The Pretense of Knowledge by MT Nguyen, The Empire, CA

The title comes from the Austrian economist, F.A. Hayek’s, Nobel Prize winning address. I like the title and the sentiment it expresses. Hayek applied it specifically to economists of his era, and I would like to apply it, although in a different context, to economists as well, including to Hayek himself.

For those who are not familiar with Hayek (I wasn’t until about a month ago), the one interesting thing to know is that he is something of a hero to the right wing. His attack on socialism, The Road to Serfdom, is a classic; his work on economics forms one cornerstone in what is known as the Austrian School (roughly, anti-Keynesian economic theory). In trying to learn something about the large clash of ideas that is occurring now because of our economic crisis, one could do far worse than spend some time studying his writings.

Much can be gleaned from what Hayek concludes in his Nobel address:

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.

This should be understood as a call for skepticism, a wariness of human arrogance in matters of knowledge. In Hayek’s case, he applied this skepticism to economic knowledge, asserting that we cannot have the kind of knowledge that many economists claim. This epistemic hole implies, Hayek claims, that governmental economic market manipulation is (more or less) always unjustified. Grounding this skepticism is his assertion that the market-place possesses its own kind of ‘wisdom’. Specifically, markets can sum up the totality of human economic intentions and communicate them to all economic players in the form of prices. This is the coordinating function at which it is uniquely master. According to Hayek, the only way acquire the ‘wisdom’ of the marketplace would be to know the intentions of each individual market player, and since that is possible only for God, if such there be, it would be overreaching (to say the least) to insinuate oneself, as the government does, when it fixes prices, attempts to manipulate wages, prevents capital flight, or performs any number of other interventionist actions.

Many have used Hayek to draw the conclusion that government should never interfere with the marketplace. This is highly misleading. First, Hayek himself was quite clear that exceptions existed, e.g. when the costs of a business venture cannot be summed up by price (pollution is a classic example because a polluting business does not solely bear the costs of its pollution, but gains all the profit); and, when the enjoyment of a good cannot be efficiently charged to its recipient (e.g. signposts and roads). In such cases markets fail to do their job, and government has a role to play. Second, and rather surprisingly, he believed a strong case could be made that government should provide a safety net against catastrophic loss, i.e. a kind of insurance against shortfalls in basic material necessities. I take it some of his followers will take him to task for his alleged inconsistency on this matter. It is unclear to me how far he is willing to go, but it makes his position interesting and far from the dyed-in-the-wool anti-interventionist his followers want and paint him out to be. On both counts, therefore, he was not, as he repeatedly says, a proponent of laissez-faire economics.

Aside from the exceptions just noted, generally he thought that there was a positive role for government: it should be like a gardener tending to his garden, cultivating the conditions necessary for (economic) growth. Nevertheless, the exceptions and cultivating activities are, for Hayek, necessarily protracted and limited.

Leaving those not insignificant nuances aside, we can ask the question whether it follows from this type of economic theory that governmental intervention is generally wrong. On the face of it, it is easy to say no. Governmental intervention is wrong only if we make the striking conclusion, one which I have argued before there is no reason to accept, that a true economic theory implies economic justice. That is, that allowing true economic theory to dictate policy necessarily benefits everyone. This is a Platonic fantasy to which we shouldn’t be beholden.

When the mechanisms of the marketplace lead to unjust economic distributions, there is good reason why government should interfere. The reason is simple: government should be in the business of achieving justice. It is important to digest the truth that economists for all their pretensions of knowledge, all their mind-numbing econometric models, really, I mean really, have no special competence and hence no authority to say anything about how economic goods should be distributed.

I just said that governments are in the business of justice and concluded that economists are not and so should shut up (or at least make clear that when they are dispensing ethical advice, they don’t pass it off as grounded in some mathematical model or, worse, some a priori truth born out of reflection on the nature of rationality). But here’s the rub. Many of the most influential 20th-century economists from von Mises to Murray Rothbard, to Hayek, to Milton Friedman have philosophical pretensions. Look at the titles of their influential works and there can be no doubt: “Socialism” by von Mises, in which he purports to establish the irrationality and immorality of all forms of socialism; “For a New Liberty” by Murray Rothbard in which he purports to establish libertarianism as a philosophical doctrine; “The Road to Serfdom” by Hayek, as I said earlier an attack on socialism; “Capitalism and Freedom” by Milton Friedman, in which he defends the idea that economic freedom is a necessary condition of political freedom.

This whole cast of ‘liberal’ economists suffer a pretense to knowledge, namely, that they can make true claims about social justice. Turning again to Hayek, when he asserts that government interference may make it a ‘destroyer of civilization,’ he does not mean just a destroyer of economies. He means that governmental interference unjustly restricts individual liberty, and thus casts an inextricable totalitarian shadow over the whole of political life. In the end, Hayek proposed fairly moderate policies. This cannot be said of his heirs. This is why there now exists a more severe strand of conservatism (or libertarianism, nee classical liberalism) a la Grover Norquist which aims, in Norquist’s famous quip, to “drag [government] into the bathroom and drown it in the bathtub”. On this radical view, the business of economics cannot be separated from that of justice; for government to intervene in economic transactions just is for it to destroy liberty and send us all on the short road to serfdom.

Whatever is to be said on either side of this debate, and much ink has been spilled, my point is to note the movement to an entirely different habitat than the one in which the academic economist lives. What we have here is an ethical/political theory, one which posits a conception of happiness and the necessary steps to achieve it. We are in the domain of philosophy in the grand Platonic/Nietzschean sense (as opposed to the narrow academic sense). To his credit, in the original preface to ‘The Road to Serfdom’ Hayek explicitly acknowledges that its content stands outside the ken of his specialty, academic economics. That however didn’t stop him from writing the rest of the book, nor did he repeat that qualification in the subsequent editions—after it had enjoyed its successes. These philosophical ambitions, perhaps, explain the longevity of their ideas, and why they persist even though the economic basis of the ideas have fallen out of favor.

In a recent interview, Paul Krugman quipped that no special license is required to identify oneself as an economist. This truth applies to an even greater extent to identifying oneself as a philosopher. Our 'liberal' economists, not content with the small deliverances of their own discipline, seem to want to ‘play the master’ (to use Nietzsche’s phrase) and fancy themselves philosophers. This is ironic since for all their railing against government planning out and directing individual lives, these people have taken on the ultimate synoptic perspective: that of the philosopher who knows the good for man and aims in their activities to make that vision real. Plato would be proud.

Hayek rightly chided economists for their ‘scientism’, that is, their pretending that economics can deliver knowledge on a par with physics. I think he should have chided them, and himself, additionally for pretending to have the wisdom of philosophers. Assuming such a wisdom exists, there is no special reason to think that economists have it, and thus no special reason to listen to them when they make philosophical claims. Of course, we need not deny that as individuals these economists can have philosophical insight; but, since there can be no sound inference from true economic theory to a sound ethical theory, any philosophical claims must be diligently distinguished and judged on their own merits. I intend on tackling some of their more interesting philosophical claims in my next essay.