This review was written by Eugene Kernes
Book can be found in:
Genre = Economics
Intriguing Connections = 1) Learning Economics: Basic to Advanced, 2) To Cooperate Or To Defect?,
“The difficulty which we encounter is not merely the familiar fact that the current political terms are notoriously ambiguous or even that the same terms often means nearly the opposite to different groups. There is the much more serious fact that the same word frequently appears to unite people who in fact believe in contradictory are irreconcilable ideals.” – F. A. Hayek, I. Individualism: True and False, Page 8
“While the design theories necessarily lead to the conclusion that social processes can be made to serve human ends only if they are subjected to the control of individual human reason, and thus lead to socialism, true individualism believes on the contrary that, if left free, men will often achieve more than individual human reason could design or foresee.” – F. A. Hayek, I. Individualism: True and False, Page 12
“The constitutional limitation of man’s knowledge and interest, the fact that he cannot know more than a tiny part of the whole society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere he knows.” – F. A. Hayek, I. Individualism: True and False, Page 14
Quotes with permission from publisher
This is a book about economic epistemology. Questioning the language and assumptions that economists use. How they are ambiguous and misused. Those questions are directed at how people know information, and the limitation to understand a complex reality. Knowledge is dispersed in the economy rather than being centralized. Each individual has expectations that need to be continuously adjusted to coordinate behavior with others. What matters is who makes the decisions based on what knowledge. The limitations of knowledge means that decisions need to favor local agents rather than distant centralized authority. Decisions are propitious by those who have specialization of knowledge in a given area.
The language used by people is ambiguous. The same words mean different things to different people, and can unite people who have contradictory beliefs. The usage of the words changes over time, leaving them with the same name but attached to heterogeneous principles. Many ideas contain assumptions which are not realistic. Applying assumptions which assume away complexity results in policies that are either misleading, or dangerous.
Individual human reason is limited in understanding the complex economic reality. Individuals possess dispersed knowledge bits which are incomplete and at times contradictory. Using that knowledge, the economic problem of society is how to best allocate resources to any member when the resources relative importance is known only to the individuals. The problem is the utilization of knowledge which is never complete. Each individual possesses limited knowledge can only respond to situations with that limited knowledge. Acknowledging the limitation of knowledge in practice results in limited coercive or exclusive power.
The state is a deliberately organized institution that is consciously directed power, which provides the framework for societies individuals to collaborate. As the state functions within a society, it should be small. There is a vast difference between rules and orders. Government by rules informs individuals of responsibilities that shape decisions, while a government by orders imposes specific duties. There are many actions that governments can take that are not coercive which go beyond the enforcement of civil and criminal laws, while also enhancing efficiency of individual action such as by reducing avoidable uncertainty and spreading information.
Coordination requires planning. The problem is who is supposed to be doing the planning. It can be done in a centralized way or decentralized way. Centralized planning directs the economy with a unified plan. Competition is decentralized planning by different economic agents. Theories that design a society need to be under control of individual human reason. But individuals who come together tend to have better results than those designed or foreseen by individual human reason. Those who believed in individualism want to find institutions in which individuals would voluntarily contribute to the needs of other. That is problematic because there are conflicts of individual interests.
Hayek takes a stance of going against the rationalistic psychology defined by Economic Man. Explaining that the Classical economists were describing a very complicated and realistic understanding of human nature who adjusts to circumstance. The role of the individual within a society is to adapt to changes and conventions which appear to be irrational, without recognizable justification, and not the result of intelligent design. Traditions and conventions which are not enforceable but create a set of expected behaviors which allow for coordination of individuals.
Equilibrium depends on intertemporal decisions, which inherently means individual foresight. Comes about from the convergence of expectations and planning, which any change disrupts the equilibrium of actions. Time is an essential feature of equilibrium because it comes about from the relationship between actions depended on anticipation. But this has a problem of the way in which equilibrium is achieved, the way in which knowledge is communicated. Hayek argues against the solution of perfect competition where people are close to omniscient. The assumption subsidized the acquisition of knowledge. Equilibrium comes about from this assumption because it is assumed to be the outcome. What Hayek saw was that equilibrium still comes about from individual spontaneous actions which was not planned but looks like it was made by a centralized plan.
Economic problem come about from change. Without change, there is no need to make different decisions. As the problem of economics is rapid change, the ones who decide how to change should be those with tacit knowledge of the problem. Those familiar with the circumstances and changes can make quick adjustments with the available resources. It would take time to convey the changes to a central authority and more time to deliver a response after aggregating available knowledge. Central authorities see the economic statistics but there is knowledge which cannot be entered into statistical form which makes it impossible to convey.
Hayek goes against perfect competition, as the concept is not actually describing competition. Perfect competition assumes away the need for individuals to adjust to changes, as they are assumed to already be adjusted to everyone. Perfect competition is the absence of all competitive activities. It is competitive activities in which individuals find alternatives by the various means that the market spreads the information. A tool of discovery by exploring the unknown. Making new decisions and attempting to do things differently. Many of those who advocate free markets are actually protecting their own privilege rather than in opposition of all privileges. The disciple of the competitive markets needs to apply not just to the masses, but also those who are against state control.
The book has a lot of knowledge to deliver but it does so with, at times, difficult writing. At times being very tedious and at other delivering clear arguments. As this book is a collection of essays, they sometimes contain passages that contradict themselves. The themes in the book are similar, but have poor transition. There is more critical analysis in arguing against terrible ideas, than in providing an understanding to those supported.
Questions to Consider while Reading the Book
•What is the raison d’etre of the book? For what purpose did the author write the book?
•Why is language ambiguous?
•Why do words mean different things to different people?
•What are the limitations to knowledge?
•Why do people need to adjust to others?
•To what problems should what type of knowledge be applied?
•What is specialization of knowledge?
•What is wrong with perfect competition?
•What is the state?
•How and why do individuals collaborate?
•What is the difference between government by rules and government by orders?
•Do people plan?
•What is centralized planning?
•What is competition?
•What is the Economic Man? What are the problems with Economic Man?
•What is equilibrium?
•Why follow conventions?
•Why does change happen?
•What does change do the economics?
Edition ISBN: 9780226321219
Pages to read: 210
1st Edition: 1948
Ratings out of 5: