ALS: thoughts on freedom

Mises-Hayek Dehomogenization and Objectivism

I have great respect for the Ludwig von Mises institute. However, some of their intellectuals are precipitating a disturbing trend of attempting to dehomogenize von Mises and von Hayek, and I wish to protest this trend. All Objectivists should be familiar with von Mises as Rand’s favorite economist. Her opinion of von Hayek was much less flatterring, and regarded him as a compromiser of classical liberalism and an enemy of reason. I will get to this point later but first, some context…

The American “Misesian” branch of the Austrian School (more correctly, the Rothbardian branch) claim that the Hayekian tradition within Austrianism is contradictory to the Misesian tradition, with the latter being far superior to the former. It is correct that the two theorists emphasize different things; Mises emphasizes purposeful individual action and economic evaluation in terms of money, Hayek emphasizes the epistemic properties of the price system and the spontaneous nature of market order. However, there is no inherent contradiction.

The first field of attempted dehomogenization is the Economic Calculation Argument. The Dehomogenizers argue that Mises ‘nailed’ it the first time around. His argument was that without a system of prices in the means of production, there can be no profit-and-loss tests (profits being “efficient” and losses being “inefficient”) for businesses. There can be no evaluation of anything in terms of “bottom line” monetary values. As such, rational efficiency is impossible because all economic evaluation is reduced to guesswork. The Dehomogenizers argue that Hayek’s emphasis was completely different in nature, focussing on the informational impossibility of planning (planners can never know enough to plan well). The Misesian/Rothbardians argue, of course, that Hayek’s argument was confusing, unrequired, and at best a tangent off Mises, and as such should be ignored.

Fallacy 1: The first fallacy here is that the Rothbardians are context-dropping. Hayek’s argument was against the ‘market socialism’ of Oskar Lange (which was Lange’s rebuttal against von Mises). Lange, as well as the Paretian economists, argued that socialism could in principle be just as efficient as the market if there was a free price mechanism. Hayek was rebutting the possibility of this as a solution to the economic calculation problem. Comparing von Mises to von Hayek without remembering this context is a fallacy.

Fallacy 2: As Steven Horowitz (2004) points out, the ‘information-calculation’ dichotomy is a false one. The Rothbardian Dehomogenizers “ignore that the outcome of the use of economic calculation by individual entrepreneurial actors and by firms and households is precisely the “use of knowledge in society” that characterizes the Hayekian spontaneous market order.” How can one perform economic calculation without any information? Do entrepreneurs have some magical precognitive powers? The fact is that economic calculation of a potential future project will often require details of immediate-past similar projects. It will depend quite critically on price information. Mises’s argument in itself depended on the informational nature of the price system that Hayek explained in his argument. Without information of the immediate past and the present that is conveyed by the price system, there is no rational basis for estimating future conditions. This fallacy; divorcing prices from the information that make up prices; is a complete departure from Mises and indeed a massive departure from Austrianism as a whole. I refer to it as the “Stiglitz Fallacy” (meaning, treating information as exogenous to markets and hence re-introducing it).The second way in which Deho’s attempt to split Mises from Hayek is by essentially accusing Hayek of being a neoclassical by saying his argument about the price system is a substitute for the neoclassical “perfect information” assumption.

Fallacy 3: This is a very distorted reading of Hayek that Horowitz addresses. Certainly, the Deho’s use a very strong interpretation of the term ‘knowlege’ and the Hayekian idea that prices ‘convey’ knowlege. What Hayek meant was that prices “serve as knowledge surrogates” and hence condense knowlege (or sum all the relevant facts) into a price, and as such people acting on the price act as if they had the knowlege. This is not neoclassicism. The most uncharitable reading given by the Deho’s is a distortion.The final Deho argument is that Hayek completely abandons any understanding of rational individual action. “Critics of Hayek, including those associated with the de-homogenizers, have accused him of believing that people perform “a spontaneous action without knowing why and for what purpose” and that others imitate the process “again without any motive or reason” (Hoppe 1994:139).2″ (Horowitz). It is obvious that Hayek believed no such thing. Again, quoting Horowitz, “Clearly, as late as the mid 1970s, Hayek was endorsing this view of rational action, intentionality, and individual planning.”

Why is the Deho case so extreme, so severe? Certainly, given the large distortions of Hayek’s work, it seems difficult to believe that this critique is consistent with a rational reading of Hayek. I do not think this is in itself a product of evasion. Rather, it is more a product of the Rothbardian’s Rationalist streak, if anything. Possibly, there may also be some resentment of Hayek’s success and influence. Maybe the disagreement is political in nature, and because Hayek was in some circumstances more moderate than Mises or Rothbard the Deho’s have dispensed with Hayek’s monumental contributions. Possibly, the Mises-Rothbard school may have a similar form of doctrinal pressure to the Objectivist orthodoxy. I do not know, and I will not pretend to, but the extremely distorted reading of Hayek the Deho’s give is at least somewhat suggestive of a less than accidental mistake (although I will refrain from proceeding with a moral hanging unless I have some hard proof).

Now, on to the Objectivism And Hayek issue. Was Hayek an enemy of reason? As stated above, this is not true. Hayek did, in his calculation argument, stress the limits to human cognitive abilities. But by this, he meant that humans are not omniscient, and one designer cannot create utopia. Fundamentally, it was an attack on constructivist rationalism rather than reason as such. Rand, however, thought that the concept of ‘limits to reason’ referred to her conception of reason rather than the Rationalist one. The fact is that it is NOT the case that “If John Galt cannot solve the economic calculation problem, everything is permitted” like Rand seemed to think. Indeed, Hayek’s more empirical outlook compared to Misesian Rationalism is epistemologically more Objectivist than it is given credit for. Was Hayek a compromiser of freedom? I do not believe this to be the case. Yes, he believed that government intervention was acceptable in some circumstances, but even some Objectivists do (in the context of how people currently are, as opposed to the Randian context of how people should be).

I believe Objectivism has much to gain from Hayek, and Austrianism will only suffer from Dehomogenization. Hayek and Mises may have focussed on different things, but their economic work is not contradictory, it is complementary.

December 7, 2006 - Posted by Andrew Russell | Economics