I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics. I have been assigned to discuss the Austrian economists Carl Menger and F A. Hayek. I will have about eight minutes for each Menger and Hayek. This post presents the basic ideas I will present on Hayek.
F. A. Hayek won the noble prize in economics. He is probably best known for his book The Road to Serfdom, which was written during world war two. In academic circles Hayek is best known for his work on how prices in a market economy provide information and result in a spontaneous order. This work is closely related to Adam Smith’s ideas about the “invisible hand.” Ayn Rand and Hayek never met, but Rand was highly critical of Hayek.
Hayek considered one of his great achievements his work on “cultural evolution”, which lays out his epistemology. One commentator summarizes Hayek’s cultural evolution this way
According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups. The theory, of which Hayek himself was proud, is on all accounts central to his economic, social, and political project. (Emphasis Added)
The History of Hayek’s Theory of Cultural Evolution, Erik Angner
Dept. of History and Philosophy of Science
Hayek’s objection to central planning is not based on individualism, but on the fact that central planning substitutes the knowledge and decisions of a few people for that of the group. This disrupts the process of cultural evolution according to Hayek.
This group basis of evolution is based on Hayek’s belief that reason is limited at best.
Burke and Hayek, then, shared a common enemy as well as a common understanding: Enlightenment rationalism. Perhaps the most characteristic attribute of Enlightenment thought was its cavalier dismissal of ‘irrational’ tradition as mere superstition and prejudice. (Emphasis added)
The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, Linda C. Raeder is Associate Editor of HUMANITAS and a Research Associate at the National Humanities Institute
David Kelley summarizes Hayek’s position on Capitalism best.
This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.‖10
Symposium: Rand and Hayek on Cognition and Trade
Rand versus Hayek on Abstraction
David Kelley The Atlas Society
Hayek also accepts the Austrian economics position of subjective values and as a result rejects a rational or scientific ethics. “No universally valid system of ethics can ever be known to us,‖3 which is obviously not consistent with her view.”
It is clear that Hayek is inconsistent with Ayn Rand’s metaphysics, epistemology, and ethics. Hayek’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.
I am proud to announce that Will Thomas and I will be giving a talk on Objectivism and Austrian Economics. This year’s Atlas Summit will be held in Las Vegas July 11-13 just proceeding FreedomFest at the same location. Here is the description of our talk:
Prominent Objectivists have argued that Austrian Economics is compatible with Objectivism. Ludwig von Mises was Ayn Rand’s favorite economic thinker, and Objectivist economist George Reisman was trained by Mises. Despite this, Rand was very critical of a number of Austrians including F.A. Hayek and Murray Rothbard. David Kelley has written that “Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system.” What are the philosophical foundations of Austrian Economics? Is Austrian Economics good economics? Dale Halling and William R Thomas will explore these questions in this panel session.
Presently our talk is scheduled for Wednesday, July 13 from 12:00–1:00 PM, however this is subject to change. I have been told that I can invite anyone to my talk and they can hear my talk for free, although they will not be able to see the other fine talks at Atlas Summit.
Note that right now there is a $100 discount for early registration and this also gives you access to FreedomFest.
I hope to see many of you there.
In my book Source of Economic Growth I outlined a school of economics that I called Intellectual Capitalism. This is the first of a series of posts I intend to write to expand upon that outline. Most schools of economics do not explicitly state the philosophical foundations upon which they are based. In this post I will layout the philosophical foundations of Intellectual Capitalism by comparing it to the philosophical foundations of the major schools of economics.
Most mainstream modern economics is based on the ideas of Adam Smith. Smith is part of the Scottish Enlightenment and this is key to understanding the philosophical basis of Smith’s and modern economics philosophical underpinnings. The father of the Scottish Enlightenment was Francis Hutcheson, who believed that we have moral senses (similar to vision, hearing, smell, taste, and touch). This elevates emotions to valid epistemological tools. Adam Smith picked up on Hutcheson’s ideas in his book The Theory of Moral Sentiments.
Smith was also a close friend of David Hume, one of the giants of the Scottish Enlightenment. Hume argued that causation was an illusion and attacked induction as invalid. He also picked up on Hutcheson’s ideas on moral philosophy. Smith never explicitly states that he agrees with Hume, however they admired each other and Smith never rejects Hume’s ideas. The result is that economics is not based on the same philosophy of science as were the hard sciences of physics, chemistry, and biology. Furthermore it means that Smith and modern economics rejects Natural Rights, which are based on reason (the philosophy of the hard sciences).
This rejection of the philosophy of science by economics, at least implicitly, in my opinion is one of the reasons modern economics has been stuck in the equivalent of pre-Newtonian physics.
This is perhaps the second largest school of modern economics and is named for John Maynard Keynes. Keynes was somewhat circumspect about his philosophical underpinnings, however it appears that Kant can be considered his most important philosophical influence. In the paper “The Philosophy of John Maynard Keynes (A Reconsideration)” by Elke Muchlinski he shows that Keynes and Kant shared a common epistemological approach.
His method provides a background for his conception of convention which still encompasses the fragility and precariousness of knowledge. Keynes rejected formal logic as inadequate for his purposes to outline the process of acquiring knowledge.
This should hardly be surprising as Keynes confuses cause with effect, by making consumption the key to the economy. It is clear that Keynes rejects the philosophy of science. Note there is only one correct philosophy of science, so I will no longer qualify that this was the philosophy of the hard sciences. If logic (and evidence) is precarious then the only other potential epistemological tool is emotion. The result is that Keynes also rejects Natural Rights as a valid moral theory.
It is probably incorrect to consider the ideas of Karl Marx a school of economics, as it is really more a school of sociology. Marx greatest intellectual influence was Kant with a close runner up being Hegel. As a result, Marxists reject the philosophy of science, reason, and Natural Rights.
The founder of Austrian Economics is Carl Menger who stated explicitly that the philosopher Franz Brentano was his biggest intellectual influence. Brentano is best known for his influence on psychology and Sigmund Freud. Brentano like the Scottish Enlightenment argues that emotions are valid epistemological tools. This appears to the basis for Menger’s subjective theory of values and prices in economics, which has been picked up by most of modern economics. It is important to note that when Menger and the Austrians talk about subjective values, they do not mean that each individual chooses for himself, they mean the choices are disconnected from reality.
It is clear the foundation of Austrian economics is antithetical to the philosophy of science. Their subjective theory of values is not limited to economic decisions but to all values, which means they also reject Natural Rights.
From Menger there are two slightly variations in modern Austrian Economics: Hayek and Mises
- A Hayek is a direct descendant of the Scottish Enlightenment and he set down his ideas on epistemology in his theory of cultural evolution. This theory explicitly rejects reason (logic and evidence – or the philosophy of science) as the source of knowledge. Instead Hayek substitutes that knowledge is gained and held collectively and not necessarily consciously. For more information see Hayek: Friend or Foe of Reason, Liberty and Capitalism? As a result, Hayek also rejects the idea of Natural Rights.
Ludwig Von Mises’ equivalent of Hayek’s cultural evolution is praxeology which is the study of human action. Praxeology starts with an a priori theory of economics. From these fundamental axioms of human action all of economics can be derived without any reference to observation (empirical evidence). This makes praxeology part of philosophical rationalism and a system of math or logic at best. This means that praxeology explicitly rejects the philosophy of science. Because they reject the philosophy of science and adhere to the subjectivity of values and prices, they reject the idea of Natural Rights.
It is interesting that this rejection of empirical evidence allows Austrians to continue to advocate ideas that have been shown by empirical evidence to be incorrect. Among these are Australian Business Cycle Theory (ABCT) and their argument that intellectual property and patents in particular inhibit economic growth.
Despite praxeology’s rejection of empirical evidence, Mises and his follower vehemently reject mathematics in economics and also seem opposed to the use of formal logic in economics. This obvious contradiction escapes them. I will talk more about the role of mathematics in economics below. The Austrians’ criticism of some of the mathematical approaches to economics is correct, but not for the reasons they state.
Note that Murray Rothbard is alone in Austrian economics in advocating for Natural Rights, however he also accepts praxeology and the subjective theory of values and prices. These positions are completely contradictory.
Mathematics in Economics
There is a branch of mathematical economics that grew out of the Cowles Commission that attempts to use the mathematics of linear algebra to model the economy. Paul Romer is part of this group. The idea is that using linear algebra every variable (state) in the economy can be accounted for and therefore the whole economy can be modeled. The Austrians critique this area is based on the limits of reason. However, that is not the problem with this area of economics. These mathematical models cannot take into account new technologies (inventions) and inventions are the most important thing that happens in the economy.
Unfortunately, neoclassical as well as classical economics seems better adapted to the analysis of replication than to that of technological change. The vast economic changes since the Stone Age, or for that matter during recent centuries in the West, were possible only because of technological progress.
As the famous economist Jacob Schmookler points out above, this problem is not limited to mathematical economics.
Is mathematics appropriate in economics at all then? Yes mathematics is appropriate, when it is used correctly. Mathematics cannot just be used to make non-empirical hypothesis seem more scientific, and it is inappropriate to use mathematics to make heuristic models (think ptolemaic epicycles) at least without acknowledging it. Mathematics is only appropriate when it is the reflection of the underlying economic principles and empirical observations, it can never be the driver. This is a problem occurring in modern physics today also.
Econometrics is an attempt to make economics an objective empirical science and therefore when used appropriately is a valid tool of economics.
It should be clear that Intellectual Capitalism is based on the philosophy of science. If you are uncertain what the philosophy of science is, here is an overview that I wrote. This means that Intellectual Capitalism is grounded in human biology, evolution, and to some extent the ideas of entropy. I explain this in much more detail in my book Source of Economic Growth and in the article Inventing at the Intersection of Biology and Economics. As a result, values and prices are objective (not to be confused with intrinsic). They are based on the fact that humans have certain objective needs and natures.
This brings up another point, which is that economics is not just a social science. It applies to a person on a deserted island. Intellectual Capitalism defines economics as the study of how people obtain the things they need to survive. There is no distinction between mere survival and thriving. The idea that because you have enough food for a day, or a week or a year, that economics is not about survival is short sighted. All the evidence shows that one’s standard of living is related to how long one will survive. This is partly because almost no-one has everything they will need to live forever. For instance, think of all the food, medical care, shelter etc., you will need for the rest of your life. This amount of resources exceeds all but less than one percent of the people in the world. Also one’s standard of living determines one’s chances of surviving natural disasters, illness, and other disruptions.
Intellectual Capitalism is the only school of economics that explicitly recognizes that man’s most important asset is his ability to reason (think) and this is true in economics also. This also means that Intellectual Capitalism is explicitly based on Natural Rights and therefore is consistent with the ideas of John Locke, Ayn Rand, and the founding ideals of the United States.
 The Copenhagen interpretation of quantum mechanics also rejected the philosophy of science. A number of people have begun pointing out the problems this has and is causing in modern physics.
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