Hayek on Subjectivism and Progress in Economics

14 July 2006 at 3:12 am Nicolai Foss 8 comments

| Nicolai Foss |

Austrians are very fond of quoting Friedrich von Hayek’s claim in his The Counter-Revolution of Science (1952: 52) that all major advances in economics over the preceding one hundred years represent the progress of subjectivism. Hayek’s claim is, however, quite puzzling.

Historical accuracy. Was it true at the time when Hayek wrote? What about Eli Heckscher and Bertil Ohlin’s contributions to trade theory? Certainly an advance, but not particularly subjectivist. Or, closer to Hayek’s own thinking, what about Wicksell’s Geldzins und Güterpreise (1898)? What is particularly “subjectivist” about this contribution? “Classical”, non-subjectivist scholars could have made these contributions (indeed, both the Heckscher-Ohlin and Wicksell’s stuff were heavily indebted to “classical” thinking).

Contemporary relevance. I have heard Austrians use Hayek’s dictum as an argument for extending the notion of subjectivism and for criticizing mainstream economics — i.e., all economists accept the subjectivism of preferences, some, but not all, accept the subjectivism of knowledge (many Austrians will reject the notion that the economics of information reflects the subjectivism of knowledge; e.g., see O’Driscoll and Rizzo’s The Economics of Time and Ignorance), and few accept the subjectivism of expectations in the sense of Ludwig Lachmann.

I doubt, however, that Hayek had anything like this in mind. What he “really meant” seems to me to have been the point that most promising contributions to economics since about 1870 had been a matter of the consistent application of methodological individualism (a doctrine that would seem to involve almost with necessity some kind of subjectivist methodology).

It is furthermore questionable whether one can use the Hayek dictum as a critical weapon against contemporary mainstream economics. Some of the most persuasive arguments in favor of methodological individualism and of the Verstehen principle of “putting oneself in the shoes of the agents” can be found in the work of — Robert Lucas (e.g., in Models of Business Cycles); indeed, the principle of rational expectations is sometimes defended in exactly this way. Couldn’t it be argued that while the economics of information is indeed about information rather than knowledge, the economic interpretation of “knowledge” is hard-to-measure (transfer, trade. etc) information? Economically, the information/knowledge distinction may not make much sense; what matters is the cost at which information/knowledge can be measured, etc. We can call “information” that which is less costly to measure, etc. and “knowledge” that which is more costly to measure, etc. And couldn’t it be argued that the subjectivism of expectations is at least partly captured in modelling that allows agents to hold expectations based on different models (cf. the papers in this classic volume)?

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8 Comments Add your own

1. Henrik Berglund | 17 July 2006 at 10:32 am

It seems to me that Hayek indeed has subjectivism and not methodological individualism in mind. At least this is how I understand the original text from which the famous quote is taken:

“What is true about the relations of men to things is, of course, even more true of the relations between men, which for the purposes of social study cannot be defined in the objective terms of the physical sciences but only in terms of human beliefs. Even such a seemingly purely biological relationship as that between parent and child is in social study not defined in physical terms and cannot be so defined for their purposes: it makes no difference as regards people’s actions whether their belief that a particular child is their natural offspring is mistaken or not.
All this stands out most clearly in that among the social sciences whose theory has been most highly developed, economics. And it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism. [1] That the objects of economic activity cannot be defined in objective terms but only with reference to a human purpose goes without saying. Neither a “commodity” or an “economic good”, nor “food” or “money”, can be defined in physical terms but only in terms of views people hold about things. Economic theory has nothing to say about the little round disks of metal as which an objective or materialist view might try to define money. It has nothing to say about iron or steel, timber or oil, or wheat or eggs as such.”

In terms of using the quote to criticize the ‘mainstream’ it may be revealing to note that the footnote in the text refers to Mises, including his “views about mathematical economics in general and the measurement of economic phenomena in particular”.
2. Henrik Berglund | 17 July 2006 at 10:37 am

I hate non-standard html…

Here’s the link (hopefully):.
3. Peter Klein | 17 July 2006 at 10:42 am

Henrik, I think this is your link:

http://www.compilerpress.atfreeweb.com/Anno%20Hayek%20Scientism%201.htm

(With our software, the easiest way to put a link in a comment is simply to copy the URL, like I did above, and it will automatically be converted into a link.)
4. Peter Klein | 18 July 2006 at 3:59 pm

Also, as Leland Yeager reminds us, “[Hayek’s] proposition of doctrinal history could be strictly correct without its implying that every subjectivist step was an important advance. Moreover, past success with extending subjectivism in certain degrees and directions does not imply that any and all further extensions constitute valid contributions to economics.”

Click to access rae1_1_3.pdf

Complaining that Hayek’s remark “has been quoted ad nauseam,” Yeager adds that it “has had a significance attributed to it that it simply cannot bear.”

I sympathize with Yeager’s frustration, but think he misunderstands Hayek, and the Austrians more generally, in this article, confusing the “moderate subjectivism” of Mises, Hayek, Kirzner, Rothbard, etc. with the “radical subjectivism” of Lachmann, Shackle, and Lavoie.
5. Henrik Berglund | 20 July 2006 at 8:29 am

I am a bit of a beginner in Austrian economics to please correct me if I am wrong. But it seems to me that the radical subjectivist position espoused by Shackle and especially Lachmann is a quite logical extension of Mises value-subjectivism. The objections that some Austrians have may instead be more to do with the logical implications of radical subjectivism rather than the premises on which it is based (it may for instance force them to reconsider the role of institutions on choices rather than accepting the inherent virtues of lassez-faire policies).

Of course one should not extrapolate a statement like Hayek’s too far, especially since Hayek was looking back and not ahead. But still, did not both Mises acknowledge the inseparability of time and knowledge (i.e. acknowledge Knightian radical uncertainty). And would then not a logical application of the subjectivist (and methodological individualist) position mean that individual choices are fundamentally free (more specifically, free from the historical and social forces that the historicist and methodological collectivist would stress)?

To then conclude, like Kirzner, that a subjectivist response to an uncertain future is the notion of alertness – i.e. to conclude apodictically, as it were, that people have a tendency not only as individuals but as a group, to make correct ‘equilibrating’ decisions – comes a cross a bit too faith based for my scientific instincts.

To instead conclude, like Lachmann, that the market process is neither equilibrating or non-equilibrating as a whole – that there is in fact no reason to speak of equilibrating tendencies in a radically uncertain world (equilibrating with regard to what?) – comes across as both more scientific and more realistic.
6. Peter Klein | 20 July 2006 at 10:01 am

Henrik, there is a big literature on this. For critiques of radical subectivism by “moderate” subjectivists try these:

Review of O’Driscoll and Rizzo by Charles Baird: http://www.mises.org/journals/rae/pdf/rae1_1_11.pdf

“Austrian Economics as the Middle Ground” by Garrison: http://www.auburn.edu/~garriro/j5loasby.htm

“From Lachmann to Lucas” by Garrison: http://www.auburn.edu/~garriro/j6lachlucas.htm

“On Certainty and Uncertainty” by Hoppe: http://www.mises.org/journals/rae/pdf/rae10_1_3.pdf

“The Present State of Austrian Economics” by Rothbard: http://www.mises.org/etexts/presentstate.pdf

Not sure what’s the best Kirzner reference, perhaps readers can suggest….
7. David Gordon | 20 July 2006 at 11:56 am

A couple of additions to Peter’s bibliography:

David Gordon, ” Hermeneutics Versus Austrian Economics”
http://www.mises.org/etexts/hermeneutics.asp
Murray Rothbard, “The Hermeneutical Invasion of Philosophy and Economics”
http://www.mises.org/journals/rae/pdf/rae3_1_3.pdf.

I don’t think that methodological individualism has to involve a commitment to a subjectivist methodology. The sociologist George Caspar Homans combined methodological individualism with behaviorism.
8. Peter Klein | 20 July 2006 at 5:37 pm

Thanks David. I should add that in my view, the whole debate over the presence or absence of a tendency toward equilibrium is a bit of a red herring. I commented on this in an earlier post:
https://organizationsandmarkets.wordpress.com/2006/05/05/further-thoughts-on-economic-calculation/

I hope to write an article about this soon.