American History19 Jun 2008 11:57 am
For centuries, the case for laissez-faire economic policies – defined by The Intellectual Devotional: American History Edition as “an economic doctrine that calls for minimal government interference in the marketplace” – have been defended on the basis that market forces will always produce the greatest prosperity. A notable exception is the argument made by Friedrich Hayek in the lecture he gave upon receiving the Nobel Prize in 1974. In the lecture, titled “The Pretense of Knowledge,” Hayek didn’t spend too much time extolling the wisdom of the marketplace. Instead, he focused on the relative ignorance of government planners.
As proud as a newly-minted Nobel Laureate might be expected to be, Hayek started his lecture on a pretty somber note: “We have indeed at the moment little cause for pride: as a profession we have made a mess of things.” The United States and much of the world economy was in the midst of “stagflation,” a combo of inflation and recession that put a particular damper on economic growth and prosperity until about 1980. There were certainly many factors that led to this, but Hayek didn’t hesitate to blame his colleagues, and he immediately identified the particular culprit: “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.” Economists were trying to lead the economy as if their predictions were as accurate as those of physicists. A physicist could tell an architect exactly how to keep a 50-story building from falling down; they could tell generals exactly where a missile would land; and they could tell industrial designers exactly how hot a particular material could get before it melted. Why shouldn’t economists be able to conduct themselves with the same precision?
According to Hayek, they couldn’t do so because of the nature of the field. An economist can understand basic relationships and make predictions in a very general way, but they couldn’t make the precise calculations of the physicists. As Hayek put it, in somewhat more complex language, “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.” That is, the numbers just aren’t there. In this respect, Hayek said that economics wasn’t comparable so much to physics as to biology. A biologist could, in a very general way, speak about the relationship between (for instance) the height of trees in a particular forest and the wingspan of the resident birds. What a biologist can’t do is effect a change in that relationship with any sort of precision. Imagine, for instance, an evolutionary biologist claiming that if you cut down an acre of firs over there, fertilize those maples with a gallon of such-and-such and those elms with two gallons of so-and-so, then the wingspan of the local hawks would increase by 1″ in 22 years. Sound ridiculous? Hayek’s claim was that it was no more nor less ridiculous than the claims economists were making at the time. “Increase the 2-year interest rate by .5% and you’ll create 3 million new jobs by May.” It would be nice to be able to predict and change events with that degree of precision, but the nature of the discipline meant that it just wasn’t going to happen. You might as well seed the clouds to make the rains come.