The Pretence of Knowledge
Lecture to the memory of Alfred Nobel, December 11, 1974
by Friedrich August von Hayek
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.
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.
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, and to act upon it, as we now experience, as very harmful
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, that any important factor which determines the observed events will
itself be directly observable and measurable, 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 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.
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, 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. And because the effects of these facts in
any particular instance cannot be confirmed by quantitative evidence, they are
simply disregarded by those sworn to admit only what they regard as scientific
evidence: they thereupon happily proceed on the fiction that the factors which
they can measure are the only ones that are relevant.
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.
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. 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 labour 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 labour in all sectors changes of relative
prices and some transfers of labour will be necessary.
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 labour. 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 labour, to be expected.
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.
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 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
This is
particularly true of our theories accounting for the determination of the
systems of relative prices and wages that will form themselves on a
wellfunctioning market. Into the determination of these prices and wages there
will enter the effects of particular information possessed by every one of the
participants in the market process - a sum of facts which in their totality
cannot be known to the scientific observer, or to any other single brain. It is
indeed the source of the superiority of the market order, and the reason why,
when it is not suppressed by the powers of government, it regularly displaces
other types of order, that in the resulting allocation of resources more of the
knowledge of particular facts will be utilized which exists only dispersed
among uncounted persons, than any one person can possess. But because we, the
observing scientists, can thus never know all the determinants of such an
order, and in consequence also cannot know at which particular structure of
prices and wages demand would everywhere equal supply, we also cannot measure
the deviations from that order; nor can we statistically test our theory that
it is the deviations from that "equilibrium" system of prices and
wages which make it impossible to sell some of the products and services at the
prices at which they are offered.
Before I
continue with my immediate concern, the effects of all this on the employment
policies currently pursued, allow me to define more specifically the inherent
limitations of our numerical knowledge which are so often overlooked. I want to
do this to avoid giving the impression that I generally reject the mathematical
method in economics. I regard it in fact as the great advantage of the
mathematical technique that it allows us to describe, by means of algebraic
equations, the general character of a pattern even where we are ignorant of the
numerical values which will determine its particular manifestation. We could
scarcely have achieved that comprehensive picture of the mutual interdependencies
of the different events in a market without this algebraic technique. It has
led to the illusion, however, that we can use this technique for the
determination and prediction of the numerical values of those magnitudes; and
this has led to a vain search for quantitative or numerical constants. This
happened in spite of the fact that the modern founders of mathematical
economics had no such illusions. It is true that their systems of equations
describing the pattern of a market equilibrium are so framed that if we were
able to fill in all the blanks of the abstract formulae, i.e. if we knew all
the parameters of these equations, we could calculate the prices and quantities
of all commodities and services sold. But, as Vilfredo Pareto, one of the
founders of this theory, clearly stated, its purpose cannot be "to arrive
at a numerical calculation of prices", because, as he said, it would be
"absurd" to assume that we could ascertain all the data.4 Indeed,
the chief point was already seen by those remarkable anticipators of modern
economics, the Spanish schoolmen of the sixteenth century, who emphasized that
what they called pretium mathematicum, the mathematical price,
depended on so many particular circumstances that it could never be known to
man but was known only to God.5 I
sometimes wish that our mathematical economists would take this to heart. I
must confess that I still doubt whether their search for measurable magnitudes
has made significant contributions to ourtheoretical understanding
of economic phenomena - as distinct from their value as a description of
particular situations. Nor am I prepared to accept the excuse that this branch
of research is still very young: Sir William Petty, the founder of
econometrics, was after all a somewhat senior colleague of Sir Isaac Newton in
the Royal Society!
