Another short but difficult theoretical piece for our more theoretically-inclined friends: again, these are notes ffrom our chapter from Krisis on the Austrian School.
THE MOST IMPORTANT PROBLEM with Hayek’s theoretical revision of economic theory is therefore that, fixed as it is within the uni-verse of “exchange” of neoclassical theory, the “prices” of his “intertemporal equilibrium”, just like those of general equilibrium, become mere “signals” or ciphers to enable the equilibrium co-ordination of economic activities in the market economy. This is what enables Hayek to suggest the replacement of “the division of labour” (which points clearly towards the uni-verse of “production”) with “the division of information” which, as symbolic exchange, is clearly anchored to “the uni-verse of exchange”.
Indeed, Hahn and Loasby have suggested that “prices and quantities” in equilibrium analysis ought to be abandoned in favour of “information and action” (see Loasby, ‘Equilibrium & Evolution’).
The difficulty here is that once we define an empirically determinable “catallaxy” that determines prices ex ante, which gives the market economy a “tendency to equilibrium”, then the “economic” problem becomes a strictly “technical” one from which all “competitive choice” or “self-interest” is removed: – in short, economics becomes a branch of engineering (see our discussion of “the Pure Logic of Choice”) or an ex post facto “rationalization” of a “mechanical evolutionary process” independent of human will (Hayek’s “spontaneous order”, see our discussion in ‘Hayek’s Scientism’). Hayek does not state clearly whether it is “the price mechanism” that ensures economic ‘co-ordination’, or whether it is the “spontaneous order” and the “institutions” that compose it that determine the price mechanism. The ambiguity is illustrated by Hayek himself: -
“The economic problem of society is not merely a problem of how to allocate ‘given’ resources… It is rather a problem of how to secure the best use of resources known to any members of society, for ends whose relative importance only the individuals know… it is a problem of the utilization of knowledge not given to anyone in its totality,”
Hayek is clearly hypothesizing that the co-ordination problem is one of explaining not the optimal ‘potential’ allocation of resources, but rather the best available allocation from the perspective of freely-competing ‘individuals’ – which is what transforms ‘co-ordination’ from a ‘technical (engineering) allocation’ problem to a “spontaneous/institutional or political” one.
[Incompatibility of “co-ordination” and “competition” is the greatest problem. Hayek speaks of “different plans” or “(individual) ends of relative importance” and of “utilization of knowledge”. But he presumes all along that these “plans”, “ends” and “knowledge” all have a common goal or convergent aim, which is not at all what “competition by self-interested individuals” actually means! The outcome is that no “co-ordination” is possible without the further specification of a “convergence mechanism”. This takes us back to the ‘metaphysical’ notion of ‘utility’/endowments, that of “scarcity” and “resources”, and above all brings into question that of “self-interested individual”! Hence, the need for Hayek to embark on the whole “evolutionary” enterprise of discovering a “spontaneous order” accompanied by the “institutional” regulation of competition”.]
The problem with this approach is that we can never know, even a posteriori – except tautologically – whether the market pricing mechanism truly ensures this “best use” of resources in the sense of “best utilization of knowledge”.
So, either we prescribe a “spontaneous order” that ensures “co-ordination” as an outcome; or we postulate (a posteriori) that the existing system is the “best use” in any case. Obviously, because Hayek sees ‘co-ordination’ as a problem, his approach must favour the former pathway.
But another even greater difficulty emerges right away. If indeed the entire purpose of “the division of knowledge/information” is solely to ensure the “efficient co-ordination” of different individual plans, even assuming that these “plans by self-interested individuals” can be “convergent” and therefore are capable of “co-ordination”, it is no longer possible to divine what is the basis of the “market competition” that determines the “economic” character of the whole “market exchange mechanism based on the price system”. Again it seems evident that unless individuals can “profit” from this process, the logic of “equivalent exchange” will result in equilibrium and stagnation. Alternatively, if individuals do profit from the exchange, then the logic of “competition” will end up in “monopoly”, with devastating consequences for Hayek’s entire analysis of “best use of resources known”, and tendentially “monopoly” will result once again in “stagnation” and “non-action”.
Economic theory involves the interaction between prices and quantities for exchange. Ultimately, the purpose of “market exchange” is not “information” or “knowledge” – but something far more controversial such as profits! It will never be clear whether it is “prices” that determine “the utilization of knowledge” (the ‘institutions’ of NIE) or “utilization of knowledge based on quantities” that determines “prices” to ensure the “co-ordination” of economic decisions in the sphere of exchange. The question remains: do prices determine “the utilization of knowledge” (the shape of ‘institutions’) so that some individuals may ‘profit’ or is it the other way around so that the end-result will be a stagnant equilibrium with no profits and no price changes? It is no answer to break up the economic decision-making process into ex ante plans and ex post “verification” (as do Boettke et al. in ‘Context’) because no amount of slicing up of individual exchange decisions (or learning process or Walrasian ‘tatonnement’) will ever give us the answer to the fundamental arrow of causality:
Boettke et alii:
Economic coordination requires the dovetailing of the diverse plans of individuals dispersed throughout the economic system. The production plans of some, must mesh with consumption demands of others, and do so in a manner that tends to exploit the gains from trade, and realize technological efficiency. Minds must meet and this is accomplished through the market process of relative price adjustments and profit and loss accounting. Ex ante expectations guide the decisions of individuals and are informed by the existing array of prices that decision-makers confront. Ex post improvements of plans are communicated via profit and loss, and serve to indicate the appropriateness of those plans in terms of the competing demands for the resources and the concurrent plans of everyone else in the economy,” (‘Context’).
Walrasian ‘tatonnement’ was meant precisely, like Boettke’s ex ante/ex post analysis, to remedy the aporetic ‘timelessness’ of the equilibrium simultaneous equations (see Hayek quote above). But neither stratagem can remove the insuperable difficulty that the ‘theoretic’ framework is an ‘identity’ and therefore lacks ‘causality’ and ‘time’ (is ‘synchronic’ and not ‘diachronic’, and therefore is ‘aporetic’).
Above all, this framework always needs to introduce surreptitiously the whole rationale of the “exchange” – profit and loss – which is what makes it “competitive” and destroys all the sanctimonious elaborations on “co-ordination” and “spontaneous order”. As long as economic analysis remain ‘imprisoned’ in the sphere of exchange, these ‘apories’ will be irresoluble and the “theory” will remain “flat” in the sense that it will lack “the arrow of causality” or “the purpose” between production and prices for exchange.