A little over 38 years ago F.A. Hayek, then in Stockholm, Sweden, to accept the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (popularly known as the Nobel Prize in economics), said,
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. [Emphasis added.]
It was classic Hayek, and his address is still relevant today, since the Federal Reserve — with a great deal of support — is creating vast quantities of money for the purpose of buying the government’s gargantuan debt and keeping interest rates low.
The previous evening, at the Nobel banquet, Hayek suggested that the creation of the economics prize was a mistake. Unlike the other prizes, Alfred Nobel did not create this one. Ironically — in light of Hayek’s prize-winning work on “the theory of money and economic fluctuations” — the honor had been created by the Swedish central bank.
Hayek said he was grateful, “yet I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it.” He originally had two reasons for thinking this. The first reason — that it would “accentuate the swings of scientific fashion” — had been demolished, he said, by the selection of one “whose views are as unfashionable as mine are.”(He shared the prize with the statist Gunnar Myrdal, who later called for its abolition because it been given to “reactionaries.”)
And Hayek’s other reason? “It is that the Nobel Prize confers on an individual an authority which in economics no man ought to possess.” Unlike Nobel laureates in the natural sciences, Hayek said,
the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.
There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society — as the press tends to treat him till in the end he may himself be persuaded to believe.…
I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past.
Hayek concluded his brief banquet remarks by recommending that the Nobel committee require “an oath of humility, a sort of Hippocratic oath, never to exceed in public pronouncements the limits of their competence.”
Short of that, he suggested that winners be read something Nobel himself once said: “Students of social science, must fear popular approval: Evil is with them when all men speak well of them.”
Despite Hayek’s modest effort to rein in economists’ hubris, things have not changed. Policymakers, the news media, and the public still see establishment economists, particularly the prizewinners, as oracles qualified to pronounce on all sorts of things. Some are even given prominent newspaper columns. (Kudos to another Nobel laureate, Thomas Sargent, for his self-effacing appearance in an Ally Bank commercial, in which he confesses that he doesn’t know what CD rates will be two years hence.)
The Pretence of Knowledge
Hayek elaborated on the reasons for his attitude the following day when he accepted the prize. He titled his speech “The Pretence of Knowledge.”
Hayek located the source of the economists’ failure in “their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences.” Hayek by then had a long history of debunking “scientism,” an attitude that he had earlier called “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.” In other words, one can’t do economics the way one does physics because the object of study — the unintended consequences of human action — is radically different.
Specifically, Hayek said,
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.
As one can see, little has changed. The Keynesian pretence of knowledge continues to plague us.
Unlike the natural world of measurable and observable events, Hayek continued, the social world is especially complex because it is shaped by human action and interaction, that is, by each person’s imagination and expectations. “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 … will hardly ever be fully known or measurable.”
To be sure, statistics on aggregate demand and employment can be wrung until sought-after correlations of pseudo-precision are “found.” But accounts of how real-world markets smoothly and spontaneously coordinate a multitude of individual plans can only be given “imprecisely,” that is, verbally and non-quantitatively. As a result, what can be measured is arbitrarily given emphasis over more pertinent things that lie beyond quantification. Who wouldn’t expect judgment to be distorted by “the superstition that only measurable magnitudes can be important”?
Hayek did not merely fault economists for pretending to know what they cannot know. He also warned of the danger they posed to society:
To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.… In the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.… Its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.
He concluded with this tocsin:
There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try … to subject not only our natural but also our human environment to the control of a human will. 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.
Hayek’s courageous address is a timely reminder that today’s social engineers, who so easily devise coercive schemes to corrupt market incentives and spend other people’s money, descend from those who helped create our current predicament.