The Pretence of Knowledge

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Lecture
to the memory of Alfred Nobel, December 11, 1974.

The particular
occasion of this lecture, combined with the chief practical problem
which economists have to face today, have made the choice of its
topic almost inevitable. On the one hand the still recent establishment
of the Nobel Memorial Prize in Economic Science marks a significant
step in the process by which, in the opinion of the general public,
economics has been conceded some of the dignity and prestige of
the physical sciences. On the other hand, the economists are at
this moment called upon to say how to extricate the free world from
the serious threat of accelerating inflation which, it must be admitted,
has been brought about by policies which the majority of economists
recommended and even urged governments to pursue. We have indeed
at the moment little cause for pride: as a profession we have made
a mess of things.

It seems to
me 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. It is an approach which has come to be described as the "scientistic"
attitude – an attitude which, as
I defined it some thirty years ago
, "is decidedly unscientific
in the true sense of the word, since it involves a mechanical and
uncritical application of habits of thought to fields different
from those in which they have been formed." I want today to
begin by explaining how some of the gravest errors of recent economic
policy are a direct consequence of this scientistic error.

The theory
which has been guiding monetary and financial policy during the
last thirty years, and which I contend is largely the product of
such a mistaken conception of the proper scientific procedure, consists
in the assertion that there exists a simple positive correlation
between total employment and the size of the aggregate demand for
goods and services; it leads to the belief that we can permanently
assure full employment by maintaining total money expenditure at
an appropriate level. Among the various theories advanced to account
for extensive unemployment, this is probably the only one in support
of which strong quantitative evidence can be adduced. I nevertheless
regard it as fundamentally false, and to act upon it, as we now
experience, as very harmful.

This brings
me to the crucial issue. Unlike the position that exists in the
physical sciences, in economics and other disciplines that deal
with essentially complex phenomena, the aspects of the events to
be accounted for about which we can get quantitative data are necessarily
limited and may not include the important ones. While in the physical
sciences it is generally assumed, probably with good reason, that
any important factor which determines the observed events will itself
be directly observable and measurable, in the study of such complex
phenomena as the market, which depend on the actions of many individuals,
all the circumstances which will determine the outcome of a process,
for reasons which I shall explain later, will hardly ever be fully
known or measurable. And while in the physical sciences the investigator
will be able to measure what, on the basis of a prima facie theory,
he thinks important, in the social sciences often that is treated
as important which happens to be accessible to measurement. This
is sometimes carried to the point where it is demanded that our
theories must be formulated in such terms that they refer only to
measurable magnitudes.

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the rest of the article

December
6, 2008

F.
A. Hayek (1899–1992) was a founding board member of the Mises
Institute
. He shared the 1974 Nobel Prize in Economics with
ideological rival Gunnar Myrdal “for their pioneering work in the
theory of money and economic fluctuations and for their penetrating
analysis of the interdependence of economic, social and institutional
phenomena.”

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