When Friedrich
Hayek won the Nobel Prize for economics in 1974, he embarrassed
many economists by noting their failures. Speaking in the midst
of a great inflation that caused a greater loss of stock-market
wealth in the U.S. than the Great Depression, he noted that the
inflation was "brought about by policies which the majority
of economists recommended and even urged governments to pursue."
He added, "We have indeed at the moment little cause for
pride: As a profession, we have made a mess of things."
Hayek pronounced
the failure of economics to be rooted in a "scientistic"
attitude that employed the habits and methods of physical science
where they were not appropriate. He faulted particularly, "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."
Hayek conceded
that there was quantitative evidence for the assertions and beliefs
adduced by John Maynard Keynes and his followers, but he warned
that the evidence was not good enough: "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...will hardly ever be fully known or measurable."
Economists,
Hayek continued, "happily proceed on the fiction that the
factors which they can measure are the only ones that are relevant.
The correlation between aggregate demand and total employment,
for instance, may only be approximate – but as it is the
only one on which we have quantitative data, it is accepted as
the only causal connection that counts. On this standard, there
may thus well exist better 'scientific' evidence for a false theory,
which will be accepted because it is more 'scientific,' than for
a valid explanation, which is rejected because there is no sufficient
quantitative evidence for it."
Hayek, of
course, was on the side that had less quantitative evidence.
