HOMO ECONOMICUS IS DEAD (via Mike Daley):

Hayek's Incomplete Victory: a review of HAYEK'S CHALLENGE: An Intellectual Biography of F. A. Hayek By Bruce Caldwell (Francis Fukuyama, Wilson Quarterly)

Hayek's critique of socialism was, at its core, empirical rather than normative. He argued that human knowledge is inevitably partial: There are limits to rationality, and what any individual knows tends to be local in nature. This is particularly true in a macroeconomy, which depends on the interactions of thousands, even millions, of individual producers and consumers.

The problem with socialism, Hayek argued, is that it seeks to replace the dispersed knowledge of those myriad actors with that of a single, omniscient planner. Socialist central planning cannot work because it attempts the impossible: using a static equilibrium model to capture unfathomably complex inputs and outputs characterized by dynamic, constantly shifting equilibria. In market economies, by contrast, the price mechanism provides information about preferences and relative scarcities to thousands of agents, whose continual exchanges produce a socially beneficial if unplanned outcome. [...]

But Hayek also offered a far more profound critique of the limits of human reason, which extended to the models that would come to underlie postwar American neoclassical economics and, thus, the economics that we teach university students to this day. Caldwell explains that a constant theme in Hayek's writing-from his early critique of "scientism" in his "Abuse of Reason" project to his last published work, The Fatal Conceit (1988)-is a critique not just of real-world planners but of positivist social scientists who aim to turn the study of human behavior into something as empirical and predictive as the physical sciences.

Like contemporary neoclassical economists, Hayek was a "methodological individualist" who believed that the behavior of groups needs to be explained in terms of the interactions of the individuals who make up the collectivity. But his view of individual choice was far more nuanced and complex than the typical neoclassical model of economic man. He understood that individuals are neither omniscient nor fully rational and are constrained by institutions, norms, and traditions that can be understood only through a study of history.

As Caldwell notes, Hayek initially thought the dividing line between possible and impossible positivism lay in the distinction between natural sciences and social sciences, but by the 1950s he had come to understand that the issue was really one of complexity. A positivist, predictive
science is possible only for phenomena, whether human or natural, that are relatively simple-particle physics, for example. One can never fully model and predict complex phenomena such as the spontaneous orders produced by the interactions of simpler agents. These orders include the human brain, whose higher functions cannot possibly be inferred from its physical substratum, as well as ecosystems and, of course, markets, cultures, and other human institutions.

Hayek, in other words, fully anticipated the rise of what we now know as the study of complex adaptive systems, or complexity science. Drawing much of its inspiration from evolutionary biology, this approach is today practiced in such places as the Santa Fe Institute, a multidisciplinary think tank that uses agent-based simulations to model the emergence of complex behaviors on the part of larger collectivities. But Hayek would doubtless disapprove of the research agenda in much of the complexity field, which seeks to use these models to produce deterministic, predictive outcomes.

One of the most interesting parts of Caldwell's book is the epilogue, which quotes Hayek toward the end of his life as saying he regretted his failure to return to his critique of Milton Friedman's Essays in Positive Economics (1953) as much as his failure to revisit his critique of John Maynard Keynes. Hayek's critique had not to do, of course, with Friedman's preference for markets and limited government, but rather with his belief that economics could be turned into a rigorously empirical and predictive science. Caldwell notes that while econometric methodology has become far more sophisticated, and game-theoretic models ever more complex, economics' promise to cumulate knowledge about universal laws of human behavior has remained largely unfulfilled. Thus, the highly mathematical and ahistorical turn that academic economics has taken in recent years would have been, for Hayek, as much an abuse of reason as the socialist planning of earlier generations.

Interesting how Darwin misunderstood Adam Smith and thought that Nature must work like the free market, then economists misunderstood Darwin and thought the market must be reducible to science.

MORE:
-Taking On 'Rational Man': Dissident economists fight for a niche in the discipline (PETER MONAGHAN, January 24, 2003, Chronicle of Higher Education)
-In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies

Posted by Orrin Judd at May 11, 2004 11:54 PM