Hayek’s Economic Theory: The Problem Is with “Experts”

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What was Friedrich Hayek’s economic theory? Why did he spend so much of his career railing against socialism?

Economist Friedrich Hayek argued that a dynamical system like the economy was simply too complex for a single entity to master. This was in contrast to the prevailing rational choice theory.

We’ll cover the basic elements of Hayek’s libertarian economic theory and explore why uncertainty makes prediction impossible.

Hayek’s Economic Theory: Libertarianism

One of very few esteemed economists (he won a Nobel in 1974) to understand the futility of prediction, Friedrich Hayek spent much of his career railing against the main feature of socialism, central planning. In a classical socialist society, all economic decisions—allocation of resources, setting of prices, etc.—are made by a single entity.

Hayek attributed notions of central planning to misguided “experts” (nerds, in Taleb’s terminology) who applied the methods of the physical sciences to social matters. Hayek recognized a stark distinction between soft sciences like economics and hard sciences like physics. This distinction was part of Hayek’s economic theory.

Hayek’s skepticism regarding any entity’s ability to predict the functioning of the economy led him to advocate for an “a-Platonic” approach, one that is open-minded and proceeds from the bottom up rather than the top down. In Hayek’s economic theory, he argued that a libertarian system, wherein individuals are able to pursue their self-interest with a minimum of direction from above, is the best way to manage uncertainty. In a system like this, he believed, the system itself would react accordingly to any unexpected changes in, say, the food or credit supply. 

Hayek’s anti-Platonifying approach to economics also puts his thought at odds with contemporary mainstream economists’.

For example, most economists today subscribe to some version of rational choice theory, which holds that individuals (or “agents”), when faced with an economic choice, will choose the option that maximizes their economic benefit. (A basic illustration: If an economic agent has a choice between an investment that returns $2 and one that returns $5, the agent will always choose the one that returns $5.) The assumption that agents will always act rationally when it comes to economic choices allows economists to create models and propose predictions for future economic behavior.

The problem with rational choice theory, however, is that it’s demonstrably false: Empirical psychologists have shown that, in all sorts of economic situations, given various factors, individuals will act contradictorily and irrationally—they make the “wrong” choice. Hayek’s economic theory accounted for this.

The upshot is that there is no such thing as a “general theory” of the economy, thus economic prediction is impossible. 

Forget Heisenberg

Hayek’s economic theory takes the inherent uncertainty of life into account. When discussing uncertainty, experts will frequently invoke physicist Werner Heisenberg’s uncertainty principle. In its specific application, the uncertainty principle holds that the more precisely one measures the position of a given particle, the less precisely one can measure its momentum, and vice versa.

The problem with this analogy is that subatomic uncertainty actually hails from Mediocristan—particles’ deviations from their expected positions or momentums can be graphed using a bell curve, and the sheer number and tininess of particles in existence mean those mild deviations average out.

Real uncertainty arises in the real world—like, for example, when Taleb can’t reach his ancestral village in Lebanon from New York because Israel is battling Hezbollah. This uncertainty was part of Hayek’s economic theory.

Why Plan?

If prediction is impossible, as suggested by Hayek’s economic theory, and any human attempt to predict is ultimately futile, why do we continue to make forecasts or plans for the future?

First, it’s important to note that there are some areas of human experience where prediction is more viable than others. For example, the physical sciences have an enviable track record in terms of predicting phenomena, from the subatomic to the cosmic.

But second, there is evidence that humans are biologically conditioned to anticipate. In fact, it’s possible that our ability to imagine future consequences from present actions—an essential benefit of having consciousness—is the evolutionary advantage that allowed us to develop into the earth’s most advanced species.

This advantage only serves us so far, however. In terms of avoiding immediate harm, our capacity for anticipation is essential. But when we try to anticipate the long-term workings of dynamical systems, we inevitably get ourselves into trouble.

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