fact it seems hardly possible to
attach any definite meaning to the much used concept of a change in the
(objective) data unless we distinguish between external developments in
conformity with, and those different from, general expectations, and define as a
“change” any divergence of the actual from the expected development,
irrespective of whether it means a “change” in some absolute sense. Surely if the alternations of the seasons
suddenly ceased and the weather remained constant from a certain day onward,
this would represent a change of data in our sense, that is a change relative to
expectations, although in an absolute sense it would not represent a change but
rather an absence of change. But
all this means that we can speak of a change in data only if equilibrium in the
first sense exists, that is, if expectations coincide. If they conflicted, any development of
the external facts might bear out somebody’s expectations and disappoint those
of others, and there would be no possibility of deciding what was a change in
the objective data.
1
1. Cf. “The Maintenance of Capital”,
Economica, (N.S.), Vol. II, 1935, p.265.
40
For a society then we can
speak of a state of equilibrium at a point of time - but it means
only that compatibility exists between the different plans which the individuals
composing it have made for action in time. And equilibrium will continue, once it
exists, so long as the external data correspond to the common expectations of
all the members of the society. The
continuance of a state of equilibrium in this sense is then not dependent on the
objective data being constant in an absolute sense, and is not necessarily
confined to a stationary process. Equilibrium analysis becomes in principle
applicable to a progressive society and to those inter-temporal price
relationships which have given us so much trouble in recent times.
1
These considerations seem to throw
considerable light on the relationship between equilibrium and foresight, which
has been somewhat hotly debated in recent times.
2 It appears that the concept of
equilibrium merely means that the foresight of the different members of the
society is in a special sense correct. It must be correct in the sense that
every person’s plan is based on the expectation of just those actions of other
people which those other people intend to perform, and that all these plans are
based on the expectation of the same set of external facts, so that under
certain conditions nobody will have any reason to change his plans. Correct foresight is then not, as it has
sometimes been understood, a precondition which must exist in order that
equilibrium may be arrived at. It
is rather
1 This separation of the concept of
equilibrium from that of a stationary state seems to me to be no more than the
necessary outcome of a process which has been going on for a fairly long time.
That this association of the two
concepts is not essential but only due to historical reasons is to-day probably
generally felt. If complete
separation has not yet been effected, it is apparently only because no
alternative definition of a state of equilibrium had yet been suggested which
has made it possible to state in a general form those propositions of
equilibrium analysis which are essentially independent of the concept of a
stationary state. Yet it is evident
that most of the propositions of equilibrium analysis are not supposed to be
applicable only in that stationary state which will probably never be reached.
The process of separation seems to
have begun with
2. Cf.
particularly O. Morgenstern, “Vollkommene Voraussicht und Wirtschaftliches
Gleichgewicht,” Zeitschrift für Nationalökonomie, Vol. VI, p. 3.
41
the defining characteristic of a
state of equilibrium. Nor need
foresight for this purpose be perfect in the sense that it need extend into the
indefinite future, or that everybody must foresee everything correctly. We should rather say that equilibrium
will last so long as the anticipations prove correct, and that they need to be
correct only on those points which are relevant for the decisions of the
individuals. But on this question
of what is relevant foresight or knowledge, more later.
Before I proceed further I should
probably stop for a moment to illustrate by a concrete example what I have just
said about the meaning of a state of equilibrium and how it can be disturbed.
Consider the preparations which
will be going on at any moment for the production of houses. Brickmakers, plumbers and others will all
be producing materials which in each case will correspond to a certain quantity
of houses for which just this quantity of the particular material will be
required. Similarly we may conceive
of prospective buyers as accumulating savings which will enable them at certain
dates to buy definite quantities of houses. If all these activities represent
preparations for the production (and acquisition) of the same amount of houses
we can say that there is equilibrium between them in the sense that all the
people engaged in them may find that they can carry out their plans.
1 This need not be so, because other circumstances which
are not part of their plan of action may turn out to be different from what they
expected. Part of the materials may
be destroyed by an accident, weather conditions may make building impossible, or
an invention may alter the proportions in which the different factors are
wanted. This is what we call a
change in the (objective) data, which disturbs the equilibrium which has
existed. But -if the different plans were from
1. Another example of more general
importance would, of course, be the correspondence between “investment” and
“saving” in the sense of the proportion (in terms of relative cost) in which
entrepreneurs provide producers’ goods and consumers’ goods for a particular
date, and the proportion in which consumers in general will at this date
distribute their resources between producers’ goods and consumers’ goods. (Cf. my “Preiserwartungen, monetäre
Storungen und Fehlinvestitionen,” Ekonomisk Tidskrift, Vol. 34, 1935
(French translation: “Previsions de.Prix, Perturbations Monétaires et Faux
Investissements,” Revue des Sciences Economiques, October, 1935) and The
Maintenance of Capital,” Economica
(N.S.), Vol. II, 5935, pp. 268-273.) It may be of interest in this connection
to mention that in the course of investigations of the same field, which led the
present author to these speculations, the theory of crises, the great French
sociologist G. Tarde stressed the “contradiction de croyances” or.
“contradiction de jugements” or “contradictions des esperances” as the main
cause of these phenomena (Psychologie Economique, Paris, 5902, Vol. II,
pp. 528-9; Cf. also N.
Pinkus, Des Problem des Normalen in der Nationalokonomie,
Leipzig, 1906, pp. 252 and
275).
42
the beginning incompatible, it is
inevitable that somebody’s plans will be upset and have to be altered, and that
in consequence the whole complex of actions over the period will not show those
characteristics which apply if all the actions of each individual can be
understood as part of a single individual plan he has made at the beginning.
1
When in all this I emphasise the
distinction between mere inter-compatibility of the individual plans
2 and the correspondence between them and the actual
external facts or objective data, I do not of course mean to suggest that the
subjective inter-agreement is not in some way brought about by the external
facts. There would of course be no
reason why the subjective data of different people should ever correspond unless
they were due to the experience of the same objective facts. But the point is that pure equilibrium
analysis is not concerned with the way in which this correspondence is brought
about. In the description of an
existing state of equilibrium which it provides, it is simply assumed that the
subjective data coincide with the objective facts. The equilibrium relationships cannot be
deduced merely from the objective facts, since -the analysis of what people will
do can only start from what is known to them. Nor can equilibrium analysis start merely
from a given set of subjective data, since the subjective data of different
people would be either compatible or incompatible, that is, they would already
determine whether equilibrium did or did not exist.
We shall not get much further here
unless we ask for the reasons for our concern with the admittedly fictitious
state of equilibrium. Whatever may
occasionally have been said by over-pure economists, there seems to be no
possible
1. It is an interesting question, but
one which I cannot discuss here, whether in order that we can speak of
equilibrium, every single individual must be right, or whether it would not be
sufficient if, in consequence of a compensation of errors in different
directions, quantities of the different commodities coming on the market were
the same as if every individual had been right. It seems to me as if equilibrium in the
strict sense would require the first condition to be satisfied, but I can
conceive that a wider concept, requiring only the second condition, might
occasionally be useful. A fuller
discussion of this problem would have to consider the whole question of the
significance which some economists (including Pareto) attach to the law of great
numbers in this connection. On the
general point see P. N. Rosenstein-Rodan, “The Coordination of the General
Theories of Money and Price,” Economica, August,
1936.
2. Or, since in view of the
tautological character of the Pure Logic of Choice, “individual plans” and
“subjective data” can be used interchangeably, between the agreement between the
subjective data of the different individuals.
43
doubt that the only justification
for this is the supposed existence of a tendency towards equilibrium. It is only with this assertion that
economics ceases to be an exercise in pure logic and becomes an empirical
science; and it is to economics as an empirical science that we must now
turn.
In the light of our analysis of the
meaning of a state of equilibrium it should be easy to say what is the real
content of the assertion that a tendency towards equilibrium exists. It can hardly mean anything but that
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. In this form
the assertion of the existence of a tendency towards equilibrium is clearly an
empirical proposition, that is, an assertion about what happens in the real
world which ought, at least in principle, to be capable of verification. And it gives our somewhat abstract
statement a rather plausible common-sense meaning. The only trouble is that we are still
pretty much in the dark about (a) the conditions under which this
tendency is supposed to exist, and (b) the nature of the process
by which individual knowledge is changed.
VII – Conditions for
Equilibrium
In the usual presentations of
equilibrium analysis it is generally made to appear as if these questions of how
the equilibrium comes about were solved. But if we look closer it soon becomes
evident that these apparent demonstrations amount to no more than the apparent
proof of what is already assumed. 1
The device generally adopted for this purpose is the
assumption of a perfect market where every event becomes known instantaneously
to every member. It is necessary to
remember here that the perfect market which is required to satisfy the
assumptions of equilibrium analysis must not be confined to the markets of all
the individual commodities; the whole economic system must be
assumed
1. This seems to be implicitly
admitted, although hardly consciously recognised, when in recent times it is
frequently stressed that equilibrium analysis only describes the conditions of
equilibrium without attempting to derive the position of equilibrium from the
data. Equilibrium analysis in this
sense would, of course, be pure logic and contain no assertions about the real
world.
to be one perfect market in which
everybody knows everything. The
assumption of a perfect market then means nothing less than that all the members
of the community, even if they are not supposed to be strictly omniscient, are
at least supposed to know automatically all that is relevant for their
decisions. It seems that that
skeleton in our cupboard, the “economic man”, whom we have exorcised with prayer
and fasting, has returned through the back door in the form of a
quasi-omniscient individual.
The statement that, if people know
everything, they are in equilibrium is true simply because that is how we define
equilibrium. The assumption of a
perfect market in this sense is just another way of saying that equilibrium
exists, but does not get us any nearer an explanation of when and how such a
state will come about. It is clear
that if we want to make the assertion that under certain conditions people will
approach that state we must explain by what process they will acquire the
necessary knowledge. Of course any
assumption about the actual acquisition of knowledge in the course of this
process will also be of a hypothetical character. But this does not mean that all such
assumptions are equally justified. We have to deal here with assumptions
about causation, so that what we assume must not only be regarded as possible
(which is certainly not the case if we just regard people as omniscient) but
must also be regarded as likely to be true, and it must be possible, at least in
principle, to demonstrate that it is true in particular
cases.
The essential point here is that it
is these apparently subsidiary hypotheses or assumptions that people do learn
from experience, and about how they acquire knowledge, which constitute the
empirical content of our propositions about what happens in the real world.
They usually appear disguised and
incomplete as a description of the type of market to which our proposition
refers; but this is only one, though perhaps the most important, aspect of the
more general problem of how knowledge is acquired and communicated. The important thing of which economists
frequently do not seem to be aware is that the nature of these hypotheses is in
many respects rather different from the more general assumptions from which the
Pure Logic of Choice starts. The
main differences seem to me to be two:
45
Firstly, the assumptions from which
the Pure Logic of Choice starts are facts which we know to be common to all
human thought. They may be regarded
as axioms which define or delimit the field within which we are able to
understand or mentally to reconstruct the processes of thought of other people.
They are therefore universally
applicable to the field in which we are interested - although of course where
in concreto the limits of this field are is an empirical question. They refer to a type of human action
(what we commonly call rational, or even merely conscious, as distinguished from
instinctive action) rather than to the particular conditions under which this
action is undertaken. But the
assumptions or hypotheses, which we have to introduce when we want to explain
the social processes, concern the relation of the thought of an individual to
the outside world, the question to what extent and how his knowledge corresponds
to the external facts. And the
hypotheses must necessarily run in terms of assertions about causal connections,
about how experience creates knowledge.
Secondly, while in the field of the
Pure Logic of Choice our analysis can be made exhaustive, that is, while we can
here develop a formal apparatus which covers all conceivable situations, the
supplementary hypotheses must of necessity be selective, that is, we must select
from the infinite variety of possible situations such ideal types as for some
reason we regard as specially relevant to conditions in the real world.
1 Of course we could also develop a separate science, the
subject matter of which was per definitionem confined to a “perfect
market” or some similarly defined object, just as the Logic of Choice applies
only to persons who have to allot limited means among a variety of ends. And for the field so defined our
propositions would again become a priori true. But for such a procedure we should lack
the justification which consists in the assumption that the situation in the
real world is similar to what we assume it to be.
1. The distinction drawn here may help to solve
the old difference between economists and sociologists about the role which
“ideal types”play in the reasoning of economic theory. The sociologists used to
emphasise that the usual procedure of economic theory involved the assumption of
particular ideal types, while the economic theorist pointed out that his
reasoning was of such generality that he need not make use of any “ideal
types”. The truth seems to be that within the field of the Pure Logic of
Choice, in which the economist was largely interested, he was right in his
assertion, but that as soon as he wanted to use it for the explanation of a
social process he had to use “ideal types” of one sort or another.
46
VIII – Acquisition of
Knowledge
I must now turn to the question of
what the concrete hypotheses are concerning the conditions under which people
are supposed to acquire the relevant knowledge and the process by which they are
supposed to acquire it. If it were
at all clear what the hypotheses usually employed in this respect were, we
should have to scrutinise them in two respects: we should have to investigate
whether they were necessary and sufficient to explain a movement towards
equilibrium, and we should have to show to what extent they were borne out by
reality. But I am afraid I am now
getting to a stage where it becomes exceedingly difficult to say what exactly
are the assumptions on the basis of which we assert that there will be a
tendency towards equilibrium, and to claim that our analysis has an application
to the real world. I cannot pretend
that I have as yet got much further on this point. Consequently all I can do is to ask a
number of questions to which we shall have to find an answer if we want to be
clear about the significance of our argument.
The only condition, about the
necessity of which for the establishment of an equilibrium economists seem to be
fairly agreed, is the “constancy of the data”. But after what we have seen about the
vagueness of the concept of “datum” we shall suspect, and rightly, that this
does not get us much farther. Even
if we assume - as we probably must - that here the term is used in its objective
sense (which includes, it will be remembered, the preferences of the different
individuals) it is by no means clear that this is either required or sufficient
in order that people shall actually acquire the necessary knowledge, or that it
was meant as a statement of the conditions under which they will do so. It is rather significant that at any rate
some authors 1 feel it necessary to add “perfect knowledge” as an
additional and separate condition. And indeed we shall see that constancy of
the objective data is neither a necessary nor a sufficient condition. That it cannot be a necessary condition
follows from the facts, firstly, that nobody would want to interpret it in the
absolute sense that nothing must ever happen in the world, and, secondly, that,
as we have seen, as soon as we want to include changes which occur periodically
or
1. Vide
47
perhaps even changes which proceed
at a constant rate, the only way in which we can define constancy is with
reference to expectations. All that
this condition amounts to then is that there must be some discernible regularity
in the world which makes it possible to predict events correctly. But while this is clearly not sufficient
to prove that people will learn to foresee events correctly, the same is true to
a hardly less degree even about constancy of data in an absolute sense. For any one individual, constancy of the
data does in no way mean constancy of all the facts independent of himself,
since, of course, only the tastes and not the actions of the other people can in
this sense be assumed to be constant. And as all those other people will change
their decisions as they gain experience about the external facts and other
people’s action, there is no reason why these processes of successive changes
should ever come to an end. These
difficulties are well known 1 and I only
mention them here to remind you how little we actually know about the conditions
under which an equilibrium will ever be reached. But I do not propose to follow this line
of approach further, though not because this question of the empirical
probability that people will learn (that is, that their subjective data will
come to correspond with each other and with the objective facts) is lacking in
unsolved and highly interesting problems. The reason is rather that there seems to
me to be another and more fruitful way of approach to the central
problem.
The questions I have just discussed
concerning the conditions under which people are likely to acquire the necessary
knowledge, and the process by which they will acquire it, has at least received
some attention in past discussions. But there is a further question which
seems to me to be at least equally important, but which appears to have received
no attention at all, and that is how much knowledge and what sort of knowledge
the different individuals must possess in order that we may be able to speak of
equilibrium. It is clear that if
the concept is to have any empirical significance it cannot presuppose that
everybody knows everything. I have
already had to use the undefined term “relevant
1. On this cf.
knowledge”, that is, the knowledge
which is relevant to a particular person. But what is this relevant knowledge?
It can hardly mean simply the
knowledge which actually influenced his actions, because his decisions might
have been different not only if, for instance, the knowledge he possessed had
been correct instead of incorrect, but also if he had possessed knowledge about
altogether different fields.
Clearly 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 labour. But while the latter has been one of the
main subjects of investigation ever since the beginning of our science, the
former has been as completely neglected, although it seems to me to be the
really central problem of economics as a social science.
1 The problem which we pretend to solve is how the
spontaneous interaction of a number of people, each possessing only bits of
knowledge, brings about a state of affairs in which prices correspond to costs,
etc., and which could be brought about by deliberate direction only by
somebody who possessed the combined knowledge of all those individuals. And experience shows us that something of
this sort does happen, since the empirical observation that prices do tend to
correspond to costs was the beginning of our science. But in our analysis, instead of showing
what bits of information the different persons must possess in order to bring
about that result, we fall in effect back on the assumption that everybody knows
everything and so evade any real solution of the problem.
Before, however, we can proceed
further, to consider this division of knowledge among different persons, it is
necessary to become more specific about the sort of knowledge which is relevant
in this connection. It has become
customary among economists to stress only the need of knowledge of prices,
apparently because - as a consequence of the confusions between objective and
subjective data - the complete knowledge of the objective facts was taken for
granted. In recent times even the
knowledge of current prices has been taken so much for granted that the only
connection in which the question of knowledge has been regarded as problematic
has been the anticipation of future
1. I am not certain, but I hope, that
the distinction between the Pure Logic of Choice and economics as a social
science is essentially the same distinction as that which Professor A. Ammon has
in mind when he stresses again and again that a “Theorie des Wirschaftens”
is not yet a Theorie der Volkswirzschaft”.
49
prices. But, as I have already indicated at the
beginning, price expectations and even the knowledge of current prices are only
a very small section of the problem of knowledge as I see it. The wider aspect of the problem of
knowledge with which I am concerned is the knowledge of the basic fact of how
the different commodities can be obtained and used,
1 and under
what conditions they are actually obtained and used, that is, the general
question of why the subjective data to the different persons correspond to the
objective facts. Our problem of
knowledge here is just the existence of this correspondence which in much of
current equilibrium analysis is simply assumed to exist, but which we have to
explain if we want to show why the propositions, which are necessarily true
about the attitude of a person towards things which he believes to have certain
properties, should come to be true of the actions of society with regard to
things which either do possess these properties, or which, for some reason we
shall have to explain, are commonly believed by the members of society to
possess these properties..
2
But to revert to the special problem
I have been discussing, the amount of knowledge different individuals must
possess in order that equilibrium may prevail (or the “relevant” knowledge they
must possess), we shall get nearer to an answer if we remember how it can become
apparent either that equilibrium did not exist or that it is being disturbed.
We have seen that the equilibrium
connections will be severed if any person changes his plans, either because
his
1 Knowledge in this sense is more
than what is usually described as skill, and the division of knowledge of which
we here speak more than is meant by the division of labour. To put it shortly, “skill” refers only to
the knowledge of which a person makes use in his trade, while the further
knowledge about which we must know something in order to be able to say anything
about the processes in society, is the knowledge of alternative possibilities of
action of which he makes no direct use. It may be added here that knowledge, in
the sense in which the term is here used, is identical with foresight only in
the sense in which all knowledge is capacity to predict.
2. That all propositions of economic
theory refer to things which are defined in terms of human attitudes towards
them, that is, that for instance the “sugar” about which economic theory may
occasionally speak, is not defined by its “objective” qualities, but by the fact
that people believe that it will serve certain needs of theirs in a certain way,
is the source of all sorts of difficulties and confusions, particularly in
connection with the problem of “verification”. It is, of course, also in this connection
that the contrast between the verstehende social science and the
behaviourist approach becomes so glaring. I am not certain that the behaviourists
in the social sciences are quite aware of how much of the traditional
approach they would have to abandon if they wanted to be consistent, or that
they would want to adhere to it consistently if they were aware of this. It would, for instance, imply that
propositions of the theory of money would have to refer exclusively to, say,
“round discs of metal, bearing a certain stamp,” or some similarly defined
physical object or group of objects.
tastes change (which does not
concern us here) or because new facts become known to him. But there are evidently two different
ways in which he may learn of new facts which make him change his plans, which
for our purposes are of altogether different significance. He may learn of the new facts as it were
by accident, that is in a way which is not a necessary consequence of his
attempt to execute his original plan, or it may be inevitable that in the course
of his attempt he will find that the facts are different from what he expected.
It is obvious that, in order that
he may proceed according to plan, his knowledge needs to be correct only on the
points on which it will necessarily be confirmed or corrected in the course of
the execution of the plan. But he
may have no knowledge of things which, if he possessed it, would certainly
affect his plan.
The conclusion then which we must
draw is that the relevant knowledge which he must possess in order that
equilibrium may prevail is the knowledge which he is bound to acquire in view of
the position in which he originally is, and the plans which he then makes. It is certainly not all the knowledge
which, if he acquired it by accident, would be useful to him, and lead to a
change in his plan. And we may
therefore very well have a position of equilibrium only because some people have
no chance of learning about facts which, if they knew them, would induce them to
alter their plans. Or, in other
words, it is only relative to the knowledge which a person is bound to acquire
in the course of the carrying out of his original plan and its successive
alterations that an equilibrium is likely to be reached.
While such a position represents in
one sense a position of equilibrium, it is however clear that it is not an
equilibrium in the special sense in which equilibrium is regarded as a sort of
optimum position. In order that the
results of the combination of individual bits of knowledge should be comparable
to the results of direction by an omniscient dictator, further conditions must
apparently be introduced. 1
And while it seems quite clear that it is possible to
define the amount of knowledge which individuals must possess in order that this
result should be obtained, I know of no real attempt in this direction. One condition would
1. These conditions are usually
described as absence of “frictions”. In a recently published article
(“Quantity of Capital and the Rate of Interest,” Journal of Political
Economy, Vol. XLIV/5, 1936, p. 638) Professor F. H. Knight rightly points
out that “’error’ is the usual meaning of friction in economic
discussion”.
51
probably be that each of the
alternative uses of any sort of resources is known to the owner of some such
resources actually used for another purpose and that in this way all the
different uses of these resources are connected, either directly or indirectly.
1 But I mention this condition only as an instance of how
it will in most cases be sufficient that in each field there is a certain margin
of people who possess among them all the relevant knowledge. To elaborate this further would be an
interesting and a very important task, but a task that would far exceed the
limits of this paper.
But although what I have said on
this point has been largely in the form of a criticism, I do not want to appear
unduly despondent about what we have already achieved in this field. Even if we have jumped over an essential
link in our argument, I still believe that by what is implicit in its reasoning,
economics has come nearer than any other social science to an answer to that
central question of all social sciences, how the combination of fragments of
knowledge existing in different minds can bring about results which, if they
were to be brought about deliberately, would require a knowledge on the part of
the directing mind which no single person can possess. To show that in this sense the
spontaneous actions of individuals will under conditions which we can define
bring about a distribution of resources which can be understood as if it were
made according to a single plan, although nobody has planned it, seems to me
indeed an answer to the problem which has sometimes been metaphorically
described as that of the “social mind”. But we must not be surprised that
such claims on our part have usually been rejected by sociologists, since we
have not based them on the right grounds.
There is only one more point in this
connection which
1. This would be one, but probably
not yet a sufficient, condition to ensure that, with a given state of demand,
the marginal productivity of the different factors of production in their
different uses should be equalised and that in this sense an equilibrium of
production should be brought about. That it is not necessary, as one might
think, that every possible alternative use of any kind of resources should he
known to at least one among the owners of each group of such resources which are
used for one particular purpose is due to the fact that the alternatives known
to the owners of the resources in a particular use are reflected in the prices
of these resources. In this way it
may be a sufficient distribution of knowledge of the alternative uses, m, n, o, . . . y, z, of a commodity, if A, who uses
the quantity of these resources in his possession for m, knows of n,
and B, who uses his for n, knows of m, while C
who uses his for o, knows of n, etc., etc., until we get to
L, who uses his for z, but only knows of y. I am not clear to what extent
in addition to this a particular distribution of the knowledge of the different
proportions is required in which different factors can be combined in the
production of any one commodity.
For complete equilibrium additional assumptions will be required about
the knowledge which consumers possess about the serviceability of the
commodities for the satisfaction of their wants.
52
I should like to mention. This is that if the tendency towards
equilibrium, which we have reason to believe to exist on empirical grounds, is
only towards an equilibrium relative to that knowledge which people will acquire
in the course of their economic activity, and if any other change of knowledge
must be regarded as a “change in the data” in the usual sense of the term, which
falls outside the sphere of equilibrium analysis, this would mean that
equilibrium analysis can really tell us nothing about the significance of such
changes in knowledge, and would go far to account for the fact that pure
analysis seems to have so extraordinarily little to say about institutions, such
as the press, the purpose of which is to communicate knowledge. And it might even explain why the
preoccupation with pure analysis should so frequently create a peculiar
blindness to the role played in real life by such institutions as
advertising.
With these rather desultory remarks
on topics which would deserve much more careful examination I must conclude my
survey of these problems. There are
only one or two further remarks which I want to add.
One is that, in stressing the nature
of the empirical propositions of which we must make use if the formal apparatus
of equilibrium analysis is to serve for an explanation of the real world, and in
emphasising that the propositions about how people will learn, which are
relevant in this connection, are of a fundamentally different nature from those
of formal analysis, 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. The important point is rather that we
should become clear about what the questions of fact are on which the
applicability of our argument to the real world depends, or, to put the same
thing in other words, at what point our argument, when it is applied to
phenomena of the real world, becomes subject to
verification.
The second point is that I do not
want of course to suggest that the sort of problems I have been discussing were
foreign to the arguments of the economists of the older generations. The only objection that can be made
against them is that they have so mixed up the two sorts of propositions,
the
53
a priori and the empirical,
of which every realistic economist makes constant use, that it is frequently
quite impossible to see what sort of validity they claimed for a particular
statement. More recent work has
been freer from this fault - but only at the price of leaving more and more
obscure what sort of relevance their arguments had to the phenomena of the real
world. 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 apt 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 oneself from the technicalities of the argument and to ask
quite naďvely what it is all about. If I have only shown that in some
respects the answer to this question is not only not obvious, but that
occasionally we do not even quite know what it is, I have succeeded in my
purpose.
54