"F. A. Hayek and the Rebirth of Classical Liberalism"

Introduction:
The Revival of Interest in Hayek—A Unified Research Program in Hayek’s Writings?

The Unity and Coherence of Hayek’s Writings: Conception of Mind & Unity of Knowledge

Overview of Topics Covered in This Essay

I begin my survey by examining briefly the chief claims Hayek makes in his centrally important but sadly neglected treatise in theoretical psychology, The Sensory Order (1952), where he most systematically and explicitly develops his account of the mind and of human knowledge. Having set out the principal features of Hayek’s view of the mind and of the forms of human knowledge, I shall try to show how these conceptions inform his account of a spontaneous order in society, and how they condition his distinction between ‘economy’ and ‘catallaxy,’ his elaboration of the argument about economic calculation under socialism, and his distinctive position as to the appropriate theory and methods for economics. I proceed then to examine how Hayek applies his general philosophy to the relations of individual liberty with the rule of law. In the course of this survey I will canvass some of the most important criticisms of Hayek’s system, concentrating particularly on the claim that his conception of a spontaneous order in society is unclear, and his use of it objectionable. It is often argued that, when taken in conjunction with its twin idea of cultural evolution by the natural selection of rival social practices, the idea of spontaneous social order has a conservative rather than any liberal or libertarian implication, since it appears to entail blind submission to the result of any unplanned social process. Against this criticism, which expresses the common view that Hayek’s political thought is an unstable compound of conservative or traditionalist and liberal or libertarian elements, I will argue that the idea of spontaneous social order in Hayek’s work is best seen as a value-free explanatory notion and that invoking this idea illuminates rather than undermines the bases for the commitment to liberty.[1a]

In developing my argument by way of an examination of the criticisms of a number of writers in opposed intellectual traditions—Michael Oakeshott, James Buchanan, and Irving Kristol, for example—I will conclude that Hayek’s chief achievement is in his reviving the intellectual tradition of classical liberalism of which varied strands in contemporary conservatism and libertarianism are quarreling offspring. In the course of this survey I will, also, identify three principal achievements of Hayek’s social philosophy: (1) his demonstration of the import for social theory of an erroneous Cartesian theory of the mind and the role of this theory in inspiring modern attempts at the rational design of social life; (2) his theory of the liberal order, which is a synthesis of the theories of justice of Immanuel Kant (1724-1804) and David Hume (1711-1776) with a devastating critique of contemporary conceptions of distributive justice; and (3) his proposal for a resolution of a central difficulty of classical liberal theory in the intriguing ideas of a market in traditions.

The upshot of my assessment of Hayek’s thought will be that, whereas his critics have identified ambiguities, tensions, and unclarities in some of his formulations, the interest and appeal of his system remains unimpeached. Despite (or even because of) its problematic aspects, Hayek’s system of ideas remains a powerful and compelling research program—in my own opinion, the most promising we have at our disposal—for classical liberal social philosophy.

Hayek’s General Philosophy—The Kantian Heritage

Hayek’s uncompromisingly skeptical Kantianism is strongly evidenced in The Sensory Order (see Hayek bibliography, B-10). There Hayek disavows any concern as to “how things really are in the world,” affirming that “… a question like ‘what is X?’ has meaning only within a given order, and… within this limit it must always refer to the relation of one particular event to other events belonging to the same order.”[1b] Above all, the distinction between appearance and reality, which Hayek sees as best avoided in scientific discourse,[2] is not to be identified with the distinction between the mental or sensory order and the physical or material order. The aim of scientific investigation is not, then, for Hayek, the discovery behind the veil of appearance of the natures or essences of things in themselves, for, with Kant and against Aristotelian essentialism, he stigmatizes the notion of essence or absolute reality as useless or harmful in science and in philosophy. The aim of science can only be the development of a system of categories or principles, in the end organized wholly deductively, which is adequate to the experience it seeks to order.[3]

Hayek as a Skeptical Kantian

Hayek is a Kantian, then, in disavowing in science or in philosophy any Aristotelian method of seeking the essences or natures of things. We cannot know how things are in the world, but only how our mind itself organizes the jumble of its experiences. He is Kantian, again, in repudiating the belief, common to empiricists and positivists such as David Hume and Ernst Mach, that there is available to us a ground of elementary sensory impressions, untainted by conceptual thought, which can serve as the foundation for the house of human knowledge. Against this empiricist dogma, Hayek is emphatic that everything in the sensory order is abstract, conceptual and theory-laden in character: “It will be the central thesis of the theory to be outlined that it is not merely a part but the whole of sensory qualities which is… an ‘interpretation’ based on the experience of the individual or the race. The conception of an original pure core of sensation which is merely modified by experience is an entirely unnecessary fiction.”[4] Again, he tells us that “the elimination of the hypothetical ‘pure’ or ‘primary’ core of sensation, supposed not to be due to earlier experience, but either to involve some direct communication of properties of the external objects, or to constitute irreducible mental atoms or elements, disposes of various philosophical puzzles which arise from the lack of meaning of these hypotheses.”[5] The map or model we form of the world, in Hayek’s view, is in no important respect grounded in a basis of sheer sense-data, themselves supposed to be incorrigible. Rather, the picture we form of the world emerges straight from our interaction with the world, and it is always abstract in selecting some among the infinite aspects which the world contains, most of which we are bound to pass by as without interest to us.

Three Influences on Hayek’s Skeptical Kantianism: Mach, Popper, and Wittgenstein

1. Ernst Mach and Metaphysical Neutrality

In both The Sensory Order and later in The Constitution of Liberty, Hayek affirms that the age-old controversy about the freedom of the will embodies such a phantom-problem.[6] Hayek’s ‘compatibilist’ standpoint in respect of freedom of the will—his belief that the casual determination of human actions is fully compatible with ascribing responsibility to human agents for what they do—is analogous with his stance on the mind-body question. In both controversies Hayek is concerned to deny any ultimate dualism in metaphysics or ontology, while at the same time insisting that a dualism in our practical thought and in scientific method is unavoidable for us. Thus he says of the relations of the mental and the physical domains that “While our theory leads us to deny any ultimate dualism of the forces governing the realms of the mind and that of the physical world respectively, it forces us at the same time to recognize that for practical purposes we shall always have to adopt a dualistic view.”[7] And Hayek concludes his study of the foundations of theoretical psychology in The Sensory Order with the claim that “to us mind must remain forever a realm of its own, which we can know only through directly experiencing it, but which we shall never be able to fully explain or to ‘reduce’ to something else.”[8]

Hayek’s thought has a Machian positivist aspect, then, not in the theories of mind or perception, but in its attitude to traditional metaphysical questions, which is dissolutionist and deflationary. There is yet another link with positivism. Notwithstanding Hayek’s opposition to any sort of reductionism, whether sensationalist or physicalist, he seems to be a monist in ontology, averring that “mind is thus the order prevailing in a particular part of the physical universe—that part of it which is ourselves.”[9] Hayek may seem here to be qualifying or withdrawing from that stance of metaphysical neutrality which in Machian spirit he commends, but this appearance may be delusive. There is much to suggest that, when Hayek denies any ultimate dualism in the nature of things, he is not lapsing into an idiom of essences or natural kinds, but simply observing—much in the fashion of the American pragmatist philosopher, W. V. Quine—that nothing in our experience compels us to adopt ideas of mental or physical substance.[10] Though Hayek has not to my knowledge ever pronounced explicitly on the question, the whole tenor of his thought inclines to a Quinean pragmatist view of ontological commitments. In his skeptical and pragmatist attitude to ultimate questions in metaphysics and ontology, Hayek lines up with many positivists rather than with Kantian critical philosophy—though positivists themselves sometimes claim, with some justification, to be treading a Kantian path.

2. Karl Popper: The Growth of Knowledge

A second influence on Hayek’s general philosophy which gives it a distinctive temper is the thought of his friend, Karl Popper (b. 1902). I mean here, not Popper’s hypothetico-deductive account of scientific method, which there is evidence that Hayek held prior to his meeting with Popper,[11] nor yet Popper’s proposal (which Hayek was soon to accept) that falsifiability rather than verifiability should be adopted as a criterion of demarcation between the scientific and the non-scientific. Again, Hayek has under Popper’s influence come to make an important distinction between types of rationalism,[12] such that “critical rationalism” is commended and “constructivistic rationalism” condemned. But this is not what I have in mind. I refer rather to certain striking affinities between Hayek’s view of the growth of knowledge and that adumbrated in Popper’s later writings on “evolutionary epistemology.” As early as the manuscript which later became The Sensory Order (published in 1952, but composed in the twenties), Hayek made it clear that the principles of classification embodied in the nervous system were not for him fixed data; experience constantly forced reclassification on us. In his later writings, Hayek is explicit that the human mind is itself an evolutionary product and that its structure is therefore variable and not constant. The structural principles or fundamental categories which our minds contain ought not, then, to be interpreted in Cartesian fashion as universal and necessary axioms, reflecting the natural necessities of the world, but rather as constituting evolutionary adaptations of the human organism to the world that it inhabits.

The striking similarity between Popper’s later views, and those expounded by Hayek in The Sensory Order, is shown by Popper’s own application of the evolutionist standpoint in epistemology to the theory of perception:

… if we start from a critical commonsense realism… then we shall take man as one of the animals, and human knowledge as essentially almost as fallible as animal knowledge. We shall suppose the animal senses to have evolved from primitive beginnings; and we shall look therefore on our own senses, essentially, as part of a decoding mechanism—a mechanism which decodes, more or less successfully, the encoded information about the world which manages to reach us by sensory means.[13]

J. W. N. Watkins’ comment on this view is as apposite in the respect of Hayek as it is of Popper:

Kant saw very clearly that the empiricist account of sense experience creates and cannot solve the problem of how the manifold and very various data which reach a man’s mind from his various senses get unified into a coherent experience.

Kant’s solution consisted, essentially, in leaving the old quasimechanistic account of sense-organs intact, and endowing the mind with a powerful set of organizing categories—free, universal and necessary—which unify and structure what would otherwise be a mad jumble. Popper’s evolutionist view modifies Kant’s view at both ends: interpretative principles lose their fixed and necessary character, and sense organs lose their merely causal and mechanistic character.[14]

Hayek’s account of sense perception anticipates Popper’s later views in a most striking fashion, because in both sensation is conceived as a decoding mechanism, which transmits to us in a highly abstract fashion information about our external environment. Again, both Hayek and Popper share the skeptical Kantian view that the order we find in the world is given to it by the creative activity of our own minds: as Hayek himself puts it uncompromisingly in The Sensory Order, “The fact that the world which we know seems wholly an orderly world may thus be merely a result of the method by which we perceive it.”[15] One difference between Hayek and Popper is in the fact that, at any rate in his published work to date, Hayek has not followed Popper in his ontological speculations about a world of abstract or virtual entities or intelligibles.[16a]

3. Wittgenstein & Hayek

A third influence on Hayek’s thought which gives his view of knowledge and the mind a very distinctive character is that of his relative, Ludwig Wittgenstein (1899-1951).[16b] This influence runs deep, and is seen not only in the style and presentation of The Sensory Order, which parallels in an obvious way that of Wittgenstein’s Tractatus, but in many areas of Hayek’s system of ideas. It is shown, for example, in Hayek’s recurrent interest in the way in which the language in which we speak shapes our thoughts and forms our picture of the world. In fact, Hayek’s interest in language, and in a critique of language, predates Wittgenstein’s work, inasmuch as he had an early preoccupation with the work of Fritz Mauthner, the now almost forgotten philosopher of radical nominalism whom Wittgenstein mentions (somewhat dismissively) in the Tractatus.[17] There are, however, many evidences that Wittgenstein’s work reinforced Hayek’s conviction that the study of language is a necessary precondition of the study of human thought, and an indispensable prophylactic to the principal disorders of the intellect. Examples which may be adduced are Hayek’s studies of the confusion of language in political thought[18] and, most obviously, perhaps, of his emphasis on the role of social rules in the transmission of practical knowledge.

It is on this last point that one of the most distinctive features of Hayek’s Kantianism, its pragmatist aspect, is clearest.[19a] Of course there is a recognition in Kant himself that knowledge requires judgment, a special faculty, the Urteilskraft, which cannot be given any complete or adequate specification in propositional terms, and whose exercise is necessary for the application of any rule. In the sense that we must exercise this faculty of judgment even before we can apply a rule, it is action which is at the root of our very knowledge itself. Hayek’s concern is not with this ultimate dependency of rule following upon judgment—which the later Wittgenstein, perhaps following Kant, emphasizes—but rather with the way that knowledge of all sorts, but especially social knowledge, is embodied in rules. Our perceptual processes, indeed all our processes of thought, are governed by rules which we do not normally articulate, which in some cases are necessarily beyond articulation by us, but which we rely upon for the efficiency of all our action in the world. Indeed, it is not too much to say that, for Hayek (notwithstanding his stress on the abstract or conceptual character of our sensory knowledge) all our knowledge is at bottom practical or tacit knowledge: it consists, not in propositions or theories, but in habits and dispositions to act in a rule-governed fashion. There is here an interesting parallel with Popper’s view, which sees even our sense organs as being themselves embodied theories.[19b]

There is much in Hayek’s writings to suggest that he takes what Gilbert Ryle calls “knowing how,”[20] what Michael Polanyi calls tacit knowing,[21] what Michael Oakeshott[22] calls the traditional knowledge, to be the wellspring of all our knowledge. It is in this sense—in holding the stuff of knowledge to be at bottom practical—that Hayek may be said to subscribe to a thesis of the primacy of practice in the constitution of human knowledge. It is not indeed that Hayek disparages the enterprise of theory-building, but he sees the theoretical reconstruction of our practical knowledge as necessarily incomplete in its achievements.

Why is this? Hayek argues that, not only human social life, but the life of the mind itself is governed by rules, some of which cannot be specified at all. Note that Hayek does not contend merely that we cannot in fact specify all the rules which govern both social and intellectual life: he argues that there must of necessity be an insuperable limit beyond which we are unable to specify the rules by which our lives are governed. As he puts it:

So far our argument has rested solely on the uncontestable assumption that we are not in fact able to specify all the rules which govern our perceptions and actions. We still have to consider the question whether it is conceivable that we should ever be in a position discursively to describe all (or at least any one we like) of these rules, or whether mental activity must always be guided by some rules which we are in principle not able to specify. If it should turn out that it is basically impossible to state or communicate all the rules which govern our actions, including our communications and explicit statements, this would imply an inherent limitation of our possible explicit knowledge and, in particular, the impossibility of ever fully explaining a mind of the complexity of our own.

Hayek goes on to observe of the inability of the human mind reflexively to grasp the most basic rules which govern its operations that “this would follow from what I understand to Georg Cantor’s theorem in the theory of sets according to which in any system of classification there are always more classes than things to be classified, which presumably implies that no system of classes can contain itself.” Again, he remarks that “it would thus appear that Gödel’s theorem is but a special case of a more general principle applying to all conscious and particularly all rational processes, namely the principle that among their determinants there must always be some rules which cannot be stated or even be conscious.” Hayek concludes this development of themes first explored in his Sensory Order with the fascinating suggestion that conscious thought must be presumed to be governed by “rules which cannot in turn be conscious—by a “supraconscious mechanism,” or, as Hayek prefers sometimes to call it, a “meta-conscious mechanism”—”which operates on the contents of consciousness but which cannot itself be conscious.”[23]

The third source of influence on Hayek’s skeptical Kantianism, which I have ascribed primarily to the work of his relative Wittgenstein, plainly comprehends other influences as well. Hayek cites Ryle in support of his observations that ” ‘know how’ consists in the capacity to act according to rules which we may be able to discover but which we need not be able to state in order to obey them,” and glosses the point with reference to Michael Polanyi.[24] Here the insight is that all articulated or propositional knowledge arises out of tacit or practical knowledge, the knowledge of how to do things, which must be taken as fundamental. Nothing is said in Ryle or Polanyi thus far about rule-governedness as a distinctive mark of human (and, it may well be, not only human but also animal) intelligent behavior.

It is for the insight that practical knowledge is transmitted mimetically through the absorption of social rules that we need to turn to Wittgenstein, from whom Hayek may have taken it. (There are, to be sure, contrasts between Hayek’s view of rule-governed behavior and Wittgenstein’s, particularly in regard to the skepticism about rule-following expressed in Wittgenstein’s On Certainty and the dependency of social rules upon forms of life, stressed in Wittgenstein but not discussed by Hayek; but these contrasts need not concern us here.) What is original and novel in Hayek’s account, and (so far as I know) is nowhere to be found in Wittgenstein, is his account, firstly, of the hierarchy of rules in perception and action, with the most fundamental rules being meta-conscious rules beyond the possibility of identification and articulation; and, secondly, Hayek’s systematic exploration of the selection of these rules in a process of evolutionary adaptation.[25] According to Hayek, in other words, the rules of action and of perception by which both intellectual and social life are governed are in the first place stratified or ordered in a hierarchy, with the most fundamental rules (which shape the basic categories of our understanding) always eluding conscious articulation. But secondly, all of these rules, including even the most fundamental of them are products of a process of evolutionary selection, by which they may be further altered or eliminated. Systems of rules conferring successful behavior are adopted by others without conscious reflection. It is this disposition to emulate or copy successful behaviors which explains the cultural evolution of which Hayek speaks, and which (though he recognizes its primitive beginnings in the social lives of animals) Hayek regards as the distinguishing mark of human life.

Hayek on Knowledge and Mind: Implications for Social Theory

Hayek’s Kantian Philosophy of Mind

I began by noting the striking Kantian attributes of Hayek’s epistemology and philosophy of mind—aspects which Hayek himself does not stress, perhaps because he conceives the formative influence of Kantian philosophy on his thought to be self-evident. As he puts it himself in a footnote to his discussion in a recent volume of the government of conscious intellectual life by super-conscious abstract rules: “I did not mention… the obvious relation of all this to Kant’s conception of the categories that govern our thinking—which I took rather for granted.”[26]

Hayek’s Kantianism is seen, first in his repudiation of the empiricist view that knowledge may be constructed from a basis of raw sensory data and, second, in his uncompromising assertion of the view that the order we find in the world is a product of the creative activity of the human mind (rather than a recognition of natural necessity). His Kantian view is distinctive in that it anticipates Popper in affirming that our mental frameworks by which we categorize the world are neither universal nor invariant, but alterable in an evolutionary fashion; his Kantian view also follows Wittgenstein in grasping the role of social rules in the transmission of practical knowledge. Hayek’s Kantian view is original, finally, in recognizing a hierarchy in the rules that govern our perceptions and actions, and in insisting that the most fundamental of these rules are “super-conscious” and beyond any possibility of specification or articulation.

Hayek’s Philosophy of Mind & His Social Theory: Beyond Kantianism

Hayek’s conception of mind is a notion whose implications for social theory are even more radical than are those of Hayek’s Kantianism. It is the chief burden of the latter, let us recall, that no external or transcendental standpoint on human thought is achievable, in terms of which it may be supported or reformed. In social theory, this Kantian perspective implies the impossibility of any Archimedean point from which a synoptic view can be gained of society as a whole and in terms of which social life may be understood and, it may be, redesigned. As Hayek puts it trenchantly: “Particular aspects of a culture can be critically examined only within the context of that culture. We can never reduce a system of rules or all values as a whole to a purposive construction, but must always stop with our criticism of something that has no better grounds for existence than that it is the accepted basis of the particular tradition.”[27] This is a useful statement, since it brings out the Kantian implication for social theory: that all criticism of social life must be immanent criticism, just as in all philosophy inquiry can only be reflexive and never transcendental.

Hayek goes beyond Kantianism, however, in his recognition that, just as in the theory of mind we must break off when we come to the region of unknowable ultimate rules, so in social theory we come to a stop with the basic constitutive traditions of social life. These latter, like Wittgenstein’s forms of life, cannot be the objects of further criticism, since they are at the terminus of criticism and justification: they are simply given to us, and must be accepted by us. But this is not to say that these traditions are unchanging, nor that we cannot understand how it is that they do change.

In social theory, Hayek’s devastating critique of Cartesian rationalism entails that, whatever else it might be, social order cannot be the product of a directing intelligence. It is not just that too many concrete details of social life would always escape such an intelligence, which could never, therefore, know enough. Nor (though we are nearer the nub of the matter here) is it that society is not a static object of knowledge which could survive unchanged the investigations of such an intelligence. No, the impossibility of total social planning does not rest for Hayek on such Popperian considerations,[28] or, at any rate, not primarily on them.

Such an impossibility of central social planning rests, firstly, on the primordially practical character of most of the knowledge on which social life depends. Such knowledge cannot be concentrated in a single brain, natural or mechanical, not because it is very complicated, but rather because it is embodied in habits and dispositions and governs our conduct via rules which are often inarticulable. But, secondly, the impossibility of total social planning arises from the fact that, since we are all of us governed by rules of which we have no knowledge, even the directing intelligence itself would be subject to such government. It is naive and almost incoherent[29] to suppose that a society could lift itself up by its bootstraps and reconstruct itself, in part at least because the idea that any individual mind—or any collectivity of selected minds—could do that, is no less absurd.

The Idea of a Spontaneous Social Order

The errors of constructivist rationalism are closely connected with Cartesian dualism, that is, with the conception of an independently existing mind substance which stands outside the cosmos of nature and which enabled man, endowed with such a mind from the beginning, to design the institutions of society and culture among which he lives… The conception of an already fully developed mind designing the institutions which made life possible is contrary to all we know about the evolution of man.[30]

The master error of Cartesian rationalism[31] lies in its anthropomorphic transposition of mentalist categories to social processes. But a Cartesian rationalist view of mind cannot explain even the order of mind itself. Hayek himself makes this point when he remarks on “the difference between an order which is brought about by the direction of a central organ such as the brain, and the formation of an order determined by the regularity of the actions towards each other of the elements of a structure.” He goes on:

Michael Polanyi has usefully described this distinction as that between a monocentric and a polycentric order. The first point which it is in this connection important to note is that the brain of an organism which acts as the directing centre for the organism is in turn a polycentric order, that is, that its actions are determined by the relation and mutual adjustment to each other of the elements of which it consists.[32]

Hayek states his conception of social theory, and of the central importance in it of undesigned or spontaneous orders, programmatically and with unsurpassable lucidity:

It is evident that this interplay of the rules of conduct of the individuals with the actions of other individuals and the external circumstances in producing an overall order may be a highly complex affair. The whole task of social theory consists in little else but an effort to reconstruct the overall orders which are thus formed… It will also be clear that such a distinct theory of social structures can provide only an explanation of certain general and highly abstract features of the different types of structures… Of theories of this type economic theory, the theory of the market order of free human societies, is so far the only one which has been developed over a long period…[33]

Because it is undesigned and not the product of conscious reflection, the spontaneous order that emerges of itself in social life can cope with the radical ignorance we all share of the countless facts on knowledge of which society depends. This is to say, to begin with, that a spontaneous social order can utilize fragmented knowledge, knowledge dispersed among millions of people, in a way a holistically planned order (if such there could be) cannot. “This structure of human activities” as Hayek puts it “consistently adapts itself, and functions through adapting itself, to millions of facts which in their entirety are not known to everybody. The significance of this process is most obvious and was at first stressed in the economic field.”[34] It is to say, also, that a spontaneous social order can use the practical knowledge preserved in men’s habits and dispositions and that society always depends on such practical knowledge and cannot do without it.

Examples abound in Hayek’s writings of spontaneous orders apart from the market order. The thesis of spontaneous order is stated at its broadest when Hayek says of Bernard Mandeville (1670-1733) that “for the first time [he] developed all the classical paradigmata of the spontaneous growth of orderly social structures: of law and morals, of language, the market and money, and also the growth of technological knowledge.”[35] Note that whereas Hayek acknowledges that spontaneous order emerges in natural processes—it may be observed, he tells us, not only in the population biology of animal species, but in the formation of crystals and even galaxies[36]—it is the role of spontaneous order in human society that Hayek is most concerned to stress. For applying what Hayek illuminatingly terms “the twin ideas of evolution and of the spontaneous formation of an order”[37] to the study of human society enables us to transcend the view, inherited from Greek, and, above all, from Sophist philosophy, that all social phenomena can be comprehended within the crude dichotomy of the natural (physis) and the conventional (nomos). Hayek wishes to focus attention on the third domain of social phenomena and objects, neither instinctual in origin nor yet the result of conscious contrivance or purposive construction, the domain of evolved and self-regulating social structures. It is the emergence of such self-regulating structures in society via the natural selection of rules of action and perception that is systematically neglected in much current sociology (though not, it may be noted, in the writings of Herbert Spencer,[38] one of sociology’s founding fathers). It is because he thinks that the sociobiologists view social order as being a mixture of instinctive behavior and conscious control, and so neglect the cultural selection of systems of rules, that Hayek has subjected this recent strain of speculation to a sharp criticism.[39] It may be noted, finally, that Hayek’s repudiation of the Sophistic nature-convention dichotomy sets him in opposition to Popper and his talk of the critical dualism of facts and decisions and brings him close to the Wittgensteinian philosopher, Peter Winch, for whom the distinction is essentially misconceived.[40]

The Application of Spontaneous Order in Economic Life: The Catallaxy

The central claim of Hayek’s philosophy, as we have expounded it so far, is that knowledge is, at its base, at once practical and abstract. It is abstract inasmuch as even sensory perception gives us a model of our environment which is highly selective and picks out only certain classes of events, and it is practical inasmuch as most knowledge is irretrievably stored or embodied in rules of action and perception. These rules, in turn, are in Hayek’s conception the subject of continuing natural selection in cultural competition. The mechanism of this selection, best described in Hayek’s fascinating “Notes on the Evolution of Systems of Rules of Conduct,”[41] is in the emulation by others of rules which secure successful behavior. It is by a mimetic contagion that rules conferring success—where success means, in the last resort, the growth of human numbers[42]—come to supplant those rules which are maladapted to the environment. Finally, the convergence of many rule-following creatures on a single system of rules creates those social objects—language, money, markets, the law—which are the paradigms of spontaneous social order.

It is a general implication of this conception that, since social order is not a purposive construction, it will not in general serve any specific purpose. Social order facilitates the achievement of human purposes: taken in itself, it must be seen as having no purpose. Just as human actions acquire their meaning by occurring in a framework that can itself have no meaning,[43] so social order will allow for the achievement of human purposes only to the extent that it is itself purposeless. Nowhere has this general implication of Hayek’s conception been so neglected as in economic life. In the history and theory of science, to be sure, where the idea of spontaneous order was (as Hayek acknowledges) put to work by Michael Polanyi, false conceptions were spawned by the erroneous notion that scientific progress could be planned, whereas, on the contrary, any limitation of scientific inquiry to the contents of explicit or theoretical knowledge would inevitably stifle further progress.[44] In economics, however, the canard that order is the result of conscious control had more fateful consequences. It supported the illusion that the whole realm of human exchange was to be understood after the fashion of a household or an hierarchical organization, with limited and commensurable purposes ranked in order of agreed importance.

This confusion of a genuine hierarchical ‘economy’—such as that of an army, a school or a business corporation—with the whole realm of social exchange, the catallaxy, informs many aspects of welfare economics and motivates its interventionist projects via the fiction of a total social product. This confusion between ‘catallaxy’ and ‘economy’ is, at bottom, the result of an inability to acknowledge that the order which is the product of conscious direction—the order of a management hierarchy in a business corporation, for example—itself always depends upon a larger spontaneous order. The demand that the domain of human exchange taken as a whole should be subject to purposive planning is therefore, the demand that social life be reconstructed in the character of a factory, an army, or a business corporation—in the character, in other words, of an authoritarian organization. Apart from the fateful consequences for individual liberty that implementing such a demand inexorably entails, it springs in great measure from an inability or unwillingness to grasp how in the market process itself there is a constant tendency to self-regulation by spontaneous order. When it is unhampered, the process of exchange between competitive firms itself yields a coordination of men’s activities more intricate and balanced than any that could be enforced (or even conceived) by a central planner.

The Catallactic Order, Practical Knowledge, and the Calculation Debate

The relevance of these considerations to Hayek’s contributions to the question of the allocation of resources in a socialist economic order is central, but often neglected. It is, of course, widely recognized[45] that one of Hayek’s principal contributions in economic theory is the refinement of the thesis of his teacher, Ludwig von Mises (1881-1973), that the attempt to supplant market relations by public planning cannot avoid yielding calculational chaos. Hayek’s account of the mechanism whereby this occurs has, however, some entirely distinctive and original features. For Hayek is at great pains to point out that the dispersed knowledge which brings about a tendency to equilibrium in economic life and so facilitates an integration of different plans of life, is precisely not theoretical or technical knowledge, but practical knowledge of concrete situations—”knowledge of people, of local conditions, and of special circumstances.” As Hayek puts it: “The skipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices—are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.” Hayek goes to comment: “It is a curious fact that this sort of knowledge should today be regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably.”[46] The “problem of the division of knowledge,” which Hayek describes as “the really central problem of economics as a social science,”[47] is therefore not just a problem of specific data, articulable in explicit terms, being dispersed in millions of heads: it is the far more fundamental problem of the practical knowledge on which economic life depends being embodied in skills and habits, which change as society changes and which are rarely expressible in theoretical or technical terms.

One way of putting Hayek’s point, a way we owe to Israel Kirzner rather than to Hayek himself but which is wholly compatible with all that Hayek has said on these questions, is to remark as follows: if men’s economic activities really do show a tendency to coordinate with one another, this is due in large part to the activity of entrepreneurship. The neglect of the entrepreneur in much standard economic theorizing, the inability to grasp his functions in the market process, may be accounted for in part by reference to Hayek’s description above of the sort of knowledge used by the entrepreneur. As Kirzner puts it, “Ultimately, then, the kind of ‘knowledge’ required for entrepreneurship is ‘knowing’ where to look for ‘knowledge’ rather than knowledge of substantive market information.”[48] It is hard to avoid the impression that the entrepreneurial knowledge of which Kirzner speaks here is precisely that practical or dispositional knowledge which Hayek describes.

It is the neglect of how all economic life depends on this practical knowledge which allowed the brilliant but, in this respect, fatally misguided Joseph Schumpeter (1883-1950) to put a whole generation of economists on the wrong track, when he stated in his Capitalism, Socialism and Democracy (1942) that the problem of calculation under socialism was essentially solved.[49] It is the neglect of the same truth that Hayek expounded which explains the inevitable failure in Soviet-style economies of attempts to simulate market processes in computer modeling. All such efforts are bound to fail, if only because the practical knowledge of which Hayek speaks cannot be programmed into a mechanical device. They are bound to fail, also, because they neglect the knowledge-gathering role of market pricing. Here we must recall that, according to Hayek, knowledge is dispersed throughout society and, further, it is embodied in habits and dispositions of countless men and women. The knowledge yielded by market pricing is knowledge which all men can use, but which none of them would possess in the absence of the market process; in a sense, the knowledge embodied or expressed in the market price is systemic or holistic knowledge, knowledge unknown and unknowable to any of the elements of the market system, but given to them all by the operation of the system itself. No sort of market simulation or shadow pricing can rival the operation of the market order itself in producing this knowledge, because only the actual operation of the market itself can draw on the fund of practical knowledge which market participants exploit in their activities.

Hayek’s Refinements of the Misesian Calculation Debate

Fortunately, such a transformation is possible, if at all, only as a thought-experiment. In practice, all supposedly socialist economies depend upon precisely that practical knowledge of which Hayek speaks, and which though dispersed through society is transmitted via the price mechanism. It is widely acknowledged that socialist economies depend crucially in their planning policies on price data gleaned from historic and world markets. Less often recognized, and dealt with in detail only, so far as I know, in Paul Craig Roberts’ important Alienation in the Soviet Economy,[50] is that planning policies in socialist economies are only shadows cast by market processes distorted by episodes of authoritarian intervention. The consequence of the Hayekian and Polanyian critiques of socialist planning is not inefficiency of such planning but rather its impossibility: we cannot analyze the “socialist” economies of the world properly, unless we penetrate the ideological veil they secrete themselves behind, and examine the mixture of market processes with command structures which is all that can ever exist in such a complex society.

The third and final implication of Hayek’s contribution to the calculation question is his clear statement of the truth that the impossibility of socialism is an epistemological impossibility. It is not a question of motivation or volition, of the egoism or limited sympathies of men and women, but of the inability of any social order in which the market is suppressed or distorted to utilize effectively the practical knowledge possessed by its citizens. Calculational chaos would ensue, and a barbarization of social life result, from the attempt to socialize production, even if men possessed only altruistic and conformist motives. For, in the absence of the signals transmitted via the price mechanism, they would be at a loss how to direct their activities for the social good, and the common stock of practical knowledge would begin to decay. Only the inventiveness of human beings as expressed in the emergence of black and gray markets could then prevent a speedy regression to the subsistence economy. The impossibility of socialism, then, derives from its neglect of the epistemological functions of market institutions and processes. Hayek’s argument here is the most important application of his fundamental insight into the epistemological role of social institutions—an insight I will need to take up again in the context of certain similarities between Hayek’s conception of liberty under law and Robert Nozick’s meta-utopian framework.