Critical Essay on Friedrich August von Hayek's Lecture

Introduction

Friedrich August von Hayek was born in Australia and British in 1899 and became a great economist and philosopher, he died in 1992. He was known for his idea of liberalism. Having been born in the time of the great depression that occurred in 1929, economics as a professional was in a crisis that was generated by a sense of confusion and importance as the world faced stagflation which is a combination of high inflation rates, recession, and unemployment which had plagued the world economy(Hayek, 1942). It was in this period that the majority of the neoclassical economists faced the challenge of the Keynesian theories which most of the developing and developed economies were using as their basis for the policy development through the optimal stochastic control (OSC). The approach was based on the growing presumption and the idea that it would be easy to know and control system behavior. However, Hayek was strongly opposed to the Keynesian theories through counterarguments and making proposals. Particularly Hayek suggested that the monetary expansion and lending would surpass the rate of voluntary savings. Thus he opposed the Keynesian theories arguing that it would lead to the misallocation of resources which could have a devastating effect on the capital structure. It is because of his contribution that he received a Nobel memorial prize in economics in 1974 along with another Swedish economist Gunnar Myrdal.

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Friedrich Hayek Nobel Lecture Review

In his Nobel memorial lecture in 1974, Hayek pointed out serious economic issues. In his speech, called the pretense of knowledge, he shockingly explained why the idea of government at that time was intellectual, untenable, and presumptuous. He was critical of both socialism and interventionism. In his speech, he shows that the government was incapable of doing what is required to do thus conceding it with roles pertaining to economic and social management is itself contravening liberty. His speech was not particularly driven by his opposition to Keyanism but to the approach to macroeconomic policy and the erroneous application of the theories to real situations.

In this speech, Hayek challenges the thought that the state has the wisdom and the knowledge to viably plan the economic issues of the society. Kayenism’s approach tried to micromanage the macroeconomy, which Hayek views as an incredibly erroneous assumption. In his speech, he demonstrated his dissatisfaction with the advocating of the transformed markets, societies to the socialist and centrally planned economies. He laments that there are inherent loopholes in the socialist schemes that would cause economic stagnation and political tyranny if they were implemented.

Hayek also talked about the division of knowledge in a society where he puts a vivid concept of the nature of man, society, and the workings of the market order. He laments that division of labor cannot be escaped or separated from the division of knowledge. He says that it is not by accident that people take different occupations in the system. This is because there are different types and kinds of knowledge that all people in the system come to possess which also is not fully understood and appreciated.

Why Does Friedrich Von Hayek Deserve the Nobel Prize?

The different kinds of knowledge that Hayek is talking about include the scientific knowledge which is acquired through education. This is the knowledge that could be acquired by anyone if one devotes more time, discipline, and effort to learn. Hayek says that it would be difficult for all people to acquire all types of knowledge, hence due to limited time; the knowledge is purchased through the market exchange. Another knowledge that Hayek argues about in his speech is the knowledge that is acquired through a particular circumstance and time. He says that there is various knowledge in various aspects that may not be learned through formal education.

In his speech, Hayek tears through the Keynesian theory terming it as erroneous which is the result of the grave economic policies. He says that the economic predicament that the world was finding itself during that time was because of scientific error. He says that the theory that had guided the monetary and financial policy for decades was based on a mistaken conception of a good scientific procedure. This procedure consisted of the assertion that there exists a simple but positive correlation between the total employment and the aggregate size of the demand of goods which is an assumption that there can be full employment if there is constant spending at an appropriate level. His central point in the argument is that there is an adamant belief by many economists that they can learn and centrally plan or regulate the diverse and dynamic human activities in a highly developed and complex social system. Thus, it would not be possible to be able to master decentralized and dispersed bits of information about the individuals in the society. Therefore, Hayek remarks that the social engineers and the state policymakers choose to ignore this reality of multilayer knowledge and their qualitative characteristics which cannot be summarized quantitatively. According to Hayek, the social engineers and the state policymakers are only concerned with what is measurable and easy to manipulate to achieve the policy purposes which include the statistical averages and aggregations such as aggregate employment, wage levels, and total output for the whole economy. Furthermore, they use the procedure to come up with the empirical relationships of the various levels of aggregate demand spending on all the services and goods in the market.

Hayek points out that there is a fallacy in the macroeconomic aggregates as the state policymakers and social engineers have limited themselves to their own conception of the market economy dynamics. They do not find out how and why the market economy works that way before they can quantify and make their policy and planning decisions. Therefore, Hayek says that the real determining factors of production, employment are usually derived from different sectors of the economy and are made up from the decisions made by all the players in the maker system. This is where each individual uses particular combinations of knowledge that result in various statistical concepts.

Hayek further points out that the multitude of decisions and actions are coordinated and connected by the competitive market price system. Therefore, the market price integrates and combines all the knowledge that people in the market have. Thus, it influences their willingness to supply, buy, produce and seek employment opportunities in society. The individual bits of knowledge in a complex society cannot be mastered hence it cannot be captured in the macroeconomic statistical aggregates.

Hayek also points out that the results obtained from the macroeconomic approach are not a result of intellectual error but that as a result of the state policy perspectives that caused all the imbalances, fluctuations, and distortions experienced in the employment and output disguised as the business cycle. He also points out the presence of false market signals and deliberate misdirection of production. Finally, Hayek says that the false approach to the social and state policy formulation is a threat not only to increased recession and inflation but also to the sustainability of a prosperous and functioning society.

Therefore, Hayek’s article talks about the current state of affairs in economics and the factors that have led to the current situation. He focuses on the events that have occurred over time because of economic errors. He believes that not all things that happened were well planned for as they could not be controlled or stopped in time. Hayek points out the outcomes of the unplanned actions were not entirely bad, but the results have led to various changes and discoveries in the economic sectors (Hayek, 1989).

Hayek states that economists have failed in their roles to guide policies more successfully. He argues that economists have a long struggle to communicate a methodology with which to examine economic (and other social) phenomena, without wearing the classification of a lesser science (Hayek, 1942). The challenge confronting Hayek was the irreducible difference between physical and social science. He explains that unlike the rigor and certainty of physical sciences (particularly physics, hereafter Science), social sciences were owed to self-organized complexity" (Hayek, 1989). Hayek questions the very possibility of methodologies used by the central planners, which they claim to be the means used by physical sciences. He was highly critical of what he termed scientism, described by Caldwell (in Hayek, 2014) as the application of methods of the natural sciences in domains where they were not appropriate. He argues that the term scientism is a false understanding of the methods of science, which has been forced upon the social sciences, such as the view that all scientific explanations are simple two-variable linear relationships. Hayek points out that many signs involve the explanation of complex multivariable and non-linear phenomena (Hayek, 1989). As a result, this paper will be investigating the scientific aspect and Hayek's alternative methodology.

The Scientific Aspect And Hayek's Alternative Methodology

As seen from the review, Hayek was a strong opponent of the Keynesian theory since it was produced. However, his speech did not dwell on the theory but strongly pointed out various issues on the approach to macroeconomic policy and the manner in which it was forcibly included to economists to base the theory in the real life. Hayek's main idea about the free-market organization in society is that it is difficult to have access to individual elements of information in the entire society. This means that it would not be easy to overcome using developed statistical techniques because it would be an illusion to search for a numerical constant. In the speech, Hayek meant that there is an intrinsic limitation that comes from the economic theory that is developed to satisfy such a measure(O'Driscoll, 1977).

The main thing that Hayek was opposed to in the theory is that it was possible to directly relate the real-world data and provide detailed prediction and control in a scientific form. Thus he says that unlike what is visible in the physical sciences and other disciplines, the market phenomenon is dependent on the action of many individuals playing or participating in the system. Therefore, all the factors that would determine the outcome of the process would not be fully determined or measurable. To explain this argument, Hayek states that the whole history of modern science proves to be a process of progressive emancipation from our innate classification of the external stimuli until in the end they completely disappear (Caldwell, 2004). He points out that natural scientists do not care what people think about the world and what they inhibit as their role is to challenge the natural way in which people sense their world (replace the classification system of our senses with a new way of conceptualizing reality). In contrast, the social sciences must take our natural way of seeing the world as their starting point because...