Friedrich Hayek Theory Of Methodology

Friedrich August Von Hayek Theory Of Methodology

At the centre of Hayek's system of ideas is a profound concern with the key epistemological questions of social science. Most important is his insistence that there are necessary limitations on the amount of knowledge that one mind or institution can acquire; a point that is crucial to his argument that the failures of rational economic planning stem from the mistaken attempt to centralise all knowledge. The social sciences deal with knowledge that is dispersed throughout a social order and the most efficient use is made of this decentralised information when individual actors are allowed to pursue their own purposes within general rules. Hayek's social philosophy is specifically addressed to a certain hubris in man which leads to successive attempts to reconstruct the social world according to rational principles. These attempts, whether they come from eithteenth-century European rationalism, nineteenth-century British utilitarianism, or the many contemporary versions of collectivism and socialism, all treat economic knowledge (that is, knowledge of consumer tastes, productive resources, inventive­ness, costs and so on) as if it could be centralised and made available for the advancement of collective goals.

The kind of knowledge an economic planner has is engineering knowledge, the technical knowledge which is limited to one input, process or purpose, whereas a society is characterised by a variety of competing purposes. Hayek, therefore, stresses the importance of the knowledge of 'time and place' that is maximised in free societies; this is the knowledge of merchants and traders in decentralised markets which enables them to respond to ever-changing events more efficiently than a centralised planner could

It follows from this that the methods of explanation appropriate to the physical sciences are inappropriate to the social sciences and the error of 'scientism' (Hayek, 1955, pp. 53-63) consists of the illegitimate transfer of the former to the latter. The physical scientist deals with essentially 'simple' phenomena , i.e. phenomena that display regularities between elements which can be readily observed; therefore knowledge of a purely physical system can be 'objectified'. This objectification is possible because the physical scientist classifies objects by re­ference to common properties which they possess. Furthermore, because of the small number of variables involved in the explanation of physical events, the predictions made in the natural sciences are highly precise, in a quantitative sense. In other words, theories in the physical sciences have a high degree of empirical content.

In the social world, however, there are no regularities.which can be directly observed, so that a form of explanation that employs mechanical laws of cause and effect is inappropriate. It is true that societies and economies are understood in terms of certain kinds of regularities but these are not directly observable:. they are reconstructed out of the opinions, attitudes and beliefs of individuals. Thus words like 'society', 'market' and 'legal system' do not stand for real entities which can be observed but are theoretical concepts used to explain the behaviour of individuals (Hayek, 1955, pp. 53-8). The 'subjective' element in social science consists of the fact that the social scientist classifies the data and establishes regularities not in virtue of common properties that objects possess but because similar minds react to phenomena in similar ways. There are no 'constants' or regular events in social affairs which constitute the basis of 'empirical laws', there are only individuals; and the 'facts' of the social science are no more than the assumptions that we make about individual behaviour. From these assumptions it is possible to deduce the properties of market economies and legal orders.

It follows therefore that economic 'laws' are not established by the inductive method. The law of demand is not established by repeated observations of the fact that a fall in price is followed by a rise in demand; it is a logical implication of certain axioms of human nature. Again, the familiar properties of monetary theory, including the explanation of inflation, can be deduced from true generalisations about individual behaviour.

The generalisationson which deductive economic theojy rests are simple. Hayek says that they include the assumptions that 'most people engage iff trade in order to earn an income' and that 'they prefer a larger income to a smaller one' (Hayek, 1967, p. 35). At the heart of this methodology is the concept of man as 'acting' man,.This means that individuals are not automatons who obey causal psychological laws but are choosers who employ means to realise their ends (although these ends are not always 'economic' in the strict sense of the word). For this reason there will always be a large element of unpredictability in economic affairs so that economic science is concerned with the explanation of human behaviour and not the prediction of discrete events.

It should be clear from this that Hayek is a rigorous defender of methodological individualism against collectivism. For example, 'classes' do not save or invest, only..indiyiduals can do those things 'Yet it does not follow from this that social science is. reducible to psychology. Social science is concerned ...primarily, with the unintended consequences of individual action. From the free actions of individuals a market order emerges, even though it was not intended or designed by any one individual Hayek argues that many of the most beneficial social institutions were not deliberately created and he is especially critical, of social theorists who "maintain that the way to social improvement is to rationally plan institutions with specific purposes.

In fact Hayek's methodology has departed a little from the standard Austrian approach since he accepts Sir Karl Popper's j argument (1957) that the logic of both the physical and social sciences is the same. This is because all science is characterised by deduction and not induction so that the original Austrian argument that economics is unlike physics because there are no empirical regularities in the economic order was misdirected since induction cannot establish the laws of physics either. However, the Popperian approach to science embodies the 'hypothetico- deductive' methodology in which knowledge grows by the constant attempts to falsify hypotheses: no theory can be regarded as invulnerable to tests. This contrasts sharply with the Austrian stress on axiomatic reasoning from necessarily true premises (Mises, 1962).

Hayek accepts the doctrine of 'falsifiability' but maintains that falsification is a matter of degree and that well-established economic theories should not be regarded as falsified simply because a very small number of observations appears to refute them. Obviously, Hayek would not say that the central tenet of liberal economics, that unhampered market economies tend towards the full employment of all resources, was refuted by the/ experience of the Great Depression. Hayek also agrees that economics is concerned with prediction but it is prediction of a general kind. From certain generalisations about human be­haviour we can, for example, predict that if the rents of council houses are subsidised the demand will go up, queues will develop and the authorities will have to allocate the property by political or bureaucratic methods. This is, of course, a theoretical, not an historical, prediction.

An economic order is a competitive order which can be predicted to emerge if individuals are allowed to transact within general rules. Its elements can be understood by contrasting it with orthodox neoclassical theory, especially that which de­veloped from the Walrasian model. While the Walrasian system of economics is subjectivist in regard to the theory of value it is objectivist in its explanation of the competitive market order. This is because it is concerned almost entirely with the conditions that describe a stationary equilibrium. An economy is in equilib­rium when it is impossible to switch any resource from one use to another without making one person worse off (the marginal rates of substitution between any two factors of production must be identical in all their different uses). In the Walrasian stable equilibrium all incentives to change are therefore removed. In principle, if knowledge of technology, resources and consumer tastes is 'given' to the observing economist, then an equilibrium state could be 'objectified', that is translated into quantitative terms, and economic behaviour made fully predictable (on the assumption, of course, that individuals behave economically in the narrow sense). Hayek's main objections to the notion of a static, timeless equilibrium are that, first, it misdescribes the real world of market economies, which are characterised by repeated movements away from the state of rest described by general equilibrium theory; and secondly, it distorts the nature of competition. This is because it describes the state of affairs competition has brought about rather than analyses the competi­tive process itself.