Tuesday, February 15, 2011

Posting Way Too Much...

Good afternoon, Alaska. Hayek's journey continues with reason and responsibility this week.

Again, I think it's helpful to view these two chapters through the lens of Hayekian epistemology. In a world of limited, dispersed, and tacit knowledge, how do we coordinate anything, how do we make plans? Answer Part One: through institutions, and by recognizing the limits of our limited reason in a world of limited knowledge. Answer Part Two: through responsibility, by making sure the feedback mechanism works, so that institutions will provide the right knowledge and incentives.

Chapter Four is classic Hayekian intellectual history. Those of you who are mildly intrigued can read his 1945 piece, "Individualism: True and False" (also found in the 1948 compilation Individualism and Economic Order); it's AWESOME (yeah, it changed my life and my intellectual approach. Really). Those amongst you who are really interested should check out Hayek's 1952 The Counter-Revolution of Science: Studies on the Abuse of Reason, where he details the intellectual history of… the abuse of reason, specifically by the legacy of the French Enlightenment. So there's the "separate book" that Hayek mentions (49).

The two most important lessons I see in this chapter are the limits of reason, and institutional correction.

On the limits of reason, Hayek is working squarely in the heritage of the Scottish Enlightenment. If I may, I'd like to indulge in a little bit of intellectual history (or perhaps you can indulge me). Until roughly the 17th century, the orthodox mode of argument was basically Aristotle, as modified by Aquinas, and the deductive thinking of the disputatio. That is, you started with accepted authorities – as revealed by the Church and the Ancient Greeks to be truths. Then you used deductive thinking to show how your observations about the world conformed to the established truths (de-ductive, i.e. start with the principle, and draw conclusions from that). For example, the authorities tell us that the Earth is the center of the universe (accepted truth), and we see the sun rise and set daily. So, from the known truth ("Earth is center of the universe"), we can say something about our observation (the sun rotates around the Earth, which explains day and night). This mode of argumentation comes down to what intellectual historian Allan Charles Kors has called "the presumptive authority of the past." Along comes the 17th century and the "modern revolution" (a misnomer, as we'll see in a second, because there were really two modernities, AKA "individualism, true and false," AKA the British and the French).

The moderns disputed this type of logic, rejected the presumptive authority of the past, and rejected deductive reasoning from accepted authorities. We thus had a new way of thinking, best illustrated by inductive thinking (as opposed to deductive). Instead of starting with accepted authority and explaining how our observations of the real world conform to that authority, we start by observing the world, and then draw conclusions from our observations.

Now, this "modern" revolution had two basic strains. Hayek describes this in chapter four, so I won't belabor it, but I do want to comment on the institutional implications (and thus the implications for liberty). The French Enlightenment broke completely with tradition, thinking basically that everything could be designed from human reason (think Descartes, the quintessential French Enlightement character, and his "I think, therefore I am."). The consequences, as Hayek describes, are things like social engineering, centralized planning (from expert thought rather than "random emergence" or "irrational" markets), and a rejection of tradition.

The Scottish/British Enlightenment, on the other hand, was much more cautious. As Hayek describes it, this strain of Enlightenment was acutely aware of the limits of reason, and the place of spontaneous order – but also how reason (itself limited) and knowledge are nestled within (a) rules and institutions, which provide knowledge that we don't have, as described in earlier chapters; and (b) moral and values, which also provide knowledge (of a certain kind) that we don't have, and rules that we can't simply design, but have emerged over time.

The above should not lead us to the conclusion that reason is useless (which, it seems to me, is a bit what the Postmoderns do, but that's another story. Whatever, man. It's all relative). Instead, part of the use of reason, for a Scottish Modern, is finding the limits of reason (69); the abuse of reason (as in the French tradition) is rejected, but not the use of reason (69). Likewise, reason is seen to operate within a matrix of institutions, morals, traditions, etc., all of which convey knowledge which we don't have in our minds. This is "not an abdication of reason, but a rational examination of the field where reason is appropriately put in control." (69).

The extremes are obvious. No person, no committee, no government agency, has sufficient knowledge (or a reason sufficiently powerful) to control the entire economy – which is why central planning must fail. On the other hand, if you turn off your alarm clock tomorrow morning on the assumption that spontaneous order will do your homework and your dishes, you're in for a bad surprise. The challenge is recognizing the boundaries in either case. So, a factory, for example, seems like something that can be centrally managed. On the other hand, the Koch Foundation and Koch Industries (our generous sponsors) have done quite well by decentralizing, as appropriate (see Charles G. Koch's The Science of Success). So there are no easy answers.

This also has implications for institutional change; Hayek give us good advice: "In all our endeavor at improvement we must always work inside this given whole [of tradition/civilization/organism], aim at piecemeal, rather than total construction, and use at each stage the historical material at hand and improve details step by step rather than attempt to redesign the whole." (70, footnote omitted).

Now, I'm not one for hagiography of the American founding; I think much good (but not all) came out of it, and we lucked out on the public choice considerations… but… this pretty much describes the US founding, no? Many aspects of change and design (new institutions and agencies set up the constitution), but all squarely within existing traditions (common law, local self-governance, federalism).

Finally, this whole discussion should help explain why Hayek seems like such a moderate – and why some more radical libertarians have accused him of being a socialist. Sure, he'd probably love to wave his magic wand, do away with the welfare state, and impose a free society. But Hayek is too cautious, and too aware of his own limitations to do that. (This reminds me of an old story. Apparently, somebody once asked Mises, OK, fine, you've got all these great policies, but you can't get them implemented. If you were dictator of the world, what would you do. Without missing a beat, Mises replied: "abdicate.")

In sum, you can think of the Ancients as (basically) rejecting change; the French Enlightenment as rejecting tradition; and the Scots (led by Edmund Burke and Hayek), boldly stepping into an unknown future with one foot, leaving the other foot firmly planted in tradition.

I'll keep this comment brief, because I've already written too much. This chapter strikes me as a necessary explanation of the mechanism of institutional learning and evolution. To recap, first, institutions help overcome our limited knowledge; second, institutions provide incentives to act a certain way; third, institutions evolve over time, as bad ones are rooted out, and better ones emerge. But this can only work within a system of responsibility, i.e. one where individuals face the consequences of their actions (chapter five, esp. 71 and 76). If individuals are protected from the consequences of their actions, they can't learn (think "moral hazard"), because they won't have incentives or knowledge from the process. So institutions no longer work as learning mechanisms, and institutions won't evolve.

I won't comment on the opportunity to do the wrong thing and make mistakes, because (a) well, that's how we learn; and (b) it drives the conservatives around here crazy, so I get plenty of that anyway (see 79). I can comment in future posts, or I can return to this when we discuss the Postscript.

I do want to mention briefly one key point (82) about being rewarded in a free society, not for our intentions, but the value we create for others. I think this is more obvious in the sense of the discipline of the market. But Hayek the social theorist goes further than Hayek the economist. In a world of limited knowledge, we are guided by "signs or symbols, such as prices offered for [our] products, or expressions of moral or aesthetic esteem for… having observed standards of conduct." (28) Thus, institutions (whether market or social institutions) provide knowledge, with which we can act. Hence also the idea of "voluntary conformity," by which we voluntarily submit to rules that we do not understand (66), because institutions give us the incentive to do so… but, in the grander scheme of things, those institutions are giving us information about appropriate conduct (more on that in later chapters).

Phew. I was afraid I'd have a short post this week, because I had two or three central points, rather than many small points. A few questions.

1. Does Hayek satisfy you on the problem of institutional correction? Free society + Responsibility = Institutional Evolution? What about path-dependence? What are the limits? When can, or should, we step in with corrections, if piecemeal, based on our limited reason, and limited knowledge?

2. What about meta-ethics? Several of you raised this, and I, after all these years of reading Hayek, don't have a satisfactory answer. On the one hand, morals change over time (this is simply historical observation), and rules (of conduct, of morality) emerge – this is the Hayekian nomos, or rules of general conduct, he discusses later. But does that mean that morality is entirely an accident of history (because entirely emergent)? Are there standards outside of history, or does history create the standards? I'm now reading C.S. Lewis's The Abolition of Man, in which he asserts that there are eternal rules, outside of history – and that no appeal to value from outside those rules ("the Tao") can make sense. Maybe. On the other hand, given his own limited knowledge, and given that moral rules have changed over the centuries… how does he know?

3. Many libertarians accuse Hayek of being moderate, compromising… either too socialist in his refusal to dismantle the welfare state completely (see part three, unassigned)… or too conservative, because he won't make a radical break from tradition, even if he doesn't like it. On the other hand, could it not be said that the more radical libertarians (and anarcho-capitalists), with their dreams of doing away with the current interventionist system, are themselves central planner of a sort, engaging in the abuse of reason, in the French tradition?

Have a good week. Sorry I wrote so much. I love this stuff. NW

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