Question

Discuss the Hayek paper on the use of knowledge in society. What is the primary economic problem and how is Hayek proposing the go about dealing with it? What are some of the strengths of his argument? What are some of the weaknesses?

Answer 1

In The Counter Revolution of Science Hayek is concerned to contrast the natural and social sciences, whose relation to their subject matter, he claims, is fundamentally different. In the natural sciences, advances involve recognising that things are not what they seem. Science dissolves the immediate categories of subjective experience and replaces them with underlying, often hidden, causes. The study of society on the other hand has to take as its raw material the ideas and beliefs of people in society. The facts studied by social science

differ from the facts of the physical sciences in being beliefs or opinions held by particular people, beliefs which as such are our data, irrespective of whether they are true or false, and which, moreover, we cannot directly observe in the minds of people but which we can recognise from what they say or do merely because we have ourselves a mind similar to theirs.

He argues that there is an irreducible subjective element to the subject mater of the social sciences which was absent in the physical sciences.

[M]ost of the objects of social or human action are not ``objective facts" in the special narrow sense in which the term is used in the Sciences and contrasted to ``opinions", and they cannot at all be defined in physical terms. So far as human actions are concerned, things are what the acting people think they are.

His paradigm for the social or moral sciences is that society must be understood in terms of men's conscious reflected actions, it being assumed that people are constantly consciously choosing between different possible courses of action. Any collective phenomena must thus be conceived of as the unintended outcome of the decisions of individual conscious actors.

This imposes a fundamental dichotomy between the study of nature and of society, since in dealing with natural phenomena it may be reasonable to suppose that the individual scientist can know all the relevant information, while in the social context this condition cannot possibly be met.

2.2  The basic economic problem

From this philosophical ground Hayek (1945) poses the question: `What is the problem we wish to solve when we try to construct a rational economic order?'

He continues:

On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

He immediately makes it clear, however, that the `familiar assumptions' upon which the above approach is predicated are quite unreal.

This, however, is emphatically not the economic problem which society faces ¼ The reason for this is that the data from which the economic calculus starts are never for the whole society given to a single mind which could work out the implications, and can never be so given. )

Hayek then spells out his own perspective on the nature of the problem:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

The true problem is therefore ``how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know'' (Hayek, 1945, p. 520, emphasis added). That this is not generally understood, Hayek claims, is an effect of naturalism or scientism, that is ``the erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature''