by Greg Fisher
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:
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.
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