Hayek's Warning Against Ignorance and Conceit

We celebrate winners. Decades after athletic success, fans still clamor to meet and greet their favorite athletes — posing for pictures with them as they reminiscence over that special season or iconic play. But the losers — they drift off into obscurity. It’s much the same in life’s other domains. Those successful in business, entertainment, and politics enjoy a lifetime of notoriety, while those who tried and failed are forgotten. 

There are many “failures,” though, who deserve notoriety because their ideas, even if they didn’t prevail (entirely) at the moment, have impacted the world. 

F.A. Hayek is one of those people.

Friedrich August (F.A.) von Hayek is a hero to a niche group of economic thinkers known as subscribers to the Austrian School of Economics. Hayek’s ideas aren’t taught in business school. He’s better known for being an opponent of the man whose ideas won in the marketplace of ideas, John Maynard Keynes. But Hayek held important views, many of which I suspect will ultimately triumph—  but for now, he’s more like the basketball player who failed to block the buzzer-beater that decided the Championship game.

During the 1930s, an economic battle was raging. On one side was Keynes, who championed the use of monetary and fiscal policy to lessen the effects of recessions and depressions. By the late 1930s, many of the leading western countries had adopted his policy recommendations. Contrarily, Hayek rejected the notion that we are capable of steering the markets, saying of Keynes, “He was so convinced that he was cleverer than all the other people that he thought his instinct told him what ought to be done, and he would invent a theory to convince people to do it. That was really his approach.” 

One of the best introductions to Hayek’s ideas is his 1974 noble prize lecture, The Pretense of Knowledge, where he warned against scientism and identified two types of ignorance — concepts that are as relevant today as they were in December 1974. Although Keynes won the economic debate of the day, Hayek’s ideas continue to survive thanks to curious economists who appreciate his views and believe their adoption would create a fairer, more stable economic system.

Complexity

One of the primary points in Hayek’s famed lecture is that we’re easily fooled into believing we understand things that we don’t. He says:

“Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones”

First, Hayek identifies a differentiation between economics (and other social sciences) and the physical sciences. He correctly points out that we cannot attain enough data in complex social sciences (the range of outcomes is too extensive). Further, Hayek contends that the data we can gather might not be critical data to begin with. 

We’re said to be living in the information age. We have more information at our disposal than ever before, yet in many areas, like economics, we’re as confused as ever. Hayek passed in 1992, so he didn’t live to experience the massive impact the internet has had on data, but I suspect he’d be worried about the level of confidence “experts” maintain and the quantities of “supporting data” they present just before being entirely wrong on a complex issue. Our urge to understand the world makes data an irresistible impulse. 

Two Types of Ignorance

It’s not the fact that we don’t understand that’s troublesome. Instead, it’s the presentation of fiction as fact that presents a threat. Socrates discussed two types of ignorance: simple ignorance and double ignorance. Socrates was famous for downplaying his wisdom, constantly claiming that he knew little (and what he did know was worthless). An awareness of one’s lack of knowledge is Socratic ignorance or simple ignorance. Paradoxically, simple ignorance is knowledge —an acknowledgment of what is unknown; thus, it’s not particularly harmful.

Double ignorance, on the other hand, is “ignorance of ignorance, combined with conceit.” Hayek didn’t use the Socratic definitions, but I think he correctly identified double ignorance amongst his fellow economists:

“We know: of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”

Spontaneous Order

Hayek’s most renowned legacy centers around his idea that complex social systems are developed spontaneously from the bottom up instead of planned and directed from the top down. This idea is similar to Adam Smith’s notion of the invisible hand (found in his book Wealth of Nations). His theory also echos the Scottish natural law philosophers “who argued that society developed from a spontaneous order which was the result of human action but not of human design.” 

The concept of spontaneous order works symbiotically with the idea of double ignorance. Hayek argued that societies and markets are neither planned nor unplanned but fall into a category of order that evolves in growingly complex ways that observers cannot understand. The resulting systems were not conjured up and implemented by any single individual or group. Even in hindsight, we cannot explain these complex developments. Imagine, for example, trying to explain the development of language fully. 

Hayek demonstrates our inability to understand complex systems in the context of wage and price determination — a scorching topic at the time due to high inflation:

“Into the determination of these prices and wages there will enter the effects of particular information possessed by every one of the participants in the market process — a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain. It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons, than any one person can possess.”

To simplify these concepts further, Hayek turns to something we can all understand — sports. Hayek asks the listener to think about “some ball game played by a few people of approximately equal skill.” He argues that if we had some special insights into those players, like “their state of attention, their perceptions and the state of their hearts, lungs, muscles, etc., at each moment of the game,” we might be able to predict the outcome of such a contest. Of course, those data points (and the many others we’d need) are unattainable, so even if we knew the relationship between those metrics and the outcome, it’d be useless in predicting the result. 

I live in Kentucky, so the first Saturday in May is quite the spectacle. Sports enthusiasts, horse racing fans, celebrities, and the well-dressed masses ascend to the state to witness the annual running of the Run for the Roses. Bettors come equipped with data to aid them in betting on the race. They know the basic information, like the success rates of the owners, trainers, and jockeys. They can compare the horses’ recent performances and workouts and determine which runners are in the best form. 

More serious gamblers have even more data, broken into smaller bits. They create formulas to recombine these bits of information into ratings and rankings. And yet, almost everyone gets it wrong when the race is run. I’ve watched one group celebrate after betting on the winning horse due to the color and pattern of the jockey’s silks. At the same time, another group looks perplexed. Their in-depth analysis of hoards of data showed the #4 horse having better closing speed than he displayed…what gives?

It’s not a question of what we know; it’s what we don’t know — and, more importantly, what we can never know. Was the horse developing a minor illness that the vet missed? How will the horse handle the boisterous crowd? Is the jockey going to get pinched at the rail and forced to run a different style race than he’d like? In horse racing, the results are inconsequential. Sure, we may lose a few bucks and be humbled by how wrong we got it, but that’s about it. But the stakes are higher when “planning” societies, markets, and economies. Hayek believed this too, saying:

“To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.”

Scientism

Calling out scientism can be confused with being anti-science. But this confusion results from a misunderstanding of science, a symptom of hubris. Like Socrates, we must be open to acknowledging that we don’t understand many things. By manipulating evidence to fit our pre-existing views, we won’t improve the human condition; we’ll make matters worse. Hayek concluded his speech by saying:

“If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.”

F.A. Hayek helped me realize that despite how many economic experts I listen to and how compelling their predictions are, they have very little ability to predict outcomes correctly. This revelation led me to focus less on making predictions and more on controlling my thoughts, actions, and reactions. Keynes might have had a more significant impact on modern economics to date. Still, Hayek’s ideas will become more persuasive as time passes and our inability to control markets becomes more apparent.