A Simplified “Pretence of Knowledge”

When economist F.A. Hayek accepted the Nobel Prize in 1974, he gave a brilliant, insightful speech, The Pretence of Knowledge.” But Hayek packed that insight into a very dense web of obscure words, long sentences, and economic jargon. Periodically over the past several years I have been drafting and re-drafting a “simplified” version of his speech. (Talk about pretentious!) I have no doubt that this re-write has lost much of the nuance and brilliance of the original. But I hope it retains at least some of the meaning. And I hope you’ll offer your comments about what I got wrong.

We economists are often asked to solve the very problems we created with our policy recommendations. Our recent policy failures are due to our “scientistic” attitude — we’ve tried to treat economics like physics. But economics is not like physics, for at least three reasons.

First, unlike physics and other natural sciences, the variables economists can measure may not be the important ones. Despite this, economists have mistakenly emphasized the few things we can measure because they are easier to study. Thus, while we know there are a large number of unmeasurable variables in economics, economists frequently pretend those variables do not matter.

Here’s an example of this mistake. We have data for the total amount of goods or services purchased and we have data for total employment. And we have measurements showing that these two variables are correlated. Because this is the only correlation for which we have data, economists act as if this is the only causal connection that matters. Therefore they conclude that extensive unemployment can be resolved by increasing the total amount of things or services purchased, or “aggregate demand.” But this ignores the likely true cause of extensive unemployment, which I’ll address in a moment.

Fooled into believing that the measurable variables are the most critical, economists propose “solutions” that actually worsen the problem. Today, it is popular to propose that the government boost total consumer demand by continuously injecting money into the economy. But this creates a purely temporary boost that attracts labor and resources to jobs that will disappear once the injection of money slows or stops. When the injection of money slows or stops, unemployment is bound to increase.

Second, while economists can produce general predictions, unlike physicists they cannot generate precise results. Returning to the problem of unemployment: economists have a good understanding of how economies supply the right amount of goods to meet consumer demand. We also generally know that unemployment indicates that the relative prices and wages are distorted, and that shifts in relative prices and labor will be necessary to reduce unemployment. However, although we know in general the cause of unemployment, economists cannot offer specific quantitative evidence of the right prices or wages to cure that unemployment. We have no idea.

Why can’t we economists provide the sort of precise data that natural scientists are expected to produce? It’s because the variables that economists study cannot be summarized or averaged. Physicists, for example, don’t need to measure the velocity and acceleration of every atom in a swinging pendulum. They can instead observe the average behavior of the atoms as a whole, thereby reducing a large number of independent variables into a very few variables representing the essence of the swinging pendulum. In contrast, economics and other social sciences deal with complex structures that we cannot reduce in this way. Economists study people and other complex elements where the essential nature includes the relationships between the individual elements, and this cannot be reduced without losing critical information.

As an example of this irreducible complexity, consider how a market determines prices and wages. The market emerges from the choices and interactions of a wide range of individuals. There is no way to capture all of a market’s information in a single mind, not even in approximate or average form. This is the amazing thing about markets — a market can coordinate the action of a wide range of individuals without any single mind having a full set of information about the system. Order emerges without central design or control.

(As an aside, I note that although our knowledge of economic variables has limits, I am not rejecting the use of mathematics in economics. Indeed, algebraic equations help us understand the general patterns of the economy by capturing the relationship between the various variables. But — as even the originators of these techniques have noted — these equations cannot be used to calculate the proper prices and quantities of all products and services.)

The third reason economics differs from physics relates to the first two: the information necessary to test detailed economic predictions is impossible to gather. The fields of science that have advanced the most rapidly are those where the predicted outcomes can be explained by laws which rely on only a few variables. For fields involving complex phenomena with many variables, we can often formulate theories about the system, but the real problem is gathering the large number of facts needed to test the theory. The scientific method, and science itself, cannot really help us gather the necessary facts.

Here is a simple example: Consider trying to predict the score of a ball game. If we knew the rules of the game as well as everything about the exact state of the players’ minds and their physical state and skill level at each moment of the game, we could predict the outcome with some accuracy. But of course, we cannot know such things. Thus, although we could build a theory that would accurately predict the score given an assumed set of facts, we cannot in actuality predict the score because we cannot gather all the necessary facts. This does not mean we cannot make any predictions. For example, if we knew the rules of soccer and the rules of basketball, we could very easily determine whether a specific sporting event was soccer or basketball, and therefore easily predict whether the players involved were likely to score more than 20 total points.

Similarly, in economics we can ascertain some but not all of the basic principles that determine an outcome, and using this we can predict (in a falsifiable and therefore scientific manner) some general outcomes, even if we know little about the individual elements of the system. But there are limits to what science and the scientific method can achieve. In particular, studying society generally shows how difficult it is to control. This truth may disappoint those who want to build a science to shape society. But the scientific method is not a recipe that can be mechanically applied to all situations. Critical thinking is always key.

Despite these three fundamental differences from natural sciences, economists often seek to imitate the methods and results of natural sciences. I call this “scientism.”

The motivation for scientism is easily understood. Compared to the precise predictions achieved by physicists and other natural scientists, economic predictions of general patterns can seem disappointing. Yet the public demands solutions to social problems. And because the natural sciences have been so incredibly successful, people (even experts but especially laymen) often uncritically accept arguments that look scientific. As a result, because the public expects solutions, people eager to satisfy the public often announce their “scientific” solutions to such societal problems.

Scientistic claims harm the reputation of the scientific method. More importantly, economic scientism is very dangerous. If economists claim knowledge we do not have, we are likely to harm people. A physicist on a quest to discover perpetual motion will cause little harm. But the economist who claims that his knowledge will enable him to solve a complex social problem will frequently be granted the power to dictate the lives of other men. This centralized approach slows or stops the many interactions in society that actually produce emergent solutions to complex problems.

If we truly wish to improve society, we must be humble and realize the bounds of what is possible with social science. Rather than attempting to shape society directly like a sculptor shapes a statue, we must seek instead to understand and to create the right environment for progress, like a gardener in a garden. Overconfidence in the use of science to control society will make a man a tyrant, and will lead to the destruction of a civilization which no brain has designed, but which has instead grown from the free efforts of millions of individuals.

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