Hayek, Summers, Macroeconomists and Truth

In a recent post by Boudreaux on Cafe Hayek there is a link to Hayek's Nobel Lecture in 1974, entitled The Pretence of Knowledge. The essence of Hayek's lecture was simply that macroeconomics is not a science, and the attempt to treat it as such and to guide an economy as one would use astrophysics to guide a spacecraft would be at the very least fool hardy. We have been back at this same theme ourselves.

Yet there is something in Hayek that may give a slight glimpse of hope. This was presented in 1974, an interesting time, for several key things were happening then. First, biology which Hayek calls a field which deals with essential complexity was un-modellable in a manner akin to physics, was dramatically changing at that very time. Specifically Hayek in his talk says:

"Why should we, however, in economics, have to plead ignorance of the sort of facts on which, in the case of a physical theory, a scientist would certainly be expected to give precise information? It is probably not surprising that those impressed by the example of the physical sciences should find this position very unsatisfactory and should insist on the standards of proof which they find there. The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables. Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons."

The second thing that that was changing was our ability to model dynamic systems which were essentially random processes. I published my first book in 1972, Stochastic System and State Estimation, stating in the Preface the thought, "the world is filled with uncertainty" and then I went on. In that book I presented the methods to deal with uncertainty and to predict with some form of certainty the future. I did so to the point of actually implementing it. It was these very theories that were used in the guidance of the Apollo spacecraft in the late 60s.

The third phenomenon which changed at that very time was the introduction of minicomputers and the explosion of the ability to perform massive amounts of computation in lower and lower cost environments.

Thus the three things: understanding biology via the paradigm of the gene, which is now done through quantitative genomics, understanding how to think of systems as random dynamic processes, and having the computer processing skills to execute the algorithms has taken the unthinkable in Hayek's mind of biology as a descriptive science, into what we now know as biology as akin to any engineering skill which we are all familiar with. I can now engineer a flower color and engineer a cure to certain cancers. Unthinkable in Hayek's talk.

However the unthinkable in macroeconomics is still there. There does not exist an underlying paradigm of reality to work with such as a gene, a photon, an electron, a molecule, a force field, or the like. There is just a massive set of folders with plants and dry bones which we still measure and classify. There is no DNA to measure closeness of species and how the genetic changes occurred to work backward and to work forward with statistical precision.

Now let us jump to the current situation and to Larry Summers. As the Wall Street Journal has said:

"At a briefing last week, Mr. Summers provided Mr. Obama with a 30-page book outlining options to beef up financial regulation. He asked former Fed Chairman Paul Volcker -- an Obama adviser during the campaign who Friday unveiled his new economic-recovery panel of advisers -- to lead the discussion. Other briefings have included health care, particularly on changes that can be made in the economic-stimulus and budget plans in anticipation of a health-care overhaul. The former Harvard economist is constantly doing his own first-person research. At the Alfalfa Club dinner this past Saturday night, Mr. Summers worked the room with a mission -- gathering evidence on how the president's economic stimulus package could work. When he saw an auto-industry official, he pushed for information on car sales to gauge the state of consumer demand."

This appears to state, and it is evident that he does believe this, that macroeconomics has an ability to quantitatively and with some accuracy, always with precision, predict the future of this Stimulus package. Yet as Hayek stated a quarter century ago, this is truly unachievable. Possibly if macroeconomics achieves a breakthrough as did biology it may be sought but such is not the case.

The level of this sense of hubris is exacerbated by the opening sentence of this article which states:

"An hour after the release of Friday's grim jobs report, Lawrence Summers was in the Oval Office giving President Barack Obama his daily economic briefing. The chief White House economic adviser told his boss with econometric precision that there was a roughly 80% chance -- "in the low 80s" -- that the $800 billion stimulus bill being revised in the Senate would create as many jobs as Mr. Obama's original proposal. The president asked whether that is "83% or 84%," poking fun at Mr. Summers's tendency to quantify an event's chances and shun the usual briefer's hedges of "likely" and "unlikely.""

This is not a joke, it is a way to say that they truly believe that this is predictable to that level of accuracy. I remember when we sent men to the moon, I designed the optical guidance system so I had a "dog in the fight", that we looked at our errors quite carefully and we always looked at the downside risks and managed for them. My system worked in Apollo XIII. It does not give one comfort to see such a level of confidence in a field which has been built entirely on fee of sand!

We should remember some of the final words of Hayek in 1974:

"It is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science. The enormous publicity recently given by the media to a report pronouncing in the name of science on The Limits to Growth, and the silence of the same media about the devastating criticism this report has received from the competent experts6, must make one feel somewhat apprehensive about the use to which the prestige of science can be put. But it is by no means only in the field of economics that far‐reaching claims are made on behalf of a more scientific direction of all human activities and the desirability of replacing spontaneous processes by "conscious human control". If I am not mistaken, psychology, psychiatry and some branches of sociology, not to speak about the so‐called philosophy of history, are even more affected by what I have called the scientistic prejudice, and by specious claims of what science can achieve."

The Limits to Growth written by the Club of Rome was in the period of the early 1970s a hubris beyond belief. This group had said they could model all of humanities future and from their models they started to tell society what they had determined was the best path. There is a fear here reflected in Hayek's words. This fear can today be applied to many areas, from the global warming hysteria of some, to the ability of some macroeconomists to give predictions within 1%!