5. The Analysis Developed: Hayek

C H A P T E R 5

The Analysis Developed: Hayek

I

Hayek at University

Like Mises, Hayek read law at the University of Vienna. As he went there immediately after the First World War, he was allowed to fi nish in three years instead of four. He read law “in order . . . to do economics”, but his degree included psychology, in which he was “about equally interested” at the time.

The single remaining lecturer in psychology came back seriously ill from the

War; after his death, Hayek had to teach himself from reading the literature.

He fi nally settled on economics for practical reasons: it held the opportunity for a job 1.

Hayek had “more or less decided to do economics” during his war service in Italy. His fi rst serious reading was of “two volumes … which were as poor specimens of economics as can be imagined.” He later marvelled that they did not put him off the subject permanently. Then, like Mises, Hayek became an economist only after reading Menger: “Mises says … this book

[Menger’s Principles] made him an economist. Having gone through the same experience, I know what he means.” Hayek was apparently directed to both of

Menger’s books by Othmar Spann (from whose seminar he was shortly thrown out.) Hayek also found Spann’s own book somewhat helpful in grasping the signifi cance of the logical analysis of means and ends in economics. But he

“really got hooked” through Menger’s Principles: “Such a fascinating book, so satisfying.” In retrospect, Hayek recognised that both the Principles and the

231

Investigations into Method had exerted a “decisive infl uence” on him, which he did not realise at the time. He “probably derived more” from these two works, particularly the general sociological analysis of the Investigations:

“This conception of the spontaneous generation of institutions is worked out more beautifully there than in any other book I know” 2.

Thus all four of the major Austrian economists were directly infl uenced and changed through Menger’s writings — not only Bohm-Bawerk and Wieser but also Mises and Hayek. In Hayek’s case, this was because Wieser was temporarily absent from the University, as a member of the Austrian cabinet, up to 1919. It was during the fi nal year of his degree (1920-21) that Hayek fi rst studied under Wieser. Since Hayek’s was a law degree, economics constituted only a small part: one subject in one of the major exams. In Wieser’s absence, economics was taught by the same Karl Grunberg — the “Marxist economic historian” and follower of the Younger German School — who had supervised

Mises. Later Spann also taught the subject. When Wieser returned, he lectured mainly to the law students, who had only this one course in economics.

Otherwise, Hayek reports that “any professional competence we had largely to acquire by our own reading and from the teaching of men for whom this was a part-time labour of love” 3. Amongst these last was Mises, but Hayek met

Mises for the fi rst time only after his degree (see further).

Of his legal subjects, Hayek says he retained some of his study of modern law, but it was the extensive course on legal history, especially Roman law, which provided such “legal knowledge” as remained with him. Hayek later said that he was “by original training … a lawyer.” This was in 1954; but in

1967, in an essay on Mach, Hayek stated, “… during the three years that I was offi cially enrolled as a law student, I divided my time about equally between economics and psychology, while my law studies were merely a sideline” 4.

Nevertheless, these legal studies helped profoundly to determine his view of the role of economics in analysing the real world (see further).

But apart from the three subjects of law, economics and psychology (the last mostly self-taught, and also much of the second), Hayek attended a huge variety of lectures at the University, on an enormous range of other subjects, including the history of art and classical Greek drama. He was also an “outstanding member” of a number of seminars. Despite studying “half a dozen other subjects”, Hayek got a fi rst in his law degree, which he obtained a few weeks ahead of his closest friends (he passed the fi nal exam in October 1921).

He wrote the thesis for his higher doctorate under Wieser, obtaining this higher degree in early 1923 5.

Hayek’s Years with Mises

But as soon as Hayek passed his exams, he set out to fi nd a job. The story of his fi rst encounter with Mises is well-known. Mises had charge of a temporary government offi ce which handled the settlement of international private debts between Austria and her erstwhile opponents (debts dating from before

1914.) Hayek arrived with a note from Wieser, who described Hayek as a

“promising young economist.” Having read this, Mises looked at Hayek: “I’ve never seen you at my lectures!” Mises gave Hayek a job nonetheless and later assisted him signifi cantly to visit the U.S. (for 14 months). When the offi ce was wound up, Mises tried to get Hayek into the Austrian Chamber of Commerce

[purely an advisory body to government] to form an economic research unit.

When this failed, Mises set about securing the funding for the Austrian Institute of Business Cycle Research, which he founded in January 1927, mainly

“because he had to help Hayek fi nd the right start in life.” Hayek dealt with the organisational details, but Mises persuaded government departments and trade bodies, among others, to provide the funds. Thus Hayek worked with Mises for some ten years, during which he saw Mises almost daily. In May 1924 (after his return from America) Hayek was admitted into Mises’ famous Privatsemi-nar6 , surely one of the most infl uential such groups this century . Hayek left

Vienna in 1931 to take up a visiting post and then the Tooke Chair at the LSE.

Mises on Hayek

Mises’ opinion of Hayek is clearly gauged from Mrs von Mises’ observation made during Mises’ fi nal teaching years at New York University: “Lu[dwig]

met every new student hopeful that one of them might develop into a second

Hayek” 7. Three inferences are clear: One, Mises regarded Hayek as the standard against whom he assessed all his students thereafter. Two, Mises hoped one day to fi nd someone to equal Hayek, not surpass him. Three, Mises was still searching as his teaching career ended.

Hayek on Mises

Hayek, on the other hand, is more explicit and categorical in his assessment of Mises. He fi nds Mises to be “one of the most original thinkers of our time in the fi eld of economics and social philosophy.” Hayek sees in Mises “a width of view and an intellectual spaciousness”, akin to that of an eighteenth-century philosopher. Mises (says Hayek) “must be compared to … Voltaire or Montesquieu, Tocqueville and John Stuart Mill.” Hayek is emphatic that

Mises “was … never a real specialist”, hence the Viennese academics were right in their instinct that “he would not quite fi t into their circle”, even though 234 Early Modern England | Sudha Shenoy

he knew more about economics than most holders of university chairs in the subject. Hayek sums up Mises thus:

“Mises’ work as a whole covers far more than economics in the narrower sense. His penetrating studies of the philosophical foundations of the social sciences and his remarkable historical knowledge place his work much closer to that of the great eighteenth-century moralphilosophers than to the writings of contemporary economists.”

Hayek himself refers to “my great master, Ludwig von Mises” (and more often, in interviews, to “my master, Mises”.) In 1978, he summed up Mises’

lasting infl uence on him: “I am to the present moment pursuing the questions which he made me see, and that, I believe, is the greatest benefi t one scientist can confer on one of the next generation.” Hayek also says of Mises:

“There is no single man to whom I owe more intellectually …” He describes his ten years under Mises as “a long, close collaboration”, during which Mises

“became the chief guide in the development of my ideas”. Although Mises was never his teacher formally, Hayek counts himself a “pupil” and a “close disciple” of Mises, stating: “I have probably learnt more [from him] than from any other man.” Mises’ Socialism had the most profound impact on Hayek: after he read the book, “the world was [never] the same again.” Hayek underscores this infl uence repeatedly. He estimates that Human Action will produce similar intellectual results in due course, through the work of those who read it at a decisive moment in their intellectual development 8.

Hayek’s Criticism of Mises

Hayek made one criticism of Mises on a number of occasions: that he was a rationalist utiliarian, who pushed the “a priori character of economic theory”

too far. Hayek felt this last was the outcome of Mises’ professional isolation:

Mises fi rst had to battle the German historicists; then he found himself in reaction to the “dominant scientistic positivism,” prevailing especially in America. So Mises “was driven to certain exaggerations”, as with his “teaching that all economic theory had a logically deductive a priori character.” Hayek said

(some four and a half decades later) that he wrote ‘Economics and Knowledge’

to persuade Mises that the whole of economic theory could not be worked out a priori — only the pure logic of choice, i.e. of individual action, could be so deduced. But with many people interacting through the market, “the crucial processes were those by which information was transmitted among individuals.” These processes were “purely empirical”. Hayek says he was “then largely unaware that he was developing a rather neglected part of the Mengerian tradition.” Mises did not take criticism kindly at all, but unexpectedly he

“even approved the article”, seemingly unaware that “it was a criticism of his Early Modern England | Sudha Shenoy 235

views”. Hayek feels that Mises took this silently, “but no longer was prepared to reconstruct his by then fully developed system…” 9.

Hayek made the above statements some 46 years after he fi rst wrote “Economics and Knowledge” (it was his presential address to the London Economic Club on 10 November 1936; published in Economica, 1937). At an informal gathering organised by the present writer (in Menlo Park, California, in June 1975) Hayek was reminded he had actually made the point in 1933, in his article on “Price Expectations,…” He then remarked that once his work had been published he never read it again. So Hayek, in the 1980s, was clearly unaware that his article, written in late 1936, in fact developed Mises’ reference to the “division of knowledge” which paralleled the division of labour in a market order. Mises fi rst observed this in his 1920 article on socialist calculation which was incorporated into Socialism. Hayek’s 1936 article not only acknowledges the latter (in a footnote), it italicises the phrase (in the text) and uses it twice. Hayek later referred (in a footnote to his essays on Scientism) to

“the division of knowledge on which impersonal social processes rest” and then (in 1945) to “a coordinated utilisation of resources based on …divided knowledge.” So the same Mengerian infl uence in fact reached Hayek both directly 10and via Mises .

Furthermore, Mises did modify his own position: in Human Action (p.66)

he says that “the only elaborated part of praxeology” so far — subjectivist economics — concentrates on those problems useful for “the comprehension of reality.” Therefore “[e]conomics does not follow the procedure of logic and mathematics.” Rather it combines aprioristic reasoning with “the application of its theorems to … concrete historical and political problems.” In presenting its results, “aprioristic theory and the interpretation of historical phenomena are intertwined.” Mises points out that its “subject matter” enjoins this “singular and logically somewhat strange” procedure upon economics. It requires

“caution and subtlety” and Mises warns against “a careless confusion of the two epistemologically diff erent methods implied.” — This reads like at least an attempt to incorporate Hayek’s point, although Mises does not mention

Hayek’s article.

Hayek felt that Mises’ rationalist utilitarianism was not entirely compatible with the latter’s “basic subjectivism” and conceded more to the Anglo-American position than the “Austrian methodological tradition” warranted.

But Hayek also described Mises as “a child of the rationalist age of enlightenment” who could never shake loose from the view that reason could always do better than “mere habit.” Hayek says Mises remained a rationalist utilitarian to the end. On two occasions, Hayek cites specifi c passages from Mises. One is 236 Early Modern England | Sudha Shenoy

taken from Theory and History (p._); Mises says there [I omit a couple of sentences not germane here]:

“The ultimate yardstick of justice is conduciveness to the preservation of social cooperation. Conduct suited to preserve social cooperation is just, conduct detrimental to the preservation of society is unjust …

The problem is to organise society for the best possible realisation of those ends which men want to attain by social cooperation. Socialutility is the only standard of justice…”

Hayek comments: “Though this is more rationalistically expressed than I would care to do, it clearly expresses an essential idea.” He immediately adds:

“But Mises was of course a rationalist utilitarian in which direction … I cannot follow him” 11.

We may note here that Burke had earlier linked justice and social utility.

For Burke there were “only two [,] foundations of Law [;] … equity and utility”. By the latter Burke says explicitly he means “general and publick utility”

which is “derived directly from [,] our rational nature”, and from everyone’s interest as “a member of the commonwealth.” To this, Burke puts in opposition a “partial and limited” utility, such as that of “a robber” — i.e., a “dome— stick enemy.” 12 — Even with the substantial diff erences in historical circumstances and therefore in expression, it seems quite clear that both Burke and

Mises are extremely close in the content of their ideas here.

To continue: As an instance of “extreme rationalism”, Hayek cites a passage from Socialism in which Mises says that ‘all social cooperation’ emanates from ‘rationally recognised utility’. Hayek feels this statement is “factually mistaken”: the socioeconomic order which so benefi ts humans was never designed by anyone, nor were its benefi ts seen in advance. Rather (says Hayek), people learnt to prefer something which had already been long in operation. But at this point Hayek says that this indeed is what Mises’ analysis has shown; and so “Mises as much as anybody has helped us to understand something which we have not designed.” Hayek feels that Mises, to his great credit, did emanci— pate himself from “that rationalist-constructivist starting-point” 13. Thus even as Hayek characterises Mises as a utilitarian rationalist, he is impelled to qualify this assessment, to recognise that Mises’ work carries on Menger’s analysis of social formations. We have seen earlier just how Mises does this.

II

In the late twentieth century, political philosophers, legal theorists, the separate sections of neoclassical economics — all move in self-contained airtight compartments. Therefore Hayek’s work is conventionally broken up into a number Early Modern England | Sudha Shenoy 237

of hermetically-sealed boxes, such as capital theory, monetary theory, trade cycle theory, the socialist calculation debate, political philosophy, jurisprudence, legal theory, methodology, the history of ideas and so on. (And no doubt as further subdivisions appear in due course, Hayek’s work will be further fragmented). It is the historian specifi cally who has to recognise that the work of Menger, Mises and

Hayek constitutes an analytical and historical unity, as we saw earlier: — they all three investigate the analytics of individuals’ actions, the interconnections amongst these actions and the resulting social and economic formations that develop historically. We now note Hayek’s contributions.

Menger on Capital

We begin with the production structure. Menger, Mises and Hayek all saw that the analytical unit consisted of: a. the entire range of fi nal goods and services being turned out in a particular historical context and therefore b. all the various production chains, made up of specifi c investments (in both “fi xed”

and “working” capital) yielding this particular range of fi rst-order goods. In what follows I shall fi rst set out the general abstract components of the analysis, then illustrate how these analytical components actually appear in concrete, historical materials (these illustrations are my own).

Menger (as noted earlier) saw that even in the simplest hunting-gathering societies, people deliberately provided for their future requirements; i.e., they allocated resources to production processes yielding a range of diff erent consumption services in some future period, close though this “future” might be.

Then people began producing goods of slightly higher orders, further from fi nal consumption. Over time, they moved into the production of goods of ever higher orders, continuing progressively to move ever further from the consumption stage, until, in the late nineteenth century, the existing inter-fi rm production chains were lengthy enough to provide for consumption up to a decade ahead 14.

In sum, Menger says people specifi cally allocate resources “now” to production processes that will yield a variety of consumption services in future periods. Thus people gradually build up production chains consisting of goods of successively higher orders, that correspondingly yield fi rst order goods further and further into the future. To illustrate the principle: A small handmade fi shing net, thrown from the shore, is made relatively quickly, “produces” small quantities of fi sh rapidly and wears out as fast. A fi shing boat requires a vastly greater range of complementary inputs and skills, takes much longer to build, and provides more fi sh over a far longer period of time. These however, are only two isolated capital items, separated for purposes of exposition from the 238 Early Modern England | Sudha Shenoy

investment chains in which they are links; and fi sh are only one of a range of consumption goods produced from an array of investment chains. These chains, as Menger saw, are made up of specifi c investments in combination.

Some investment goods are more versatile: they can be moved to stages closer to, or further from, fi nal consumption. Other capital goods are more specifi c

(in this sense). The outputs of any single fi rm are clearly only a small portion of any production chain, which consists of complementary outputs from innumerable fi rms. Menger described a sequential division of labour here, which can be extended through time (or contracted, according to circumstance).

Mises (as we saw above) stressed that all such production chains are adaptations to a particular set of historical circumstances. Scarcity of resources means the slate can never be wiped clean. As circumstances change, particular existing investments have to be re-adapted; new investments have to be adjusted to those already existing. Thus every capital structure is inescapably an historical formation, made by continuous adjustments to changing situations15.

The Average Period of Production

Hayek elaborates on and extends all these insights into the time-structure of production. The question arises: Did Hayek work fi rst with the notion of the average period of production and then abandon it for a multiperiod theory? When did he fi rst analyse an inter-fi rm production process of the type that Menger and Mises analysed? When did he realise that the investments of various fi rms actually formed investment chains that led to fi nal outputs?

The answer: In fact, from his essay on imputation (for his higher doctorate;

published in 1928) to The Pure Theory of Capital (1940), Hayek consistently developed Menger’s and Mises’ analysis of an inter-fi rm production process leading to a collection of fi nal outputs; Hayek says explicitly that he is building on Mises 16. Hayek’s writings contain only a few passing references to an average period of production, all from the years 1929-34. The concept is only mentioned — it plays no part in the analysis, which is concerned throughout with inter-fi rm investment chains. Thus in the second edition of Prices and

Production, 36 pages (in Lecture III) are devoted to analysing such inter-fi rm investment processes; there is one mention (p. 42) of an average period of production, which is never used 17.

The Capital Structure

Taking therefore a composite picture from Hayek’s various analyses18:

The time-“length” of this inter-fi rm production structure determines simulta-neously: i. the range, quantities, qualities and types of fi nal goods and services Early Modern England | Sudha Shenoy 239

produced ii. how far into the future this same fl ow of fi nal outputs can continue iii. the extent to which this time-shape of consumption can be varied, if consumer-savers so desire (in composite). In other words: the “existing” production structure, whatever its time-“length” (“shorter” or “longer”), makes available certain supplies of goods over certain time-periods. Within these limits, people can set, and change, their preferred time-shape of consumption. 1.

They can continue as is or 2. Within the limits mentioned, they can increase consumption in the near future, beyond the level already provided for. To do this, the provision “now” being made for later time-periods has to be reduced.

In which case: a. in these periods, a restricted range and smaller quantities of fi nal outputs will be available; b. they will be available for a shorter overall period into the future than previously provided for. This means a “shortening”

of the existing production structure. Or 3. people can reduce the provision being made “now” for consumption in nearer time-periods, below the level previously made. Such a reduction concomitantly releases versatile resources, to go into production stages furthest from final consumption. Thus more resources are moved into those inter-fi rm production chains that yield fi nal outputs in yet later time-periods, i.e. periods extending even further into the future than already provided for. This further “lengthening” of the production structure also improves provision at these later dates — a wider and better range of fi rst-order goods in larger quantities are made available then, together with new such goods.

Clearly, the “shorter” the existing capital structure, the narrower are the limits within which these preferences can be realised. Conversely, the “lengthier” the structure, the greater the achievable variation in the time-pattern of consumption.

Any production structure is an historical phenomenon, part of the specifi c and changing circumstances forming a particular historical context. These circumstances include consumer-savers’ desired changes in the future time-shape of their consumption. Adjusting the existing complex of investment chains to all such changes is a continuing historical process; it involves continuing changes in all these various investments: many are modifi ed and/or re-positioned; others are dropped; new investments are added. It is through such alterations in the actual chains of concrete existing capital goods that, for example, a desire to provide further into the future than currently allowed for, is fulfi lled . Thus the “length” of any production structure and any changes in it, are historical developments.

The Capital Structure in Anglo-Saxon England

To clarify these and other key aspects of the production structure, I now set out two illustrations, putting these abstract points into more concrete form.

Let us begin with the relatively “short” production chains found in an Anglo-Saxon village living primarily on subsistence agriculture. Households rely on their current crops and livestock to carry them to the next harvest. Any food stocks might cover one or two bad harvests at most. Village craftsmen — blacksmith, potter, woodcutter/charcoal-burner, ironworker, cobbler, leatherworker, carpenter — are all part-time farmers as well, while also producing craft goods for immediate barter or sale in the village or nearby market. As compared with the global production chains of the late twentieth century, fi nal outputs are extremely simple, narrow in range, and scant in quantity. They consist of coarse foodgrains; simple, coarse, handmade clothing and footwear; and only a few or more household items such as coarse woollen blankets; wooden stools, benches, bowls, platters; perhaps a knife or two. Only a very few, relatively unspecialised, intermediate goods are produced — intermittently, in very small quantities: eg iron ore, from surface mining; charcoal, small iron bars, clay, fences, yarn, leather, and the like. These are produced with a few simple hand— tools, made by the blacksmith. Production processes are extremely “short”

and many occur in the household itself — eg the output of cloth, clothing, simple footwear. The most important such process, subsistence agriculture, uses only simple tools: eg wooden ploughs, hoes, spades, etc; all produced intermittently, in ones and twos. The division of labour is also comparatively narrow; specialisation and exchange are highly limited, relative to later historical periods with a more extended production structure.

Furthermore, if these “existing” fl ows of fi nal outputs are to be maintained, the various investments composing even so short a production structure would have to be replenished or replaced. Livestock herds would need to be kept up, grain stocks and seed grain set aside, agricultural and craft tools and implements repaired and then replaced, labour and other inputs re-invested at the time needed in agricultural and craft production, and so on.

“Extending” this capital structure would involve principally agricultural investments: better crop rotations, more and/or better implements (for ploughing, weeding, harrowing, harvesting etc), better seed, more and better fertiliser, more ploughing, more weeding etc. These investments require more resources in stages somewhat further removed from fi nal consumption. For example, more/improved implements require more iron, charcoal, etc, plus more craft labour (blacksmith, ironsmith, etc.). This means higher payments than before — whether in grain or some other good(s), which means a bigger reduction than otherwise in “current” grain consumption or stocks, on the Early Modern England | Sudha Shenoy 241

farmer’s part. If grain output is close to subsistence, then any further reduction is highly risky. If, however, using these better implements allows grain output to be maintained at a higher level, then some of the additional grain can be set aside to exchange for the larger quantities of craft outputs and services needed for repairs and replacements. And craftsmen, in turn, will have to use more resources to repair and replace their own tools, furnaces, etc.

Continued higher output of grain then allows better crop rotations including more fodder crops and the diversion of more land to meadow and pasture for more and better-fed livestock. — Meadows require haying implements and skilled labour. — This increases the supply of fertiliser and livestock products which allows further specialisation and exchange and so on. Thus: extending the capital structure and increasing specialisation are two sides of the same coin.

The above is an oversimplifi ed account but I believe it illustrates the general principle.

In sum: in comparison with the worldwide production processes of the late twentieth century: this relatively “short” production structure of the Anglo-Saxon period supplies only a tiny range of fi rst-order goods in very small quantities and for only a very short time-period into the future. Household production is very signifi cant; correspondingly the division of labour is relatively limited. There is very little scope for varying the time-shape of consumption; in particular to extend provision beyond one or two seasons ahead.

The Global Capital Structure

Consider now the global capital structure which began developing from around the mid-eighteenth century onwards, which now binds all peoples fi rmly together. To get an idea of the historical phenomenon involved, imagine the vast array of specifi c goods and services available in the nearest shopping centre. Now think of all the goods and services in all shopping centres throughout the developed world from North America through Western Europe, parts of South Africa, then Australasia and Japan. Take any one good and mentally trace through every single production process, input and skill needed to provide that one fi nal good, including all land and sea transport, insurance and legal services. There is no stopping point other than the entire world capital structure. Some comments nevertheless:

The production chains involved are obviously incomparably “lengthier”

than in Anglo-Saxon England, with an immensely vaster range of fi nal consumption goods. These last include hundreds of thousands — perhaps millions — of items available only through such “lengthier” investment chains: 242 Early Modern England | Sudha Shenoy

— to name only one or two, there are CDs, TVs, dishwashers, cars, electrical home tools, mass produced books, magazines, pianos, etc. etc. The production processes likewise are composed of hundreds of thousands of various kinds of

“intermediate” goods and “fi xed” assets eg retail shops, stocks of retail goods, lorries, warehouses with stocks, an immense variety of machinery, equipment, goods-in-progress, containers and packaging, spare parts and components, steel, other metals, raw materials, steel mills, etc, etc. All outputs are unimaginably better in quality and produced in quantities unthinkable in earlier historical circumstances when production chains were far “shorter”.

It is impossible to enumerate all the various outputs produced as components and fi nal products of this worldwide capital structure. It is equally impossible to list all the varieties and types of distinct occupations and specialisms that are necessarily part of all the production processes involved, down to the fi nal consumption stage. For each individual fi rm or production unit, their various outputs (goods and/or services) are only tiny segments of links in a particular succession of production processes leading to some fi nal output(s).

All these activities of the innumerable fi rms and individuals involved are linked together and coordinated through prices and returns, on the various items produced or producible.

The Time-Shape of Consumption

Now to analyse the time-shape of consumption in this global production structure: As we go from the fi nal consumption stage to production stages successively more distant, the intermediate goods-in-progress can be expected to issue in due course as fi nished consumer goods at time periods that move successively further into the future. Thus consumer goods now in warehouses can be expected to move into the retail stage fairly soon. Consumer goods still being worked on in factories will be ready for fi nal consumption only at a later

“date” than the goods in warehouses now: the goods still in factories need fi nishing, then they have to be distributed.

Moving back, stage by stage, further and further away from fi nal consumption: various inputs and intermediate goods are now being prepared to go into factories; inputs are now passing through steel mills, sawmills and the like; iron ore, coal and other minerals are currently being mined while timber is growing in forests and plantations. The goods in each of these sequential stages can be expected to issue as fi nal consumption goods at periods successively more distant in the future: The intermediate goods being readied now for the factory have to go through the manufacturing, fi nishing and distribution processes.

The inputs now passing through steel mills, sawmills, etc have to be further Early Modern England | Sudha Shenoy 243

worked on and converted into intermediate products, then pass through the various manufacturing and finishing stages, then be distributed. The iron ore, coal, timber, etc. have to go through steel mills, sawmills etc, then the various preparation, manufacturing, fi nishing and distributive stages. Thus in a

“lengthy” production structure, intermediate products passing successively through various stages emerge as consumption goods in successive future periods. Clearly the “lengthier” the capital structure, the further into the future will consumer goods continue emerging.

In due course, if nothing else intervenes, all the intermediate goods now being worked on in all production stages will have fi nished their progress to fi nal consumption. This means that to maintain the “current” quantities, qualities, range and time-shape of consumption outputs, investments must continue to be made to continuously replenish the various fl ows of inputs and intermediate products in each successive stage. For instance, mining and timber-cutting have to continue, to provide a continuing fl ow of coal, iron ore, other minerals and timber. Such investment processes are even further removed from fi nal consumption; they too are integral to maintaining the “current” time-shape of consumption. Furthermore, the diff erent kinds and varieties of production equipment, the machinery of all types, such as machine tools, mining machinery, steel-making equipment, machines for producing cars, fridges, washing machines, TVs, CDs, tinned fruit, soap, cereals, clothing…..et hoc genus omne, will all wear out, each in due course. So, to maintain the “current” fl ows and time-shape of consumption beyond this point, all these manifold types of machinery and equipment have to be not only repaired and maintained, but replaced eventually as needed. To do all this, such production processes have to be going on “currently” that will provide, at the times needed in the future, the specifi c sorts of capital items — the particular kinds of machinery — required. With such an extended capital structure, technical changes can be tried out and successful ones embodied in new machinery quickly, so such change is rapid. Thus over time, the capital structure incorporates technical developments amongst all its other historical features. Finally, buildings, of course, need repairs, maintenance, replacement, including technical and design changes, as they occur.

To summarise: in the “lengthy” production structure here outlined, from the late twentieth century, in every production stage en route to fi nal consumption, there are immense quantities of innumerable types of goods-in-progress and other inputs being worked on and moved into the next succeeding stage.

Thus each “stage” also uses massive investments in a vast variety of plant, equipment and machinery. At all stages, a range of transport services are used, which means further substantial investments in a range of vehicles, ships, etc, 244 Early Modern England | Sudha Shenoy

to be utilised as needed. Finally, production is under-way “now”: fi rstly, to continue the fl ow of goods-in-progress, secondly, to provide a continuing fl ow, through future periods, of plant, equipment and machinery, including technical changes, and new types. All these production processes are subdivided amongst all the innumerable fi rms involved, and lead ultimately to a vast variety of fi nal outputs, including leisure. Concomitantly, this extremely “lengthy”

capital structure generates a minutely subdivided division of labour, with an immense array of particular and changing functions. — Table 5.1 gives an attempt to visualise some of the features outlined above.

Table 5.1

The Time-shape of Consumption

Stage of Services/Inputs Being ProductionGoods Passing ThroughAdded/Used Up

Retail shopsHuge range of consumer Transport, buildings, shop-fi t—goods — ready to go tings, shelving, offi ces, equip-home.ment, etc.

WarehousesConsumer goods waiting Buildings, fi ttings, shelving, to go to retail shops.forklifts, lighting, offi ces, phones, etc, etc.

Finishing stagesGoods-in-progress — fi n—Workshops/buildings; fi nish—ished, packed.ing, packing materials.

FactoriesGoods-in-progress being Machinery — huge variety of (consumer produced, worked on, inputs of all kinds.goods)taken to fi nishing stages.

Rolling mills, Intermediate prod—Machinery of various descrip—machine shops, ucts being prepared for tions; inputs being used up; etcnext stage of produc—eg steel products, other inter-tion. Machine parts being mediate metal products.prepared.

Woodworking Wood products being Wood products being used shopsworked on.up.

KilnsDrying timber.

Steel millsIron ore, coal, other ores, Mills, machinery, furnaces, etc being converted into fuel, etc; offi ces and equip-steel products.ment. Mineral inputs.

SawmillsTimber being worked on.Machinery etc.

MinesIron ore, coal, other Mining machinery, lighting, minerals.ventilating, equipment to remove ores, coal.

Timber Growing timber.Saws etc to cut timber as plantationsneeded.

Various facto—Replacements for: Various inputs being used up.

ries, workshops, Retail shop fi ttingsmills, etc.

Warehouse fi ttings

Machinery for fi nishing stages

Machinery for consumer goods factories

Machinery for rolling mills, machine shops, woodworking shops, etc

Machinery for steel mills, sawmills

Mining and ventilating machinery

Machinery to replace machines producing replacement machinery.

Other items: various rubber items, lubricating oils, fuels, bricks, brick kilns, transport, legal services, insurance, etc, etc, etc.

Notes:

1. All the above production processes are being carried on ‘now’.

2. But the goods being worked on will issue forth as fi nal outputs at time-periods successively further into the future. Thus goods in retail shops will go home in a few days; the timber now being planted will become furniture only much further into the future. But the trees must be planted ‘today’ for this future output to appear in future time-periods. Similarly, the replacement machinery now being prepared for future renewal of (eg) a steel mill, will contribute to the emergence of fi nal goods at time-periods even further distant into the future. But these preparations must be made ‘today’, if the steel mill is to be renewed at the time determined upon.

3. The ‘current’ level/range/quality of fi nal goods is the outcome of similar production processes set in train in past time-periods.

4. All this refl ects the composite preferred time-shape of consumption of the body of consumer-savers. As these preferences change, versatile inputs are shifted into stages further from/close to the consumption stages; and the rates at which goods-in-progress fl ow through these stages are correspondingly speeded up/slowed down, within the possible limits.

5. New technology is incorporated into machines as they are replaced;

the pace of renewal/replacement depends on the time-preferences of consumer-savers.

Gains and Losses are Essential

This whole complex of production chains is formed, maintained and changed in accordance with returns — operating profi ts and losses, capital gains and losses — on the various specifi c investments (“fi xed” and “circulating”) making up each of the “links” in every “chain”. Since each individual investment is only part of a link in an investment chain, profi t and loss are equally essential: it is through these that the various separate investments in separate fi rms are linked together to form a chain ending with fi nal consumption. As — historical — circumstances change, particular investments will have to be altered to maintain the chain and its contribution to the range of fi nal outputs, themselves changing. So, capital and operating losses remove the malinvestments that no longer “fi t”, while better adapted investments, including new ones, earn profi ts and capital gains.

To maintain the ‘current’ range, quantities, qualities and time-shape of fi nal goods and services, means maintaining the interlinked price-cost relationship

— the chains of returns — on all the various and changing investments — intermediate products, equipment, buildings etc — making up just those production chains yielding just this collection and type of consumption services.

Clearly, such a production structure has very substantial scope for varying the fl ow of fi nal outputs in diff erent time-periods, according to the changing preferences of consumer-savers. Its immensely greater “length” provides immense quantities of fi nal goods and services. Correspondingly, this permits far wider limits within which the time-shape of consumption can be varied.

Putting this fi rst in abstract terms: changing to a diff erent time-shape of consumption means changes in the “length” of the overall production structure

(making it “longer” or “shorter” than “currently”). This means concomitant changes in returns in diff erent production stages, so as to bring about corresponding shifts in investments, both “fi xed” and “circulating”.

Lengthening the Capital Structure

Suppose consumer-savers wish to increase provision in time-periods more distant into the future, above the level already provided for. This means in these more distant periods, they seek to raise the quantities, qualities, and range of fi nal outputs, including new ones, beyond what had been hitherto allowed for.

To achieve this goal requires an additional “lengthening” of the production Early Modern England | Sudha Shenoy 247

process involved — additional, that is, to that already embarked upon. These further processes have to be added on “today”, ie investments have to be further expanded now in stages furthest from fi nal consumption, with new links added to the various investment chains.

Changes in returns — in cost-price relationships — in the diff erent production stages, bring about these adjustments. Initially, the desire to provide more

“today” for additional and improved consumption in more distant time-periods manifests as a relative slowing in “current” purchases of fi nal outputs (that is, “saving” rises above previous, expected, levels). This slowdown is smaller or larger, according to consumer-savers’ changed time-preferences. Thus, returns are reduced correspondingly in stages closest to final consumption — the price-cost gap is narrowed, below producer expectations, on those processes bringing fi nal outputs forward in the relatively closer future. There is now a slower rate of fl ow of consumer outputs in nearer time-periods: eg retailers and wholesalers now fi nd stocks lasting longer and begin to reduce them, the rate of production slows in consumer goods factories. Rather more quantities of versatile resources (eg. steel, labour, raw materials, etc) are released. Correspondingly, in stages further from fi nal consumption, returns rise, as (alternate)

costs are reduced, in line with the additional versatile resources now available.

To put all these in somewhat more concrete form: as returns fall on production processes nearest fi nal consumption, there is a concomitant reduction in the fl ows of steel, intermediate products, raw materials, labour, fuel and other versatile resources into these processes. This in turn means a reduced rate-of— fl ow of fi nal goods, eg TVs, CDs, washing machines, furniture, etc, in the near or very near future. Instead, rather more steel, raw materials, fuel, labour and intermediate goods, than previously allowed for, go into areas remoter from fi nal consumption, eg the production of mining machinery, steel-making equipment, machine tools, other types of machinery and equipment, etc. New types of capital goods are produced. More bricks go into factories and plants in these stages, rather fewer go into consumer goods factories, shops, warehouses, etc.

More/larger brickworks are built. More timber is used for pit props, and in factories and workshops, relatively less for furniture, bird tables etc. Timber is left to grow longer; more trees are planted to mature later. Mining and other investments are increased, to provide an enhanced fl ow of minerals in future.

In time: as timber plantations yield more trees, more timber is available to help produce additional furniture and the like. More bricks mean more housing. A larger fl ow of minerals goes into larger and/or more numerous steel and other plants, with more and/or better equipment. Outputs go from there to more and/or larger factories, again better equipped.

There are more and newer types of intermediate products, as well as more and better production machinery of all kinds. Some investment goods are much reduced in use; others are dropped altogether. Taking one example only:

consider what happens so that accelerating quantities of CDs and CD players are produced while output of records and record players is severely cut back; or when computers replace typewriters. A large number of interrelated changes have to occur in all production stages — from those far removed from the fi nal output, right down to the retail stage. Many investments become economically unusable; new investments and intermediate goods are produced.

Plants, factories, equipment, machinery: some types are no longer useable;

new types are produced and expanded considerably; many are modifi ed.

All these increased/improved/new outputs are as yet moving through production stages further removed from fi nal consumption. These intermediate products will be further worked on and reach the fi nal stage — eventually, at periods further in the future. For those stages near consumption: there is now available an enhanced fl ow of better/new intermediate products; the resources necessary to enlarge/improve consumer goods factories are also being produced. Thus from these nearer stages, more/better/new types of fi nal goods fl ow into bigger wholesale and retail sectors. As all these larger/improved fl ows of goods-in-progress move into stages close to consumption, costs are reduced there, returns rise and so the rate of fl ow of fi nal outputs rises. All this occurs at dates later, into the future.

In the interim, while investment chains are being thus “lengthened”, the rate of fl ow of fi nal outputs is reduced relative to what it would have been otherwise, as noted above. As these “longer” chains are “completed”, the larger/ improved fl ows of goods-in-progress in due course reach the retail stage and being to issue forth as improved consumption services. For these chains to be completed, the price-cost relationships — the pattern of relative returns in the various stages — that bring about such a lengthening need to be maintained throughout this interim period. So long as consumer-savers’ time-preferences are unchanged, they will continue to “save” to the extent necessary in the interim — ie they will do nothing to change this rate of fl ow and thus change these price-cost relationships. It is clear that “saving” in the sense necessary here cannot be a fi nancial aggregate defl ated by some price-index. “Saving”

rather refers to the maintenance of the price-cost relationships necessary to extend the capital structure; which means acceptance of a necessarily reduced rate-of— fl ow of fi nal products during such an “extension”. Similarly, if this extended structure is to be maintained — ie if the improved fl ows of fi nal services are to be retained — the production processes that produce all the new/added intermediate products and “fi xed” assets in all stages must continue. This means Early Modern England | Sudha Shenoy 249

again: maintenance of the relevant price-cost relationships — ie a continuation of “this” set of time-preferences on the part of consumer-savers.

Shortening the Capital Structure

Suppose now consumer-savers wish to bring consumption forward to nearer periods in the future, again, above the level previously provided for. Then all the processes outlined above would be reversed. As purchases of final goods are speeded up, prices and returns rise above expectations while stocks are reduced more rapidly than allowed for. Production fl ows are speeded up in consumer goods factories. To do this, versatile resources are shifted into processes that yield consumer outputs more rapidly in the nearer future. Concomitantly, costs rise in stages furthest from fi nal consumption; returns are squeezed in these areas. Outputs of machinery and “fi xed” assets furthest from fi nal consumption are slowed down (eg mining machinery, steel-making equipment, etc). And so on: reversing the sketch drawn above. — Patently, there are extremely wide limits within such an extended capital structure for varying the time-shape of consumption. But it is always the available resources, as determined by the “existing” production structure, which sets the limits within which such variations are achievable: scarcity, as always, limits choice.

Complexity of the Capital Structure

The above is, as said, only a bare sketch pointing to the extraordinarily complex production fl ows and interconnections actually found in even the most modest capital structure. Hayek himself said of his own attempt, in The

Pure Theory of Capital, to delineate the principles on which production structures are formed: “…the things become so damned complicated, it’s almost impossible to follow it” 19.

Clearly, this abstract analysis of the capital structure is a tool for historical study: to bring out the complex interconnections amongst human activities in real historical contexts. Such notions as “an average period of production”;

aging wine or growing timber; the average age of investments; even input-output analysis and the theories of multiperiod production processes — all fail to bring out the key aspects of the historical reality that the capital structure is built on: the range of fi nal outputs that people seek to obtain (including leisure) ; and the investment chains that produce this range, through time. Thus each fi nal good or service is only part of a wider range of such fi nal outputs;

and with respect to all non-consumption outputs, the questions that need asking are: which fi nal output(s) does this good/service ultimately contribute to? What are the other investments in the investment chain(s) in which it 250 Early Modern England | Sudha Shenoy

helps to form a link? Where does it stand in relation to the fi nal link — fi nal consumption?

As mentioned, Hayek works throughout on refi ning and extending this abstract picture of the capital structure. We can now see why he explicitly repudiated the notion of an average period of production. Speaking in retrospect, he is quite negative about it: “The average period of production is a beautiful simplifi cation, but doesn’t help you at all”. It is “crude”, and “so oversimplifi ed as to mislead in the application” 20.

The Trade Cycle

Hayek’s analysis of the trade cycle is again explicitly a further development from Mises 21. This analysis is not relevant here; it is only necessary to say that the trade cycle is super-imposed on the production processes constituting the — changing — capital structure in any particular historical context. The cycle is a combination of: 1. an attempted further extension of the production structure, beyond that which corresponds to consumer time-preferences. This attempt is in response to an acceleration in the money-supply. 2. This is followed by a shortening which brings investment chains into line with consumer-savers’

desired time-shape of consumption. Thus the changes making up the trade cycle are additional to all the other processes taking place; in particular, those that refl ect consumer-savers’ time-preferences and adjustments of investment chains to ever-changing circumstances. In short, the primary analysis has to be of the production structure; the analysis of the trade cycle can only follow, as a contingent corollary. (For a fi ercely condensed outline, see footnote 22).

In neoclassical economics, however, trade cycle theory is a self-contained unit. Hence, Hayek’s account of the cycle is likewise seen as similarly complete and independent. Sraff a’s noted exchange with Hayek, over the fi rst edition of Prices and Production, is one of the earliest encounters between the

Anglo-American neoclassicals of the time and the “Austrian” approach. Sraff a remains fi rmly within the Anglo-American framework. He, therefore, fi nds the analysis of the capital structure to be both obstructive and unintelligible;

he is plainly irritated by such irrelevant “preliminaries”, whose “description

[obscures] the main issue”. Not surprisingly, Sraff a has to focus on Hayek’s auxiliary monetary assumption (that MV is constant) and his tentative comments on monetary policy, and treat these as the central theory, fully-fl edged and self-suffi cient. Sraff a’s conceptual prism, in other words, fi lters out the cat and shows him only the grin — or perhaps a few whiskers. So Sraff a argues that it is completely irrelevant whether infl ated or uninfl ated money is used to purchase “capital” [non-consumption] goods; consumption is still reduced Early Modern England | Sudha Shenoy 251

and the goods are just as [automatically] productive. Where the funds are infl ated, there is class robbery: but the robbed party — the workers — cannot force the robber-capitalists to give up the goods. Thus Sraff a excuses himself from trying to grapple with the capital structure: “Hayek as it were builds up a terrifi c steam-hammer in order to crack a nut — and then he does not crack it.”

So “we need not spend time criticising the hammer” 23.

Thus, Sraff a explicitly refuses to tackle the vital issue: the analysis of the interconnected investment chains that yield fi nal outputs. Thus he cannot see that only after such an analysis is it possible to consider the eff ect of infl ation on the formation of such investment chains. He chooses rather to criticise Hayek’s observations and comments on this eff ect, with no knowledge of what is being aff ected and, therefore, how it is aff ected. Instead, Sraff a develops some aspects of his own Ricardian theory 24.

Equilibrium

Hayek is generally considered an equilibrium theorist who then abandoned the concept, although some hold he remained true to the end. The historian’s question is diff erent: When did Hayek realise the real world needed analysing? From this perspective, it is clear that Hayek never saw the depiction of equilibrium as a ne plus ultra: he was aware from the start that such a picture was only a tool, that beyond it still lay the analysis of reality.

Hayek’s observations on the preparatory role of equilibrium occur in the course of his analysis of the production structure and the trade cycle, and in his penetrating commentaries on the (im)practicalities of the various proposals for socialist economic calculation. He diff erentiates sharply between the representation of equilibrium and “the true functioning of the price mechanism”; he specifi cally investigates this last in separate essays (I examine these below).

Hayek’s ideas on the nature and role of equilibrium theorising are a direct development from Mises’ ideas. Mises refers to the “stationary state” as a necessary conceptual aid. But it could “never exist”; it was “a theoretical assumption to which there is no counterpart in reality.” So too the ceteris paribus assumption of the “static method” was an “indispensable fi ction” 25. Hayek’s comments are similar: He refers to “an imagined static state of aff airs.” Although

“the static approach” is “an indispensable theoretical tool”, the assumptions necessary to use it “artifi cially create the data”. Equilibrium prices are “hypothetical”. Equilibrium theory can only handle “such changes in data as are predictable”, with “no deviation from the expected course of events”. If equilibrium is to extend through time, a necessary assumption is that changes in

“wants and means of production” are all known to individuals at the outset. 252 Early Modern England | Sudha Shenoy

In such a situation, everyone achieves the ends they seek. Although “this will never be seen in reality”, it allows the eff ects of change to be assessed. Equilibrium is thus “a foil” to highlight “the actual course of events”. Lastly, Hayek identifi es equilibrium with the “modern theory of the general interdependence of all economic quantities”, as best exemplifi ed by the Lausanne School 26.

Concurrently with all these characterisations, Hayek repeatedly emphasises that such an equilibrium contains no money. Systematic analysis is still needed of how the inclusion of money changes and influences individual prices, especially when it takes the “alien” form of “bank credit”. One major example of how money alters non-monetary “equilibrium” prices is the trade cycle. The latter “show(s) empirically observed movements” that equilibrium theory is still inadequate to explain. In the course of the cycle, price changes initially do not lead to equilibrating changes in quantities; price expectations are falsifi ed. Only later are all these rectifi ed. In other words, people act on the basis of individual money prices and price expectations. A purely statistical relationship between some price index and some monetary aggregate says nothing about the individual actions that drive economic phenomena 27.

Parallel with the above, Hayek also refers to an “equilibrium” — a regularity in economic interrelationships, which is rooted in “the logic of economic action”, — individuals trying to make the most of their resources. This allows equilibrium analysis to be applied to all economic phenomena. Hayek emphatically rejects any “far-reaching indeterminacy” resulting from monetary infl uences — ie economic explanation is still possible in a money economy. From very early on, Hayek saw economic theory as Mises did: as a way of organising concrete data: “the task of theory is…to provide the framework into which any concrete assumptions” about individual actions “can be fi tted”. Along with Menger and Mises, Hayek sees these concrete data as historical in nature, the “constantly changing object(s)” of theoretical explanation. Actual historical fl uctuations contain a vast variety of features and diff er greatly amongst themselves. In the earliest of his (translated) articles, Hayek was well aware that statistical indices did not capture the data corresponding to analytical categories. Two key changes in particular, could not be so caught: a. relative shifts towards goods further removed from fi nal consumption, b. how far these shifts correspond to the actual release of resources from processes nearer consumption for investment in processes further away. Even within the fi rm, management demarcations diff er from theoretically signifi cant categories. Hayek also emphasises that the range of real-world interest rates does not correspond to the “interest rate” of Austrian theory. The latter’s functions are performed rather by returns in diff erent production stages 28. Thus Hayek, right from the Early Modern England | Sudha Shenoy 253

outset, was concerned with developing analytical tools to study an historical reality.

In The Pure Theory of Capital, Hayek distinguishes between ‘static’ and

‘dynamic’ equilibrium, the latter being a refi nement and extension of the intertemporal equilibrium which he had set out in his 1928 article. Even at that early date (as we just saw), he realised that it could handle the expected only, and therefore it was only “a foil” for comprehending reality. Twelve years later, in the Pure Theory, Hayek explicitly and repeatedly terms any picture of equilibrium, whether “static” or “dynamic”, as “fi ctitious” or “purely fi ctitious”. (There are nine such references in sixteen pages. Once, this “imaginary” state is said to be a “foil”. Twice, the idea that it refers to reality is called a “pretence”.) Hayek, in fact, feels that only two types of analysis are useful — a hypothetical equilibrium and an historical sequence:

“the only relevant distinction is between two methods, that of logical analysis of diff erent plans existing at the one moment (“equilibrium analysis”) and that of causal analysis of a process in time. For this distinction, the terms statics and dynamics seem altogether inappropriate, and it would probably be better if they were to disappear entirelyfrom economics” 29.

Hayek emphasises that equilibrium is only an “intellectual tool”. Its function is to “analyse in isolation a set of relationships…relevant for the explanation of actual events.” To explain “historical sequences…is of course the ultimate goal of all economic analysis”. Actual historical investments are adaptations to “a series of unforeseen changes”, so in most cases diff erent goods will be produced instead, in due course. Thus, the real-world capital structure is in

“a process of continual change” 30.

The Wider Context

As mentioned previously, Hayek is seen as having left the airtight box of economics for other sealed compartments, such as political philosophy, methodology, etc, from around the late 1940s. But, as Hayek puts it (in retrospect), he was “turn[ing] to general problems” 31 somewhat later than Mises had done.

In other words, Hayek considers he moved into a broader part of the same fi eld of study. This is because Hayek continues throughout to develop the same framework which Menger established and Mises extended. All the phenomena that Hayek investigates lie within this framework — they are all analysed as the unforeseen outcome of the interconnected actions of individuals over time:

the capital structure (above); the pricing system, the katallaxy, the common law, moral rules (all below).

Hayek’s writings on the production structure and the trade cycle were discussed extensively in the journals between 1931 and (February) 1936. But these writings were part of a framework addressed to analytical issues that even then lay defi nitively outside the contemporaneous Anglo-American theoretical structure; his inaugural lecture on “The Trend of Economic Thinking” clearly illustrates this (I consider it below). At the time, of course, such a gulf could hardly be seen, if at all. From 1936 onwards, there is scarcely any reference to his work in the journals. And Hayek’s writings from 1940 onwards, begin to contain some indications he was becoming aware of a certain distance (see below, on the economist’s role).

The Trend of Economic Thinking

Hayek’s inaugural lecture at the LSE, in May 1933, was addressed solely to “general problems”, ie the general analysis of social phenomena. He built solidly on Menger and Mises here; certain of its key points are extended somewhat in his fi rst article on socialist calculation. Thus Menger (as we saw) distinguishes between “pragmatic” ie designed, orders and those that result unintentionally from historical development — from people’s actions aiming at various ends. Mises sets out the diff erences between an organisation, the outcome of a single will, and an organism, which manifests “mutuality”. Hayek (in his inaugural lecture) uses Mises’ terms and analysis: The lay mind identifi es order with deliberate organisation only (says Hayek). This attitude is “probably the last remnant” of a “primitive” animism and anthropomorphism, abandoned in the natural sciences. But “society is an organism… not an organisation”. So too are other “spontaneous institutions”, including the economic system. With this, as with similar phenomena, “the spontaneous interplay of the actions of individuals” produces an organism whose parts are functionally interdependent. No human mind designed it, nor did people’s actions aim at it.

The economic system solves complex problems no-one realises exist; it functioned long before it was understood; it coordinates people’s actions, through a complex mechanism. Only after “intense…systematic inquiry”, are its existence and functions grasped, as the object of economic theory. Thus economic analysis begins with elementary facts that everyone knows, but it then pursues the implications systematically and comprehensively, far beyond the obvious, to discover the workings of an “unsuspected order”, the “interdependence ”

and “coherence of economic phenomena”. — These points are, of course, developments from Mises 32.

Again with Menger and Mises, Hayek sees in the Younger German Historical School, the chief antagonist of this ‘economic’ analysis. This School’s economic ideas are those of the man-in-the-street (he says). It seeks to derive Early Modern England | Sudha Shenoy 255

regularities directly from historical materials. Naturally, failing in this, it then denies that economic phenomena are orderly; they are only a succession of independent historical events. Hayek goes on: the natural sciences have to begin with complex phenomena, surmise their basic elements and establish these through experiments. But the social sciences start from the directly and indisputably “known empirical elements” that form complex (social) phenomena; analysis then derives otherwise unobserved regularities. Thus, the social sciences are “empirically deductive”, and the pricing system solves “permanent economic problems [that are] independent of the historical framework”. —

Some comments are in order. Hayek here follows Menger and Mises. Menger fi rst pointed out this fundamental diff erence between natural and social phenomena; he realised historical data were complex, as did Mises; for the latter,

“economic theory” means systematic reasoning about human action, reasoning which continues long past the immediately obvious 33.

Furthermore, Hayek clearly is describing a specifi cally ‘Austrian’ position here, which has always been entirely distinct from anything in Anglo-American economics. In sum: for the older Austrians, economic theory studies social phenomena that have a. functioned for very long periods of time, b. emerged over these periods through the actions of unsuspecting individuals. Only after these phenomena are investigated, are their existence and functioning be recognised. In short, Hayek and the older Austrians, were analysing actual — abstract — features of actual historical developments. — Now clearly these are not natural phenomena, so natural scientists need not study them or realise what their analysis involves. Anglo-American economists, even by the 1930s, had already reached this ‘scientifi c’ position, it became further entrenched from the 1940s onwards. The development of neoclassical economics, as found in the late twentieth century, and the development of analytical tools for historians, as done by the older Austrians, are the development of two historically distinct and separate phenomena.

We shall see how Hayek gradually developed and extended this ‘Austrian’

position. Now Hayek did not write with a view to making things easier for the historian who followed; — his works have to be grouped thematically rather than simply set out chronologically. Nevertheless, I shall try to put these distinct thematic groups into a roughly chronological order, to see how his ‘Austrian’ analysis unfolded.

Socialist Calculation

We begin with his three essays on socialist calculation. In the fi rst of these,

Hayek surveys the various attempts made (or, rather, not made) up to then 256 Early Modern England | Sudha Shenoy

(1935) to demonstrate how exactly all economic activities of all people, fi rms, etc, could be directed centrally, as if all were parts of a single organisation. In the other two essays, (1935, 1940), he analyses thoroughly the more prominent proposals off ered.

Now Mises had earlier pointed out that, in analytical terms, ‘socialism’

meant a position of static equilibrium:

“…it is quite easy to postulate a socialist economic order under stationary conditions. We need only avoid asking how this stationary condition is achieved. If we do this there is no diffi culty in examiningthe statics of a socialist community. All socialist theories and Utopias have always had only the stationary condition in mind”.

But — Mises underlines — equilibrium is an “imaginary state”, an “expedient” for analysing economic 34change. Hayek develops his analysis out of this essential distinction: between a purely imaginary picture, drawn to help analyse the ever-changing reality, and the direct analysis of that constantly moving reality.

And so: for the socialist economists concerned, central direction meant depicting an equilibrium situation, which would be maintained or changed as necessary, through appropriate directives to the managers of the various economic units. For Hayek, the key issue is practicality: it has nothing to do with a “hypothetical equilibrium”, it has everything to do with “rapid and complete adjustment to the daily changing conditions in diff erent places and diff erent industries”. Hayek goes on to outline a host of practical problems that could not be grasped within the purely theoretical scheme of either “stationary equilibrium” or perfect competition 35.

Thus Hayek emphasises that in order to decide how resources are to be used, practical information is needed; the central directors would have to know about the following: a. each and every item of ‘fi xed’ capital and equipment — plant, buildings, machinery, etc. Each item is unique, in terms of location, state of wear, technical characteristics, etc. b. Each and every intermediate good — again each is unique with respect to: technical features; situations;

age; ‘distance’ from fi nal consumption; costs of and potential for use elsewhere; etc. c. Alternative technical possibilities of production in each plant, fi rm, etc, including potential adaptations that could be made according to changing circumstances. d. Types, quantities, etc, of all consumer goods and continuing changes in consumer tastes. e. And then there are all the remaining “special circumstances of time, place and quality”, also changing… As

Hayek notes, to centralise all this is already “beyond human capacity”. But this is precisely the “amount and nature of concrete information required” to Early Modern England | Sudha Shenoy 257

make the best possible use of resources, so it will all have to enter into any proposed system of equations 36.

More than this: in the real world, there is incessant and unpredictable change in all particular circumstances: eg in the weather, people’s health, the availability of some natural resource, temporary scarcities, etc. Only cumulative constant adjustments in all fi rms can maintain the fl ow of outputs. In a decentralised system, the result is those “frequent and…varied price changes”

that are essential to “economic effi ciency”. And further: since all prices are interconnected, a change in one price leads to changes in “hundred of other prices”. But under centralisation, all this could “fi nd no expression in prices”, and price changes would have to be at longish intervals 37.

In short, Hayek is not referring purely and simply to the hundreds of thousands of simultaneous diff erential equations involved in depicting some equilibrium system. He is demonstrating a. all the constantly changing practical information which must be utilised to extract the “maximum” from the “available” resources b. the impossibility of centralising all this ever-changing circumstantial information into the central authority’s equations c. the consequent impossibility of making and communicating all the constant changes in the concrete decisions needed 38. It should be added that it was the social-ist economists who identified “prices” and equation-solving; Hayek was analysing the practicalities of this view. His three essays on socialist calculation cover some 89 pages; he devotes only about a page or so to the number of equations implied, — ie some 88 pages are concerned with practical real-world issues. — But these, of course, lie outside neoclassical economics.

Hayek analyses a further key function of prices: to determine “costs”. As he points out, it is only in “a stationary state” that “costs” are precise, defi nite and objectively given cost curves. In the real world: a. the problem is to dis-cover, “sometimes almost from day-to-day”, the cheapest method of production. Here, the crucial player is often the outsider who actually provides alternatives at lower cost. b. The critical question is: which costs does it seem worthwhile to incur now? The answer depends on expected future prices, and whether prices realised then actually cover the costs incurred. Thus even the “current” organisation of production — eg how hard to run the machinery — refl ects views about the future. c. Key prices, as for many capital goods, actually refl ect product prices, since these instruments will never be physically replaced. Again, how hard to run this machinery? The relevant “cost” here is of alternative methods: but this in turn depends on returns in producing alternative products, ie their prices. d. Many capital goods are produced to order, after tendering by a diff ering group of producers for each order. How will the central authority fi x these prices? 39

Hayek points out that the cumulative impact of all the continuous, mostly unforeseeable changes outlined earlier is to constantly shift resources amongst fi rms and to change the organisation of industries. The central socialist authorities would face the same changing circumstances; how resources are distributed amongst industries is “the diff erence between plenty and scarcity” 40.

Hayek underlines the practical problems arising at the most fundamental level, the fi rm; these include the following: a. the size of the fi rm, ie its plant and equipment and their valuation — ie estimates of future earnings; b. rein— vestment, and whether to retain or remove the capital goods to another fi rm;

c. how much risk “should” managers take? — as “there [is] no objective test of magnitude”. How far “should” losses be allowed to run? Could costs have been lower? — Decisions on these matters are vital to both the fi rm and the system’s overall functioning, but devotion to the greater good provides no criteria.

Who will decide, on what basis, and bear the burden of mistakes? In a socialist system, fi rm managers and central authorities are all salaried state offi cials:

what are the economic consequences of bureaucratic procedures and supervision? 41

With private property, Hayek points out, none of these problems appear:

capital and operating gains transfer resources to more successful entrepreneurs, while the less successful lose their capital through losses. And the entrepreneur who obtains and keeps resources also decides how much to invest, and selects the managers. Under socialism, on the other hand, successful managers get bonuses while unsuccessful ones are demoted 42. — We may further point out here that these two are personal rewards and penalties, whereas the real issue is the change in resource allocation brought about through capital and operating gains and losses. — In other words, Hayek refers to an economic process which transfers resources amongst production units, not to purely personal incentives and disincentives.

Thus, Hayek compares the “results [achieved] by a competitive system based on private property” with the various proposals for a centralised socialist system. These three essays are a sustained and systematic delineation of the practical outcome of an actual functioning pricing process, and what might be expected in practice from a proposed socialist centralisation. It may be noted that Hayek does see private property as the foundation of the pricing system, despite the suggestion that only Mises realised this. And it is the socialist economists who remain fi rmly attached to static equilibrium, which is why

Hayek insists on their “complete unawareness of the real problem” 43. Early Modern England | Sudha Shenoy 259

Earlier, Mises had noted the existence and the crucial role of an intermediary group of intellectuals who channelled ideas to the mass of the population — including and especially, the concepts of socialism. Original ideas fi rst reach

“the circle of those capable of grasping and understanding what others have thought; through these intermediaries…ideas reach the massesand there condense themselves into the public opinion of the time”.

Socialism “[l]ike every other great thought…has penetrated to the masses only through the intellectual middle class” 44. Hayek systematically elaborated and extended this insight in his 1949 essay, “The Intellectuals and Socialism”.

His analysis of the emergence and pivotal role of intellectuals — “professional secondhand dealers in ideas” 45 is remarkably penetrating and prescient of later developments.

Hayek had already seen that the kind of legal rules that prevailed, strongly infl uenced the character of economic activity. In the fi rst two of his essays on socialist calculation, he denies that setting up a centralised administrative apparatus for the central direction of economic activity is the only conceivable way ahead. There is an alternative: assessing and improving the “permanent legal framework” within which competition operates and individuals adapt to economic change 46. I consider his further development of these ideas below; here

I merely note the starting point of this line of analysis. What is important is that

Hayek is looking to the real-world development of economic activity in an historical context. These historical interconnections have to be brought out for historians to use.

The Pricing Process I

Now to Hayek’s direct examination of the actual workings of the pricing process: Hayek analyses this as a social phenomenon, formed out of the interactions of numerous individuals. The content of individuals’ actions reveal that they are actually interacting with countless other individuals far beyond their immediate range of “economic” contacts. Hayek indicates again the gulf between this analysis and the approach of the modern economics of the time.

Hayek’s refl ections also lead him to consider the combination of analytical tools needed to investigate the historical reality.

Hayek had already seen that, by following prices, people participated in a production process without knowing the full picture. The trade cycle is, therefore, a systemic disruption: price changes at fi rst dis-equilibrate people’s economic activities. Only later do prices again function “normally”. In his 1933 lecture on “Price Expectations…”, Hayek now turns to the critical limitation of the equilibrium concept: its meaning is unambiguous only for the decisions 260 Early Modern England | Sudha Shenoy

of a single self-suffi cient individual or a centrally-directed group. But with a large number of people, their actions and responses necessarily succeed one another through time. “Equilibrium” now has to imply correct expectations with respect to both the future “objective data” and the future actions of those people they transact with. These expectations will or will not turn out to be mutually compatible, according to the prices on which they were based. Some

“price constellations” will create expectations that are doomed to failure; other price arrays will do the opposite 47.

Initially, Hayek was still concerned with the trade cycle: the “price guides”

that entrepreneurs followed were usually reliable but in the cycle these guides led everyone to form expectations that were necessarily disappointed. Some three years later, in his address on “Economics and Knowledge”, he outlined the crucial insight: the question had been put back to front:

“before we can explain why people commit mistakes, we must fi rst explain why they should ever be right”.

Hayek reiterated that the real problem was “the explanation of social relations”, ie “the interactions of a number of different individuals”. He now includes key steps that push the analysis far forward: the actions of even a single individual “take place successively through time”. So “equilibrium” implies the successful execution of a plan, which requires that the individual’s subjective knowledge remain unchanged. Where many individuals are involved in exchange, their actions are interdependent, so they can all achieve their goals only if all their plans are mutually compatible. Such compatibility is clearly a sine qua non for successful plan execution. In addition, if plan compatibility is to persist through time, everyone also has to correctly anticipate the “external”

data. What would bring this about 48?

Hayek observes that economics can be empirical only because there is a real-world tendency to “equilibrium”: ie “under certain conditions” people’s “knowledge and intentions” do come closer together and entrepreneurial expectations “do become more and more correct”. Empirically, knowledge — not just of prices but the entire range of economic possibilities and resources

— is divided amongst people. But “spontaneous interactions” produce an outcome which, in eff ect, combines all this knowledge into the “economic” data.

How this happens is the “central problem of economics” and indeed of “all social sciences” — Hayek here raises Menger’s question, and as noted earlier, he acknowledges Mises’ recognition of the “division of knowledge” 49.

Hayek poses the real issue: “How is knowledge acquired and communicated?” How does “experience create knowledge?” Equilibrium requires eff ectively unchanged information and cannot deal with such changes, ie social Early Modern England | Sudha Shenoy 261

processes. Modern economics simply assumes the problem away: “the whole economic system [is] assumed to be one perfect market in which everybody knows everything”. Hayek notes that the questions posed above refer to social interactions, so the answers are in principle falsifi able — Hayek explicitly takes this point from Popper’s Logic of Scientifi c Discovery, — the original German edition. To tackle these questions, Hayek points out that the Pure Logic of

Choice has to be clearly distinguished from the supplementary hypotheses relating “to the particular conditions under which…action is undertaken”.

The former begins with facts common to all human minds to deduce universally-human general categories. Thus, the Pure Logic of Choice covers the entire field of human action. So, economic “facts” are actually subjective meanings under which various things are subsumed. But to explain social processes, we have to select those “ideal types” that appear most relevant to the real conditions. Hayek is emphatic this does not open fresh fi elds for empirical research; indeed, he expects nothing new from such research. The point rather is that questions of fact determine the applicability of economic propositions to the real world and it is necessary to be aware of this. Such applications are in principle falsifi able 50 — Hayek examines all these issues in considerable depth in his essays on “Scientism and the Study of Society” and in a number of other key essays, considered below.

The Pricing Process II

After an interval of some ten years, Hayek returned to the process of pricing in two articles on “The Use of Knowledge in Society” [1945] and “The

Meaning of Competition” [1946]. Again he focusses on real world phenomena in contrast with modern economics, which he fi nds to be “entirely remote”

from real world processes. Modern theory eliminates facts, while concentrat— ing “on a long-term equilibrium which, in an ever-changing world, can never be reached”. Mathematical methods systematically omit precisely what needs explanation 51 — Here Hayek follows Mises.

Hayek develops a number of important interrelated insights in these two articles, insights that were fi rst outlined in his intervening studies on “Scientism and the Study of Society”. 1. He explicitly lists “language, most of our cultural inheritance” and economic activities as “truly social phenomena”, whose analysis involves the same general issues. The pricing system “is not the product of human design”. Because people stumbled on it, civilisation and the division of labour could advance. 2. The economic problem is one of discovery: discovering costs and prices and those outputs that satisfy consumer requirements most cheaply, as also the most suitable suppliers. All this involves adaptation to continuing change. 3. The above means utilising all the fragmentary and 262 Early Modern England | Sudha Shenoy

changing knowledge about particular circumstances, divided amongst people.

In all fi rms, the physical and human resources are the result of “historical accident”. These existing resources have to put to the best uses known, or dis— coverable. 4. Knowledge is constantly communicated and acquired through price changes and the competitive process, which are social interactions. Passing through many intermediaries, they spread information and lead people to adapt to wider circumstances that they need not know directly. Relative prices and price changes are “condensed information” about the relative signifi cance of commodities in “the whole means-ends structure”. Thus information is transmitted about changes in both objective data and people’s actions. Such changes follow necessarily from the competitive process. 5. Because information is spread, and price changes coordinate people’s actions, “coherence and unity” are created in the economic system and “the whole acts as one market”.

Hayek emphasises that it is only the economist’s imagination which conceptually divides the economic system “into distinct markets for separate commodities”. 6. Hayek also emphasises that production involves humans, not statistical aggregates. Output continues though constant adjustments. Businessmen know that a change in management can change costs and turn profi t into loss, or vice versa, with the same physical equipment. 7. Hayek relegates equilibrium fi rmly to the sidelines: it is illegitimate to extend the concept beyond the individual to “a social process in which the decisions of many individuals infl uence on another and necessarily succeed one another in time”. Thus, the study of equilibrium is “no more than a useful preliminary to…the main problem” 52.

Again, it is clear that Hayek’s analysis was developing squarely within a distinctively ‘Austrian’ framework: the preparation of analytical tools to grasp the historical reality. Therefore, its evolution is quite separate from that of neoclassical economics.

Legal and Political Analysis: The Beginnings

We saw above that Hayek addressed himself not only to the economics of socialism but also to its political and legal corollaries. We now retreat back a decade to the interwar period. The momentous developments of the time called forth major responses from both Hayek and Mises.

The 1920s and 1930s saw the rise to power and expansion of Nazi and

Fascist regimes on the Continent, the continued consolidation of Communist rule in Russia, and the rise and expansion of Japanese militarism in the “Far

East” (as the term then was). Simultaneously, in the “democratic” countries, opinion swung decisively towards economic and political centralisation, while Early Modern England | Sudha Shenoy 263

strong Fascist and Communist movements developed. Opinion at the time saw a chasm between the two types of regime. From the 1920s to about the

1950s, “socialism” meant, in economic terms, that the economic activities of all fi rms, individuals, etc, were all to be made parts of a single all-embracing organisation, centrally directed. The political and administrative machinery which a central directorate would need, was also widely discussed. It was felt that such

‘economic’ centralisation would enhance ‘freedom’ in all other matters.

Mises did not merely oppose these dominant views, he analysed them exhaustively, relentlessly, and ruthlessly, pursuing every possible logical implication and corollary. He laid out the full logical picture, from start to fi nish, in his monumental work on Socialism. Hayek, as noted above, was profoundly infl uenced by his work. He moved into this wider arena through “annoyance with the complete misrepresentation in English ‘progressive’ circles of the character of the Nazi movement…” He fi rst wrote a memorandum for Beveridge, at that time head of the LSE; this memo became an article on “Freedom and the Economic System” published in April 1938. Hayek outlined the authoritarian consequences of economic centralisation:

“Economic life is not a sector of human life which can be separated from the rest; it is the administration of the means for all our diff erent ends. Whoever takes charge of these means must determine which ends shall be served, which values are to be rated higher and whichlower…in short, what men should believe and strive for”.

He also underlined the deep family resemblances shared by fascists and communists:

“The similarity between many of the most characteristic features of the

‘fascist’ and ‘communist’ regimes becomes steadily more obvious” 53.

Hayek now extended and combined all three analyses (working between

1938 and 1943): i. the totalitarian results of economic centralisation ii. the nature of a grown economic order iii. the type of “permanent” legal rules the latter worked under and the general nature of potential improvements. The article mentioned above became a pamphlet (in 1939) with the same title.

There followed an article on “Planning, Science and Freedom” (November

1941) and, of course, 54The Road to Serfdom (written 1940-43) .

The Analysis of Social Phenomena

Simultaneously, Hayek followed three related investigations (whose publication, however, was somewhat drawn out): iv. he examined, in considerable depth, the intellectual origins, amongst the Saint-Simonians in the eighteenth century, of the view that the economic system was, or should become, 264 Early Modern England | Sudha Shenoy

a deliberately-designed organisation, — ie the intellectual origins of the socialist concept. This work was clearly well-formulated by early 1940; but “The

Counter-revolution of Science” came out a little later, in February, May and

August 1941 (in Economica). v. At the same time, as he tells us, he investigated the underlying unity and combined infl uence of Comte and Hegel — both believed the social order was designed. This essay was published only in

1951. vi. Concurrently, he further examined and delineated the broad analytical diff erences between natural and social phenomena; the general diff erences between organisations and ‘spontaneous orders’; and the errors resulting from seeing all social phenomena as designed. The analysis fi rst enunciated in his inaugural lecture on “The Trend of Economic Thinking” was extended substantially in a series of essays on “Scientism and the Study of Society”. These came out (in Economica), in August 1942 and in February 1943 and 1944. —

But Hayek had been already working on the subjectivity of social phenomena in late 1936. — The main analytical issues covered in the series were summarised as “The Facts of the Social Sciences” (delivered in Cambridge, 19

November 1942) 55.

Chronologically, Hayek published the analytical material first, in these essays. After this, he went on (in his publications) to identify those thinkers — including Mandeville, Ferguson, Smith, Burke, Hume, de Tocqueville, etc — who fi rst saw the existence of spontaneous orders, depicting their grasp of the individual in society. He contrasted this understanding with those theorists, such as Rousseau, for whom the individual was a blank isolated atom (“Individualism, True and False”, lecture of 17 December 1945). As we shall see

(below, p. __), Hayek appears to have read and assimilated Ferguson by early

1940, since he refers in “Scientism” to social institutions that are not designed but are the results of human action. In the article on “Planning” (mentioned above), he uses Ferguson’s formulation (at the end of the following passage):

“…the division of labour, which forms the basis of modern civilisation, has been able to develop on a large scale only because man happened to stumble on the method which made this possible” 56.

Hayek developed certain key components of the analysis somewhat later:

in his talk on “The Dilemma of Specialisation” (1956) and in portions of the

chapter on “Reason, Freedom, Tradition” (fi rst published in Ethics, 1958) in

The Constitution of Liberty (fi nished early 1959). Thereafter he dealt specifi - cally with the analysis of complex social structures, to a larger or smaller extent, in the following essays: “The Legal and Political Thought of David Hume”

(1963); “Kinds of Rationalism” (1964); “Rules, Perception, Intelligibility”

(1964); “Notes on the Evolution of Systems of Rules of Conduct” (1966); Early Modern England | Sudha Shenoy 265

“The Results of Human Action But Not of Human Design” (1967); “The

Errors of Constructivism” (1970) 57.

As we saw above (chapter 4), Mises had seen (in Socialism) that the idea of evolution went from social analysis to biology; he was also extremely critical of the “monstrosity” of Social Darwinism. Hayek first pointed out, in the Constitution of Liberty, that the notion of evolution had been developed to explain linguistic and social development, and then adopted by Darwin.

Hayek expanded on this in later works, adding critical remarks on Social Darwinism 58. Hayek does not mention Socialism, but this is one more piece of evidence for the impact which he tells us it had on him. Hayek’s work is unifi ed throughout by his concern to analyse the two types of social order — their origins, features, etc. With the essays on “Scientism”, he begins to work out systematically the various analytical characteristics of those social phenomena that are the unintended results of historical development. This will constitute the bulk of his writings from here on. — In “Scientism” and in “The Facts of the Social Sciences”, Hayek’s list of such phenomena derives from Menger and Mandeville: law, language, customs, markets, prices, money. — It has been suggested that law came later to his list, but in fact he 59does include it here . —

Hayek’s analysis throughout “Scientism” is patently grounded in Menger’s

Investigations and in Mises’ Epistemological Problems. Hayek also refers to

Mises’ Nationalokonomie (published early 1940); he recommends Mises’

term, the ‘praxeological’ sciences for the “theoretical sciences of society”. With

Mises, Hayek fi nds that “theory is logically prior to history”: complex historical facts are investigated through theories that have to be developed fi rst, just because the facts are so complex. These theoretical constructs are the logical implications of the elements, “known beyond…dispute”, that form complex social phenomena. — The elements are, of course, people’s actions. Hayek again specifi cally tackles the Younger German Historical School: historical study is only possible because the subjective categories of action are universal

— they are what defi nes humans. Otherwise, historical documents would be unintelligible. Thus social theory too is universal: the general category of price

(for instance) expresses the relative scarcity of means at all times and places; a specifi c price for a particular good is an historical circumstance of a particular time and place 60.

Natural and Social Phenomena

Menger, Mises and Hayek all three distinguish between the natural and the social worlds. As Hayek puts it, humanity’s “position [is] midway between”

the two: people are the eff ect of the fi rst and the cause of the second. Therefore, the study of natural and of social phenomena each begin from opposite 266 Early Modern England | Sudha Shenoy

standpoints: “The place where the human individual stands in the order of things brings it about that in the one direction…he perceives” natural phenomena that need to be broken down into their constituent parts, “while in the other direction”, he is given the “elements from which… more complex

[social] phenomena area composed, that…cannot [be] observe[d] as wholes”

61. That is, social phenomena have to be reconstructed from what is already known about their directly accessible components. In short:

“while at the world of nature we look from the outside, we look at the world of society from the inside” 62.

And so, “in the natural sciences” the components of natural phenomena

“can be at best only surmised” but “[i]n the social sciences the elements of… complex phenomena are known beyond the possibility of dispute”. That is because “the essential basic facts which we need for the explanation of social phenomena are part of our own experience, part of the stuff of our thinking”.

These facts “give rise” to complex phenomena, so “the existence of these elements is…much more certain than any regularities” in these social structures.

Thus it is the elements — people’s actions — that are “the truly empirical factor in the social sciences”. Starting “directly from known empirical elements” the social sciences use these elements “to fi nd regularities in…complex phenomena which direct observations cannot establish”. Thus the social sciences “are, so to speak, empirically deductive sciences, proceeding from…known elements” to regular social structures “which cannot be directly established” 63.

People’s actions are guided by ideas; such actions are the components of social phenomena: “the various types of individual beliefs or attitudes are… the elements from which we build up the structure of possible relationships between individuals”. There are further analytical problems “only in so far as the conscious action of many men produce undesigned results [regularities]

which are not the result of anybody’s design”. Thus there exists “an object for theoretical sciences of society”. If all orderly social phenomena were deliberately designed then we would move from the Pure Logic of Choice to psychology, not social theory 64.

All Minds Have the Same Logical Structure

The subjectivity of these data derives from the fact that all human minds have the same logical structure65 [N.B. this is not ‘specifi c content’!!!]. This fact is as real as any natural event. Students of society

“deal with phenomena which can be understood only because the object of our study has a mind of a structure similar to our own. That Early Modern England | Sudha Shenoy 267

this is so is no less an empirical fact than our knowledge of the external world” 66.

That human minds have a similar general structure is an important fact, the basis for the study of their actions:

“the fact that diff erent men do perceive diff erent things in a similar manner [not found] in the external world, must be regarded as a signifi cant datum of experience, which must be the starting point in anydiscussion of human behaviour” 67.

These subjective categories into which things and actions are classifi ed are the social data studied. Such categories are not objective things; they are subjectively recognisable in people’s actions, because we, the observers, have a similar mental structure:

“beliefs…as such are our data…which, moreover, we cannot directly observe in the minds of…people but which we can recognise from what they do and say merely because we have ourselves a mind similarto theirs 68.

This common mental structure means that people have a “common principle on which they classify external events” 69. It also means that people have a common set of abstract subjective meanings which they impute to things and actions that have no common physical properties. Such imputations too are signifi cant facts: “that diff erent objects mean the same thing to diff erent people, or that diff erent people mean the same thing by diff erent acts, remain important facts…” 70. This “common structure makes communication possible” but the actual contents of people’s minds are, of course, enormously varied:

“the knowledge and beliefs of diff erent people…will yet be diff erent and often confl icting in many respects”.

Only minds with structures similar to ours can be recognised as minds; it is “meaningless to speak of [,] a mind diff erent from our own” 71.

If human actions have no meaning, they are physical facts; if actions do have meaning, they are subjective facts, not physical ones:

“Either we cannot…recognise the meaning of the individual actions, they are nothing but physical facts to us, the handing over of certain material things, etc, or we must place them in the mental categoriesfamiliar to us but not defi nable in physical terms” 72.

Social Data Are Subjective

This imputing and recognition of meaning, to and in people’s actions,

“works in the overwhelming number of cases”, although there are always 268 Early Modern England | Sudha Shenoy

instances where we are uncertain. Such imputation and recognition is “certainly the only basis of all our historical knowledge since this is all derived from the understanding of signs or documents” 73. Because human minds are similar in their logical structure, historical and other documents are not mere physical objects — they are materials produced by human beings and as such, intelligible [N.B., once their language, palaeography, etc are mastered]. Where there are no minds, there natural facts begin 74. — This last is, of course, Mises’ point as well.

To explain people’s actions with respect to things is to identify the meanings people attach to these objects:

“wherever we have to explain human behaviour towards things…these things must…be defi ned…in terms of what the acting person thinksabout them. A medicine or a cosmetic…for the purposes of social study, are not what cures an ailment or improves a person’s looks, but what people think will have that eff ect”.

In short:

“So far as human actions are concerned the things are what the acting people think they are” 75.

“Economic” data are also subsumed into this subjective category: these

“data” too are subjective meanings that people impute to objects, exactly as physical movements become actions of various kinds, through imputed meanings:

“that the objects of economic activity cannot be defi ned in objective terms but only with reference to a human purpose goes without saying. Neither a “commodity” or an “economic good”, nor “food” or “money” can be defi ned in physical terms but only in terms of viewspeople hold about things. [Economic theory] has nothing to say about iron or steel, timber or oil, or wheat or eggs as such. The history of any particular commodity indeed shows that as human knowledgechanges the same material thing may represent quite diff erent economic categories. Nor could we distinguish in physical terms whether two men barter or exchange or whether they are playing some game orperforming some religious ritual” 76.

The congruence with Mises is obvious.

The student of people’s actions thus has to grasp the meaning which act-ing persons have in mind, from their specifi c knowledge and beliefs:

“the logical character of the concepts we have to use to interpret people’s actions is the same whether our beliefs coincide with theirs or not. Whether a medicine is a medicine, for the purposes Early Modern England | Sudha Shenoy 269

of understanding a person’s actions, depends solely on whether that person believes it to be one, irrespective of whether we, the observers, agree or not”.

In short:

“no superior knowledge the observer may possess about the object, but which is not possessed by the acting person, can help us in understanding the motives of their actions” 77.

Only if “we…understand what acting people mean by their actions” can we successfully explain them, i.e “subsume them under rules which connect similar situations with similar actions”. People’s actions can be comprehended only in terms of the general meaning acting persons attribute to things, happenings, events, etc:

“in interpreting human actions, we…have to use the classifi cation in which these facts actually appear in the minds of acting people”78.

Connotation and Denotation

These general classifi cations are, as it were, the general connotations, present in all minds, while the things to be classifi ed are their respective denota— tions. As circumstances change, an indefi nite number and variety of items can present themselves for classifi cation; it is the connotation, the meaning, which sorts and arranges these. Eg, it is the general meaning which enables us to see that both a revolver and a blowpipe are weapons, and both banknotes and cowries are money — to their respective users. Thus “in principle” an “exhaustive classifi cation of all the possible forms of intelligible behaviour” is achievable,

“ ‘apriori’ [in] deductive…fashion”. For instance, if “we defi ne as economic actions all acts of choice which are made necessary by the scarcity of means…”, then all possible situations can be subdivided, “step by step”, into alternatives with “no third possibility” 79. This is patently identical with Mises’ analysis.

Historical Facts — What They Are

Thus the ‘data’ of the ‘social sciences’ are subjective meanings: a. of actions b. of the intentions of acting persons c that objects hold for acting persons. Historical facts — people’s actions — are therefore apprehended subjectively, through “mental reconstructions”. It is thus impossible “to go and see what [historical facts] are like” 80, as one might look at stones or animals. Natural phenomena have defi nite physical boundaries; not so historical ones:

“no physical criterion can tell us what are the parts of the [historical]

fact and how they hang together”.

From what we know about a particular historical context, we pick out certain happenings as interrelated; this means we use a theory [N.B, implicit though it may be]:

“We…use a theory when we select from the knowledge we have about a period — certain parts as intelligibly connected and forming part of the same historical fact”.

Since historical facts are not physical units, they cannot be observed as such self-defi ning entities. We have to utilise a theory to put these facts together;

this is true even of the simplest such facts:

“We never observe states or governments, battles or commercial activities, or a people as a whole. When we use any of these terms, we always refer to a scheme which connects individual activities by intelligible relations; that is, we use a theory which tells us what is and whatis not a part of our subject”.

Our use of theories is implicit and unwitting. That this is so only becomes clear when we refl ect on what we are doing. Historical facts are interrelationships amongst particulars, apprehended via a theoretical lens: “terms like ‘state’

or ‘town’…cannot be defi ned in physical terms”; they “refer to a complex of relationships which, made explicit, constitute a ‘theory’ of the subject” 81.

Thus historians “cannot avoid using social theories in this sense”. Now

“for most purposes”, the linkages implied are so obvious that very simple ‘theories’ are quite adequate. For such simple phenomena, no “elaborate apparatus” is needed; the theorising is done “spontaneously”, with the historian’s

“instinct” proving a correct guide. These conclusions are not disputed, therefore. Thus historians are little aware they have “used theoretical reasoning at all” 82. — Hayek clearly reiterates here both of Mises’ points: i. Historians, like

M. Jourdain, are astonished to hear they use theory. ii. Even the simplest historical relationships, however obvious and transparent they may be, still rest on implicit theories.

Hayek goes on: Even apparently simple phenomena — “government” or

“trade” — are composed of a. “observed elements” — i.e people’s actions b.

“between some of [which]” there persists “a system of relationships” which is not directly observable; it “can be merely inferred” 83. It follows that this is even more true of “more complex phenomena, such as those of language, law and economics” 84.

Complex Social Formations: Their Features

Such formations are even less visible than simpler structures and are therefore apprehended only through appropriate conceptual lenses. Any general Early Modern England | Sudha Shenoy 271

picture has to begin from the elements of the phenomenon — i.e the actions of individuals and show how they produce the phenomenon. This general explanation has to deal with the characteristics of these more complex structures.

Their fi rst and most important feature is that they are undesigned orders, they were not produced intentionally.

Thus the crucial characteristic of these formations is that they are not deliberately organised; they are undesigned and unintended developments:

“languages, economic systems, bodies of law”, “money or morals”, Hayek underlines,

“are not…products of deliberate creation. Not only have they not been designed by any mind, …they are also preserved by, and depend for their functioning on, the actions of people who are not guided by the desire to keep them in existence” 85.

Hayek identifies a general category of undesigned social phenomena:

“human institutions [are] in a sense man-made, i.e entirely the result of human actions, [but] they may yet not be designed, not be the intended product of these actions”. — It seems clear that Hayek had read and absorbed Ferguson by about this time (around early 1940). Hayek emphasises that the term ‘institution’ is misleading — social structures are not instituted by anyone; they are therefore better termed ‘formations’ 86.

To indicate the analytical issues involved, we may here bring out two further features of these social formations. Firstly, Hayek identifi es a key diff erence between people’s actions and the formations that are one outcome of their interactions. The knowledge of circumstances that individuals act upon is, in the case of each individual, a small fragment of that whole which is available with all individuals taken together. But this whole does not exist as a separate and distinct entity. This too is a fundamental fact in social life:

“The concrete knowledge which guides the action of any group of people never exists as a consistent and coherent body. It only exists in the dispersed, incomplete and inconsistent form in which it appears in many individual minds and this dispersion and imperfection of all knowledge is one of the basic facts from which the social sciences have to start” 87.

Social formations, however, precipitate, as it were, the knowledge of innumerable individuals over generations. Such formations

“are greater than any individual precisely because they result from the combination of knowledge more extensive than a single mind can master”.

Because people have available to them, and use, a range of social formations, they are able to benefi t from more knowledge than they could possibly obtain: “our civilisation is the result of a cumulation of individual knowledge”

which is embodied in “habits and institutions, tools and concepts”. Thus

“man in society is constantly able to benefi t from a body of knowledge neither he nor any man completely possesses” 88. — It is quite clear that Hayek is here building on Mandeville’s insights.

Social formations are also eminently useful. These “persistent social structures which we have come to take for granted” are “devices” on which people “tumbled”, devices that gave them “powers which [they] used”. Such

“spontaneously grown institutions were ‘useful’ because they were the conditions on which the further development of man was based” 89. Neither money nor the pricing system “were… designed for [the] purpose”, but they “enable man to achieve things which he desires”; they “made possible” the “growth of civilisation”.

In short, unintended social orders enable people to envisage and then obtain their aims:

“the social wholes which are thus maintained [unintentionally] are the condition for the achievement of many of the things at which we as individuals aim, the environment which makes it possible even to conceive of most of our individual desires and which gives us the power to achieve them” 90.

Compositive social theory alone explains how such inter-individual structures develop and thus allow people jointly to obtain more than they could think of:

“only…the individualist or compositive method [enables us] to understand how structures of interpersonal relationships emerge, which make it possible for the joint eff orts of individuals to achieve desirable results which no individual could have planned or foreseen”91.

No one aims to produce these social formations, so their orderliness is not the outcome of anyone’s deliberate intent. It is this which makes a general explanation necessary:

“The problems…arise only in so far as the conscious action of many men produce undesigned results, in so far as regularities are observed which are not the result of anyone’s design…It is only in so far as some sort of order arises as a result of individual action but without being designed by any individual that a problem is raised which demands a theoretical explanation” 92.

An abstract schema is essential to historical investigation of situations involving orderly and unintended — i.e otherwise unsuspected — consequences:

“any explanation of a historical process involves assumptions about the kinds of circumstances that can produce certain kinds of eff ects

— assumptions which, where we…deal with results which were not directly willed by somebody, can only be studied in the form of a generic schema…a theory” 93.

Constitutive Ideas and Popular ‘Explanations’

As these social formations are not, and cannot be, produced intentionally, how do they come about? Hayek points to the crucial role of ideas — “opinions and beliefs” — in guiding people’s actions:

“the ‘facts’ of the social sciences are…[the] opinions of those whose actions produce the object of the social scientist” 94.

Certain views and ideas cause people to act in a regular and orderly fashion: these “beliefs and opinions…lead a number of people regularly to repeat certain acts e.g to produce, sell or buy…”. It is through actions based on these crucial ideas and views, that people manifest and maintain social formations in the course of their day-to-day activities:

“Such beliefs and opinions are a condition of the existence of the

‘wholes’ which would not exist without them, they are…‘constitutive’, essential for the existence of the phenomenon [referred] to as ‘society’ or the ‘economic system’”.

While people act on their “motivating or constitutive opinions”, they also form “speculative or explanatory views…about the wholes…”. Hayek underlines the sharp diff erence between the two:

“The real contrast is between ideas which by being held by the people become the causes of a social phenomenon and the ideas which people form about that phenomenon”.

For example: as people change their “opinions…about a particular commodity” they “cause…a change in the price of that commodity”. But these constitutive ideas are “clearly in a diff erent class from the ideas which the same people may have…about the causes of the change in price or the ‘nature of value’…”. Hayek emphasises the necessity of clearly separating the two kinds of concepts: “It is very important that we should carefully distinguish between”

constitutive ideas that prompt particular kinds of actions, and people’s untutored “ideas about the undesigned results of their actions”. Hayek goes on:

“confusion between the two is a constant source of danger” 95.

That is because these popular views cannot capture the nature and structure of undesigned social formations. People are untrained in these matters, so they have “vague concepts of wholes which [are] merely intuitively comprehended” 96. This is, in eff ect, animism; such a “vaguely apprehended whole is treated as something akin to the individual mind” — which is “an illegitimate use of anthropomorphic concepts” 97. Hayek is especially emphatic that “the social scientist…must not mistake for facts” those “pseudo-entities” that popular thinking creates. The following, he underlines, are not real phenomena:

a98 . “those collectives which are no more than popular generalisations” b.

“vague popular theories” c. “provisional theories….constructed by the popular mind to explain the connection between some of the individual phenomena we observe” 99d. “popular abstractions”, “the ideas which the popular mind has formed about…collective entities” 100.

Social Animism

Hayek points out that methodological collectivism cannot explain complex phenomena; its approach is animistic:

“The collectivist [….] who claims to be able directly to comprehend social wholes as such, is never able to defi ne the precise character of these wholes or their mode of operation, and is regularly driven to conceive of these wholes on the model of an individual mind”101.

The collectivist standpoint thus sees a super-being termed ‘society’, quite separate from all people and the embodiment of the social views of those who speak for it: “‘society’ …assumes a dual personality: it is fi rstly a thinking, collective entity with aspirations of its own…diff erent from those of the individuals” who compose it; “and secondly,…it becomes the personifi cation of the views held on…social aspirations by certain individuals who claim to be endowed with a more profound insight or…a stronger sense of moral values” 102. — Again the parallel with Mises is obvious.

Analysing Complex Formations

As opposed to both the popular and the collectivist viewpoints, Hayek points out that social facts “exist [irrespective] of the concepts which…people have formed about these wholes”. So only correct theory can enable us even to see these complex phenomena.

Initially, historians and theorists share the public’s untutored ideas about undesigned social formations. Professional study is undertaken expressly “to revise and improve” 103 these “vague and indistinct suggestions about the way in which certain phenomena are connected”. These unexamined views are Early Modern England | Sudha Shenoy 275

replaced with “precise” 104 meanings for terms and descriptions of phenomena.

Such correct theory accurately links components together: “the wholes about which we speak exist only if, and to the extent to which, they theory is correct which we have formed about the connection of the parts which [these wholes]

imply” 105. Correct theory is especially necessary with complicated structures

“such…as languages, economic systems and bodies of law”. These phenomena are so complex they require “the help of an elaborate technique” for their reconstruction. If historians “[disdain] to use” what theorists have worked out, historians are “almost certain to come to grief ”: they are “led into contradiction” or assert a sequence of causation which does not follow 106. (Cf. Mises!)

Even more than other types, such complex phenomena do not demarcate themselves: “These…social structures are never given to us as natural units, are not defi nite objects given to observation”. Social formations are not “given facts, objective data”. Hayek emphasises that people’s actions — i.e the subjective meanings common to all minds — are the components of social structures.

In his words: a. “we try to understand human beings” b. “this understanding is made possible by the fact that we have a mind like theirs” c. “from the mental categories we have in common with them we can reconstruct the social complexes which are our concern” 107.

These formations, then, spring from the common structure of all people’s minds, the common principles on which they classify things and happenings, so the analysis of social structures has to be in the same terms. The mental structure that everyone has in common “provide[s] us with the knowledge of the recurrent elements of which diff erent social structures are built up and in terms of which we can alone describe and explain them”. Thus the task of theoretical reasoning is “to constitute these [wholes]…form the familiar elements” — these last are “familiar to us from everyday experience”. Starting with the directly-known, we systematically follow up “the interactions of individual eff orts”, working through the implications of particular combinations of actions, reconstructing the interconnections amongst them. And so, “by a deliberate eff ort of directed thought…we come to see the necessary eff ects of the combinations of…actions by many people” 108.

In short, since ideas lead to action, “the facts of our mind must remain… data on which the explanation of human action guided by these mental phenomena must be based” 109. Hayek stresses “[it] is important” to see that “the various types of individual beliefs or attitudes are…the elements from which we build up the structure of possible relationships between individuals”. To the extent “individual thought” is analysed, “the purpose is…to distinguish the possible types of elements with which we shall have to reckon in the construction of diff erent patterns of social relationships”. Hayek emphasises that “[for] 276 Early Modern England | Sudha Shenoy

the social sciences, the types of conscious action are data”; “[it] is a mistake to believe” that these are to be explained. Thus from individuals’ actions — which are directly known, we proceed to the unknown — the complex resulting formations, and so we fi nd otherwise unseen interconnections: Individuals

“attitudes… are the familiar elements” 110; by combining these

“we try to reproduce the complex phenomena, the results of individual action, which are much less known — a procedure which often leads to the discovery of principles of structural coherence of the complex phenomena which had not (and perhaps could not) be established by direct observation…” 111.

Hayek points to language as an undisputed instance of such a social phenomenon. In sum “[t]he social complexes, the social wholes which the historian discusses” — “are without exception constructions of our mind”. We can see these social structures only by mentally working through all the implications of individual actions, to discover all the links:

“These wholes…do not exist…apart from the theory by which we constitute them, apart from the mental technique by which we can reconstruct the connections between the observed elements and follow up the implications of this particular combination” 112.

Permanent Interrelationships and Changing Components

Hayek gives some instances of how complex historical facts are built up:

they are persisting processes or interrelationships that become visible only as they are reconstituted mentally, using the directly-known components, people’s actions:

“if our historical fact is such a complex as a language or a market, a social system or a method of…cultivation, what we call a fact is a recurrent process or a complex pattern of persistent relationships which is not ‘given’ to our observation, but which we can only laboriously reconstruct — and which we can reconstruct only because the parts (the relations from which we build up the structure) are familiar and intelligible to us” 113.

Economic phenomena too are not ‘given’ — their interconnections and interrelationships also have to be reconstructed by working out the further logical consequences of individuals’ actions. These logical implications are of course unknown to the lay mind:

“when…we speak of the behaviour of, e.g. the ‘price system’ as a whole and discuss the complex of connected changes which will correspond…to a fall in the rate of interest, we are not concerned with a whole which obtrudes itself on popular notice or that is ever defi nitely Early Modern England | Sudha Shenoy 277

given; we can only reconstruct it by following up the reactions of many individuals to the initial change and its immediate eff ects” 114.

Thus the social formations found in history are general patterns of interrelationships amongst changing components: “All unique objects of history…are in fact either constant patterns of relations or repeatable patterns in which the elements are of a generic character”. Such patterns are “a persistent system of relationships between the ever-changing elements”. The process of forming these social structures is similar whether this formative process extends over a long period, as with language or money, or whether it is “constantly repeated anew”

as with such 115“recurring phenomena” as price formation or production. In other words, economic phenomena are formed exactly as are other social — inter-individual — phenomena. — Hayek echoes Menger here; and when Hayek sees that complex social structures are reconstructed from individual actions, the content is exactly that of Mises, when Mises says that all social entities are manifested in individuals’ actions towards each other.

Theory Precedes History

And so, with Mises, Hayek too sees the “task” of social theory as that of assisting the historian, i.e theory has

“to provide schemes of structural relationships which the historian can use when he has to attempt to fi t together into a meaningful whole the elements which he actually fi nds” 116.

These theoretical schemes are thus essential for historical investigation, since they render visible historical developments that would otherwise remain unknown. Theory thus has to precede history:

“the place of theory in historical knowledge is thus in forming or constituting those wholes to which history refers; it is prior to these wholes which do not become visible except by following up the system of relations which connects the parts” 117 [italics added].

As Hayek sums up: “Social theory…is, then, 118logically prior to history”

[italics added].

Hayek is well aware of the problems of historical investigation: “in any concrete situation [a] large number of other changes…will always occur simultaneously”. The problem is to pick out those that “form a more closely interrelated complex”, the one “we are interested [in]”. This interrelationship derives from “certain relevant aspects in the attitudes of men toward the things” 119, the analysis too is derived there from. The historian is thus enabled to “group together as instances of the same” formation or whole, “different complexes of individual events”. These are “by themselves perhaps 278 Early Modern England | Sudha Shenoy

quite dissimilar”, but they are linked together as “certain elements of a complex picture on the basis of a theory about their coherence” 120. Thus because we have a prior knowledge of the components, we can isolate a social structure in the plethora of facts found in reality:

“it is only because we already know the ties that hold them together that we can select a few elements from the immensely complicated world around us as parts of a connected whole” 121.

A social whole, then, is a selection of facts made on the basis of a conceptual schema; a social complex is “a mental scheme that shows the connection between some of the many facts which we can observe”. Thus we look, amongst these varied happenings, for a “pattern or order…which is not…spatial or temporal”; it “can be defi ned only in terms of relations which are intelligible human attitudes”. Neither the “order or pattern” nor “these relations themselves” are “perceptible as…physical [facts]” 122.

As we have seen (at some length) the components of social formations are directly known, since these components are people’s actions; theory is needed to help reconstruct the resulting complex phenomena, which are not known otherwise than through such a reconstruction. These theories then “are not about the social wholes as wholes”. Rather, social theory is a system of reasoning to help discover additional features of the known elements, individuals’

actions. Social theory

“attempts…to provide a technique of reasoning which assists us in connecting individual facts, but which, like logic or mathematics, is not about the facts. All that we can and must verify is the presence of our assumptions in the particular case” 123. [Shades of Mises!]

This is especially problematic and raises ‘a genuine ‘question of fact’

[which] it will often not be possible to answer with the same certainty as… in the natural sciences”. Social theory, however, is a type of analytical thinking

[N.B. about people’s actions]:

“…the theory itself, the mental scheme for…interpretation, can never be ‘verifi ed’ but only tested for its consistency. It may be irrelevant,because the conditions to which it refers never occur; or it may prove inadequate because it does not take account of a suffi cient number of conditions. But it can no more be disproved by facts than can logic ormathematics” 124.

There can be no plainer statement of Mises’ ‘praxeological’ analysis. It may again be noted that these points are all found earlier in the fi rst two essays in Mises’ Epistemological Problems. It should also be pointed out that Hayek developed the analysis in his essays on ‘Scientism’ after his justly-famous Early Modern England | Sudha Shenoy 279

‘Economics and Knowledge’, in a footnote to which he prefi gured the developed subjectivism of his later essays.

Hayek points to some implications of this analysis. In refl ecting on people’s actions, we “constantly” discover that “we…use processes of thought which we have not yet analysed or made explicit” 125. — But the logical categories are common to all minds. — Similarly, historical research may require that the components of a theoretical construction be reorganised to help analyse historical developments. But the historian still uses a theory about how these

— known — components are linked together in a structure:

“…historical study frequently forces the theorist to revise the constructions or to provide new ones [to] arrange the information he fi nds. But in so far as the historian talks, not…about the individual actions of particular people but about what…we can call social phenomena, his facts can be explained as facts of a certain kind only in terms of a theory about how its elements hang together” 126.

Hayek further recognises that these theoretical constructions are only analytical tools for studying complex historical phenomena: “The models of

‘wholes’, of structural connections, which theory provides readymade for the historian to use [are] the results of theoretical activity”. Therefore these theoretical constructions “are not identical with the ‘wholes’ which the historian considers”. Such theoretical ‘models’ “consist necessarily of elements of one kind…selected because their connection can be explained by a coherent body of principles” 127. Theories cannot therefore answer “a particular question about concrete phenomena”. For this, historians “regularly have to use” — various diff erent theoretical generalisations. Historical work is thus “an application of generic concepts to the explanation of particular phenomena” 128.

Historical study is of such specifi c happenings: “with social phenomena the explanation of the particular and unique situation is as important and often of much greater interest than any generalisation”. History studies the unique make-up and complexities of particular historical developments, “the particular circumstances of an individual process”; it concentrates on what “is important in the unique historical instance”, with its “particular attributes”. Theory does not deal with this. It considers only “those steps essential to produce a particular result…” 129. Theory concentrates on “those [attributes] which under conditions which may be repeated can be produced again in the same combination”. In short, theory brings out “a process which, at least in principle, may be repeated elsewhere at diff erent times”. So a theoretical explanation of the interdependence of “the parts of the social whole” will often be

“a genetic account”, a sort of “schematic” or “conjectural history”. But this is not history, of course, it is “compositive social theory”. Here Hayek points 280 Early Modern England | Sudha Shenoy

to Menger’s recognition that “the genetic element is inseparable” from social theory 130.

To Study History is the End Goal

With Mises, Hayek too fi nds that historical study and social theory are closely linked:

“theoretical and historical work are…logically distinct but complementary activities…though they have distinct tasks, neither is of much use without the other” 131.

But Hayek is also emphatic that social theory’s only role is to aid historical research. Theory by itself has little value; it is history which is really needed:

“I should like even to emphasise that the whole purpose of theory is to help our understanding of historical phenomena and that the most perfect knowledge of theory will be of very little use indeed without a most extensive knowledge of a historical character” 132.

Comment: It is evident that Hayek has followed Mises very closely. His analysis expands upon or is complementary to, the various points Mises made in the fi rst fi ve essays in Epistemological Problems.

In his essays on ‘Scientism’, Hayek had already began to break new ground in one direction. Earlier Mises had distinguished between the ‘simple’ facts established in laboratory experiments and the complex facts of history. And

Hayek had earlier analysed prices as transmitters of information about the ever-changing particular circumstances of time and place. Building on these foot— ings, Hayek fi rst enunciated a category of ‘complex’ phenomena: so many concrete infl uences contributed to the formation of these phenomena that it was possible to state only the principle on which they were formed; the specifi c facts could never be recaptured. Then, in “The Theory of Complex Phenomena”, Hayek pulled all these strands together to systematise the analysis for the fi rst time. Hayek identifi es “complex” phenomena as combining: i. a persistent abstract pattern, ii. an ever-changing array of particular facts. Thus, it is possible only to state the principle(s) on which these phenomena develop; the concrete facts entering into the formation can never be given. Physical phenomena by this criterion are ‘simple’; social structures are ‘complex’ because of all the particular facts that join to form them. Hayek expanded some points further in his Nobel lecture on “The Pretence of Knowledge” (December

1974)133.

Acting on Rules

Hayek also continued to address the issue of how individuals’ actions produce complex results: i.e how the elements — people’s actions — produce the social whole 134. In answering this question, Hayek builds extensively on

Mandeville’s analysis of custom and habit being wiser than their practitioners;

Menger’s insight that customs are unintended social phenomena; and Ferguson’s observations on how children and peasants could observe complicated linguistic rules in practice. Hayek now, for the fi rst time, combines and generalises all these analytical points: a. people manifest social and legal rules in their actions, b. these rules can be extremely complex, c. they develop over time, d.

people have absolutely no idea of the complexities manifested in their actions.

Thus, people acted on rules before they could articulate them.

Hayek first recognised, with Menger, that legal (and moral) rules were instrumental — they enabled people to pursue a wide variety of ends, in conjunction with an equally wide range of rankings of these ends. But Hayek’s fi rst specifi c analysis was of moral rules. They are “genuine social growths, the results of a process of evolution and selection, the distilled essence of experiences of which we ourselves have no knowledge”. Rules prevent confl ict amongst people [i.e they make for peace]. Hayek points out that “groups in which [these rules] held sway have proved to be more eff ective than other groups”. — Hayek enlarged on this observation much later, to note that such groups expanded as more people joined them or imitated their rules. — Mises had earlier noted that groups who could not integrate themselves into the peaceful division of labour eventually died out. — With respect to legal rules,

Hayek emphasises that people follow “a whole system of rules” in which one modifi es the consequences of the other. A single rule cannot be seen in isolation. He again underlines the eff ects of historical growth: “In a slow process of evolution…much more knowledge and experience has been precipitated in

[such rules] than any one person can know” 135.

Where people follow the same abstract rules, their actions form an abstract overall order, whose specifi c details “depend on the particular circumstances known only to its individual members”. Hayek had already seen (before 1939)

that the movement from a tribal to a more open society was a movement from concrete to abstract rules. He later elaborates on this: As people follow “rules of conduct [that are] independent of the particular purposes of those concerned”, they follow practices that serve reciprocal but not common purposes.

Such rules inherently can be extended to ever more people, making possible a peaceful order covering all humanity 136.

Finally, Hayek recognises three types of ‘social’ rules that are manifested in people’s actions.

a. innate or genetic rules or instincts, developed through the immense period in which humanity lived in small hunting bands, pursuing common goals.

b. learnt or “cultural” rules, that led to the gradual dissolution of the hunting band and the growth of ever-wider groups extending far beyond those people met daily. Such groups, held together solely by the common rules, or types of rules that their members followed, eventually covered the globe, and enabled a vast increase in population.

c. A small thin top layer of rules deliberately thought out and adopted, in more recent times.

People’s understanding has not yet assimilated the momentous change from a closed group where everyone follows the same set of ends, to an open, worldwide socioeconomic order (says Hayek). The social and ‘economic’

features and consequences of the latter are therefore apprehended as if they were those of a small closed, face-to-face group in which everyone organised themselves to pursue the same hierarchy of concrete values. The notion of

“social justice” expresses exactly this small-group vision. Hayek had seen before 1939 that in legal and moral terms, socialism meant a regression from open to closed, tribal rules. — But open-ended, universal rules apply to all-comers alike, and do not distinguish between ‘insiders’ and ‘outsiders’. These rules embody an entirely diff erent idea of ‘justice’ — the equal application of equal rules, irrespective of the outcome in particular cases. Because people acted on these rules, they now live in a global order which alone can produce the resources essential to the survival of the world’s immensely larger population 137.

It will be noticed that Hayek’s observations here complement Mises’ earlier insights in Socialism. Mises too feels that people’s perceptions have lagged far behind the development of the division of labour. Consequently, people have placed “the romantic Utopia of common ownership [in] remote antiquity”. The Romans had “the legend of the Golden Age of Saturn, described in glowing terms [and] praised” by prominent Roman writers: “These were the carefree, happy days when none had private property and all prospered in the bounty of a generous Nature”. Socialist views have not advanced further than this:

“Modern Socialism…imagines itself beyond such simplicity and childishness, but its dreams differ little from those of the ImperialRomans”.

Mises sees ideologies — sets of ideas — as guiding people’s actions such that they extend or curtail the growth of the division of labour. But people can participate in an extended division of labour while still holding to an ideology of violence which must run counter to, and undermine, peaceful cooperation.

Many who joined this extended order by moving into urban areas remained strangers to the ideas which made wider specialisation and exchange possible:

“One cannot make a social philosophy one’s own as easily as a new costume. It must be earned — earned with the eff ort of thought”137.

Hence, in history there appear periods in which the division of labour is extended and others in which it regresses: “More menacing than barbarians storming the walls from without are the seeming citizens within — those who are citizens in gesture, but not in thought” 138. — Hayek too excoriates those “non-domesticated barbarians in our midst” who “refuse to accept” the

“acquired discipline” of a worldwide division of labour while “they still claim all its benefi ts” 139.

Cosmos and Taxis

Hayek continues the analysis of complex orders; he systematises and extends the insights he built up earlier into two kinds of social order 140. —

Menger and Mises of course laid the foundations here. — In a number of articles, a pamphlet and a book chapter, Hayek combines all these perceptions with the recognition of rule-following in action, to arrive at an analytical classifi cation linking type of rule to kind of resulting order. The ‘ends-independent’

or open order, undesigned and grown, is a cosmos. The ends-independent, general and instrumental rules producing it are nomoi. A closed, hierarchical order or an organisation is a taxis. The ‘ends-oriented’ rules forming it are theseis141.

This classifi cation is more subtle and penetrating than might appear. Thus, a tribal or a caste society is closed and hierarchical, and appears not by design but because people act on the appropriate sort of concrete, ends-oriented the-seis. On the other hand, a company or a club is an ends-oriented order, deliberately produced, and its rules are likewise directed to serving particular ends.

But it is not closed or hierarchical in the sense in which a tribe or caste is.

Rules are transmitted through imitation and learning. ‘Closed’ rules can be gradually opened up by increasing their abstractness — and vice versa. The

Great Society covering the globe developed through an extremely long historical process, as more and more people gradually began following ends-independent social and legal rules in their actions. The process was set in motion millennia ago, when some tribesmen began acting on somewhat more open rules 284 Early Modern England | Sudha Shenoy

than their fellows — when the fi rst tribesman placed salt on his tribe’s boundaries, hoping for an exchange. Those groups who moved towards greater open— ness in their rules prospered, attracting new members and imitators. But no-one, of course, could realise why all this was so. — It will be seen that Hayek here extends and builds on Mises’ analysis.

Organisations — taxeis — are all, of course, parts of the larger spontaneous order — the cosmos. Many smaller “particular” or “partial” societies will emerge in the cosmos, under various “special circumstances which produce closer relationships amongst the members”. Such particular societies,

“will often overlap and every individual may, in addition to being a member of the Great Society, be a member of numerous other spontaneous sub-orders or partial societies of this sort as well as of variousorganisations existing within the comprehensive Great Society”.

Mises had, of course, underlined the same point earlier (as we saw above,

chapter 4). — Hayek emphasises the value and the signifi cance of such volun-

tary associations that the cosmos facilitates; he stresses especially their worldwide ties:

“It is the great merit of the spontaneous order concerned only with means that it makes possible the existence of a large number of distinct and voluntary…communities serving such values as science, the arts, sports and the like. And it is a highly desirable development that in themodern world these groups tend to extend beyond national boundaries and that, e.g. a mountain climber in Switzerland may have more incommon with a mountain climber in Japan than with the football fan in his own country, and that he may even belong to a common association with the former…” 142.

The Catallaxy

Two examples of cosmoi are the market order, or catallaxy, and the common law. We have seen that Hayek saw the pricing system as a coordinator of people’s actions and as an information-transmitter. He also saw competition as a continuous discovery of particular data: costs, suppliers, customers, products, prices, etc. As we saw above, he already viewed the economic system as an analytical unit:

“The conception of the economic system as divisible into distinct markets for separate commodities is, after all, very largely the productof the imagination of the economist…”.

And he pointed out that in adapting to a change in the supply of or demand for, even a single commodity, the eff ects spread throughout the system: “the Early Modern England | Sudha Shenoy 285

whole acts as one market…”. Hayek now extended the competitive process to mean the adaptation of all economic activities to continually changing circumstances. This involved the dropping/ curtailing of some activities — the disappointment of some expectations. But this meant greater supplies of means for everyone’s ends.

In terming the market order a “catallaxy”, Hayek adapted a Greek word meaning “to receive into the community” and “to turn from enemy into friend”, and also “to exchange”. Hayek took the analysis from Menger and the description from Mises, who said of the division of labour: “It makes friends out of enemies, peace out of war, society out of individuals”. And again: “human society [is] a friendly division of labour”. A catallaxy is an open-ended, spontaneous, instrumental order. Via prices, it peacefully links together people across the globe. Thus, they adapt to circumstances far beyond their immediate neighbourhood. Conversely, they obtain goods and services from a worldwide production process. Because the catallaxy is only an instrument, all the various ends it serves have their place only on the value-scales of the individuals involved; there is no single hierarchy of ends as in an organisation. This means that changes in prices and so in incomes are purely functional — they have absolutely no connection with the personal merits of the individuals concerned. To maintain and enhance the fl ow of material means for everyone, requires continuous adaptation to changing circumstances. This involves price falls and drops in income for some; this is perhaps even more essential than price and income increases: resources must be released to be redi— rected as needed. As an open order, the catallaxy utilises and incorporates all the knowledge of relevant circumstances possessed by its members: everyone is led to mutually adjust 143.

The competitive process is an aspect of the catallaxy. ‘Competition’ discovers and transmits ever-changing information on what ‘should’ be produced and, even more importantly, what should 144not be turned out .

As just noted, the incomes received in a catallaxy are functional only: they refl ect others’ estimation of the value of the services performed; this estimation is based on how well the services provide the material means that others need.

Thus incomes — all returns — can both rise and fall. Hayek draws out two necessary implications: a. Capitalists do not fi nd life easy under an exchange order:

“[capitalism] is a system which imposes upon enterprise a discipline under which…managers chafe and which each endeavours to escape”145.

b. Hayek emphasises repeatedly that material success is quite separate and distinct from someone’s moral worth and the moral merit of his (or her)

actions: “remuneration in accordance with the value of a man’s services is inevitably very diff erent from what we think of his moral merit” — ie, a person’s merit does not correspond with his/her material returns. Hayek stresses that

“to guard ourselves against becoming too materialistic” we have to recognise frankly “that there are other and often more important goals than material success”. He underlines that the catallaxy is a general-purpose instrument for all ends: “a free enterprise society” can be “a pluralistic society [which] has many diff erent principles on which esteem is based”; where worldly success is not

“regarded as certain proof of individual merit” 146.

As we just saw, the catallaxy is ends-independent and rule-based; it could develop only because of this. Hayek therefore deplores the identifi cation of income and merit:

“I rather wish to emphasise [,] that in our society personal esteem and material success are much too closely bound together. We ought to be much more aware that if we regard a man as entitled to a high material reward that in itself does not necessarily entitle him to high esteem”

147.

The Common Law

Hayek is considered to have come only rather late to an appreciation of the common law and its real signifi cance. The late Bruno Leoni is usually regarded as playing a key role in this.

We saw above that Hayek tells us he retained chiefl y the Roman law and legal history from his law degree. So the idea of law as an historical growth would not have been unfamiliar to him. He had certainly read Menger’s Inves-tigations at university. In the text of that work, law is consistently included amongst the instances of unintended, historically-grown social phenomena, while in Appendix VIII, Menger analyses the common law in exactly these terms. So again, Hayek would have at least come across the idea. The key point, however, is that Hayek, from his very fi rst mention of the subject, saw

“the ordinary rules of civil and criminal law” exactly as Menger and Mises did: as instruments to help individuals “achieve their various…ends”. Thus, these rules are compatible with a wide variety of rankings of a range of diff erent ends148.

The historical context in which Hayek fi rst wrote is important. This context was the extensive discussion of the administrative requirements of a centrally-organised society and economy. Economic centralisation requires that Early Modern England | Sudha Shenoy 287

the central directorate have the utmost possible administrative latitude and discretion. Legislation is its tool, intended to help it suppress the market economy, thus achieving the socialist ideal. Hayek didn’t just oppose this, he outlined the opposite type of legislation which supported the actions of ordinary people.

Such legislation is: i. permanent or lasts for long periods, ii. general in nature, as opposed to specifi c orders, iii. impartial — it is not known in advance who benefi ts/loses and which ends are served. Therefore, it is iv. instrumental, enabling unknown people to achieve their ends and hence vi. limited in scope.

These features, in short, are limits set on the exercise of power. Hayek mentions several times that with this type of legislation, it is impossible to know beforehand who will be aff ected, in what way 149. These features are of course those of the grown common law.

Hayek emphasises, more than once, that the general principle of private property is quite distinct from the historically-developed rules of property and contract; it is a mistake to mechanically identify the two. Ideas about the social order infl uence the development of both common law and legislation, and the content of property rights defi nitely aff ects the degree of actual competition in operation. Hayek cites the examples of cartels, monopolies and restraint of trade. A clear idea of the rationale of property is, therefore, essential: a. as conditions change and property rights develop in new fi elds b. for such new problems as urban land use c. to assess the impact of e.g. trademarks, pat— ents and copyright. In these areas, case-law and legislation have mechanically extended existing property rights, without considering the principles on which the market economy functions. So too has legislation on corporations. The result in all these areas is to limit competition seriously below its achievable degree, — the treatment of trademarks is a very clear example. Hayek is also quite emphatic that corporations, in particular, should never have been treated as natural persons 150.

Hayek specifi cally notes the legal doctrines of Sir Edward Coke, and of

Hume, in the fi rst of his lectures on The Political Ideal of the Rule of Law (delivered 1954). In The Constitution of Liberty, he refers for the fi rst time to the analysis of the common law as a grown historical phenomenon, citing not only

Menger’s analysis (in Appendix VIII to the Investigations), but also that of

Coke, Sir Matthew Hale, Hume and Burke. He also adds Sir William Jones and Wilhelm von Humboldt as lawyers who laid the foundations of linguistics.

Hayek generalises the analysis of the common law to the development of general social rules; he mentions legal rules only incidentally. — But in that work, he is clearly more concerned with legislation. In his article on Hume’s legal and political philosophy, Hayek stresses Hume’s realisation that law is a system of rules, and that rules have to be adhered to, throughout the range of cases 288 Early Modern England | Sudha Shenoy

decided. It is only in his paper on “The Principles of a Liberal Social Order”

[1966] that Hayek systematically analyses the common law as a social growth.

This analysis is extended even further in his pamphlet on “The Confusion of

Language in Political Thought” (delivered 1967), and then developed more extensively in Law, Legislation and Liberty (1973-79).

Hayek’s analysis is squarely on Mengerian lines: the “rules of just conduct” emerge over time as the unintended results of human action. These rules always manifest fi rst in people’s actions, as customs and practices followed without any conscious adoption. Cases reach the stage of decision in court only when other means have failed. All cases are, of course, specifi c practical disputes involving specifi c, practical problems — i.e a particular set of concrete circumstances. Thus all case-law develops through the application of general principles to concrete cases, regardless of the particular outcome. The judge tries to articulate the rules involved and thus a body of rules is articulated that ultimately emerge from people’s actions:

“If we are today so familiar with the conception of law in the sense of abstract rules…this is the eff ect of the eff orts of countless generations of judges to express in words what people had learnt to observe in action. In their eff orts they had to create the very language in which such rules could be expressed” 151.

The series of decisions, following people’s actions, results in an increasing consistency and generality in the rules. Thus common-law rules are the outcome of attempts to make rules ever more instrumental and abstract — i.e following an idea of justice which sees it in the equal application of equal rules to all-comers. Equity develops as the articulation of unarticulated rules in the entire system of rules. Judicial expertise then consists in identifying the key rule or rules that apply to the concrete case at hand, and recognising too the very real diffi culty of articulating the rules that people do act upon:

“It seems that the constant necessity of articulating rules in order to distinguish between the relevant and the accidental in the precedents which guide him, produces in the common law judge a capacity for discovering general principles….The common law judge is bound tobe very much aware that words are always but an imperfect expression of what his predecessors struggled to articulate” 152.

Hayek also recognises what Hale, Burke and Mises had seen earlier: that the katallaxy and the common law developed together. Changing economic activities produce new practical problems for lawyers to solve. Thus legal practice changes. And when cases go to court, judges have to face new types of facts and articulate new types of rules. Conversely, an open legal order facilitates an open-ended economic order. Legislation, which Hayek now terms Early Modern England | Sudha Shenoy 289

more dangerous than gunpowder, runs counter to the common law, because legislation is an instrument for government offi cials to issue orders to subordinates, ie. government subjects. It is, therefore, ends-oriented, and cannot serve as a general instrument for all-comers, as the common law does 153.

How to Study Society

Lastly, we come to the question: What is the fi eld of study for which all these analytical tools have been prepared? For Hayek, as for Mises and Menger, this fi eld is the study of the social order. It requires several disciplines, as well as a profound knowledge of particular facts (says Hayek). It is now broken up amongst various specialisms, but it had once been “a common fi eld of inquiry”.

This splitting-up has had especially “baneful eff ects” in economics and in law.

Both deal with particular aspects of the same social formation but neither specialist is aware of this:

“the rules of just conduct which the lawyer studies serve a kind of order…of which the lawyer is largely ignorant…this order is studiedchiefl y by the economist who, in turn, is similarly ignorant of…the rules of conduct on which the order…rests”.

After thirty years’ teaching experience, Hayek questions the separation of the two disciplines. He regrets that economists learn neither law nor legal history, and remains grateful that he had to study both legal and economic disciplines. Hayek suggests further that economics “can only gain” from looking sometimes at “the problems of theoretical linguistics”. He points out elsewhere, “[i]n the fi eld of social phenomena, only economics and linguistics seem to have succeeded in building up a coherent body of theory” 154.

Hayek says that to study society requires fi rstly “a rich and varied experience”, which gives “knowledge of men and the world”; and then a knowledge of “the inherited cultural treasures of our civilisation”, through which we gain access to “the accumulated wisdom of the past”. This cultural inheritance not only provides knowledge, it is also what we try to investigate objectively 155.

Investigation of the social reality is an extremely diffi cult art: there are no

“simple, …mechanical criteria” to identify “a certain type of theoretical situation”. Instead, the professional student of social aff airs needs “a sense for the physiognomy of events”. Only “those to whom…theoretical schemes have become second nature” will be able to acquire these practical skills. To recognise the real world counterpart of theoretical categories is extremely diffi - cult: there is an immense distance between theory and application. The latter requires a substantial knowledge of “several disciplines” as also of “particular facts”; Hayek stresses that “the need for understanding history arises in every 290 Early Modern England | Sudha Shenoy

application of our knowledge”. He emphasises that the social sciences are theoretical and highly abstract, perhaps more so than the natural sciences, but the concrete social phenomena and events that are the focus of study are complex and historical in nature. To deal with any “concrete problem”, one needs a greater knowledge of “political science and jurisprudence, anthropology and psychology, and, of course, history” than anyone can really have. Thus, to use

“technical knowledge” successfully requires a broad education, and “some knowledge of the whole fi eld of the social sciences as well as…history and philosophy”156.

Hayek stresses yet again that “the study of society” is both theoretical and historical; it is “erroneous” to identify such study with history alone. In short, he again denies the position of the Younger German Historical School but now without specifi cally naming them. The nature of this subject matter is such that “practitioner” and “theoretician” cannot be separated, as with engineering and physics. In this study, application cannot be delegated, “we…must be our own practitioners,…” and obtain the necessary “factual knowledge, the familiarity with particular circumstances” 157. — In other words, Hayek says social theoreticians must have a deep and thorough knowledge of the historical reality

— since it is for the study of this reality that social theories are developed.

Two Sorts of ‘Economics’?

We may now pull together the features of both the social subject-matter which Hayek refers to, and the discipline of ‘economics’ which he has in mind.

This ‘economics’ studies the social formations resulting from the legal rules that the lawyer studies. Like linguistics, ‘economics’ too studies social phenomena.

In addition to a knowledge of ‘economics’: historical knowledge, a knowledge of literature, worldly experience, and mastery of a range of disciplines — all are necessary to tackling the study of this social reality. Hayek explicitly sees ‘economics’ as only a starting-point for moving out into the far wider range of concrete studies involved in the investigation of society. ‘Economics’ is, for Hayek, only one part of the training needed for such investigation. This last requires many more and diff erent skills and techniques and a particular outlook. It is

“perfectly true”, therefore, that “exclusive knowledge of a single sector of the social sciences is of little use” when dealing with their concrete problems 158.

Now, none of these features are found in the neoclassical economics of the late twentieth century, so clearly this is not the ‘economics’ which Hayek is thinking of. Moreover, the social world which Hayek describes is clearly not the natural world, so this social world is unknown to natural scientists. And since neoclassical economics is a science, the social world is also unknown to Early Modern England | Sudha Shenoy 291

it. But, besides the ‘economics’ whose features are not those of neoclassical economics, Hayek refers to another ‘economics’ which he describes very differently. This type consists in “writing articles for other economists to read”.

Hayek “sometimes feels” this ‘economics’ has become so “refi ned [it] can no longer apply…to the real world”. Its “increasing technicality carries…the danger of a narrow specialism which is peculiarly harmful in this fi eld”. — Since at least 1944, Hayek has said repeatedly that to “know only economics and nothing else” is to be a “bane to mankind”. Twelve years later he said,

“I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger”.

Natural scientists, to be useful members of society, require no more than their respective specialisms (he says). But, with the social scientist, a specialism alone is damaging: “in the study of society exclusive concentration on a speciality has a peculiarly baneful eff ect”. — Now, neoclassical economists will feel, of course, that what is said of natural scientists applies to them as well, because neoclassical economics is a science. Be that as it may, it seems quite clear that the ‘economics’ Hayek fi nds so detrimental is not the ‘economics’

which he says is “indispensable” for studying “the far-reaching problems of social organisation”159.

Statistics, Aggregates, Quantities

Hayek sharply contrasts statistics and aggregates with the ‘complex’ economic phenomena — prices, quantities, wage-rates, etc — that result from individuals’ actions on the basis of their knowledge of specifi c circumstances. This last is the reason for his well-known and consistent argument that averages, aggregates and other like constructs can never be part of economic reasoning

— ie explanation or analysis. Only human beings, interacting with one another, can give rise to such economic phenomena as prices and quantities of goods, production methods, etc. That is why economic analysis has to be of individuals’ actions and their interrelationships. All these economic phenomena are the complex outcome of the particular knowledge of particular circumstances known severally to the millions of individuals involved 160. As against this, statistics simply cannot handle complex social formations:

“in the statistical study of social phenomena the structures with which the theoretical social sciences are concerned actually disappear”.

To rely on statistics and index numbers in economic reasoning is to lose achievable161 insights into the interrelationships amongst people’s actions .

In his Nobel lecture, Hayek refers — just as Mises does — to the “vain search for quantitative or numerical constants”. Statistics are historical data: 292 Early Modern England | Sudha Shenoy

“Most…economic statistics” that are ordinarily collected, “such as trade statistics, fi gures about price changes, and most ‘timeseries’, or…‘national income’

[statistics]” can provide at best only “information about the conditions existing at a particular moment”. Statistics are “an instance of…historical information about a particular situation…”. Statistical information cannot give us more:

“There is no reason to expect…these measurements will ever reveal anything… beyond the particular place and time at which they [were]

made”.

So we cannot expect constancy: “…statistical magnitudes inform us only about the past and provide no justifi cation for the assumption…they will remain constant…” 162.

Hayek is particularly sceptical about the use of macroeconomic estimates rather than the analysis of individual action. He fi nds it a “superstition that only measurable magnitudes can be important”. Thus, the myriads of prices and wage-rates that produce a sustainable distribution of employment in diff erent lines of production are the result of the “particular information” possessed by the millions of individuals concerned. It is, therefore, impossible to obtain these prices and wage-rates via statistical tests. Statistics are not the facts to which economic theories refer, and what is statistically measurable “may well

[be] theoretically wholly uninteresting” 163.

Hayek is quite scathing about economists’ preoccupation with “quantitatively measurable surface phenomena” derived from “a superfi cial similarity of procedure with the physical sciences”. He emphasises that there are “specifi c conditions…in the natural sciences” that give “quantitative measurements [a]

basic importance”; but these conditions “are not present” in the social fi eld.

Hence, there are no grounds on which to copy the natural sciences and so “the blind transfer of the striving” for such measurement “is the result of an entirely unfounded prejudice”. Hayek indicts this last in the strongest possible language: it “is probably responsible for the worst aberrations and absurdities produced by scientism in the social sciences”. This scientism

“not only leads frequently to the selection for study of the most irrelevant aspects of the phenomena because they happen to be measurable, but also to ‘measurements’ and assignments of numerical values which are absolutely meaningless” 164.

Hayek adds (much later):

“I do not see…that our habitual use of index numbers of prices…had any way assisted our understanding…or to draw relevant conclusions, except perhaps about the behaviour of index numbers”.

Hayek fi nally doubts even the value of depicting the complex pattern of general equilibrium:

“I am afraid I have become…more and more sceptical of the instructive value of…that beautiful system of equations…”.

— even though he was once “greatly fascinated” by this “construction”.

He now has reservations because “we often forget these data are purely fi ctitious, are not available to any single mind, and therefore do not really [explain]

the process we observe” 165.

Once again, two types of ‘economics’ are clearly implied in these observations, though this is never spelt out. Neoclassical economists of the late twentieth century would certainly reject Hayek’s position, which however is entirely consistent with his exposition of an ‘economics’ which is only one of the disciplines needed to study the complex, historical, social world.

Falsifi ability

So far we have worked through Hayek’s analysis of complex social phenomena: i.e formations that are not visible but have to be carefully rebuilt from the known components, people’s actions. As people manifest diff erent types of rules in their actions, two kinds of orders appear. Thus fundamental aspects of specifi c historical phenomena — such as tribes, manors, castes, clubs, fi rms, as well as languages, the common law and the worldwide exchange order — can be recognised; these aspects would otherwise remain invisible. Especially in the case of the grown, undesigned social formations, it is now possible to pull together as part of the same historical development a vast range of individual facts that otherwise appear to be self-contained and distinct.

In addition to this, Hayek also tries deliberately to meet Popper’s criterion of falsifi ability for the case of complex phenomena. We may note this criterion is, of course, crucial for the natural sciences, but it is entirely separate from the analysis of historical facts — i.e the facts of the social sciences, the actions of human beings.

The Applied Natural Sciences

Hayek begins with those sciences where complex phenomena are the rule: specifi cally, the applied natural sciences, such as astrophysics and the various branches of geophysics — geography, geology, oceanography, meteo— rology, seismology, etc. These disciplines study natural phenomena that are produced by a complex of separate infl uences, so investigation in these fi elds 294 Early Modern England | Sudha Shenoy

uses a combination of theorems already developed and “accredited” 166. Hayek points out that in these and other disciplines, and even in physics itself,

“the activity of thinking through all [the] implications [of hypotheses] is…important and valuable in its own right; and it may sometimesbe…of great complexity and diffi culty, requiring the highest forms of intelligence”.

What “the range of application or the capacity of a theory” is, how far “it can account for a certain group of observed phenomena”, etc, is “often as interesting a problem” as testing “the particular conclusion derived from the theory”. Drawing out all the implications of what we know can never be fi nished;

“it will often be…exceedingly diffi cult…to decide how much of what we observe can [or could] be explained by laws already known…” 167.

In geophysics and other applied sciences, hypotheses are selected “from what we know already about some of the elements of the phenomena”. This explanatory pattern is assumed to be true, so it is not asked whether the selected hypotheses are true; the question rather is: does the pattern fi t the observed situation? Have we chosen the right combination of theorems to explain these given phenomena? Are “the factors…singled out…in fact present in the particular phenomena we want to explain?” Are these factors “relevant and signifi cant to explain what we observe?” 168.

Where a vast number of relevant infl uences operate simultaneously, there

“neither the assumption that factors of the kind assumed are present” nor the deductions made therefrom, “need be regarded as disproved if [our] conclusions are not borne out by observation”. All that “observation of such complex situations” can do is “help…to decide whether to accept” the conditional theorems “as an explanation of the facts…we observe”. What is “tested” is

“the assertion that this or that pattern fi ts this observable situation” 169; and if this explanation is in fact correct, then it is possible to predict “combinations of events which will not occur”. So too the “tentative explanation can be proved false if the phenomena observed show characteristics which the postulated mechanism could not produce” 170.

Pattern Prediction

Explanations of this type provide a “schema or framework” which organises the “observational knowledge” we already have and supplies “niches for new observations likely to occur”. With such complex phenomena — including those of biology and the social sciences — only “explanations of the principle” are possible. This means that predictions can only limit the possible range 171 of events that might occur . It is impossible to predict “what particular Early Modern England | Sudha Shenoy 295

occurrence will take place at a particular spot or moment”. There are “absolute obstacles to the prediction of specifi c events” because they “depend on

[too] many concrete circumstances” to ascertain all of them. ‘Pattern prediction’ cannot give the specifi c arrangement which will appear, only the general 172type. Hayek is quite explicit that such predictions can be made only for “a given situation”, a “given complex of events”, or in “given” or “defi ned circumstances”173.

Natural Evolution

Hayek is emphatic that the theory of natural evolution is exactly an example of established theories applied to a particular set of natural events 174. Therefore, those “[d]isputes which have arisen in the course” of the theory’s growth

“have…signifi cantly turned not so much on facts but on such questions as whether the postulated mechanism can account for the evolution having taken place in the time…available”.

These disputes have been solved through deduction:

“…the answer has frequently come, not from the discovery of new facts, but from purely deductive arguments such as the mathematical theory of genetics…” 175.

Hayek points out that the theory can explain — but it can predict only very little, if at all, because there are too many facts involved. Thus the theory gives an “understanding of the growth and formation of organisms” but

“only in the rarest of instances [can it] be turned into specifi c predictions of what will happen in a particular case because we can hardly ever ascertain all the facts [contributing to] the outcome” 176.

Equally it is only the application of the theory to particular instances which can be refuted 177.

‘Economics’ and Pattern Prediction

Hayek emphasises that the “prediction that a pattern of a certain kind will appear in defi ned circumstances is a falsifi able (and therefore an empirical)

statement” 178. Only this type of prediction is possible with economic phenomena because of their complexity — prices, for example, are formed from the knowledge of circumstances dispersed amongst thousands, perhaps millions, of people 179. Nevertheless, pattern prediction makes it possible to provide falsifi able — empirical — statements in economics. This puts it on the right side of the divide between science and non-science 180: all is not grist to the economist’s mill, exactly as with natural scientists.

Empiricism in Economics

Hayek draws a sharp distinction between Popper’s hypothetico-deductive standpoint and the “naïve empiricism” or “certain more extreme forms of empiricism” which he fi rst met in America. He fi nds a gulf between this

“uncritical empiricism [found] in a more naïve form among American social scientists” and Popper’s approach. Hayek regrets not having publicly spo— ken about Friedman’s Essays in Positive Economics which, he says, “in a way is quite as dangerous a book [as Keynes’ General Theory]”. Hayek does not mince his words when referring to more recent developments in the social sciences. These developments are based

“only too often…on the false belief that the scientifi c method consists…in imitating the form rather than the substance of scientifi c procedure, as if one needed only to follow some cooking recipes to solve all social problems. It sometimes almost seems as if the technique of science were more easily learnt than the thinking which shows us what the problems are and how to approach them” 181.

Hayek feels that Mises is in fact closer to Popper; the real gap is between both and the empiricists. Mises “would presumably not deny that the applicability of a theory to particular circumstances depends on the presence or absence of facts which can be ascertained only by experience” 182. [N.B, this is exactly Mises’ position].

Comments

It will be noted that Hayek never questions that the demarcation problem is equally fundamental to the study of both the natural and the social world. But history is not science. Obviously it is absolutely essential to scientists that their investigations should be clearly demarcated from the doctrines of e.g Freudianism and Marxism. All is grist to the Freudian and the Marxian mill but this cannot be so for science — since this is exactly what separates it from non-science; — and scientifi c research is predicated on this demarcation. Hayek has shown that a number of applied natural sciences e.g astrophysics and geophysics, do meet the demarcation criterion, even though they study varying combinations of complex circumstances. This limits them to testing only the appli-cability of deductions from “accredited” theories to particular situations; so these disciplines can make, at best, only pattern predictions about the range/ type of events forbidden in such situations. Hayek is clearly anxious that the social sciences be shown to also fall on the scientifi c side of this demarcation.

This last point is clearly addressed to scientists and to philosophers.

At this point we may bring in (again) what Hayek saw earlier about the social world: people’s actions — the elements of complex social phenomena

— are “the truly empirical factor” in the social sciences, “known beyond…dispute”. He describes the social sciences as “empirically deductive” — since we obtain the general pattens of social phenomena by drawing out all the implications of people’s actions in the abstract. He points to the fact that: a. everyone has the same mental structure and therefore sees things in terms of the same general classifi cations b. everyone’s knowledge of circumstances is a fragment, often inconsistent, as compared with the whole, available to all people taken together. Both are the starting point for the development of social theory. On the basis of these undisputed facts, theory builds up pictures of social structures — structures that are also historical in their development, i.e they are empirical facts. Theory (says Hayek) deals with only those aspects of these social formations that are in principle repeatable; history studies the unique, the particular, the non-repeatable side. Thus both the organising framework and the historical material organised, come from exactly the same source: people’s actions.

We may take a concrete example of what Hayek is referring to in general terms: The category of ‘money’ is clearly a type of human action; and the various historical monies — e.g. cowries, coins, credit cards — can be classifi ed as such only because people have in fact used these things as media of exchange.

But the category cannot predict what will present itself to be classifi ed. Obviously classifi cation is not (always) instantaneous; it may require many tries before the ‘right’ category is found for some historical happening. Clearly the historical conclusion, ‘cowries were used by people in fi fteenth-century West

Africa as a medium of exchange’ was arrived at after historians had puzzled over the signifi cance of cowries in that particular context: did people use these shells for decoration? Playing games? Gambling? Ceremonies and/or religious rituals? Exchange? Etc. And this problem arose, of course, only in the context of extensive research into various aspects of West African history in various periods.

Now, falsifi ability is totally central to the natural sciences, but it cannot even begin to touch on the issues and the content of historical research — i.e the study of the facts of the ‘social sciences’. If philosophers and scientists, and therefore neoclassical economists, should ever feel there was something in historical study, and so want to take an interest in it, they would have to go there direct. I do not say, of course, that a knowledge of history can assist scientists and philosophers in their study of the natural world and of the problems and issues involved. But of course, the converse does not hold: as Mises insists, 298 Early Modern England | Sudha Shenoy

historians must have some knowledge of at least the conclusions of the natural sciences.

Hayek clearly thinks he is describing one horse — piebald rather than of a single colour. In fact there would appear to be two horses — both galloping off madly in opposite directions.

Sayles, Hayek, Mises

Finally, we may note that G.O. Sayles, the eminent historian, also links the study of history with that of the applied sciences, since they are concerned with non-repeatable occurrences, unlike the experimental disciplines:

“…the ‘experimental sciences’, like chemistry and physics, …deal with events that can be constantly repeated, with processes that recur or can be artifi cially produced and subsist in an external present. Our interest is with the ‘observational sciences’ or the ‘descriptive sciences,’ …like astronomy and geology, palaeontology and palaeobotany, mete—orology and biology, or such hybrids as geography, which deal with phenomena that have occurred once and for all in the course of nature and cannot be repeated….The astronomer must take the stars as he fi nds them and the geologist the earth; the palaeontologist and palae—obotanist must accept the fossils of ancient fauna and fl ora for what they are. They can conduct no experiments to bring about like results.

Now, the historian is also concerned with unique events and it is with the observational sciences that history is closely associated.”

With Mises and Hayek, Sayles too recognises that quantitative materials are historical data:

“The observational scientist and the historian are each dealing with concrete events fi xed in time and space, and without the accumulation and coordination of quantitative data there can be for them no science and no history.”

But all historical materials require organisation and arrangement:

“Rarely…do the facts come to the historian…conveniently arranged…statistical material may need a good deal of interpretation….Most of the facts with which the historian has to deal are presented to him without classifi cation and, in great part, they are not susceptible of statistical treatment at all”.

Sayles emphasises that the historical data have a “living reality”; historians have to understand this and “make the dry bones live by explaining how once they were animated. Every charter, every writ, however dull in appearance, was procured by a living man for some purpose of importance to him…”. Sayles points out that because history is about people, it is both Early Modern England | Sudha Shenoy 299

signifi cant and intelligible: “This is something more than watching as it were an ant-heap or a beehive. We are in communion with the men of the past as in one great sodality”. With Mises, Sayles too feels that the detached historian is the ideal historian:

“man does not easily contemplate his kind without the intrusion of an emotion which obscures vision and clouds judgement…the fi ndingsof the historian, like those of a doctor, will be the more certain when observations and inferences are cold and objective…”.

Mises too compared historical investigation with “the tasks to be accomplished by a diagnosing physician” 183.

A Digression on Government

As we saw earlier, the cosmos or Great Society contains numerous organisations. Government is “biggest” of these, but the cosmos is always the greater and far more complex entity, precisely because it is a spontaneous order. Government, on the other hand, “as [an] organisation must still be dedicated to a circumscribed and determined set of specifi c purposes”. Hayek, therefore, rejects very strongly “[t]he supreme superstition that the social order is created by government”; this is “a fl agrant manifestation of the constructivistic error” 184.

As opposed to the latter, “it is conceivable that the spontaneous order [called]

society may exist without government, if the minimum of rules required for the formation of such an order is observed without an organised apparatus for their enforcement…”. But “in most circumstances the organisation [called]

government [is] indispensable” to ensure these “rules are obeyed”. Nevertheless, society can carry on without government: “[t]hese spontaneously ordered activities of the members of society certainly could and would go on even if all the activities peculiar to government temporarily ceased”. Governments have assumed monopolies of “many essential services, especially in…transport and communications”, but this is not because “these…can be provided only by government” [italics omitted] 185.

Legislation is an instrument of governance, and so it is in the rulers’ interest to assimilate their orders to the grown rules of the common law: “ a ruler would fi nd it to his advantage to claim for the organisational rules the same dignity…conceded to universal rules of just conduct”. Government regulations “are called ‘laws’ as a result of an attempt to claim for them the same dignity and respect which is attached to the universal rules of just conduct”.

A constitution is “a superstructure erected to secure the maintenance of the law”, i.e it is “erected over a pre-existing system of law to organise” the latter’s enforcement 186. In short, law consists of spontaneously-generated rules, 300 Early Modern England | Sudha Shenoy

manifested in people’s actions, and articulated by common law judges when needed. Legislation, on the other hand, is deliberately organised for achieving specifi c purposes.

We may note that in the common-law countries, the volume of legislation began growing in the late nineteenth century; this growth accelerated beyond measure in the twentieth. Thus the volume of commands from Authority to its subjects has been rising drastically, relative to the continuing development of general-purpose rules of just conduct. Hayek agrees that “[l]egislation… has been justly described as among all inventions…the one fraught with the gravest consequences, more far-reaching in its eff ects even than fi re and gunpowder”. When people manifest — appropriate types of — general rules in their actions, these will form “part of a system of interdependent actions, determined by information and guided by purposes known only to the several acting persons…”. Because “each element” balances all the infl uences acting on it, all these “various actions” are adjusted “to each other”. In opposition to this, the knowledge and the ends of a “directing authority” are its own, not those of the people whose actions are mutually adjusted through the spontaneous order. So these authorities have to obtain their “particular results” through the issue of “specifi c orders”. Thus the results they aim at “will always be inconsistent with [the] overall order”, and their “isolated commands” must cause people to undertake certain actions that cannot be integrated with the interdependent actions of this order, thus eff ectively disrupting it and at least beginning to destroy its “balance” 187. Interference or intervention, aimed at particular results, “is therefore by defi nition an isolated act of coercion”. As no general rule is contemplated, “[i]t is…always an unjust act in which somebody is coerced (usually in the interests of a third [party])…where another would not be coerced”, all for someone else’s purpose 188.

On this basis Hayek points out, “…we have not yet learned…the taming of organisations”. It still remains to curb the largest one, government, by bringing it under the same general rules that apply to everyone: “…the problem of taming organisations, including the biggest one, government…through subjecting them to those abstract rules of conduct…the rule of justice, is still the main problem ahead”. Because of government’s actual role, Hayek says “I’ve a theory that all economists who serve in government are corrupted as a result…”.

From his own observation, “practical experience with government service… corrupts the attitude of the economist. He becomes a statesman [politician]

instead of an economist”. Where government enforces general rules, this activity “is somewhat like that of a maintenance squad of a factory” which keeps the production machinery “in working order”. But it is “those who buy its products” who ultimately determine how “this machinery is…used”. Hayek is Early Modern England | Sudha Shenoy 301

emphatic that the spontaneous social order is the primary entity, governments are an adjunct:

“Whatever the changing structure of government, the basic structure of society resting on the rules of conduct persists. Government therefore owes its authority and has a claim to the allegiance of the citizens only if it maintains the foundations of that spontaneous order on which the working of society’s everyday life rests” 189.

Two legal historians, foremost in their fi eld, also fi nd that the legal principles embodied in legislation are regressive. Professor S.F.C. Milsom sees a reversion to the feudal principle:

“At diff erent speeds, much of the Western world is moving back to dependent structures of which the feudal unit was a simple model. Insuch a structure the obligations of society are not between man and equal man: they are, as it were, in the vertical dimension, between manager and managed, between those with the power to allocate and those with some entitlement to allocation” 190.

Professor J.H. Baker is somewhat harsher:

“Once the Crown had been painfully brought under the law, it was parliament which began its own democratic…despotism. Countless statutory bodies have been created over the last 150 years, many of them with sweeping powers to restrict freedom and redistribute private propertyand money….In 1978 it was discovered that administrative tribunals dealt with six times as many cases as the High Court and county courts together….Many of the new administrative powers were conferred on non-judicial bodies for the very reason that government departmentswished to control…those bodies and the policy…they administered in a way which would not be allowed in the case of a court” 191.

In three important areas of contract, Baker fi nds that legislation has been regressive: leasehold tenants, employees, and ‘consumers’ of goods and services are

“deemed incapable for economic reasons of protecting themselves through the bargaining process….The result is that many important transactions entered into by non-commercial men are governed notby the individual bargain but by the statutory law….There has in that respect been a partial movement from contract to status” 192.

In the Constitution of Liberty Hayek discusses an extensive and fairly specifi c set of suitable policies that supplement the spontaneous market order and its common law rules. For the historian what is signifi cant are Hayek’s penetrating, shrewd and prescient comments on the policies actually followed in the late 1950s and the further implications that he sees in them.

Hayek’s appropriate policies follow from the existence and functioning of a spontaneous socioeconomic order. Such policies can at best only supplement this existing order. As Hayek observes, actual policies are designed to obtain specifi c ends and as such oppose and disrupt the general rules of the overall order. So suitable policies would embody two principles: a. Government offi cials are to use coercion only to enforce general rules. Offi cials themselves are to follow/implement such rules, which are to cover taxation too —

Hayek recommends a proportional income-tax in the Constitution of Liberty.

b. Government is to be treated exactly like any other large organisation: No government monopolies of any kind (except of legitimate coercion). Government offi cials may not treat ordinary citizens and their resources as means for government purposes.

Legislatively: the crucial diff erence between an historically-grown, general-purpose common law, and ends-oriented legislation, is the fundamental reason for the way in which Hayek divides legislative and administrative functions between two chambers of very diff erent compositions. One chamber, the lower, is to supervise government and levy taxes on principles laid down by the second, higher, chamber. The function of the second chamber is to lay down general rules, intended to last indefi nitely, and to express general opinions about the principles that judges should take into account in determining cases 193. — Hayek brings together two strands here. As he pointed out with respect to trademarks and corporations, case-law developed mechanically, with no clear understanding of how the market order functioned and the fundamental rationale of private property. And as he also emphasises, legal developments are guided by general ideas about the principles of social order: “the principles and preconceptions which guide the development of law inevitably come in part from outside the law…the decisive factors which will determine [legal]

evolution will always be highly abstract and often unconsciously hold ideas about what is right and proper” as well as about the Great Society 194.

Hayek’s vision of the second chamber’s composition is consistent with its functions. Its members are to consist of mature individuals who have already proved themselves in life, — i.e people with practical experience of the market order and the common law. Election, for a fairly long period, is by a constitu— ency of those in the same age-group; — this because contemporaries are best fi tted to assess any individual. On retirement members take up honorary positions, as lay judges and the like. Hayek even draws out one possible implication of the mode of election — the formation of age-clubs, whose female members may be a little younger than the men 195.

Commentators have generally missed completely the serious issue which

Hayek tackled. One such, admittedly a journalist, thought Hayek wanted to Early Modern England | Sudha Shenoy 303

set up lonely-hearts clubs for the middle-aged. Others have asked why — after all the strictures against constructivism — now design an institution? Jeremy

Shearmur doubts whether a second chamber of this type will forget particular interests and concentrate on general rules, since the latter have a diff erential impact on diff erent social groups 196. This last amounts to saying there are no general-purpose rules: that contract law, for example, must favour some particular contracts over others. — Clearly such comments fail to grasp the problem and therefore treat what is one proposed solution as if it were a self-contained political invention put forward in a total vacuum. The central issue is to articulate general opinion and principles as needed for those occasions when it seems case-law requires it, and to ensure that judges have available clearly articulated opinions for consultation, again as needed, to bring changes in case-law closer to changes in general opinion. — It may be noted once more that for political theorists and philosophers, the workings of the common law are part of a completely separate, sealed box. Historians, however, must recognise that

Hayek’s political proposals are supplementary to a common law which has already developed and continues developing.

In short, Hayek is writing in the historical context of an existing and functioning worldwide exchange order which now supports billions of people.

The other side of this coin consists of an existing array of ends-independent social and legal rules. It is impossible to wipe this slate clean and start with a perfectly blank sheet. So government offi cials can in fact only follow one of two principles: on the one hand, they can, through the kinds of taxes they impose;

the orders, directives and decrees they issue; and the kinds of spending they undertake — oppose and undermine the general rules of the common law and the market order. This means that legislation opposes and undermines that very worldwide exchange order which enables billions to survive. In relation to the evolved rules that produce this order, such legislation is the equivalent of dripping acid on various parts of a living entity. Even a little is not necessarily a good thing.

Neither is there any necessary connection between the actual reality and the ideas that justify such legislation. These various acts of governance are said to ‘correct market failures’, ‘redistribute incomes’, ‘redress the balance for the disadvantaged’, etc, etc. These ideas picture a malevolent black box, a harsh organisation, which deliberately assigns incomes in accordance with its own materialistic, money-oriented hierarchy of ends — more for the rich, less for the poor. But such ideas about the actual, historical, infl uences at work are factu-ally wrong. Consider how such a simple item as a pencil is produced, in the late twentieth century: it needs various inputs — graphite, specially-grown timber, paints, fi nishes, etc; appropriate machinery and skills; a suitable factory; 304 Early Modern England | Sudha Shenoy

an organised company, legal advice, insurance, etc. The graphite has to be mined — this needs mining machinery and appropriate skills; then processed

— more equipment and skills; then transported — lorries and ships, plus relevant skills, legal input, marine insurance etc. The timber is grown on plantations; it is then cut down, goes through sawmills and workshops, and becomes suitably-prepared wood. Previous to this are the various machines, factories, labour, steel, etc, that turn out all this machinery and equipment, and the steel mills, rolling mills, etc, that provide the various types of steel products needed;

and before that, there are the iron and coal mines using mining machinery, etc.

In short, a pencil is produced through various worldwide sequences of intricate, interlinked, continuing, investment chains, that also turn out a vast range of other consumption outputs. This is the actual historical reality. This reality cannot be grasped by taking the opposite tack, and supposing that mass consumption goods are produced by a benevolent black box, a helpful organisation which places mass requirements at the top of its list of ends to pursue.

Rather the depiction above is of something entirely diff erent: (the skeleton of)

an unintended grown order, manifesting itself — all unwittingly — in people’s actions. All such instrumental orders — language, common law, catallaxy, capital structure — are instruments or means — for the participants to achieve their several goals. The catallaxy/capital structure, as shown, enables people to produce a vast range of mass consumption goods; luxury goods are always only a fraction of the range and variety of fi nal goods produced. And contract law, for example, enables people to write a range and variety of specifi c contracts; the other side of the catallaxy. So Hayek addresses himself to the question: how to supplement all these real, grown, ends-independent rules and further improve their functioning?

As opposed to this, legislation is a political and administrative instrument for particular purposes only: that conglomerate of ends which eventually emerge from the political and administrative bargaining and confl ict amongst organised groups both in politics and in administration, — the politics here are

‘democratic’ politics, of course. No single such group will fi nd that all its preferred purposes are successful, of course, but all organised groups are united in preferring that this principle be followed rather than the enforcing and implementation of general rules. The ‘justice’ here is ‘distributive’ or ‘social justice’

— that of an organisation or hierarchy.

As Hayek points out, “Abstract rules are not likely to be invented by somebody concerned with obtaining particular results”. Rulers aim at “organising the activities of [their] subjects for the achievement of defi nite foreseeable results”. Thus rulers are “used to issuing specifi c commands and to being guided…by the needs of the moment”. The enforcement of equal abstract Early Modern England | Sudha Shenoy 305

rules “require[s] a degree of self-denial” and restraint “not to be expected”

from such types 197. To re-work Hayek’s insight: the eff ect of inserting ends-oriented legislation into a developed and developing set of common-law rules is analogous to the eff ect of acid rain on a growing forest. The forest may grow suffi ciently to off set the acid, but this does not make acid rain benefi cial.

F O O T N O T E S C H A P T E R 5

1. Information collated from: F.A. Hayek, “Introduction”, Roy McCloughry (ed),

Money, Capital, Fluctuations: Early Essays by F.A. Hayek (Routledge 1984), p. 1;

Stephen Kresge and Leif Wenar (eds) Hayek on Hayek (Routledge 1994) pp. 44, 48,51, 53, 62, 63. Quotations from pp. 48, 62.

2. Collated from Hayek on Hayek, pp. 47, 48, 54, 57. Quotations from pp. 47, 48, 57.

“Mises says…”: F.A. Hayek, “Introduction to L.v. Mises, Socialism, Liberty Classicsed, 1981” in Peter Klein (ed) The Fortunes of Liberalism (Routledge 1992) p. 138.

3. Hayek…, pp. 55, 62; F.A. Hayek, “The economics of the 1920s as seen from

Vienna”; Klein (ed) Fortunes, pp. 22, 23. “any professional…”: p. 23.

4. Hayek…, pp. 62-63; “by original training…”: F.A. Hayek, The Political Ideal of the

Rule of Law (Cairo: National Bank of Egypt 1955), Lecture 1, note 2. “…during the three years…”: F.A. Hayek, “Ernst Mach and the social sciences in Vienna”, Klein

(ed) Fortunes, p. 173.

5. Hayek…, pp. 48, 51, 52, (“half a dozen…”), 57 (“outstanding member”). Wieser and higher doctorate: Money…, p. 1.

6. First meeting with Mises: Mises, Notes, p. 76; Hayek, pp. 67-68; F.A. Hayek,“Review of L.v. Mises, Notes and Recollections”, Klein (ed) Fortunes, p. 154; idem,Knowledge, Evolution, Society (London: Adam Smith Club, 1983), p. 17. Mises’

eff orts for Hayek: Hayek, p. 69; Margit von Mises, My Years with Ludwig von Mises

(2nd ed, Cedar Falls, Iowa: Centre for Futures Education, Inc., 1984). Hayek and

Mises: Hayek, p. 76; Money, pp. 1-2. Private seminar: “Review of Notes…”, Klein(ed), Fortunes, pp. 154, 155 (also — saw Mises almost daily); Hayek, p. 69.7. Margit von Mises, My Years…, p. 133.

8. “Review of Notes…”, Klein (ed) Fortunes, p. 153; F.A. Hayek, “Review of Nation-alokonomie” ibid, p. 152, (“one of the most…”); p. 153 (“must be…”; “was…never…”; “he would not…”); “Mises’ work…”: F.A. Hayek, “The transmission of the ideals of economic freedom”, Studies in Philosophy, Politics and Economics

(Routledge and Kegan Paul 1967) p. 197; Knowledge, p. 46 (“my great master”) p.

18 (“I am to this day…”), p. 17 (“There is…; “a long…”); Money, p. 1 (“becamethe…”); F.A. Hayek, “In honour of Professor Mises”, Klein (ed) Fortunes, p. 129

(“pupil”); “Transmission…”.; p. 198 (“close disciple”); Hayek, p. 68 (“I have…”);“In honour…”, p. 133 (eff ect of Socialism, also see pp. 134, 136, 139, 140, 159), pp.

134-35 (future eff ect of Human Action).

9. “Review of Notes…”, Klein (ed) Fortunes, p. 158 (“a priori”); F.A. Hayek, “The Austrian School of Economics”, ibid, p. 55; p. 158 (“was driven”); p. 55 (“teaching”);Hayek, p. 72 (‘Economics and Knowledge’); Klein (ed) Fortunes, p. 55 (ditto); p. 56

(“the crucial processes”); p. 55 (“then largely”); Hayek p. 72 (“even approved”);Klein (ed) Fortunes, p. 55 (“but no longer”).

10. Footnote to “Scientism…”: F.A. Hayek, The Counter-revolution of Science (Glencoe, Ill: The Free Press 1955) p. 219, fn. 95; idem, “The use of knowledge in society”, Individualism and Economic Order (Routledge and Kegan Paul 1948) p. 88 (“acoordinated…”).

11. “The Austrian School” Klein (ed) Fortunes, p. 55 (“basic subjectivism”; “Austrian…”); knowledge, p. 18 (“a child…”); Hayek, p. 73 (“mere habit”); p. 72 (arationalist utilitarian); Law, Legislation, Liberty, Vol 3 (Routledge 1979), p. 205, fn.

51.

12. Edmund Burke, “Tracts Relating to the Popery Laws”, in The Writings and Speeches of Edmund Burke, Vol. IX, ed. R.B. McDowell (Oxford: Clarendon Press 1991) p.

456.

13. “Introduction to Socialism, 1981 ed”, Klein (ed) Fortunes, p. 142 (all quotes).14. Menger, Principles, pp.

15. Mises, Human Action, pp. ; “Inconvertible capital”, Epistemological Problems.16. On several occasions, Hayek explicitly acknowledges that his work builds on Mises: i.

Monetary Theory, pp. 47-48, 116-119, 128, 133-34. iiPrices and Production, 2nded1935, pp. xiii, 25. In his Introduction to Money, Capital, Hayek says: “[Mises’] The-ory of Money and his work on socialism…determined the chief direction of my work during these years [1921-31]…” (pp. 1-2). Hayek also points out that his fi rst sketch of how the trade cycle was a disruption of the capital structure, appeared in a footnote to his 1925 article on American monetary policy (pp. 2-3); this sketch was “[his] version of Mises’ theory” (p. 3). — For the chronology of Hayek’s writings on the capital structure, see fn. 18.

17. Hayek occasional references to an average period of production or investment all occur in the course of analysing a production process or chain running through many fi rms: i. “The paradox of saving” (1929; trans. 1931) repr. Profi ts, Interest,

Investment, 1939, p. 243. ii. “Addendum: the Early Hayek-Keynes Correspondence”, Bruce Caldwell (ed) Contra Keynes and Cambridge: The Collected Works of

F.A. Hayek, Vol. 9 (University of Chicago Press 1995), pp. 165, 166, 168, 169, 171

(December 1931-January 1932). iii. “Refl ections on the Pure Theory of Money ofMr J.M. Keynes (continued)”, February 1932, ibid, p. 195. iv. “Money and Capital:A Reply”, June 1932, ibid, p. 212. v. “Capital Consumption”, 1932, Money, Capital,pp. 140, 142. vi. “Saving”, 1933, repr. Profi ts, Interest, p. 165. vii. “Price expectations, monetary disturbances and malinvestments”, December 1933, repr. Profi ts,

Interest, p. 154. viii. “Capital and industrial fl uctuations”, April 1934, repr. Prices and Production, 2nd ed 1935, pp. 139, 149 fn. ix. “The maintenance of capital”,August 1935, repr. Profi ts, Interest, pp. 122, 127. x. The reference in Prices and Pro-duction is listed in the text.

18. I give below a list of Hayek’s works that explicitly analyse various aspects of the capital structure: i. “some remarks on the problem of imputation, 1926, repr. Money,

Capital. ii. “Intertemporal price equilibrium and movements in the value of money”,1928, ibid. iii. Monetary Theory and the Trade Cycle, 1929, (trans. 1933), pp. 212-230. iv. “The paradox of saving”, 1929, repr. Profi ts, Interest. v. Prices and Produc-tion, 1st ed 1931, 2nd ed 1935. vi. “Addendum: the early Haye-Keynes correspondence”, Caldwell (ed) Contra Keynes, pp. 168-69, 170-71, January 1932. vii. “Capitalconsumption”, 1932, repr. Money, Capital. viii. “Money and capital: a reply”, June1932, Caldwell (ed) Contra Keynes. ix. “The present state and immediate prospectsof the study of industrial fl uctuations”, 1933, Profi ts, Interest. x. “Price expectations,monetary disturbances and malinvestments”, December 1933, ibid. xi. “On the relationship between investment and output”, E.J. 44, 1934. xii. “The maintenance ofcapital”, 1935, Profi ts, Interest. xiii. “The mythology of capital”, Q.J.E, February Early Modern England | Sudha Shenoy 307

1936, repr. William Fellner and Bernard Haley (eds) AEA Readings in the Theory of

Income Distribution (London: Allen and Unwin 1950). xiv. “Technical progess andexcess capacity”, April 1936, repr. Money, Capital. xv. “Investment that raises thedemand for capital”, 1937, Profi ts, Interest. xvi. “Profi ts, interest and investment”,1939, Profi ts, Interest. xvii. The Price Theory of Capital (London: Routledge 1941).

xviii. “Maintaining capital intact: a reply”, Economica, August 1941. xix. “A comment” pp. 383-85, “Postscript” p. 385, Economica, November 1942. xx. “The geometrical representation of complementarity”. Rev. Econ. Stud. 1943. The following works rest on capital structure analysis and so add some further insights:xxi. “The monetary policy of the United States…after 1920”, 1925, repr. Money,

Capital. xxii. “On the problem of the theory of interest”, 1927, ibid. xxiii. Mon-etary Theory and the Trade Cycle, 1929 (trans. 1933). xxiv. “Refl ections on the PriceTheory of Money of Mr J.M. Keynes”, August 1931; “Refl ections…(continued)”,

February 1932, Caldwell (ed) Contra Keynes. xxv. “Saving”, 1933, Profi ts, Interest.19. Hayek, p. 141.

20. Quotes from Hayek, pp. 77 (“beautiful simplifi cation”), 90 (“crude”), 141 (“so oversimplifi ed”); also see pp. 79, 142. For Hayek’s clear and emphatic rejection of thenotion of an average period of production, see the following: i. “On the relationshipbetween investment and output”, E.J. 1934 — This article was already footnoted inthe second edition of Prices and Production (p. ix). ii. “The mythology of capital”,QJE 1936, repr. Fellner and Haley, eds, Readings in the Theory of Income Distribu-tion. iii. “Investment that raises the demand for capital”, 1937, Profi ts, Interest. iv.

“Profi ts, interest and investment”, 1939, Profi ts, Interest, p. 50 fn. 1. v. The Pure

Theory of Capital, 1941, pp. vi, 69-70, 76-78, 140-45, 190, 199-200, 277, 279.21. See references in fn. 16.

22. The attempt at a further lengthening of the capital structure is set off by an increase in the rate of fl ow of bank credit, which means interest rates are held below the level they would have reached otherwise. — For example, if interest rates are rising, they now rise at a somewhat slower pace. — In production stages further from fi nal consumption, we saw that goods-in-progress take longer to reach fi nal consumption; so returnshere are widened more than otherwise: interest costs are cumulatively more signifi -cant the further removed goods are from fi nal consumption. (A washing machine in a retail shop will reach the fi nal consumption stage in a matter of days or perhaps a few weeks; iron ore now being mined to be eventually made into mining machinery will take months or perhaps years to contribute eventually to the fi nal services of a washing-machine or some other consumer good. Mutatis mutandis for all the capitalinvestments — both “circulating” and “fi xed” — in all the intervening stages). Thus the lengthening process goes somewhat further than in line with consumer-savers’

time preferences: rather more circulating capital and similar versatile resources are drawn into stages further from fi nal consumption, than would be the case otherwise.

This means that somewhat fewer of these resources than otherwise are utilised in production stages nearer consumption. Thus the interim slowing in the fl ows of fi nal outputs is somewhat more than in accordance with consumer-savers’ time preferences. As consumer-savers’ money incomes rise more than otherwise, they continue buying fi nal goods according to these same time-preferences, ie their desired extent of lengthening of the capital structure (refl ecting how far into the future they wish to make provision for, out of the available real resources). These actions of consumer-savers raise returns in stages nearer consumption. Some versatile resources are now drawn back from stages further removed and the rates of fl ow of fi nal outputs once more correspond with people’s time-preferences. Some of the additional investments in stages further removed are left high and dry: the versatile resources needed to cooperate with these investments are now used in stages closer to fi nal consumption.

23. Quotes and other material from Piero Sraff a, “Dr. Hayek on money and capital”, E.J.

42 (June 1932) repr. Caldwell (ed) Contra Keynes, p. 201 (“preliminaries” whose“description…”); pp. 198-99 (Hayek’s auxiliary assumptions); pp. 203-204, 223,

(class robbery); p. 201 (“steam-hammer”).

24. The interchange between Sraffa and Hayek came on the heels of Hayek’s interchange with Keynes (in Economica) over the latter’s Treatise on Money. The two setsof exchanges should be read in conjunction, since Sraff a is clearly continuing the same dispute — see particularly the last two paragraphs of Sraff a’s review and Keynes’

astonishing editorial footnote attached to the end of Hayek’s reply.

25. Quotes from Ludwig von Mises, Socialism (London: Cape 1953) p. 122 (“stationary state”, “theoretical assumption”); Epistemological Problems, p. 108 (ceteris paribus).

Also see Human Action, pp.

26. Quotes from Money, Capital, p. 66 (“an imagined…”); p. 65, also see p. 75 (“anindispensable…”; “artifi cially…”); p. 99 (“hypothetical”), also see p. 103; p. 84

(“such changes”); p. 85 (“no deviation”); p. 76 (“wants…”); p. 86 (“this will…”);

p. 86 (everyone achieves; “this will…”); p. 95 (“a foil”; “the actual…”); Monetary

Theory, p. 42n (“modern…).

27. Monetary Theory, pp. 87ff , 91-97, 196 [very good], pp. 107ff . (equilibrium contains no money). Money, Capital, p. 11 (“alien”, “bank credit”); Monetary Theory, p. 29

(“show[s]”); pp. 55, 65, 68-69, 70-72 (price changes; index).

28. Money, Capital, p. 75 (regularity); p. 30 (“the logic”); p. 75 (all economic); Mon-etary Theory, p. 96 (“far-reaching”); Money, Capital, p. 64 (“the task”); “The Present State…”, Profi ts, Interest, p. 171; Monetary Theory, pp. 184-87, “Price Expectations…”, Profi ts, Interest, p. 138 (actual cycles); Money, Capital p. 20 (demarcations); Monetary Theory, pp. 200-203, 207 (real world interest rates).29. Pure Theory, pp. 16, 18, 21, 22, 26, 27, 28, 32, etc; p. 18fn 1 (quote).

30. Pure Theory, pp. 32, 36 (“intellectual tool”); p. 36 (“analyse…”); p. 17 (“historical…”); p. 87 (“a series”); p. 265 (diff erent goods); p. 297 (“a process”).

31. Fortunes, p. 196.

32. Hayek’s analysis should be defi nitely compared with that of Mises in Socialism, pp.

295-97; and see esp. F.A. Hayek, “The Trend of Economic Thinking” in W.W. Bartley III and Stephen Kresge (eds) The Trend of Economic Thinking (Routledge 1991)pp. 19, 27. Quotes etc: “Trend”, pp. 19, 32 (the lay mind); p. 27 (“probably”; “society”; “spontaneous institutions”; “spontaneous interplay”); pp. 27-28 (economic system); pp. 26, 19 (no-one realises; coordinates); p. 19 (“intense”) — also see p.

18; p. 21 (“unsurpassed”); pp. 18, 26, 31 (“interdependence”; “coherence”).33. “Trend”, pp. 24, 31 (man-in-the-street); “Socialist calculation I” p. 125 (regularities);“Trend”, p. 31 (succession); “Socialist calculation I”, pp. 125-27 (natural sciences);

p. 126 (“known”) — this is taken directly from Menger, see fn; p. 127 (“empirically”);

p. 128 (“permanent”); Menger, Problems, p. 142 fn; Mises, Epistemological, pp. 28,99, 105, 123. — Hayek’s account of the natural vs the social sciences (“Soc. Calc. I”

pp. 125-27) should be compared directly with Mises, Epistemological, pp. 9-10.34. Ludwig von Mises, Socialism (2nd German ed, 1932; London: Cape, new Englished., 1951) p. 163.

35. “Socialist Calculation I-III”, Individualism and Economic Order (Chicago: University of Chicago Press 1948), p. 188 (“hypothetical”, “rapid”); p. 191 (“stationary”);

pp. 188-89 (competition).

36. “Socialist Calculation II”, pp. 154-56 (practical); p. 193 (“special”); p. 156

(“beyond”); p. 153 (“amount”).

37. “Socialist Calculation I-III”, pp. 168, 173 (incessant); p. 160 (weather); p. 193

(scarcities); p. 157 (“frequent”); p. 193 (“economic”); p. 157 (“hundreds”); p. 193

(“fi nd”).

38. “Socialist Calculation I-III”, pp. 154-56.

39. “Socialist Calculation I-III”, p. 168 (“stationary”); pp. 167, 196 (precise); p. 196

(“sometimes”, outsider); p. 198 (how hard); p. 167 (key prices); pp. 168-69 (relevant “cost”); pp. 188-89 (many capital).

40. “Socialist Calculation I-III”, p. 175 (cumulative); p. 173 (organisation); pp. 159-60

(“the diff erence”).

41. “Socialist Calculation I-III”, pp. 172-76, 198-99, 201; p. 173 (“there”); p. 161

(salaried).

42. “Socialist Calculation I-III”, pp. 174-75 (problems); p. 199 (bonus); p. 174

(demoted).

43. “Socialist Calculation I-III”, p. 176 (“results”), p. 159 (“complete”).

44. Mises, Socialism, p. 508 (both quotes).

45. F.A. Hayek, “the Intellectuals and Socialism”, in idem, Studies in Philosophy, Politics,

Economics (London: Routledge and Regan Paul 1967) p. 178.46. “Socialist Calculation I-III”, pp. 135, 161 (“permanent”).

47. Monetary Theory, pp. 84-85 (participated); pp. 84-95 (esp. pp. 84-85); p. 94 (trade cycle); “Price Expectations…”, Profi ts, Interest, pp. 138-141 (“Equilibrium”, priceconstellations).

48. “Price Expectations”; “Economics and knowledge”, Individualism and Economic

Order, p. 34 (“before”); p. 37 (“take”); pp. 36-37 (successful); pp. 38-43 (plan compatibility).

49. “Economics and knowledge”, p. 44 (real world); p. 45 (“under”, “knowledge”,

“more correct”); pp. 50, 51 (entire range); p. 50 (“spontaneous”); p. 50-51 (combines); p. 50 (“central”); p. 54 (“all”); p. 50 fn 16 (“division”).50. “Economics and knowledge”, p. 46 (“How”) also see p. 33; pp. 47, 55 (equilibrium);p. 45 (“the whole”) also see p. 51; p. 45 (social interactions); p. 33 fn1 (Popper); p. 47

(supplementary); p. 52n. 18 (subjective); p. 47 (“ideal types”); p. 55 (nothing new).51. “The Meaning of Competition”, p. 102 (“entirely”); p. 101 (“long-term”); “Use ofKnowledge”, p. 91 (mathematical). — Both essays are reprinted in Individualism and Economic Order.

52. “Use” p. 88 (“language”); p. 87 (“is not”); pp. 88-89 (Because); “Meaning”, pp.

95-96 (discovery); “Use”, pp. 82, 83 (adaptation); pp. 78, 80, 81 (utilising); “meaning”, pp. 101-102 (“historical”); p. 93 (social interactions); p. 96 (intermediaries),

“Use”, pp. 85-86 (wider); p. 85 (“condensed”, “whole”); “meaning”, pp. 93, 94

(information); p. 106 (“coherence”); “use”, p. 86 (“the whole”); “Meaning” (“economists”); “use”, p. 83 (humans); p. 82 (businessmen); “Meaning” p. 93 (“social”);

“Use”, p. 91 (“no more).

53. F.A. Hayek, “Preface, 1976”, The Road to Serfdom (1944; Chicago: University of

Chicago Press, 1976 paperback ed) p. xix (“annoyance”); idem, “Freedom and theEconomic System”, Socialism and War, The Collected Works of F.A. Hayek, Vol 10,ed. Bruce Caldwell (Chicago: University of Chicago Press 1997) pp. 186-87 (“Economic”); p. 181 (“similarity”).

54. “Planning…”, Socialism and War”, Ch 10; Road, see fn 50.55. The essays on “Scientism” and on “Comte and Hegel” are reprinted in The Counter-revolution of Science (Glencoe, Illinois: The Free Press 1955); “The Facts of the

Social Sciences” — see Individualism and Economic Order.

56. “Individualism…”, see Individualism and Economic Order; “Planning”, p. 215 (“thedivision”).

57. “Dilemma…”: see Studies in Philosophy, Politics, Economics (London: Routledge and Kegan Paul 1967); The Constitution of Liberty (London: Routledge and KeganPaul 1960); “The Legal …”, “Kinds of Rationalism”, “Rules…”, “Notes…”, “The

Results…” — all in Studies in PPE; “Errors: see New Studies in Philosophy, Politics,

Economics (London: Routledge and Kegan Paul 1978).58. Constitution, p. 59; also see: “Dr. Bernard Mandeville”, New Studies, p. 265 and fn59; “Results…” pp. 103-104 fn 21; “Errors…”, p. 9 and fn 14; Law, Legislation,

Liberty, Vol I (London: Routledge and Kegan Paul 1973) pp. 22-24 and 152-53 fn

33; “The Atavism of Social Justice”, New Studies, pp. 67-68.59. “Scientism”, p. 55; “Facts”, pp. 72, 75, 76.

60. “Scientism”, p. 209 fn. (‘praxeological’); “Facts” p. 72 (“theory is prior”); “Socialist

Calculation I”, p. 126 (“known”); “Scientism”, pp. 70-79, esp. pp. 75, 76, 78 (Historical School).

61. “Socialist Calculation I”, p. 126 (humanity’s position); “Scientism”, pp. 38-39 9all other quotes).

62. “Facts”, p. 76.

63. “Socialist Calculation I”, p. 126 all quotes except “are, so to” pp. 126-27.64. “Scientism”, p. 39 (all quotes).

65. “Facts”, p. 57.

66. “Scientism”, p. 28.

67. “Scientism”, p. 22.

68. “Scientism”, p. 28.

69. “Scientism”, p. 34.

70. “Scientism”, p. 46.

71. “Scientism”, p. 29 (“common”; “the knowledge”); “Facts”, p. 66 (“meaningless”).72. “Scientism”, p. 46.

73. “Scientism”, p. 77 (“works); “Facts”, p. 64 (uncertain), p. 77 (“certainly”, also see p. 76).

74. “Facts”, p. 66.

75. “Scientism”, p. 30 (“wherever”).

76. “Scientism”, p. 31.

77. “Facts”, p. 60 (both quotes).

78. “Scientism”, p. 31 (“we…understand”, “explain”); p. 49 (“in interpreting”).79. “Facts”, pp. 65-66. Quotes p. 68.

80. “Scientism”, p. 54; also see p. 55.

81. “Facts”, p. 71 (all four quotes).

82. “Facts”, p. 72 (“cannot”); “Scientism”, p. 72 (“for”); “Facts” p. 71 (“elaborate”); p.

72 (“instinct”); p. 71 (not disputed); “Scientism”, p. 72 (“used”).83. “Scientism”, p. 71 (all quotes).

84. “Facts”, p. 72.

85. “Facts”, p. 72 (“languages”); “Scientism”, p. 84 (“money”, “are not…”).

86. “Scientism”, p. 83 (all quotes).

87. “Scientism”, pp. 29-30.

88. “Scientism”, p. 84 (all quotes).

89. “Scientism”, p. 83 (all quotes).

90. “Scientism”, p. 82 (all quotes).

91. “Scientism”, p. 85.

92. “Scientism”, p. 39.

93. “Scientism”, p. 41.

94. “Scientism”, p. 28.

95. “Scientism”, p. 37 (all quotes).

96. “Scientism”, p. 83.

97. “Scientism”, p. 57.

98. “Scientism”, p. 38 (all quotes; also see p. 34 — “mistake for facts”).

99. “Scientism”, p. 54 (points b and c).100. “Scientism”, p. 38 (“popular”), p. 37 (“the ideas”).

101. “Scientism”, p. 85.

102. “What is ‘Social’? What Does It Mean?”, Studies in PPE, p. 243.103. “Scientism”, p. 37 (“exist”, “to revise”).

104. “Scientism”, p. 56 (“vague”, “precise”).

105. “Scientism”, p. 55.

106. “Facts”, pp. 72-73. Quotes: p. 72 (“such”, “the help”); p. 73 (“[disdain]”, “almost”), p. 72 (“led”).

107. “Scientism”, p. 71 (“These…”); “Facts”, p. 74 (“given”); “Scientism”, pp. 50-51

(points a-c).

108. “Scientism”, p. 34 (“provide”); p. 56 (“to constitute” — also “Facts”, p. 72); p. 41

(“familiar to us”); p. 85 (“the interactions”); p. 41 (“by a deliberate”).

109. “Scientism”, p. 24.

110. “Scientism”, p. 39 (all quotes).

111. “Scientism”, p. 38.

112. “Scientism”, pp. 39-40 (language); “Facts”, p. 72 (“the social”); “Scientism”, p. 54

(“are without”); p. 71 (“These wholes”).

113. “Facts”, p. 71.

114. “Scientism”, pp. 56-57.

115. “Scientism”, p.72 (“All unique”); p. 71 (all other quotes).

116. “Facts”, p. 72.

117. “Scientism”, p. 71.

118. “Facts”, p. 72.

119. “Scientism”, p. 57 (all quotes).

120. “Scientism”, p. 55 (all quotes).

121. “Scientism”, p. 58.

122. “Scientism”, p. 55 (all quotes; also see p. 34).

123. “Facts”, p. 72 (“are not”); p. 73 (“attempts”).

124. “Facts”, p. 73 (all quotes).

125. “Facts”, p. 68 (all quotes).

126. “Facts”, p. 72.

127. “Scientism”, p. 71 (all quotes).

128. “Scientism”, pp. 71-72 (“a particular”), p. 72 (all other quotes).

129. “Scientism”, p. 67 (“with social”); p. 85 (“the particular”, “is important”); “Notes”, p. 75 (“particular attributes”); “Scientism”, p. 85 (“those steps”).130. “Notes”, p. 75 (“those”, “a process”); “Scientism”, p. 85 (“the parts”, “a genetic”,“schematic”); “Notes” p. 75 (“conjectural”); “Scientism”, p. 85 (“compositive”);

“Notes”, pp. 75-76 (“the genetic element”).

131. “Scientism”, p. 73.

132. “Facts”, p. 70 fn 3.

133. F.A. Hayek “The Theory of Complex Phenomena”, Studies, fn 57; idem, “The Pretence of Knowledge”, New Studies in Philosophy Politics Economics (London: Routledge 1978).

134. “What is ‘Social’? What Does It Mean?” [1957]; “Rules, Perception, Intelligibility”

[1962]; “The Legal and Political Ideas of David Hume” [1963]; “Kinds of Rationalism” [1964]; “Dr Bernard Mandeville” [1965]; “Notes on the Evolution…Rules of

Conduct” [1966]; “The Principles of a Liberal Social Order” [1966]’ “The Confusion of Language in Political Thought” [1967 — German original]; — all in Studies in PPE; “A Self-Generating Order for Society”, in J.U. Nef (ed) Towards World Com-munity (The Hague 1968); “Errors of Constructivism” [1970]; “The Atavism of

Social Justice” [1976]; “Socialism and Science” [1976]; — all in New Studies; Law,

Legislation, Liberty, Vol I, chs 1, 2; “Three Sources of Human Values”, Epilogue,

LLL, Vol III; “The Origins and Eff ects of Our Morals” [1983], in C. Nishiyama and

K.R. Leube (eds) The Essence of Hayek (Stanford, Calif.: Hoover Institution 1984).

Mises: Human Action, p. 650.

135. “Freedom and the Economic System (1939)” in Bruce Caldwell (ed) Socialism and

War (Chicago: University of Chicago Press 1997) p. 195 (rules are instrumental);

“What Is ‘Social’?” p. 243 (“genuine”, “groups”); “Legal…Hume” (legal rules);

“Kinds of Rationalism”, p. 91 (“a whole”); p. 92 (“In a”).136. “Kinds of Rationalism”, p. 92 (“depend”); “Freedom (1939)” p. 203 (movement);“Principles”, p. 168 (“rules”).

137. “Three Sources…”; “Freedom (1939)”, p. 203 (regression).138. “Socialism”, p. 49 (all quotes).

139. “Atavism of Social Justice”, p. 67 (all quotes).

140. Hayek’s fi rst reference to complex orders is, of course, in “Trend”. He further analyses complex orders in: “Legal…Hume”; “Rules, Perception”; “Notes on…Rules of

Conduct”; “The Results”; all in Studies in PPE; and in “Errors of Constructivism”,in New Studies. Hayek deals with the two kinds of social orders in “Trend”, and thenin: “Kinds of Order in Society” [German original 1963], New Individualist Review 3

(1964); “Principles”; “Confusion”; “Self-Generating”; Law Legislation Liberty I,ch. 2.

141. F.A. Hayek, Law Legislation, Liberty (London: Routledge 1973) Vol I, Chs 2, 5,

6; “The Confusion of Language in Political Thought”, “The Errors of Constructivism”, New Studies; Studies in PPE, Chs. 3, 4, 5. Also for discussion in followingparagraphs.

142. Law, Legislation, Liberty I, p. 47 (“particular”, “special”, “will often”); LLLII, pp.

151-152 (“It is”). Also see Mises, Theory and History, p. 257.143. “The Principles of a Liberal Social Order”, Studies in PPE; “Confusion…”; “Competition As A Discovery Procedure”, New Studies. Quotes on “The conception…”,“Meaning”, p. 98; “The whole…”, “Use”, p. 86. Mises on division of labour: Social-ism, pp. 297, 302. Also see Hayek, Law, Legislation, Liberty II, ch. 10. Menger:Problems, p. 93 and Appendix on National Economy.144. “Competition As A Discovery Procedure”.

145. Law, Legislation, Liberty, I, p. 62.146. “The Moral Element in Free Enterprise” [1961], Studies in PPE, p. 233 (“remuneration”, “to guard”, “that there”); pp. 234-35 (“a free”, “a pluralistic”, “regarded”).147. “The Moral”, p. 234.

148. “Freedom and the Economic System [1939]”, Socialism and War, p. 195 (“ordinary rules”, “achieve”).

149. Legislation: “Freedom [1939]” p. 195; Road to Serfdom ch VI and p. 101.150. “Socialist Calculation I” p. 135; “Freedom [1939]”, p. 195 (historically developed);“Individualism, True and False”, Individualism, p. 20; “Free Enterprise and Competitive Order”, Individualism; “The Corporation in a Democratic Society”, New

Studies.

151. Law, Legislation, Liberty, Vol I, p. 97.152. Law, Legislation, Liberty, Vol I, p. 87.153. Law Legislation Liberty, Vol I, pp. 4-5; chs. 4, 5, 6; “Confusion…”, New Studies.154. Law Legislation Liberty, Vol I, p. 5 (“common”, “baneful”); pp. 4-5 (“rules”);“Economy, Science and Politics”, Studies in PPE, pp. 251-52 (thirty years); pp. 267-68 (“can”, “problems”); “Theory”, pp. 34-35 (“in the fi eld”).

155. “The Dilemma of Specialisation”, Studies in PPE, p. 128 (all quotes).156. “Dilemma”, p. 129 (“simple”, “a sense”); p. 124 (immense; “several”; “the need”;more abstract); “Economy Science”, p. 267 (“concrete”, “political”); “On Being an

Economist”, The Trend of Economic Thinking, p. 42.157. “Dilemma”, p. 124 (“study”); p. 129 (“practitioner”, “factual”).158. “Dilemma”, p. 127 (starting point); “On being”, p. 42 (“perfectly”, “exclusive”);also see “Economy, Science”, p. 267.

159. “On Being”, p. 42 (“writing”); “Economy Science”, p. 259 (“sometimes”, “refi ned”);

“Schumpeter on the history of economics”, Studies in PPE, p. 341 (“increasing”);“On Being”, p. 42 (“know”); “Dilemma” p. 123 (“I am”; “in the study”); “Addendum: Tribute to Roepke”, The Fortunes of Liberalism, p. 196 (“indispensable”, “far-reaching”).

160. Prices and Production, pp. 4-5 (averages); “Economy, Science”, pp. 262-63 (Complex outcome); also see “The Pretence of Knowledge”, New Studies p. 27.161. “Scientism”, pp. 61-62 (quote); “Theory”, pp. 29-31 (statistics cannot handle complex phenomena); “Economy, Science”, p. 262 (achievable insights) — For generaldiscussions, see “Scientism”, pp. 50-52, 61-63; “Pretence”, pp. 24-30; Knowledge,pp. 23-26, 36.

162. “Pretence”, p. 28 (“vain search”); “Scientism”, pp. 62-63 (“Most”); p. 63 (“an instance”, “There is”); “Economy, Science”, p. 262 (“statistical”).163. “Economy, Science”, p. 262 (particularly sceptical); “Pretence” p. 28 (“superstition”, also see p. 24); p. 27 (“particular information”); “The Economics of the 1930sas seen from London”, Contra Keynes and Cambridge, Collected Works of F.A. Hayek,

Vol 9, ed. Bruce Caldwell (Chicago: University of Chicago Press 1995) p. 61 (statistics; quote).

164. “Pretence”, p. 29 (“quantitatively”); p. 31 (“superfi cial”); “Scientism”, p. 51 (all other quotes).

165. Knowledge, p. 26 (“I do not”); p. 26 (“I am afraid”, “we often”).

166. “Degrees of Explanation”, Studies in PPE, p. 6167. “Degrees”, p. 5 (“the activity”); pp. 5-6 (“the range”); p. 6 (“it can”, “often as”, “theparticular”); p. 7 (“it will often”).

168. “Degrees”, p. 11 (“from what”); p. 7 (pattern is true); pp. 7, 11, 12 (not: are hypotheses true?); p. 7 (observed situation; right combination); p. 11 (“the factors”,

“relevant”).

169. “Degrees”, p. 10 (all quotes).

170. “Degrees”, p. 11 (all quotes).

171. “Degrees”, p. 11 (“schema”, “observational”, “niches”); p. 10 (biology, social sciences); pp. 11, 16 (“explanations”).

172. “Comments on Simon Kuznets…”, R. Lekachman (ed) National Policy for Economic

Welfare…(New York: Russell and Russell 1961), p. 87 (“What particular”); “Pretence”, p. 32 (“absolute”), “Theory of Complex Phenomena”, p. 34 (“depend on”);

p. 24 (‘pattern prediction’).

173. “Pretence”, p. 29 (“a given”); “Degrees”, p. 11 (“given complex”), “Theory”, pp.

27, 28 (“given”, “defi ned”).

174. “Degrees”, pp. 11-14; “Theory”, pp. 31-34; “Notes”, pp. 74-75.175. “Degrees”, p. 13 (all quotes).

176. “Theory”, p. 33.

177. “Theory”, p. 32.

178. “Theory”, p. 28; also see “Economy, Science and Politics”, Studies in PPE, p. 261;

“Pretence”, p. 33. For a general discussion, see “Theory”, pp. 34-36.179. “Pretence”, pp. 24, 27; “Economy”, p. 263. For a general discussion, see “Pretence”,passim.

180. “Pretence”, p. 33 (pattern prediction); p. 31 (right side).

181. “Review of L.v. Mises, Epistemological Problems of Economics [1933], 1960 translation” [March 1964], Fortunes, p. 148 (“naïve”); “Economy”, p. 268 (“certain”);“Review of Epistemological”, p. 147 (“uncritical”); Hayek, p. 145 (Friedman, “in away”); “Pretence” p. 30 (“only too often”).

182. “Review of Epistemological”, p. 148 (“would”).183. G.O. Sayles, “Clio’s Web”, in idem, Scripta Diversa (London: Hambledon Press1982) p. 5 (“the experimental sciences”); p. 7 (“The observational”); p. 10 (“Rarely

…do the facts”; “living reality”; “make the dry bones”); p. 14 (“This is”); p. 11

(“man does not”); Mises: Human Action, p. 57 fn. 20.184. Law, Legislation, Liberty, Vol I, pp. 47, 50. Quotes: p. 50 (“as [an] organisation”;“biggest”); Vol III, p. 204 fn 48 (“the supreme”).

185. LLL, Vol I, p. 47 (“it is”; “in most”; “rules”); p. 131 (“these spontaneously”; “many essential”; “these…”).

186. LLL, Vol I, p. 133 (“are called”); p. 134 (“a superstructure”).187. LLL, Vol I, p. 43 (“part of ”); p. 51 (“each element” etc); Vol II, p. 128 (“particularresults”; “specifi c orders”; “will always”); Vol 1, p. 51 (“isolated commands”); Vol

II, p. 129 (disrupting); Vol I, p. 51 (“balance”).

188. LLL, Vol I, p. 129 (all quotes).

189. “A Self-Generating Order for Society”, in J. U. Nef (ed) Towards World Community

(The Hague 1968( p. 41 (taming organisations); Hayek, p. 94 (“I’ve a theory”; “practical”); LLL, Vol I, p. 47 (“is somewhat” etc); “Confusion”, p. 78 (“whatever”).190. S.F.C. Milsom, “The Past and the Future of Judge-made Law” [1981], in idem, Stud-ies in the History of the Common Law (London: Hambledon Press 1985) p. 221.191. J.H. Baker, An Introduction to English Legal History (London: Butterworths, 3rd ed,1990) p. 173.

192. Baker, Introduction, p. 405.

193. Second Chamber: “Confusion”; “The Constitution of a Liberal State”; “Economic

Freedom and Representative Government”, in New Studies, LLL, Vol III, chs 13, 16.194. “ ‘Free’ Enterprise and Competitive Order”, in Individualism; “The Corporation ina Democratic Society”, Studies in PPE; LLL, Vol I, p. 69 (“the principles”).195. See refs in fn 193.

196. Jeremy Shearmur, Hayek and after (London: Routledge 1996) p. 102.197. LLL, Vol I, pp. 87-88 (all quotes).