The Competitiveness of Nations in a Global Knowledge-Based Economy
F.
A. von Hayek
*
The Pretence of Knowledge
Nobel Memorial Lecture
American Economic
Review, 79 (6
December 1989, 3-7
The particular occasion of this lecture, combined with
the chief practical problem which economists have to face today, have made the
choice of its topic almost inevitable. On the one hand the still recent
establishment of the Nobel Memorial Prize in Economic Science marks a
significant step in the process by which, in the opinion of the general public,
economics has been conceded some of the dignity and prestige of the physical
sciences. On the other hand, the
economists are at this moment called upon to say how to extricate the free world
from the serious threat of accelerating inflation which, it must be admitted,
has been brought about by policies which the majority of economists recommended
and even urged governments to pursue. We have indeed at the moment little cause
for pride: as a profession we have made a mess of things.
It seems to me that this failure of the economists to
guide policy more successfully is closely connected with their propensity to
imitate as closely as possible the procedures of the brilliantly successful
physical sciences - an attempt which in our field may lead to outright error.
It is an approach which has come to
be described as the “scientistic” attitude - an attitude which, as I defined it
some thirty years ago, “is decidedly unscientific in the true sense of the word,
since it involves a mechanical and uncritical application of habits of thought
to fields different from those in which they have been formed.”1 I want today to begin by explaining
how some of the gravest errors of recent economic policy are a direct
consequence of this scientistic error.
The theory which has been guiding monetary and financial
policy during the last thirty years, and which I contend is largely the product
of such a mistaken conception of the proper scientific procedure, consists in
the assertion that there exists a simple positive correlation between total
employment and the size of the aggregate demand for goods and services; it leads
to the belief that we can permanently assure full employment by maintaining
total money expenditure at an appropriate level. Among the various theories advanced to
account for extensive unemployment, this is probably the only one in support of
which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally
false, and to act upon it, as we now experience, as very
harmful.
This brings me to the crucial issue. Unlike the position that exists in the
physical sciences, in economics and other disciplines that deal with essentially
complex phenomena, the aspects of the events to be accounted for about which we
can get quantitative data are necessarily limited and may not include the
important ones. While in the
physical sciences it is generally assumed, probably with good reason, that any
important factor which determines the observed events will itself be directly
observable and measurable, in the study of such complex phenomena as the market,
which depend on the actions of many individuals, all the circumstances which
will determine the outcome of a process, for reasons which I shall explain
later, will hardly ever be fully known or measurable. And while in the physical sciences the
investigator will be able to measure what, on the basis of a prima facie
theory, he thinks important, in the social sciences often that is treated as
important which happens to be accessible to measurement. This is sometimes carried to the point
where it is demanded that our theories must be formulated in such terms that
they refer only to measurable magnitudes.
It can hardly be denied that such a demand quite
arbitrarily limits the facts which are to be admitted as possible causes of the
events which occur in the real world. This view, which is often quite naively
accepted as required by scientific procedure, has some rather paradoxical
consequences. We know, of course,
with regard to the market and similar social structures, a great many facts
which we cannot measure and on which indeed we have only some very imprecise and
general information. And because
the effects of these facts in any particular instance cannot be confirmed by
quantitative evidence, they are simply disregarded by those sworn to admit only
what they regard as scientific evidence: they thereupon happily proceed on the
fiction that the factors which they can measure are the only ones that are
relevant.
The correlation between aggregate demand and total
employment, for instance, may only be approximate, but as it is the only
one on which we have quantitative data, it is accepted as the only causal
connection that counts. On this
standard there may thus well exist better “scientific” evidence for a false
theory, which will be accepted because it is more “scientific”, than for a valid
explanation, which is rejected because there is no sufficient quantitative
evidence for it.
Let me illustrate this by a brief sketch of what I
regard as the chief actual cause of extensive unemployment - an account which
will also explain why such unemployment cannot be lastingly cured by the
inflationary policies recommended by the now fashionable theory. This correct explanation appears to me to
be the existence of discrepancies between the distribution of demand among the
different goods and services and the allocation of labour and other resources
among the production of those outputs. We possess a fairly good “qualitative”
knowledge of the forces by which a correspondence between demand and supply in
the differ-
* Hayek received the 1974 Nobel Memorial Prize in
Economic Science. Copyright (c) THE NOBEL FOUNDATION 1974
1 “Scientism and the Study of Society”, Economica,
vol. IX, no. 35, August 1942, reprinted in The Counter-Revolution of
Science, Glencoe, III., 1952, p.15 of this reprint.
ent sectors of the economic system is brought about, of
the conditions under which it will be achieved, and of the factors likely to
prevent such an adjustment. The
separate steps in the account of this process rely on facts of everyday
experience, and few who take the trouble to follow the argument will question
the validity of the factual assumptions, or the logical correctness of the
conclusions drawn from them. We
have indeed good reason to believe that unemployment indicates that the
structure of relative prices and wages has been distorted (usually by
monopolistic or governmental price fixing), and that to restore equality between
the demand and the supply of labour in all sectors changes of relative prices
and some transfers of labour will be necessary.
But when we are asked for quantitative evidence for the
particular structure of prices and wages that would be required in order to
assure a smooth continuous sale of the products and services offered, we must
admit that we have no such information. We know, in other words, the general
conditions in which what we call, somewhat misleadingly, an equilibrium will
establish itself: but we never know what the particular prices or wages are
which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are
in which we can expect the market to establish prices and wages at which demand
will equal supply. But we can never
produce statistical information which would show how much the prevailing prices
and wages deviate from those which would secure a continuous sale of the
current supply of labour. Though
this account of the causes of unemployment is an empirical theory, in the sense
that it might be proved false, e.g. if, with a constant money supply, a general
increase of wages did not lead to unemployment, it is certainly not the kind of
theory which we could use to obtain specific numerical predictions concerning
the rates of wages, or the distribution of labour, to be
expected.
Why should we, however, in economics, have to plead
ignorance of the sort of facts on which, in the case of a physical theory, a
scientist would certainly be expected to give precise information? It is probably not surprising that those
impressed by the example of the physical sciences should find this position very
unsatisfactory and should insist on the standards of proof which they find
there. The reason for this state of
affairs is the fact, to which I have already briefly referred, that the social
sciences, like much of biology but unlike most fields of the physical sciences,
have to deal with structures of essential complexity, i.e. with
structures whose characteristic properties can be exhibited only by models made
up of relatively large numbers of variables. Competition, for instance, is a process
which will produce certain results only if it proceeds among a fairly large
number of acting persons.
In some fields, particularly where problems of a similar
kind arise in the physical sciences, the difficulties can be overcome by using,
instead of specific information about the individual elements, data about the
relative frequency, or the probability, of the occurrence of the various
distinctive properties of the elements. But this is true only where we have to
deal with what has been called by Dr. Warren Weaver (formerly of the Rockefeller
Foundation), with a distinction which ought to be much more widely understood,
“phenomena of unorganized complexity,” in contrast to those “phenomena of
organized complexity” with which we have to deal in the social sciences .2
Organized complexity here
means that the character of the structures showing it depends not only on the
properties of the individual elements of which they are composed, and the
relative frequency with which they occur, but also on the manner in which the
individual elements are connected with each other. In the explanation of the working of such
structures we can for this reason not replace the information about the
individual elements by statistical information, but require full information
about each element if from our theory we are to derive specific predictions
about individual events. Without
such specific information about the individual elements we shall be confined to
what on another occasion I have called mere pattern predictions-predictions of
some of the general attributes of the structures that will form themselves, but
not containing specific statements about the individual elements of which the
structures will be made up. 3
This is particularly true of our theories accounting for
the determination of the systems of relative prices and wages that will form
themselves on a well-functioning market. Into the determination of these prices
and wages there will enter the effects of particular information possessed by
every one of the participants in the market process-a sum of facts which in
their totality cannot be known to the scientific observer, or to any other
single brain. It is indeed the
source of the superiority of the market order, and the reason why, when it is
not suppressed by the powers of government, it regularly displaces other types
of order, that in the resulting allocation of resources more of the knowledge of
particular facts will be utilized which exists only dispersed among uncounted
persons, than any one person can possess. But because we, the observing scientists,
can thus never know all the determinants of such an order, and in consequence
also cannot know at which particular structure of prices and wages demand would
everywhere equal supply, we also cannot measure the deviations from that order;
nor can we statistically test our theory that it is the deviations from that
“equilibrium” system of prices and wages which make it impossible to sell some
of the products and services at the prices at which they are
offered.
2 . Warren Weaver, “A Quarter Century in the Natural
Sciences”, The Rockefeller Foundation Annual Report 1958, chapter I,
“Science and Complexity”.
3. See my essay “The Theory of Complex Phenomena” in
The Critical Approach to Science and Philosophy. Essays in Honor of K. R.
Popper, ed. M. Bunge,
Before I continue with my immediate concern, the effects
of all this on the employment policies currently pursued, allow me to define
more specifically the inherent limitations of our numerical knowledge which are
so often overlooked. I want to do
this to avoid giving the impression that I generally reject the mathematical
method in economics. I regard it in
fact as the great advantage of the mathematical technique that it allows us to
describe, by means of algebraic equations, the general character of a pattern
even where we are ignorant of the numerical values which will determine its
particular manifestation. We could
scarcely have achieved that comprehensive picture of the mutual
interdependencies of the different events in a market without this algebraic
technique. It has led to the
illusion, however, that we can use this technique for the determination and
prediction of the numerical values of those magnitudes; and this has led to a
vain search for quantitative or numerical constants. This happened in spite of the fact that
the modern founders of mathematical economics had no such illusions. It is true that their systems of
equations describing the pattern of a market equilibrium are so framed that
if we were able to fill in all the blanks of the abstract formulae, i.e.
if we knew all the parameters of these equations, we could calculate the prices
and quantities of all commodities and services sold. But, as Vilfredo Pareto, one of the
founders of this theory, clearly stated, its purpose cannot be “to arrive at a
numerical calculation of prices”, because, as he said, it would be “absurd” to
assume that we could ascertain all the data. 4 Indeed, the chief point was already
seen by those remarkable anticipators of modern economics, the Spanish schoolmen
of the sixteenth century, who emphasized that what they called pretium
mathematicum, the mathematical price, depended on so many particular
circumstances that it could never be known to man but was known only to God.
5 I sometimes wish that
our mathematical economists would take this to heart. I must confess that I still doubt
whether their search for measurable magnitudes has made significant
contributions to our theoretical understanding of economic phenomena - as
distinct from their value as a description of particular situations. Nor am I prepared to accept the excuse
that this branch of research is still very young: Sir William Petty, the founder of
econometrics, was after all a somewhat senior colleague of Sir Isaac Newton in
the Royal Society!
There may be few instances in which the superstition
that only measurable magnitudes can be important has done positive harm in the
economic field: but the present inflation and employment problems are a very
serious one. Its effect has been
that what is probably the true cause of extensive unemployment has been
disregarded by the scientistically minded majority of economists, because its
operation could not be confirmed by directly observable relations between
measurable magnitudes, and that an almost exclusive concentration on
quantitatively measurable surface phenomena has produced a policy which has made
matters worse.
It has, of course, to be readily admitted that the kind
of theory which I regard as the true explanation of unemployment is a theory of
somewhat limited content because it allows us to make only very general
predictions of the kind of events which we must expect in a given
situation. But the effects on
policy of the more ambitious constructions have not been very fortunate and I
confess that I prefer true but imperfect knowledge, even if it leaves much
indetermined and unpredictable, to a pretence of exact knowledge that is likely
to be false. The credit which the
apparent conformity with recognized scientific standards can gain for seemingly
simple but false theories may, as the present instance shows, have grave
consequences.
In fact, in the case discussed, the very measures which
the dominant “macro-economic” theory has recommended as a remedy for
unemployment, namely the increase of aggregate demand, have become a cause of a
very extensive misallocation of resources which is likely to make later
large-scale unemployment inevitable.
The continuous injection of additional amounts of money at points of the
economic system where it creates a temporary demand which must cease when the
increase of the quantity of money stops or slows down, together with the
expectation of a continuing rise of prices, draws labour and other resources
into employments which can last only so long as the increase of the quantity of
money continues at the same rate - or perhaps even only so long as it continues
to accelerate at a given rate. What
this policy has produced is not so much a level of employment that could not
have been brought about in other ways, as a distribution of employment which
cannot be indefinitely maintained and which after some time can be maintained
only by a rate of inflation which would rapidly lead to a disorganisation of all
economic activity. The fact is that
by a mistaken theoretical view we have been led into a precarious position in
which we cannot prevent substantial unemployment from re-appearing; not because,
as this view is sometimes misrepresented, this unemployment is deliberately
brought about as a means to combat inflation, but because it is now bound to
occur as a deeply regrettable but inescapable consequence of the mistaken
policies of the past as soon as inflation ceases to
accelerate.
I must, however, now leave these problems of immediate
practical importance which I have introduced chiefly as an illustration of the
momentous consequences that may follow from errors concerning abstract problems
of the philosophy of science. There
is as much reason to be apprehensive about the long run dangers created in a
much wider field by the uncritical acceptance of assertions which have the
appearance of being scientific as there is with regard to the
prob-
4. V. Pareto, Manuel d’economie politique, 2nd.
ed.,
5. See, e.g., Luis Molina, De iustitia et iure,
lems I have just discussed. What I mainly wanted to bring out by the
topical illustration is that certainly in my field, but I believe also generally
in the sciences of man, what looks superficially like the most scientific
procedure is often the most unscientific, and, beyond this, that in these fields
there are definite limits to what we can expect science to achieve. This means that to entrust to science -
or to deliberate control according to scientific principles-more than scientific
method can achieve may have deplorable effects. The progress of the natural sciences in
modern times has of course so much exceeded all expectations that any suggestion
that there may be some limits to it is bound to arouse suspicion. Especially all those will resist such an
insight who have hoped that our increasing power of prediction and control,
generally regarded as the characteristic result of scientific advance, applied
to the processes of society, would soon enable us to mould society entirely to
our liking. It is indeed true that,
in contrast to the exhilaration which the discoveries of the physical sciences
tend to produce, the insights which we gain from the study of society more often
have a dampening effect on our aspirations; and it is perhaps not surprising
that the more impetuous younger members of our profession are not always
prepared to accept this. Yet the
confidence in the unlimited power of science is only too often based on a false
belief that the scientific method consists in the application of a ready-made
technique, or in imitating the form rather than the substance of scientific
procedure, as if one needed only to follow some cooking recipes to solve all
social problems. It sometimes
almost seems as if the techniques of science were more easily learnt than the
thinking that shows us what the problems are and how to approach
them.
The conflict between what in its present mood the public
expects science to achieve in satisfaction of popular hopes and what is really
in its power is a serious matter because, even if the true scientists should all
recognize the limitations of what they can do in the field of human affairs, so
long as the public expects more there will always be some who will pretend, and
perhaps honestly believe, that they can do more to meet popular demands than is
really in their power. It is often
difficult enough for the expert, and certainly in many instances impossible for
the layman, to distinguish between legitimate and illegitimate claims advanced
in the name of science. The
enormous publicity recently given by the media to a report pronouncing in the
name of science on The Limits to Growth, and the silence of the same
media about the devastating criticism this report has received from the
competent experts 6 must make one feel somewhat apprehensive about
the use to which the prestige of science can be put. But it is by no means only in the field
of economics that far-reaching claims are made on behalf of a more scientific
direction of all human activities and the desirability of replacing spontaneous
processes by “conscious human control”. If I am not mistaken, psychology,
psychiatry and some branches of sociology, not to speak about the so-called
philosophy of history, are even more affected by what I have called the
scientistic prejudice, and by specious claims of what science can achieve.
7
If we are to safeguard the reputation of science, and to
prevent the arrogation of knowledge based on a superficial similarity of
procedure with that of the physical sciences, much effort will have to be
directed toward debunking such arrogations, some of which have by now become the
vested interests of established university departments. We cannot be grateful enough to such
modern philosophers of science as Sir Karl Popper for giving us a test by which
we can distinguish between what we may accept as scientific and what not - a
test which I am sure some doctrines now widely accepted as scientific would not
pass. There are some special
problems, however, in connection with those essentially complex phenomena of
which social structures are so important an instance, which make me wish to
restate in conclusion in more general terms the reasons why in these fields not
only are there only absolute obstacles to the prediction of specific events, but
why to act as if we possessed scientific knowledge enabling us to transcend them
may itself become a serious obstacle to the advance of the human
intellect.
The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events. This may even be the ultimate reason why we single out these realms as “physical” in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events-although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories. They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular
6. See The Limits to Growth: A Report of the Club of Rome’s Project on the Predicament of Mankind, New York 1972; for a systematic examination of this by a competent economist cf. Wilfred Beckerman, In Defence of Economic Growth, London 1974, and, for a list of earlier criticisms by experts, Gottfried Haberler, Economic Growth and Stability, Los Angeles 1974, who rightly calls their effect “devastating”.
7. I have given some illustrations of these tendencies in
other fields in my inaugural lecture as Visiting Professor at the
facts; and to derive a prediction from it, or to test
it, we have to ascertain all these particular facts. Once we succeeded in this there should be
no particular difficulty about deriving testable predictions - with the help of
modem computers it should be easy enough to insert these data into the
appropriate blanks of the theoretical formulae and to derive a prediction.
The real difficulty, to the
solution of which science has little to contribute, and which is sometimes
indeed insoluble, consists in the ascertainment of the particular facts. A simple example will show the nature of
this difficulty. Consider some ball
game played by a few people of approximately equal skill. If we knew a few particular facts in
addition to our general knowledge of the ability of the individual players, such
as their state of attention, their perceptions and the state of their hearts,
lungs, muscles etc. at each moment of the game, we could probably predict the
outcome. Indeed, if we were
familiar both with the game and the teams we should probably have a fairly
shrewd idea on what the outcome will depend. But we shall of course not be able to
ascertain those facts and in consequence the result of the game will be outside
the range of the scientifically predictable, however, well we may know what
effects particular events would have on the result of the game. This does not mean that we can make no
predictions at all about the course of such a game. If we know the rules of the different
games we shall, in watching one, very soon know which game is being played and
what kinds of actions we can expect and what kind not. But our capacity to predict will be
confined to such general characteristics of the events to be expected and not
include the capacity of predicting particular individual
events.
This corresponds to what I have called earlier the mere
pattern predictions to which we are increasingly confined as we penetrate from
the realm in which relatively simple laws prevail into the range of phenomena
where organized complexity rules. As we advance we find more and more
frequently that we can in fact ascertain only some but not all the particular
circumstances which determine the outcome of a given process; and in consequence
we are able to predict only some but not all the properties of the result we
have to expect. Often all that we
shall be able to predict will be some abstract characteristic of the pattern
that will appear - relations between kinds of elements about which individually
we know very little. Yet, as I am
anxious to repeat, we will still achieve predictions which can be falsified and
which therefore are of empirical significance.
Of course, compared with the precise predictions we have
learnt to expect in the physical sciences, this sort of mere pattern predictions
is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is
precisely the belief that in order to have a claim to be accepted as scientific
it is
necessary to achieve more. This way lies charlatanism and worse.
To act on the belief that we
possess the knowledge and the power which enable us to shape the processes of
society entirely to our liking, knowledge which in fact we do not possess, is likely to
make us do much harm. In the
physical sciences there may be little objection to trying to do the impossible;
one might even feel that one ought not to discourage the over-confident because
their experiments may after all produce some new insights. But in the social field the erroneous
belief that the exercise of some power would have beneficial consequences is
likely to lead to a new power to coerce other men being conferred on some
authority. Even if such power is
not in itself bad, its exercise is likely to impede the functioning of those
spontaneous ordering forces by which, without understanding them, man is in fact
so largely assisted in the pursuit of his aims. We are only beginning to understand on
how subtle a communication system the functioning of an advanced industrial
society is based - a communications system which we call the market and which
turns out to be a more efficient mechanism for digesting dispersed information
than any that man has deliberately designed.
If man is not to do more harm than good in his efforts
to improve the social order, he will have to learn that in this, as in all other
fields where essential complexity of an organized kind prevails, he cannot
acquire the full knowledge which would make mastery of the events possible.
He will therefore have to use what
knowledge he can achieve, not to shape the results as the craftsman shapes his
handiwork, but rather to cultivate a growth by providing the appropriate
environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling
of ever growing power which the advance of the physical sciences has engendered
and which tempts man to try, “dizzy with success”, to use a characteristic
phrase of early communism, to subject not only our natural but also our human
environment to the control of a human will. The recognition of the insuperable limits
to his knowledge ought indeed to teach the student of society a lesson of
humility which should guard him against becoming an accomplice in men’s fatal
striving to control society-a striving which makes him not only a tyrant over
his fellows, but which may well make him the destroyer of a civilization which
no brain has designed but which has grown from the free efforts of millions of
individuals.
7