Tuesday, October 28, 2008

The Pretense of Knowledge

Over at The Austrian Economists, Richard Ebeling comments on "the pretense of knowledge" and the "hubris of the intellectuals." He writes:

"What these debates about whether we are in a credit crunch or not; whether we are faced with a coming serious inflation or instead deflation; whether this will be a "normal" recession or a coming real depression, etc., etc., -- what this should remind all of us of is Hayek's points about the pretense of knowledge, or what Wilhelm Roepke called the hubris of the intellectuals.

In fact, neither Austrian Economists nor our Neoclassical and Chicago and Rational Expectations "colleagues" know what is happening in the economy -- nor exactly how and why it hit right now or where the present "crisis" is taking us.

The "deadly sin" of hubris clearly has been greater with our economist colleagues. So using all available information (i.e., statistical patterns of past events) and inserting it in the "correct" model of how the macroeconomic "really" works . . .

Did Robert Lucus or Thomas Sargent know this was going to happen, when and why? Hmmmm. Or did I miss that op-ed piece of theirs in the WSJ? (Oh, they kept it as private, secret information so they could make a "killing" in the market -- now I know who the evil "short-sellers" have been.)

But more seriously Austrians have long insisted that the laws of economics are essentially logical relationships, not empirical ones; that economics can "predict" but only in qualitative terms, not quantitative ones; that economics can only make "pattern" predictions.

This economic crisis may I suggest, again reinforces the reality of the Austrian approach to social phenomena.

Austrians (true to their theory of the logic of the interconnections between credit expansion, market rates of interest, the term structure of investment, and relative price and allocation effects caused by the non-neutrality of money) have often warned of the inflationary and destabilizing consequences from Fed policy over the last decade.

But no Austrian could (or did) claim to know when the cycle would turn, or what would set it off, and how the downturn would or could play itself out, i.e., in what in historical retrospect we will see from the vantage point of some future moment as the actual patterns and also unique time-sequence of the "micro" steps by which this will play out.

We could not and cannot know these things. As Karl Popper pointed out in "The Poverty of Historicism," knowledge of the future is logically impossible. If we live in a world in which knowledge changes, he said, then it is impossible to know tomorrow's knowledge today. Otherwise, it would be today's knowledge and not a knowledge of the future, the details of which can only be known when the future comes.

We know how the Great Depression of the 1930s played out because it is now history. We know, for example, that FDR ran on a "conservative" platform of balancing the budget, cutting taxes, maintaining the gold standard, limiting Federal intrusiveness in state-level affairs, etc.

And we know that he did the exact opposite of these things when actually in office.
But instead of reading histories of the Great Depression, suppose we went into the archives of the newspapers of the time -- the "Wall Street Journal," the "New York Times" -- and, say, from 1929 to 1935 read the stories, day-by-day, the analysis and the commentaries and interpretations of what was happening and where it was leading.

I would suggest that virtually no one knew where the process was leading. Because it depended upon the "complex phenomena" of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time. And these intersecting actions and events generated the unique path-dependent process that we call the history of that time.

All of our analysis, expectations and predictions should be implicitly framed with the inescapable humility of what our limited minds can know about the workings of our world.

Indeed, this is the reason we Austrians are always suspicious of political solutions to our social and economic problems. The working through the problem -- including an economy-wide economic crisis -- requires more knowledge about the present and the future than any one mind or group of minds can master or ever possess.

So, are we suffering from "tight" or "easy" credit conditions? Has the stock market and housing market "bottomed out"? Will globalization be part of the solution to the problem, or will governments impose forms of trade restrictions to shore up domestic output and employment levels against foreign competition? Will the next president actually be more concerned with "spreading the wealth" or letting the market adjust so the "pie" can keep growing (or growing faster than wrong-headed policy would allow)?

We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why."

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