Hayek on Models for the Economy & other Complex Systems
I read this gem in this interview by Frederick Hayek.
| Quote: |
|
I believe that economics and the sciences of complex phenomena in general, which include biology, psychology, and so on, cannot be modeled after the sciences that deal with essentially simple phenomena like physics. Don’t be shocked when I call physics essentially simple phenomena. What I mean is that the theories which you need to explain physics need to contain very few variables. You can easily verify this if you look into the formula appendix to any textbook on phvsics, where you will find that none of the formulas which state the general laws of physics contain more than two or three variables. You can’t explain anything of social life with a theory which refers to only two or three variables. The result is that we can never achieve theories which we can use for effective prediction of particular phenomena, because you would have to insert into the blanks of the formula so many particular data that you never know them all. In that sense, our possibility both of explaining and predicting social phenomena is very much more limited than it is in physics. Now, this dissatisfies the more-ambitious young men. They want to achieve a science which both gives the same exactness of prediction and the same power of control as you achieve in the physical sciences. Even if they know they won’t do it, they say, “We must try. We ultimately will discover it.” When we embark on this process, we want to achieve a command of social events which is analogous to our command of physical affairs. If they really created a society which was guided by the collective will of the group, that would just stop the process of intellectual progress. Because it would stop this utilization of widely dispersed opinion upon which our society rests and which can only exist in this very complex process which you cannot intellectually master. |
In Economics, this mathematical modeling disease has gone so far that it is practically impossible to read any paper from an academic economist in a major university without finding a lot of equations. It takes a lot of intellectual courage to resist it - because there is the attitude “If you can’t do math, you are not smart enough”.
In engineering, the same disease shows up as the quest for theorem-proof style discourse. Engineering systems are far, far simpler than what you come across in the social or biological sciences, in the sense that realistic mathematical models are possible, but those realistic models often don’t yield satisfying theorems, but can only be studied through computer simulation. This doesn’t satisfy the more ambititious young men - “we must try, we will ultimately discover it” is the cry. They are free to try anything, of course, but I do mind them trying it at taxpayer expense. If they want to indulge in pleasurable mathematical speculation, let them do it on their own dime. I think once the gravy train of government funding were withdrawn, a lot fewer of those kinds of papers would be published.
The danger with such taxpayer-funded “academic” speculation is that these academics form a symbiotic relationship with the government that funds them. Ben Bernanke is classic proof - the man has never spent any time in the real world of business, has never worried about making payroll or covering costs, yet he is going to gain control of the most important institution of the free world, namely its money. For him, money is merely a variable you manipulate in some models.
As Keynes observed:
| Quote: |
|
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. |
Bernanke is not that one man in a million, that is for sure.
Keynes, of course, was not very consistent in his views, as Hayek observes in the interview:
| Quote: |
|
Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.” Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint? Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn’t quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, “in the long run we’re all dead,” is a very good illustration of being constrained by what is now politically possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away. Reason: Did Keynes turn around in his later years, as has frequently been rumored? Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conversation I had with him (about three weeks before his death in 1945). I asked him if he wasn’t getting alarmed about what some of his pupils were doing with his ideas. And he said,” Oh, they’re just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous. you can trust me–I’m going to turn public opinion around like this.” And he would have done it. I’m sure that in the post-war period Keynes would have become one of the great fighters against inflation. |