http://mises.org/daily/3229
1. "
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."
Does economics deserve to be treated like the phsycial sciences?
Written in 1974, during a time of increasing inflation.
Hayek blames the profession for supporting policies that have led to this outcome.
2.
"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."
Critical of economists imitating procedures of the physical scientists.
Calls this scientific atttitude/mentality "decidely unscientific."
3. "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 (why?), and to act upon it, as we now experience, as very harmful."
-Correlation between total employment (all who want to work are working.
low unemployment. + the size of the aggregate demand for good and service. How is AD measured? quantified?) These two are coorealted, says Hayek, but, seems like he will argue, not a causal relationship)
-Isn't this a reference to the view of Keynesians that spending can boost the economy?
-Why is unemployment high? What was unemployment in the US in 1974?
-U today is currently in the 8% range.
-Big Idea-- Just because you can measure a cause does not mean it is the only possible factor influencing the effect.
4. 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 (why with good reason?), that any important factor which determines the observed events will itself be directly observable and measurable (is this valid?), 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 (first look, first blush) 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. (why would something important to an effect not be measurable? Seems like a reflection of complexity)
5. 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 (is not?), 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 (like what?). And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence (what is qualititative evidence?), they are simply disregarded by those sworn to admit only what they regard as scientific evidence (what is evidence? scientific evidence? unscientific evidence?):
they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.
so for example, making a connect to the Colo. shooting, just knowing the # of guns in the US vs another country might not alone explain what happened. More complicated than that.
6.
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.
7. 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 (can unemployment be solved? eliminated?). 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 labor 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 different 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 labor in all sectors changes of relative prices and some transfers of labor will be necessary.
What is unemployment? What does it mean? What is it a sign of?
8. 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 labor. 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 labor, to be expected.
9. 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.
10. 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]
11.
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]
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