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'Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainity and agitation distinquish the bourgeois epoch from all earlier ones ... All that is solid melts into air, all that is holy is profaned.' Marx

Hayek: Economics and Knowledge « Previous | |Next »
May 5, 2007

Hayek's The Road to Serfdom and The Constitution of Liberty are works of political philosophy in which he defends market institutions against interventionist policies designed to achieve "social justice." Hayek's antipathy toward socialistic (social democratic) intervention was an expression of his more general concern with what he called the "knowledge problem".

What is less frequently mentioned is that Hayek also argued against the whole neo-classical tendency 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. The assumption is that individuals have perfect rationality and foresight, and so they then unfailingly make decisions about the allocation of their resources that maximize their utility. This assumption was deeply flawed, given that human knowledge which people will acquire in the course of their economic activity is intensely personal and irretrievably limited or incomplete.

n the 1937 essay "Economics and Knowledge," Hayek formulated the "knowledge problem", which he understood as a problem for all the social sciences, thus:

"How can the combination of fragments of knowledge existing in different minds 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?"

He then adds:
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."

Hayek's answer was that market institutions manage to gather the "fragments of knowledge" and coordinate individuals toward efficient outcomes. Hayek's argument is that free markets help compensate for the limitations of human knowledge and rationality. By spontaneously gathering dispersed information and coordinating it through the setting of prices, markets make the choices of individual men both better informed and more rational than they would otherwise be.

| Posted by Gary Sauer-Thompson at 12:45 AM | | Comments (1)
Comments

Comments

"...are subject to no other test but their own consistency".
Bring on the syllogisms!
( Alf Garnett, where are you?)
This reminds very much of the sort of criticisms Age commentator Kenneth Davidson makes when he approaches aspects of pol economy, too.
Feel like I've blundered, Alice-like, into "Farenheit 451".