Commentary on Political Economy

Wednesday 10 August 2011

Note On Evolutionary Economics - Hayek and the New Institutional Economics

Once again, to reward our friends with some more theoretical reflections, here is another excerpt from the chapter in 'Krisis' devoted to the Austrian School and its "evolutionary branch", which came with Hayek's notion of "spontaneous order" - and of course Schumpeter's separate notion of economic 'Entwicklung' or 'Evolution'.

[Abandoning “Pure Equilibrium” (Blaug’s “Total Equil.” in Caldwell (ed.), ‘Carl Menger’)]

The idea that “the pure theory of stationary equilibrium” is inadequate as a tool for understanding the workings of a market economy, and that it should be replaced by a view of the market as a competitive-entrepreneurial process for the discovery and coordination of knowledge, has become a central tenet of Austrian thought. 5(Caldwell, ‘Hayek&Socialism’, p1866.)

It is Hayek’s ambiguity and the subsequent mis-conceptions that it engendered that is carried over into the NIE and gives rise to Williamson’s “fallacy of composition”, whereby he pretends “to distil” economic theoretical relations from historical “institutional” analysis through a “compositive” or “descriptive”, block-by-block method. [Quote Williamson, ‘The NIE’.] We know that this was the bane of the GHS – because no amount of “descriptive” studies, no matter how ‘detailed’, will ever amount to a theory of economic activity/reality. In this regard, of course, critique of the GHS by the Austrian School (from Menger to Bohm-Bawerk and Mises) was entirely right. A proper economic theory must not fall into the “mathematical formalism” of general equilibrium or the “logical formalism” of ‘praxeology’, but must avoid also the ‘descriptive’, ‘pictorial’, ‘data-collecting’ empiricism of historiography or, indeed, management and business studies. No amount of “historical, factual or ‘institutional’” evidence will ever yield a ‘theory’ – which is an abstract rule that connects the evidence in a causal relation.

[Nor can Boettke et al.’s attempt to postulate an ‘ex ante’ and ‘ex post’ equilibrium.]

Unable to elude the tautology implicit in his attempt to describe “theoretically” a given set of market transactions – a division of information – as a “co-ordinating equilibrium” ex post facto, Hayek had to resort to the justification/rationalization of “the market mechanism” by empirical means, that is, by showing ex ante that “the market mechanism” was in any case historically (if not “theoretically”) “the best possible utilization of knowledge” available to human societies.

This is precisely what Hayek’s “spontaneous order” or “catallaxy” was meant to achieve: - not “the best utilization” in absolute because this would have presented him with the same insurmountable apories of neoclassical theory, but rather a “historical-evolutionary” rationalization of the capitalist “market mechanism” that would present it, not as the product of specific historical social relations of production, but rather as the “spontaneous order” of human civilization, - the end-result of a “cultural evolution”, what Williamson calls “embedded, non-calculative institutions” – something akin to the ‘deep structures’ of French ‘structuralisn’. These “institutions” are “spontaneous” because…; and they constitute an “order” because Hayek wished to bestow upon them the solid “objectivity” of a pseudo-scientific ‘neo-Darwinian’ rationale.

 [See Hayek's theory of cultural evolution’ by J├╝rgen G. Backhaus.]

Note that we are not agreeing with Hodgson’s charge that Hayek’s catallaxy is “ontogenetic” rather than “phylogenetic” because it describes a “teleological” process of evolution rather than an “adaptive” one (see Caldwell, “On Hodgson”).

Our critique rests on Hayek’s description of “order”, which remains a charged description in that it “pre-judges” or “presupposes” what it is meant to prove – that an “order” exists! And if Hayek called this order “equilibrium”, then the hyperbole would be even greater and we would be back with the tautologies of his a posteriori analysis. If, instead, we take “order” ex ante, then Hayek has not specified what makes this an “order”, why it merits preference to any other “order”, and why indeed it is “spontaneous”. Again, it seems that Hayek wants to have it both ways: the market “order” is such because it is “co-ordinated”; and it is “co-ordinated” and therefore an “order” because it is “spontaneous” – where to be “spontaneous” means to be both “unplanned”, “unintended” and “harmonious” (recall Hayek’s distinction between ‘cosmos’ [organism] and ‘taxis’ [organization]).

But how can something that is unplanned and unintended be “harmonious” or an “order”? By “evolution”? But, again, “evolution” does not and cannot apply to human institutions on pain of falling into the reifications of “scientism”! Or by accident? But what can we possibly mean by “accidental order”? Is this not the “a posteriori equilibrium tautology” of Leibniz and Pangloss?

Hayek’s commixture of the two meanings of “spontaneous” as “voluntary” (unplanned) and “involuntary” (unintended) and “authentic” (uncoerced) is the source of every imaginable con-fusion.

Rothbard questions the phrase, but not, it seems, as an oxymoron:

“We need not tarry on the phrase “spontaneous order,” except to note that the word

‘spontaneous,’ once again, connotes lack of thought, activity that is not consciously (25) chosen, but rather purely reflexive and tropistic. It would have been far more accurate to

use a term such as ‘voluntary,’ which would at least focus on voluntarily chosen, rather

than coerced, actions,” (pp25-6).

But Murray Rothbard has come up with the greatest objections to Hayek’s “evolutionary” scheme. Contrast this with Caldwell’s inability to pick up on these devastating points (either in ‘Hayek&Socialism’ or in ‘On Hodgson’):

“In the passage in which he deprecates Mises’s position, however, Hayek comes up with no counter-argument of his own. If “rational” ideas—in the sense of consciously-held rather than necessarily correct ideas—do not account for the adoption of a market economy, as well as the swing away from it in the twentieth century, what in the world does? Hayek hints that man “chooses” the market economy “only in the sense that he has learned to prefer something that already operated.” Again, Hayek stresses blind habit or custom. Clearly habit plays a role, but if that were all, what accounts for the twentieth century shift away from the market economy, and, finally, for the internal collapse of the Communist politico-economic system? Hayek’s emphasis on unconscious habit or rule following thus leaves out critical parts of the answer: such as (a) how do these rules or institutions get adopted in the first place; and (b) how do they ever change, often suddenly? To fall back, as Hayek does, on “evolution” as the sole answer to the first question not only misapplies the very concept of evolution, which requires the existence of genes and mutations; it also fails spectacularly to account for sudden changes in those rules or in society’s acceptance of them. Most glaringly, Hayek’s implicit assumption of human unconsciousness violates the basic fact which we all know from our own experience as axiomatic: that human beings are indeed conscious, and that they therefore act and choose rather than move or “are moved” in an unconscious, robotic, or unmotivated manner,” (p25).

The greatest objection to “evolutionary” theories applied to economics is really quite simple (thank you, Mr. Rothbard!): The concept of evolution can only be applied to animal species and not to human institutions!

Furthermore, if we can be “scientifically” aware of such a “spontaneous order”, then we must most surely also be able to change or transform or indeed even “plan” it! And if Hayek objected that we cannot, then he would surely stand accused of the “scientism” against which he argued so vehemently! As Rothbard most correctly rejoins, human history is littered with social institutions and upheavals that represent conscious human attempts “to design” reformed human institutions. (Indeed, one must argue that Hayek himself did not shy away from such ‘reformist’ and ‘planning’ zeal [cf. ‘LLL’ and ‘TCL’].)

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