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                           Imprimis, On Line
                    July 1978 Reprinted March 1994
        
        IMPRIMIS (im-pri-mis), taking its name from the Latin
        term, "in the first place," is the publication of
        Hillsdale College. Executive Editor, Ronald L.
        Trowbridge; Managing Editor, Lissa Roche; Assistant,
        Patricia A. DuBois. Illustrations by Tom Curtis. The
        opinions expressed in IMPRIMIS may be, but are not
        necessarily, the views of Hillsdale College and its
        External Programs division. Copyright 1994. Permission
        to reprint in whole or part is hereby granted, provided
        a version of the following credit line is used:
        "Reprinted by permission from IMPRIMIS, the monthly
        journal of Hillsdale College." Subscription free upon
        request. ISSN 0277-8432. Circulation 505,000 worldwide,
        established 1972. IMPRIMIS trademark registered in U.S.
        Patent and Trade Office #1563325.
        
             ---------------------------------------------
        
                        "Coping With Ignorance"
                             by F.A. Hayek
             Nobel Laureate and Author, The Road to Serfdom
        
             ---------------------------------------------
        
                           Volume 7, Number 7
              Hillsdale College, Hillsdale, Michigan 49242
                               July 1978
                          Reprinted March 1994
        
             ---------------------------------------------
        
        Preview: This special reprint issue of Imprimis
        features a lecture delivered in 1978 on the Hillsdale
        College campus by the late Nobel Laureate Friedrich von
        Hayek, one of this century's greatest defenders of free
        markets and the free society.
        
             Dr. Hayek argued that no one, not even the federal
        government, possesses enough knowledge to predict what
        will happen in the marketplace. Central planning,
        therefore, is doomed to failure. Societies prosper only
        when individuals are free to pool their limited
        knowledge and to make their own decisions.
        
             For information on ordering additional copies of
        this issue, or on adding your name or the names of
        friends and associates to our complimentary
        subscribership, contact: Imprimis, Hillsdale College,
        Hillsdale, MI 49242 (517) 439-1524, ext. 2318, or (800)
        437-2268.
        
             ---------------------------------------------
        
        It is to me not only a great honor but also the
        discharge of an intellectual duty and a real pleasure
        to discuss here Ludwig von Mises. There is no single
        man to whom I owe more intellectually, even though he
        was never my teacher in the institutional sense of the
        word. I came originally from the other of the two
        original branches of the Austrian school.
        
             Mises had been an inspired pupil of Eugen Behm
        von Bawerk, who died comparatively early and whom I
        knew only as a friend of my grandfather before I knew
        what the word "economics" meant. I was personally a
        pupil of his contemporary, friend and brother-in-law,
        Friedrich von Wieser. I was attracted to Wieser
        because, unlike most of the other members of the
        Austrian school, he had a good deal of sympathy with a
        mild Fabian socialism to which I was inclined as a
        young man. He prided himself that his theory of
        marginal utility had provided the basis of progressive
        taxation, which then seemed to me one of the ideals of
        social justice.
        
             It was he who, just retiring as I graduated, sent
        me with a letter of introduction to Ludwig von Mises.
        Mises was one of the directors of a new temporary
        government office concerned with settling certain
        problems arising out of the treaty of St. Germain, and
        he was looking for young lawyers with some
        understanding of economics and knowledge of foreign
        languages. I remember vividly how, almost exactly
        fifty-six years ago, after presenting to Mises my
        letter of introduction by Wieser, in which I was
        described as a promising young economist, Mises said,
        "Well, I've never seen you at my lectures."
        
             That was nearly true. I had looked in at one of
        his lectures and found that a man so conspicuously
        antipathetic to the kind of Fabian views which I then
        held was not the sort of person to whom I wanted to go.
        But of course things changed.
        
             The meeting was the beginning. After a short
        conversation, Mises asked, "When can you start work?"
        This led to a long, close collaboration. First, for
        five years, he was my official chief in that government
        office and then vice president of an institute of
        business cycle research which we had created together.
        During these ten years he certainly had more influence
        regarding my outlook on economics than any other man.
        It was essentially his second great work, Die Gemein
        Wirtscaft of 1922, which appeared in English
        translation later as Socialism, that largely won me
        over to his views. And then in his private seminar, as
        we called the little discussion group which met at his
        office, I became gradually and intimately familiar with
        his thinking.
        
             I do not wish, however, to claim to be an
        authoritative interpreter of Mises' views. Although I
        do owe him a decisive stimulus at a crucial point of my
        intellectual development, and continuous inspiration
        through a decade, I have perhaps most profited from his
        teaching because I was not initially his student at the
        university, an innocent young man who took his word for
        gospel, but came to him as a trained economist, versed
        in a parallel branch of Austrian economics from which
        he gradually, but never completely, won me over. Though
        I learned that he usually was right in his conclusions,
        I wasn't always satisfied by his arguments, and
        retained to the end a certain critical attitude that
        sometimes forced me to build different constructions.
        To my great pleasure these usually led to the same
        conclusions. I am to the present moment pursuing the
        questions that he made me see, and that, I believe, is
        the greatest benefit  a scientist can confer on one of
        the next generation.
        
             I do not know whether my making our incurable
        ignorance of most of the particular circumstances which
        determine the course of this great society the central
        point of the scientific approach would have Mises'
        approval. It is probably a development that goes
        somewhat beyond his views, because Mises himself was
        still much more a child of the rationalist age of
        Enlightenment and of continental rather than of English
        liberalism, in the European sense of the word, than I
        am myself. But I do flatter myself that he sympathized
        with my departure in this direction, which I like to
        describe briefly as a movement back from Voltaire to
        Montesquieu.
        
             I've come to believe that both the aim of the
        market order, and therefore the object of explanation
        of the theory of it, is to cope with the inevitable
        ignorance of everybody regarding most of the particular
        facts which determine this order. By a process which
        men do not understand, their activities have produced
        an order much more extensive and comprehensive than
        anything they can comprehend, but on the functioning of
        which they have become utterly dependent.
        
             Even two hundred years after Adam Smith's Wealth
        of Nations, it is not yet fully understood that it is
        the great achievement of the market to have made a far-
        ranging division of labor possible, that it brings
        about a continuous adaptation of economic effect to
        millions of particular facts or events which in their
        totality are not known and cannot be known to anybody.
        A real understanding of the process which brings this
        about was long blocked by post-Smithian classical
        economics which adopted a labor or cost theory of
        value.
        
             For a long time, the misconception that costs
        determined prices prevented economists from recognizing
        that it was prices that operated as the indispensable
        signals telling producers what costs it was worth
        expending on the production of the various commodities
        and services, and not the other way around. It was this
        crucial insight which finally broke through and estab-
        lished itself about a hundred years ago through the so-
        called marginal revolution in economics.
        
             The chief insight gained by modern economists is
        that the market is essentially an ordering mechanism,
        growing up withoutanybody wholly understanding it, that
        enables us to utilize widely dispersed information
        about the significance of circumstances of which we are
        mostly ignorant. However, the various planners (and not
        only the planners in the socialist camp) and dirigists
        have still not yet grasped this. I do not believe that
        it is merely present ignorance--that we expect the
        future advance of knowledge will partly remove--that
        makes a rational effort at central planning wholly
        impossible. I believe such a central utilization of
        necessarily widely dispersed knowledge of particular
        and temporary circumstances must forever remain
        impossible. We can have a far-ranging division of labor
        only by relying on the impersonal signals of prices.
        That, here and now, we economists do not know enough to
        be justified to undertake such a task as the planning
        of the whole economic system seems to me so obvious
        that I find it increasingly difficult to treat the
        contrary belief with any respect.
        
             It  is a basic fact that we as scientists have to
        explain the results of the actions of men, that produce
        a sort of order by following signals inducing them to
        adapt to facts that they do not know. It creates a
        comparable or similar problem of coping with ignorance
        such as the people in economics encounter even more
        than the people who undertake to explain this process.
        It is a difficulty that all attempts at a theoretical
        explanation of the market process face, though it
        appears that not many economists have been clearly
        aware of the source of the difficulties that they
        encounter.
        
             If the chief problem of economic decisions is one
        of coping with inevitable ignorance, the task of a
        science of economics (trying to explain the joint
        effects of hundreds of thousands of such decisions on
        men in many different positions) is to deal with an
        ignorance, as it were, of a second order of magnitude,
        because the explaining economist does not even know
        what all the acting people know; he has to provide an
        explanation without knowing the determining facts, not
        even knowing what the individual members in the
        economic system know about these facts.
        
             We are not in the happy position in which the
        theorists of a relatively simple phenomena find
        themselves. When they have formed a hypothesis about
        how two or three variables are interrelated, they can
        test such a hypothesis by inserting "observing values"
        into their abstract formula and then see whether the
        conclusions are correct. Our problem is that even if we
        have thought out a beautiful and possibly correct
        theory of the complex phenomena with which we have to
        deal, we can never ascertain all the concrete specific
        data of a particular position, simply because we do not
        know all that which the acting people know. But it is
        the joint results of those actions which we want to
        predict.
        
             If the market really achieves a utilization of
        more information than any participant in this market
        process possesses, the outcome must depend on more
        particular facts than the scientific observer can
        insert into his tentative hypothesis that is intended
        to explain the whole process.
        
             There are two possible ways in which economists
        have endeavored at least partly to overcome this
        difficulty.
        
             The first, represented by what today we call
        "microeconomics," resignedly accepts the fact that,
        because of this difficulty, we can never achieve a full
        explanation or an exact prediction of the particular
        outcome of a given situation, but must instead be
        content with what I have occasionally called a "pattern
        prediction" or earlier, a "prediction of the
        principle." All we can achieve is to say what kinds of
        things will not happen and what sort of pattern the
        resulting situation will show, without being able to
        predict a particular outcome.
        
             This kind of microeconomics attempts, by the
        construction of simplified models in which all the
        kinds of attitudes and circumstances we meet in the
        real life are represented, to simulate the kind of
        movements and changes which we observe in the real
        world. Such a theory can tell us what sort of changes
        we can expect in the real world, the general character
        of which our model indicates, that reduces (not so much
        in scale as in the number of distinct elements) the
        facts with which we have to deal, to make its workings
        still comprehensible or surveyable.
        
             I still believe that this is the only approach
        that is entitled to regard itself as "scientific."
        Being scientific involves in this connection a frank
        admission of how limited our powers of prediction
        really are. It still does lead to some falsifiable
        predictions, namely which sorts of events are possible
        in a given situation and which are not.
        
             It is, in this sense, an empirical theory even
        though it consists largely, but not entirely, of
        propositions that are self-evident once they are
        stated. Indeed, I doubt whether microeconomic theory
        has ever discovered any new facts. Decreasing returns,
        decreasing marginal productivity or marginal utility,
        and decreasing marginal rates of substitution were, of
        course, all phenomena familiar to ordinary people even
        if they did not call them by those names. In fact, it
        is only because ordinary people knew these facts, long
        before economists discovered their importance, that
        they have always been among the determinants of how the
        market actually functions. What the economic theorists
        found out was merely the relevance of these particular
        facts for the decisions of individuals in their
        interactions with other persons.
        
             It is the obscuring of the empirical fact of
        people learning what others do by a process of
        communication of knowledge that has always made me
        reluctant to accept Mises' claim of an a priori
        character of the whole of economic theory, although I
        agree with him that much of it consists merely in
        working out the logical implications of certain initial
        facts. I recognize with him microeconomic theory as the
        only legitimate economic theory because it recognizes
        the inevitable limitation of our possible knowledge of
        the objective facts that determine any given situation;
        and we need claim no more than we are entitled to
        claim.
        
             I will not deny that we find also in microeconomic
        literature a good deal of indefensible pretense of a
        great deal more. There is, of course, in the first
        instance, the frequent abuse of the convenient
        conception of "equilibrium" toward which the market
        process is said to tend. I will not say that there are
        not forces at work that can  usefully be described as
        equilibrating tendencies. But equilibrating forces are
        of course at work in any stream of a liquid and must be
        taken into account in any attempt to analyze the flow
        of such a stream. Such a stream in the physical sense
        of the word will never reach a state of equilibrium.
        And the same is true of the economic efforts of the
        production and use of goods and services where every
        part may all the time tend toward a partial or local
        equilibrium, but long before that is reached the
        circumstances to which the local efforts adapt
        themselves will have changed themselves as a result of
        similar processes. All we can claim for the achievement
        of microeconomic theory is that the signals which the
        prices constitute will always make the individuals
        change their plans in the direction made necessary by
        actual changes of which they have no direct knowledge--
        not that this process will ever lead to what some
        economists call an equilibrium.
        
             Not content with this limited insight, which
        economics can in fact supply, economists ambitious to
        make it more precise have often spoiled microeconomics
        by a tendency, which we shall encounter in a more
        systematic form when I pass on to the second type of
        approach, macroeconomics. They tried to deal with our
        inescapable ignorance of the data required for a full
        explanation, the macroeconomic one, by trying
        measurements I shall discuss later.
        
             I will at this stage make only two further
        comments on this. The first is that it is an erroneous
        belief, characteristic of bad  mathematicians, that
        mathematics is essentially quantitative and that,
        therefore, to build on the great achievements of the
        founders of mathematical economics, men like Jevons,
        Walras and Pareto, one has to introduce quantitative
        data obtained by measurements. That was certainly not
        the intention of the founders of mathematical
        economics. They understood much better than their
        successors that algebraic mathematical formulae are the
        preeminent method for describing abstract patterns
        without assuming or possessing particular information
        about the specific magnitudes involved. One great
        mathematician has indeed described a mathematician as a
        maker of patterns. In this sense only, mathematics can
        be very helpful to us.
        
             The second point that I want to make is that
        measurements of concrete magnitudes--the hallmark of
        scientific procedure-- do not apply to the explanation
        of human action. The true reason why the physical
        sciences must rely on measurements is that it has been
        recognized that things that appear alike to our senses
        frequently do not behave in the same manner, and that
        sometimes things that appear alike to us behave very
        differently if examined. The physicist, to arrive at
        valid theories, is often compelled to substitute for
        the classification of different objects that our senses
        provide to us a different classification that is based
        solely on the relations of objective things toward each
        other.
        
             Now this is really what measurement amounts to: a
        classification of objects according to the manner in
        which they act on other objects. But to explain human
        action, all that is relevant is how the things appear
        to human beings--to acting men. This depends on whether
        men regard two things as the same or as different kinds
        of things--not what they really are, unknown to them.
        For our purposes, the results of measurements (at least
        so far as these are not performed by the people whose
        actions we want to explain) are wholly uninteresting.
        
             The belief derived from physics that measurement
        is an essential foundation of all sciences is very old.
        More than 300 years ago, there was a German
        philosopher, Erhard Weigel, who strove to construct a
        universal science, which he proposed to call
        "pantometria," based, as the name says, on measuring
        everything. Much of economics (and much of contemporary
        psychology) has indeed become "pantometria" in the
        sense that if you don't know what measurements mean,
        you should measure anyhow because that is what science
        does. The social sciences building at the University of
        Chicago, since it was built 40 years ago, still bears
        on its outside an inscription taken from the famous
        physicist Lord Kelvin: "When you cannot measure, your
        knowledge is meager and unsatisfactory." I will admit
        that that may be true, but it is certainly not
        scientific to insist on measurement when you don't know
        what your measurements mean. There are cases in which
        measurements are not relevant. What has done much
        damage to microeconomics is striving for a pseudo-
        exactness by imitating methods of the physical sciences
        which have to deal with what are fundamentally much
        more simple phenomena. And the assumption that it is
        possible to ascertain all the relevant particular facts
        still completely dominates the alternative methods of
        dealing with our constitutional ignorance, which
        economists have tried to overcome. This of course is
        what has come to be called "macroeconomics," as
        distinct from microeconomics.
        
             The basic idea on which this approach proceeds is
        fairly simple and obvious. If we cannot know all the
        individual facts that determine individual action and
        thereby the economic process, we must start from the
        most comprehensive information that we can obtain about
        them, and that is the statistical figures about
        aggregates and averages. Again, the model that is
        followed is provided by the physical sciences, which
        deal with true mass phenomena such as the movement of
        millions of molecules and which may deal with such
        principles as thermodynamics. Though we admittedly know
        nothing about the movement of any individual molecule,
        the law of large numbers enables us to discover
        statistical regularities or probabilities that indeed,
        in this way, provide an adequate foundation for
        reliable predictions.
        
             The trouble is that in the disciplines which
        endeavor to explain the structure of society, we do not
        have to deal with true mass phenomena. The events which
        we must take into account in any attempt to predict the
        outcome of particular social processes are never so
        numerous as to enable us to substitute ascertained
        probabilities for information about the individual
        events. As a distinguished thinker, the late Warren
        Weaver of the Rockefeller Foundation, has pointed out,
        both in the biological and in the social sciences,
        frequently we cannot rely on probabilities, or the law
        of large numbers, because, unlike the positions that
        exist in the physical sciences, where statistical
        evidence of probabilities can be substituted for
        information on particular facts, we have to deal with
        what he calls "organized complexity," where we cannot
        expect to find permanent constant relations between
        aggregates or averages.
        
             Indeed, this intermediate field between the simple
        phenomena of the physical sciences (where everything
        can be explained by theoretical formulae that contain
        no more than two or three unknowns) and true mass
        phenomena (which allows for the laws of probability) is
        our subject. In the social sciences like economics,
        neither theoretical formulae nor probability can be
        enough.
        
             In order to provide a full explanation, we would
        have to have information about every single event that,
        of course, is impossible to obtain. But while
        microtheorists have resigned themselves to the
        consequent limitations of our powers and admit that we
        must be content with what I've called mere pattern
        predictions, many of the more ambitious and impatient
        students of these problems refuse to recognize these
        limitations to our possible knowledge and possible
        power of prediction, and therefore also of our possible
        power of control.
        
             What drives people to the pursuit of statistical
        research is usually the hope of discovering in this way
        new facts of general and not merely historical
        importance. But this hope is inevitably disappointed. I
        certainly do not wish to underrate the importance of
        historical information about the particular situation.
        I doubt, however, whether the observation and
        measurement of true mass phenomena has significantly
        improved our understanding of the market process. What
        we can find by this procedure, as by all observation of
        particular circumstances, may possibly be special
        relations, determined by the particular circumstances
        of the moment and the place, which indeed perhaps for
        some time may enable us to make correct predictions.
        But with general laws that help to explain how at
        different places the course of economic affairs is
        determined, these quantitative relations between
        measurable magnitudes have precious little to do.
        Indeed, even the very moderate hopes that I myself had
        at one time concerning the usefulness of such economic
        forecast based on observed statistical regularities
        have mostly been disappointed. The concrete course of
        the process of adaptation to unknown circumstances
        cannot be predicted. All we can predict are certain
        abstract features of the process, not its concrete
        manifestations.
        
             It is now frequently assumed that at least the
        theory of money, in the nature of that subject, must be
        macro theory. I can see no reason whatever for this
        assumption. The cause for this belief is apparently the
        fact that the value of money is usually conceived as
        corresponding to an average of prices. But that is no
        more true than it is of the value of any other
        commodity. I do not see, for instance, that our
        habitual use of index numbers of prices, although
        undoubtedly very convenient for many purposes, has in
        any way assisted our understanding of the effect of
        monetary changes, or to draw relevant conclusions
        except, perhaps, about the behavior of index numbers.
        The interesting problems are those of the effect of
        monetary changes on particular prices, and, about
        these, index numbers or changes of general price levels
        tell us nothing.
        
             More and more it seems to me that the immense
        efforts devoted to macroeconomics over the last thirty
        or forty years were largely misspent, and that if we
        want to be useful in the future we shall have to be
        content to improve and spread the admittedly limited
        insights which microeconomics conveys. I believe it is
        only microeconomics that enables us to understand the
        crucial functions of the market process; that it
        enables us to make effective use of information about
        thousands of facts of which nobody can have full
        knowledge.
        
             ---------------------------------------------
        
        F.A. Hayek, a native of Vienna born in 1889, was
        awarded the Nobel Prize in Economic Science in 1974.
        The author of more than 20 books, including The Road to
        Serfdom (University of Chicago, 1944), Individualism
        and Economic Order (University of Chicago, 1948), The
        Counter-Revolution of Science (Free Press, 1952), Law,
        Legislation and Liberty (University of Chicago, 1981),
        and The Fatal Conceit (University of Chicago, 1988), he
        was a prominent founder of the "Austrian school" of
        free market economics. During his career, he taught at
        numerous institutions, including the University of
        Vienna, the University of Chicago and the London School
        of Economics.
        
                                  ###
        +++++++++++++++++++++++++++++++++++++++++++++++++++++++
                            (End of file)
          The March 1994 issue of Imprimis includes the files,
           IMPR9403.TXT and IMP9403A.TXT---A special reprint.
          Information about the electronic publisher, Applied
              Foresight, Inc., is in the file, IMPR_BY.TXT
        +++++++++++++++++++++++++++++++++++++++++++++++++++++++
