The Complexity of Hayek

by Greg Fisher

Hayek

There are a number of similarities between complex systems and Friedrich von Hayek’s work, which I’d like to flesh out in this blog.  For those who want to build on Hayek’s broad approach to social systems, they need look no further than complexity theory.

I should note up front that my generally pro-Hayek stance does not mean I align myself with “Hayekians” rather than “Keynesians” in the well-rehearsed and specific debate about macroeconomic management.  As I suggested in an earlier blog, complexity theory offers the opportunity to synthesise these two views.  More generally, I do have quibbles with Hayek’s emphasis (at least until his later writings) on equilibrium, including his notion of “Catallaxy”, which is discussed in more detail below; and he seemed to think of government as if it were only ever illegitimate, leaving no room for re-envisaging its role in free societies.  This was perhaps understandable after Hayek witnessed the impact of terrible government policies during his time in the Austro-Hungarian army in WW1.

In this blog I would like to briefly mention the overlap and differences between Hayek and complex systems approaches, and to ask the question where next for Hayekian thinking?

For those wanting to explore in more detail the relationship between Hayek and complexity theory, I would recommend three essays.  Roger Koppl wrote a chapter “Complexity and Austrian Economics” in the sexily titled book “Handbook of Research on Complexity” (2009); and Barkley Rosser followed Koppl with an essay “How Complex are the Austrians?” (2009), which is available online here.  Rosser summarised Koppl’s paper so I’d recommend his of the two.  My colleague, Paul Ormerod, also wrote an essay, slightly broader in scope, which is well worth a read, entitled “Keynes, Hayek and Complexity”.

Koppl listed what he thought were the similarities between the Austrians and complexity economics, using the acronym BRICE:

 

  • Bounded rationality.  This is about, in Rosser’s words, “the limits to knowledge due to logical and computational limits”.  I have to say I view bounded rationality on its own with suspicion because it remains a highly inaccurate abstraction, albeit less dangerous than its unbounded parent.  But that’s an unnecessary distraction here.
  • Rule following “is how Hayek sees our minds operating and agents operating in the economy” (Rosser).  I have some problems with rules too, preferring to think about patterns rather than rules or laws, as I discussed in my last blog.  But that’s a nuance.
  • Institutions were viewed by Hayek as a necessary part of the evolution of social systems.  This feels a lot like the concept of self-organisation in complex systems.
  • Cognition is an area where Hayek and many complexity theorists overlap.  A “social complexity” lens typically leads people to drill down in to neuroscience, cognition, and psychology.  This is precisely what Hayek did, publishing a number of papers in these fields; and what he did publish was notably consistent with the works of complexity theorists like Stuart Kauffman.
  • Evolution was discussed in Hayek’s paper “The Theory of Complex Phenomena”, which he published in 1967.  In that essay he essentially dealt with evolution as a metaphor for complex systems.

In addition to these five methodological overlaps, there were also similarities between Hayek and complexity theory in terms of concepts and outcomes.  Rosser explained that uncertainty, which is an important feature of complex systems, was also evident in Austrian thought, albeit on the fringes.  Also, complexity theorists and Hayek have emphasised the emergence of patterns without central intervention; spontaneous self-organisation, including through the price mechanism (language being another example); and the importance of pattern recognition.

What about the differences between Hayek and complexity theory?

Where many Austrians and a younger Hayek differ from complexity theory is in their emphasis on equilibrium.  Complex systems often find themselves in states of disequilibrium and in “bad” states of equilibrium.  Perhaps general equilibrium theory rubbed off on the Austrians a little too much even if they did reject the linear mathematics embedded in general equilibrium theory (as do complexity theorists).  Indeed, Hayek borrowed a term from von Mises and developed it further, Catallaxy, which Hayek referred to as “the order brought about by the mutual adjustment of many individual economies in a market”.  And Hayek’s economics was very much orientated around the view that it was the government that imposed volatility on the economy, notably by monetary expansion “causing” a mis-allocation of capital and the business cycle.  His policy recommendation was for the de-nationalisation of money, convinced that a free system would gravitate toward this state of Catallaxy.  However, Rosser noted that later in life, Hayek increasingly incorporated complexity perspectives in to his views of equilibrium, writing “the achievement of an equilibrium [in an economy] is strictly impossible” (Rosser p17, quoting Hayek in 1981).

Where now for Hayekian thinking?

In his later years, as mentioned above, Hayek seemed on his way to thinking about society and the economy as non-equilibrium systems.  In fact Hayek read and wrote about cybernetics and systems approaches, which were precursors to complexity theory.  I am certain that if he had been born, say, 30 years later, he would now be rubbing shoulders with the likes of Brian Arthur and Elinor Ostrom, discussing social systems as “complex” in nature.

Given what we now know about complex systems, it’s clear that Hayek wasn’t perfect.  That’s not a criticism of Hayek: technological advances, notably the processing power of computers, have provided new ways of formalising the behaviour of complex systems, and they have created toolboxes of brand new concepts, which help us make sense of the world around us.  Hayek was brilliant without this new technology but we can now go further.

Perhaps the most important area to develop in Hayek’s thinking is his views on “institutions”.  Hayek differed significantly from free market economists (the two are often but inappropriately conflated) who hardly recognised the importance of economic institutions.  He understood that emergent self-organisation facilitated institutional development and change, and this was a fundamental part of social systems.  And yet he seemed to loathe the idea of government.  A rich vein to tap would be to use complexity theory to explore collective action problems that emerge in complex social systems, and to look at how these are typically overcome, including through institutional development and “policy”.  This could be explored for otherwise free societies.

The concept of self-organisation in complexity theory would help in this discussion.  In human history, self-organisation has typically been a messy affair of conscious trial and error, resulting in things like the protection of property rights, which underpins our market-oriented economies.  Within the institutions of “social governance”, a big question to ask is what is the role of government? The time is right to ask this question in the UK given the current government’s openness to moving the political furniture around, through its Big Society agenda.

To conclude, in this blog I have highlighted some of the interesting overlaps between Hayek and complexity theory.  I have also noted some differences.  Hayek was brilliant but (we now know) not perfect – for those wanting to develop his thinking further, complexity theory offers a robust and credible platform on which to do that.

Follow us on twitter!  @synthesisips

Share this Article:

14 Responses to “The Complexity of Hayek”

  1. Joe H says:

    Interesting blog.

    I think the true gap between Hayek and complexity is in the idea that there is such a thing as a ‘misallocation of capital’.

    Geoffrey Harcourt’s article on the Cambridge Capital Controversies is worth a read – in the 1960s, Joan Robinson et al. showed the absurdities of there being a stable and correct interest rate implying a particular allocation of capital. As interest rates change, optimal capital allocations change.

    It is simple not meaningful to find some sort of natural or equilbrium rate of interest in the market, like the Austrians believe; rather that small differences in rates will have large consequences, particularly since investment decisions are discreet events at various points in time – i.e. chaos and complexity.

    Keynes implicity understood this, hence the importance of ‘animal spirits’ in his work – because of intrinsic uncertainty about the future, investment decisions will largely be based on fuzzy expectations.

    Until the Austrians give up their ideas about misallocation of capital, I don’t believe they can be reconciled with complexity in the way that Keynes could be.

    • Azhar says:

      One could argue that Keynesian stimulus was adarely discredited from 1930 1940, when FDR tried to spend his way out of the GD with public works projects. It is widely acknowledged that it was the massive investment in the WWII war machine that finally pulled the economy back to growth. This deficit spending was done for investment in productive machinery, not entitlements, and was financed largely by our own citizenry rather than foreign powers.

  2. Greg Ransom says:

    Hayek’s view on the explanatory role of equilibrium is found in his papers of the late 1930s and 1940s and in his _The Pure Theory of Capital_. Hayek never thought the economy was in equilibrium of the kind laid out in logic or math.

    The key to getting Hayek is the role of equilibrium constructs in the explanatory strategy of economics.

    Get that wrong or don’t get that at all and you don’t get Hayek.

    • gregfisher says:

      thanks for this Greg R,

      could you embellish what you mean a little? what do you think Hayek meant by equilibrium? and what do you mean by ‘the role of equilibrium constructs in the explanatory strategy of economics’?

      Best wishes,

      Greg F

      • Greg Ransom says:

        Hayek’s view:

        Science begins with problem raising patterns in our experience.

        Example. The problem of order seen in adaptations and the design-like aspects of biological adaptations and the design-like creation and functional wonder of biological individuals and the species they make up.

        A number of things raise the problem of order without design when we look out and begin to perceive the motion of goods and prices as a structured thing (Hayek offers several of these, including the problem of stipulating a “just price” or the problem of working out the effects of usury laws, etc. all of which beging to point to problems with designing a system which begins to seem to contain an order within itself already.)

        The “pure logic of choice” can be built into an “equilibrium construct” conceived something like an “economy” of individuals viewed and ordered from the top down by an omniscient and all powerful “Dictator”. This gives us a model of plan coordination that raises a problem when we realize that no one could be “all knowing” in the way demanded by the the conceptions built into an equilibrium construct (there is no “give” “data” for example).

        Equilibrium constructs help us perceive the market as a fairly well coordinated of set of adjusting plans — a plan-like structure ordered in many ways as if the product of a single plan.

        Order without design raises a problem — how does it come about?

        With biological order there are several possibilities. A miracle occurred. Martians did it. Or as Darwin suggested, the plan like order of the biological world is the product of an underlying contingent causal mechanism, natural selection and geographical isolation, leading to adaptation and speciation.

        Hayek’s view is that the non-causal/non-empirical pure logic of the equilibrium construct acts as a kind of foil isolating the underlying causal mechanisms in economics by what it excludes — learning in the context of changing relative prices and local conditions; and the following of negative rules of just conduct, i.e. Hume’s negative rules of justice conduct related to property and honest dealing, etc.

        The explanatory explanatory strategy comes to this.

        Identifying the empirical patterns that raise problems in our experience, and pairing that pattern with a contingent causal mechanism capable of providing a plausible empirical explanation for that empirical phenomena, i.e. entrepreneurial learning (or changes in personal judgment or perception) in the context of changing relative prices and local condition, and in the context of individuals following rules of conduct and laws of the community.

        I’ve laid much of this out in the second part of a paper on Hayek written for Bruce Caldwell & SAE which can be found here:

        http://www.hayekcenter.org/friedrichhayek/hayekmyth.htm

      • Greg Ransom says:

        Just to be clear, as Hayek lays out the story in _The Pure Theory of Capital_ and in his essays “Economics and Knowledge”, etc. the equilibrium construct has two stand out roles (among others).

        1) It helps us to perceive a design-like order in the coordination of individual plans in the economy.

        2) It helps us to isolate by exclusion the two principle contingent causal explanatory components making up the explanatory mechanism in economics science:

        a) entrepreneurial learning/changes in judgment in the context of changing relative prices and local conditions

        b) learned and patterned ways of going on together in rule governed fashion such as we see in the following of negative rules of just conduct (e.g. of morality and the law) as described, for example, by Hume.

      • Greg Ransom says:

        Implicit in Hayek’s work is the realization that these two things

        a) changes in judgment/learning

        b) shared & learned patterns of rule following (much of these embodied and never articulated)

        are NOT things that can be “modeled” in a logical or mathematical construct or any other sort of stipulated formal construct.

        For b) Hayek is working under the influence of and in the tradition of his second cousin Ludwig Wittgenstein, as well as Burke, Hume and much else.

        For a) Hayek is independently extending elements developed against Mach/Carnap positivism in conjunction with a group of thinkers, including Mises, Polanyi, Menger & Popper — learning is open-ended and creative and is not fixed by “prior givens”; individual learning in a social context involves changes in individual judgment that unique to individuals and particular evolving context in space and time (Menger & Mises on price theory, etc.); perception is theory-laden (see Hayek’s landmark _The Sensory Order_), etc.

  3. politicalEconomist says:

    More:

    Complexity, spontaneous order, and Friedrich Hayek: Are spontaneous order and complexity essentially the same thing?
    Henry E. Kilpatrick Jr
    http://onlinelibrary.wiley.com/doi/10.1002/cplx.1035/abstract

    K. I. Vaughn. Hayek’s theory of the market order as an instance of the theory of complex, adaptive systems. Journal des Economistes et des Etudes Humaines, 9(2/3), June/September 1999, pp. 241–256.

    Complex Questions
    The new science of spontaneous order
    http://reason.com/archives/1996/01/01/complex-questions/singlepage

  4. Clark T. Irwin says:

    Sir:

    Re your remarks that Hayek “seemed to think of government as if it were only ever illegitimate” and “he seemed to loathe the idea of government”:

    Really? In “The Constitution of Liberty” (Chicago, 1960), Hayek said, “The range and variety of government action that is, at least in principle, reconcilable with a free system is thus considerable.” E.g., he saw “no objection” to government’s providing parks and reserves, so long as costs were not concealed. He said “There is little reason why the government should not also play some role, or even take the initiative,” in matters such as social insurance, education, or subsidizing research.

    Hayek’s focus on individual rights, limited government, freedom from arbitrary coercion, and the rule of law do not constitute hostility to the idea of government, but to unfettered and abusive government. Having witnessed close-up the rise of Fascist and Communist dictatorships, he knew the difference.

    • gregfisher says:

      Dear Mr Irwin,

      many thanks for your pertinent reply. I think on reflection by ‘government’ I was referring not to Hayek’s view on what its role ought to be but to what I think many others perceive it to be in reality, namely collectivism (in Hayek’s meaning) and central planning.

      This is an important distinction, which I should have made clearer, so thank you for your reply.

      Kind regards,

      Greg Fisher

      • Greg Ransom says:

        Academics who have read Hayek clearly do not take Hayek to mean central planning when he speaks of government.

        And Bruce Caldwell makes clear when Hayek provided a critique of central planning, he was in fact talking about central planning, and not something else.

      • Clark T. Irwin says:

        Dear Mr. Fisher,
        Thank you for the gracious response. I should have added that apart from my modest quibble, I found your essay thought-provoking and informative. ‘Synthesis’ is highly bookmarkworthy.
        Regards,
        Clark Irwin
        Alexandria, Virginia, USA

  5. [...] it happened, as I finished the book, Tim Harford alerted his devoted Twitter followers to this blog by Greg Fisher looking at Hayek through the prism of complexity theory. Very interesting. [...]

  6. Paul Lewis says:

    People interested in Hayek’s reliance, both in his theoretical psychology and also in his account of social order, on one aspect of complexity, namely emergence, might be interested in the article found here:
    http://www.sciencedirect.com/science/article/pii/S0167268111001144

  7. Hendrik says:

    Thanks for the comment. I don’t know that Keynes would’ve efrrerped that the gov’t spend on entitlements rather than infrastructure. I’d suspect his efrrerped method of gov’t spending was on infrastructure, thus employing people . I think Keynesian economists would say that the FDR projects were just too little, too late. I agree with you that the enormous money put into making war product kick started us. To me, things are still unclear as too whether Keynes theory’s should be discounted, which I think is why we are having the current debates with Europe about fiscal spending in this Recession.

Leave a Reply