The Market and Other Orders
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The Market and Other Orders brings together more than twenty works spanning almost forty years that consider this question. Consisting of speeches, essays, and lectures, including Hayek's 1974 Nobel lecture, "The Pretense of Knowledge," the works in this volume draw on a broad range of perspectives, including the philosophy of science, the physiology of the brain, legal theory, and political philosophy. Taking readers from Hayek's early development of the idea of spontaneous order in economics through his integration of this insight into political theory and other disciplines, the book culminates with Hayek's integration of his work on these topics into an overarching social theory that accounts for spontaneous order in the variety of complex systems that Hayek studied throughout his career.
Edited by renowned Hayek scholar Bruce Caldwell, who also contributes a masterly introduction that provides biographical and historical context, The Market and Other Orders forms the definitive compilation of Hayek's work on spontaneous order.
ISBN-13: 9780226527314
Media Type: Paperback
Publisher: University of Chicago Press
Publication Date: 11-16-2017
Pages: 472
Product Dimensions: 5.90(w) x 8.90(h) x 1.20(d)
Series: Collected Works of F. A. Hayek #15
F. A. Hayek (1899-1992), recipient of the Presidential Medal of Freedom in 1991 and cowinner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and a leading proponent of classical liberalism in the twentieth century. Bruce Caldwell is research professor of economics and the director of the Center for the History of Political Economy at Duke University. He is the author or editor of many books, including Hayek's Challenge: An Intellectual Biography of F. A. Hayek, also published by the University of Chicago Press.
ECONOMICS AND KNOWLEDGE I The ambiguity of the title of this paper is not accidental. Its main subject is, of course, the rôle which assumptions and propositions about the knowledge possessed by the different members of society play in economic analysis. But this is by no means unconnected with the other question which might be discussed under the same title—the question to what extent formal economic analysis conveys any knowledge about what happens in the real world. Indeed, my main contention will be that the tautologies, of which formal equilibrium analysis in economics essentially consists, can be turned into propositions which tell us anything about causation in the real world only in so far as we are able to fill those formal propositions with definite statements about how knowledge is acquired and communicated. In short, I shall contend that the empirical element in economic theory—the only part which is concerned not merely with implications but with causes and effects and which leads therefore to conclusions which, at any rate in principle, are capable of verification—consists of propositions about the acquisition of knowledge. Perhaps I should begin by reminding you of the interesting fact that in quite a number of the more recent attempts made in different fields to push theoretical investigation beyond the limits of traditional equilibrium analysis, the answer has soon proved to turn on the assumptions which we make with regard to a point which, if not identical with mine, is at least part of it, namely, with regard to foresight. I think that the field in which, as one would expect, the discussion of the assumptions concerning foresight first attracted wider attention was the theory of risk. The stimulus which was exercised in this connection by the work of Frank H. Knight may yet prove to have a profound influence far beyond its special field. Not much later the assumptions to be made concerning foresight proved to be of fundamental importance for the solution of the puzzles of the theory of imperfect competition, the questions of duopoly and oligopoly. Since then, it has become more and more obvious that, in the treatment of the more 'dynamic' questions of money and industrial fluctuations, the assumptions to be made about foresight and 'anticipations' play an equally central rôle 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 realize that the concept of equilibrium itself can be made definite and clear only in terms of assumptions concerning foresight, although we may not yet all agree what exactly these essential assumptions are. This question will occupy me later in this essay. At the moment I am concerned only to show that at the present juncture, whether we want to define the boundaries of economic statics or whether we want to go beyond it, we cannot escape the vexed problem of the exact position which assumptions about foresight are to have in our reasoning. Can this be merely an accident? 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 stage. 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—to the 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 emphasize 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 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 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 equalize 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, strictly speaking, 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. The two main conclusions from these considerations are, first, that, since equilibrium relations exist between the successive actions of a person only in so far as they are part of the execution of the same plan, any change in the relevant knowledge of the person, that is, any change which leads him to alter his plan, disrupts the equilibrium relation between his actions taken before and those taken after the change in his knowledge. In other words, the equilibrium relationship comprises only his actions during the period in which his anticipations prove correct. Second, that, since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept of equilibrium any meaning. This deserves mention, since many economists appear to have been unable to find a place for time in equilibrium analysis and consequently have suggested that equilibrium must be conceived as timeless. This seems to me to be a meaningless statement. III 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 plan need not satisfy any special criteria in order that its execution 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 to execute the plan as originally conceived. The situation is, however, different with 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, second, in a society based on exchange their plans will to a considerable extent provide for 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 should be able to carry all of them out. 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, are 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 actions 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 merely a special instance, and which is due to an equivocation of the term 'datum.' The data which here 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 those facts, and only those 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, 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. IV The confusion about the concept of a datum is at the bottom of so many of our difficulties in this field that it is necessary to consider it in somewhat more detail. Datum means, of course, something given, but the question which is left open, and which in the social sciences is capable of two different answers, is to whom the facts are supposed to be given. Economists appear subconsciously always to have been somewhat uneasy about this point and to have reassured themselves against the feeling that they did not quite know to whom the facts were given by underlining the fact that they were given—even by using such pleonastic expressions as 'given data.' But this does not answer the question whether the facts referred to are supposed to be given to the observing economist or to the persons whose actions he wants to explain, and, if to the latter, whether it is assumed that the same facts are known to all the different persons in the system or whether the 'data' for the different persons may be different. 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 carefully distinguished. 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 mean merely that these plans are mutually compatible and that there is consequently a conceivable set of external 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 still remains, however, the other question of whether the individual sets of subjective 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 retrospectively, 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, what has been expected, 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. If, for example, the alternations of the seasons suddenly ceased and the weather remained constant from a certain day onward, this would certainly 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. Read an Excerpt
THE MARKET AND OTHER ORDERS
By F. A. Hayek, Bruce Caldwell THE UNIVERSITY OF CHICAGO PRESS
Copyright © 2014 The Estate of F. A. Hayek
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ISBN: 978-0-226-08955-3
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Table of Contents
Editorial Foreword
Introduction
THE MARKET AND OTHER ORDERS
Prologue: Kinds of Rationalism (1965)
Part I. The Early Ideas
One Economics and Knowledge (1937)
Two The Facts of the Social Sciences (1943)
Three The Use of Knowledge in Society (1945)
Four The Meaning of Competition (1948)
Part II. From Chicago to Freiburg: Further Development
Five The Political Ideal of the Rule of Law (1955)
Lecture I. Freedom and the Rule of Law: A Historical Survey
Lecture II. Liberalism and Administration: The Rechtsstaat
Lecture III. The Safeguards of Individual Liberty
Lecture IV. The Decline of the Rule of Law
Six Degrees of Explanation (1955)
Seven The Economy, Science and Politics (1963)
Eight Rules, Perception and Intelligibility (1962)
Part III. A General Theory of Orders, with Applications
Nine The Theory of Complex Phenomena (1964)
Ten Notes on the Evolution of Systems of Rules of Conduct (1967)
Eleven The Results of Human Action but Not of Human Design (1967)
Twelve Competition as a Discovery Procedure (1968)
Thirteen The Primacy of the Abstract (1969)
Appendix: The Primacy of Abstract—Discussion
Fourteen The Errors of Constructivism (1970)
Fifteen Nature vs. Nurture Once Again (1971)
Sixteen The Pretence of Knowledge (1975)
Appendix A New Look at Economic Theory—Four Lectures Given at the University of Virginia, 1961
Lecture I. The Object of Economic Theory
Lecture II. The Economic Calculus
Lecture III. Economics and Technology
Lecture IV. The Communication Function of the Market
Appendix B Economists and Philosophers—Walgreen Lecture, University of Chicago, 1963
Index
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