I think that FA Hayek’s work on mental processes is both extremely interesting and hardly understood in the economics field, even among Austrian economists. Among mainstream economists, good luck—they’re totally lost. I have written a few times on this topic and linked to a couple of other works on the topic. If you have not yet, read the first one. It’s one of my favorite posts and does a decent job of explaining Hayek’s ideas in the context of a baseball manager.
Hayek tried to work his two key ideas—that the mind is a theory-based classification engine, and that the independent interactions of free individuals will constitute an order not of their design, but often beneficial to them—into one paper, but did not succeed at it. He could not tie the two elements together in a manner satisfactory enough to publish. A few decades later, Steven Horwitz tried, with From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism. One of the nice things about reading Horwitz is that he just makes it look so easy. One of the less nice things is that whenever I think of a good paper topic, it seems that he beat me to the punch by a decade…
Horwitz sees links between the theory-based classification engine that people have and how we relate that to our larger society. For example, Hayek would argue that “Human actors require constitutional constraints because we are epistemologically unable to generate social order in any other way” (23). In other words, we need some kinds of general rules to follow, simply because are brains are hard-wired that way. Horwitz states that the “mind is a cultural product that evolves from a particular physical structure” (24). Our brains work in a certain way—we have theories and apply them to circumstances which arise or phenomena we experience (or don’t experience, occasionally). From this experience, we create rules. We also have a set of genetic rules built in (fight or flight, attraction to others, desire to be social, etc.). But there is a third set of rules, as well: cultural. We pick up rules from our parents, friends, sources of entertainment, and so on.
With our particular physical brain, we absorb all kinds of theories and try to apply them to the world we see and experience. Some of these rules may be incorrect. Horwitz points out that “Sets of classifications that do not successfully guide action [...] will prevent the organism whose actions are being guided from thriving” (25). In other words, failed mental classification structures endanger the evolutionary viability of an organism. If you hear the sound of a lion and link it to a kitten, you as an organism just became a good bit less evolutionarily viable, given that you will soon become lion lunch.
What is important about our brains is that we can change our theories. Think of the mind as a cartographer: they fill in the details on a map, occasionally changing things when they’re wrong (i.e., when the model fails the test of reality). Early maps of the Americas had some measure of truth, and some were actually quite close to reality, but as people explored and discovered more of the country, they updated these old maps and gave us new ones. In mental terms, “the mind gives us a model of the present environment that serves as the backdrop for classifying incoming sensory information in the current context. The model is also forward-looking in that it enables the actor to anticipate the likely consequences of both his own actions and external events” (25). We don’t have “Kantian categories” but rather theories that reflect the perceived reality of the individual, the individuals forebearers, or the individual’s peers.
But the interesting thing here is that even though there are these other streams of experience, we cannot simply understand the categories in the minds of others and adapt our own minds to it, at least according to Hayek. “We can never ‘step back’ and attempt to view the mind itself as a sensory input” (26). You can’t see your own eyes with your own eyes; you can see with your eyes, but that’s as far back as you go. Hayek notes that “any apparatus of classification must possess a structure of a higher degree of complexity than is possessed by the objects which it classifies” (26). So the brain may be able to understand how the eyes operate or how neurons operate, but we will never understand precisely how the human brain operates, simply because we cannot categorize the thing which does the categorizing. From this, Hayek derives that there is some knowledge which must, by necessity, always remain tacit—understood, but never really explained. We cannot write it down, or even articulate it in a comprehensible and complete manner. All we can do is get it; we can never explain it.
Horwitz argues that this is the link between Hayek’s theory of the mind and his theory of the liberal order. Institutions develop out of human interaction as a means of communicating knowledge that we have difficulty articulating, due to mental limitations, an overwhelming amount of information available, or time constraints. The amount of rain on every square inch of North America at every point in time over the past century is something that we could theoretically collect, but given that the price of foodstuffs already takes things like this into consideration, we don’t need to. Furthermore, institutions help us correct these false theories and categories we develop—they assist us by providing knowledge that we otherwise could not have gleaned.
This differentiates Hayek from the equilibrium economists of his day (and ours, quite frankly). As Horwitz notes, “Equilibrium requires that each actor has enough knowledge to have correct expectations of the future, including the actions of other choosers” (28). And for a central planning board, these equilibrium economists believed that they simply needed to make a few assumptions regarding available data: “1) treat the firm’s cost and revenue curves as given and known; 2) treat the consumer’s preferences as given and known; and 3) treat the quantity of available resources as given and known” (28). After that point, you get a computer to do enough calculations and you have the best set of options for all individuals in an economy, so you can have the State tell people exactly how much of what to produce and you’ll be in Shangri-La.
But it isn’t that simple. Hayek liked to point out that “data” is Latin for “given,” and that what we call “data” isn’t given. It’s something we have to try to find, and much of the knowledge we would need is subjective and tacit. Knowledge of individuals’ preferences is entirely subjective, depending upon that individual’s belief of what is available. Furthermore, it is tacit—ask somebody to give a complete preference function and that person will be unable to. This is true even for general equilibrium economists. And to go to the next step—understanding preferences under all conceivable states of the world—is mind-boggling. We simply do not have the mental capacity to do what general equilibrium economists take as “simple.” Instead, “the ‘economic’ problem was how do firms and consumers most easily discover and disseminate knowledge about cheaper production methods and better consumption bundles?” (28) Far from the world of taking all of the knowledge knowledge and applying it in the best way, we struggle to find ways to learn enough to get by. We use knowledge aggregators and shortcuts like prices and general rules of behavior to get around the time-consuming and often-impossible knowledge problem. This is what economists should study, Hayek argues, and not trying to scale up solutions to toy problems to a level that is infeasible.
Even with the above, there is yet another layer of difficulty. Suppose that you could fully understand how the brain operates. From there, it is still another step to getting all of the knowledge in a single brain, and from there, a much bigger step to processing and understanding all of the knowledge in a brain (much less billions of brains) and putting it together into a coherent whole. Much of that knowledge is conjectural and a combination of loose facts and theories, so to attempt to aggregate this in some kind of mathematical fashion would be beyond even a being that could fully understand how the human brain operates. Horwitz puts it a similar way, by writing that “[i]f the mind can never exhaustively describe and know itself, any one mind or group of minds can surely never direct economic processes that can only be understood in terms of the phenomenal pictures (i.e., expectations) held in the minds of all of the actors in an economy” (31).
So, instead of trying to seek out full information and solve mathematical maximization problems from there, we aggregate knowledge using tools such as relative prices. “Where a final good has a number of technologically feasible methods of production involving inputs with multiple alternative uses, the producer needs some way of comparing the technologically feasible methods to determine which is the most economically rational” (31). To do this, they use money prices, as Ludwig von Mises pointed out. Entrepreneurs form conjectures and try to operate based on these conjectures, changing their patterns after they get proved wrong (or, as I would like to call it, Popperian entrepreneurship). Horwitz spends more time combining the works of Mises and Hayek together to show that the Misesian entrepreneur had a Hayekian mind. In this discussion on page 32, I scribbled a side note that I found it interesting that Mises and Karl Popper disagreed so strongly, considering how well, in this case at least, the ideas of Mises fit with Popper’s framework of conjecture and refutation. My guess is that because Popper did not see praxeology as a legitimate scientific method, Mises probably took a strong enough dislike to make it difficult to fuse their ideas together in a meaningful way. Now that they both have been dead for a little while, we may be able to combine them. An interesting work might be to link Mises and Popper through Hayek—as he was the common bond between the two—and clear some of the tensions between all three.
Anyhow, back to the main topic. Horwitz also points out that knowledge takes time. “Today’s capital goods derive from yesterday’s plans, just as today’s ‘map’ reflects the result of the feedback to yesterday’s ‘model’” (33). Knowledge comes as a result of the theories and efforts of the past, which means that there is the potential for sub-par paths as people start with bad theories and have trouble catching up. If you hold the belief that import substitution or tariffs are great for development, that will keep a country poor, as it did to much of Latin America during the 1960s. Ideas are important, as they help form the knowledge we have, and this knowledge forms plans of action for individuals.
I shall conclude this in part 2 (yeah, this is a cheap way of getting another day out of this paper…but I’m already over 1800 words and just about halfway through Horwitz’s work), which will go up tomorrow.