In response to an article in the New York Times, I read Friedrich von Hayek's lecture, The Pretense of Knowledge, and found some of his claims to be illuminating. The theme is about the risks of running inflation under monetary policy. Early on he establishes:
It seems...that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error.Through out this work, the professor makes it clear that the theoretical frameworks in the Physical Sciences cannot be applied in the Social Sciences; Hayek claims that the Social Sciences are larger systems that involve interactions between many agents. Because there are less variables at play in some of their models, the Physical Sciences successfully use the Scientific Method to build models for prediction. The point of contention for the Nobel Laureate is that misapplication of theory became a guiding principle for policy at the time.
Hayek's words are echoed, time and again, when members of Congress deliberate on policy in times of an impending recession. The stance is not a misguided one because it is one based on history. His words came at a time after the United States went through the Great Depression; they became a critique to the policies that tried to counteract high unemployment and depressed aggregate demand for goods and services with economic stimulus. The lecturer points out a popular view on market interventions during recessions:
We know, in other words, the general conditions in which what we call, somewhat misleadingly, an equilibrium will establish itself: but we never know what the particular prices or wages are which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are in which we can expect the market to establish prices and wages at which demand will equal supply.Plenty was said, but the idea is that "ignorance" of details keeps the market from achieving equilibrium. In light of this, Hayek proposes that the most that can be said is that prices and wages must be at a level where demand and supply are nearly equal; what those precise numbers are is an uncertainty. The ending sentence pointed out something that is hotly debated during economic recessions, that is, can prices and wages reach a level that could equilibrate supply and demand without government intervention. He opines with:
It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons, than any one person can possess.
The Laureate seems to be skeptical that the government, an outside entity from the market, can spark activity in the market. In fact, Hayek reiterates that the market lacks all the knowledge about itself; his trail of thought leads a reader to question if an outside force, the government, with less details about the machinery involved, has any hope of doing the job that the market best does itself. The argument on government interventions ends with:
The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation...
It has to be stated, the Laureate Economist is pessimistic when viewing things through the lens of uncertainty. There is too much faith put on the fact that the market can fix itself. Market disorganization due to government intervention is one example of a negative outlook. At the very least, grim as it may seem, the government only helps in keeping inflation down in the short-term. The long-term hope in intervention, that Hayek fails to state, is that the market will be regenerated to a hopeful state where supply and demand are able to provide affordable prices and livable wages.
