Cognition, Competition, and Catallaxy in Memory of Friedrich August Von Hayek

CONSTITUTIONAL POLITICAL ECONOMY, VOL. 4, NO. 2.
1993
COGNITION, COMPETITION, AND CATALLAXY

In Memory of Friedrich August von Hayek*
M a n f r e d E. Streit**
The paper focuses on central elements of the scientific work of Fdedrich A. v. Hayek
since the 1930s. In a first part, his epistemological position and its implications for his
understanding of the tasks of the social sciences are presented as he set them out
particularly in the Sensory Order 0952). Then, it is shown how his findings in economic
theory as well as in the analysis of economic and societal systems are formed by these
foundations. His emphasis on the subjectivity and the constitutional limitations of human
knowledge is identified as a precondition for the outstanding analytical insights which
he gained with regard to the functioning of a market order and the role of institutions
in societal development. Furthermore. it is argued that Hayek's enduring campaign for
freedom and against the socialist tendencies in welfare states was not simply a matter
of personal conviction. It was also the result of his analysis in constitutional political
economy which revealed to him that freedom as a normative basis of economic and
societal institutions is the key to the explanation of European cultural evolution.
The curious task of economics is to demonstrate to men how little they

know about what they imagine they can design ( Hayek 1988: 76).
Introduction
F r i e d r i c h A u g u s t v o n H a y e k d i e d M a r c h 23, 1992 o n l y a f e w w e e k s
b e f o r e his n i n e t y - t h i r d b i r t h d a y . T o p a y t h e a p p r o p r i a t e t r i b u t e to the
scientific w o r k o f this o u t s t a n d i n g s c h o l a r is a t a s k that r e q u i r e s t h e
efforts of many. This appears necessary, not only because of the wide
r a n g e o f scientific t o p i c s that he c o v e r e d o v e r m o r e t h a n s e v e n d e c a d e s
o f s t u d y b u t a l s o b e c a u s e o f t h e o r i g i n a l i t y o f his findings w h i c h c h a n g e d
t h e f o u n d a t i o n s o f s o m e d i s c i p l i n e s to a n e x t e n t t h a t is still not fully
acknowledged.
*This article is the extended version of a paper presented at the Hayek-Symposium

1992 at Bleibach-Gutach, Germany and is based on a corresponding essay in German
(Streit 1992). I like to thank my collaborators Daniel Kiwit, Werner Mussier, Stefan
Voigt and Michael Wohlgemuth for useful criticism and suggestions.
**The author holds the chair of Political Economy at the University of Freiburg that
was previously held by Friedrich A. v. Hayek.
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CONSTITUTIONAL POLITICAL ECONOMY
The present essay is designed to recall some of the cornerstones of

Hayek's scientific oeuvre and to demonstrate the relationships among
them. The first part outlines Hayek's epistemoiogieal foundations which
he set forth primarily in his Sensory Order. The second part presents
his views on issues of economic theory and the theory of economic
systems that have been strongly influenced by his epistemological posi-
tion. It will be demonstrated that his criticisms of collectivist economic
planning and of the general equilibrium theory are based on this posi-
tion. His answer to the problem of knowledge in human interaction
was the conception of the spontaneous order which, in turn, led him
to the system of rules governing the process of interaction. From there
it was but a small step to analyze the functional properties and the
normative implications of these rules, as well as their emergence. These
and further typical problems of constitutional political economy domi-
nated his research efforts since the 1950s. The solutions which he
offered are still stimulating the discussion in this relatively new disci-
pline.
I. Epistemological Foundations
Hayek's theoretical understanding, his image of man, and--closely
related to it--his normative position are rooted in a physiologically
derived epistemological basis, the foundation of which he worked out
during the 1920s. It was further developed in the time thereafter and
finally published in 1952 as The Sensory Order. ~ The results, some of
which are outlined here, played a key-role in the development of his
approach to the social sciences, especially to economics. Most of these
results may no longer be surprising to those engaged in the philosophy
of science. This, however, hardly holds true with regard to the episte-
mological positions which still dominate mainstream economics.
1. Perception as a Formation of Theories
The first result deals with human perception. To Hayek perception
is formed by the relationships between (!) the physical order of the
1 This appears to correspond to his own view. Hayek (1979: 199, n. 26) later mentioned
that social scientists found this book uninteresting or indigestible. For him, however, it
was a great help in developing his conception of evolution and of a spontaneous order and
to analyze methods and limits of our endeavors, in order to explain complex phenomena.
224
external world, (2) man's own neurosensory order, and (3) the mental
or phenomenal order of sensations and other mental qualities (Hayek
[1952] 1976: 39). Hayek's central proposition was that no isomorphism
can exist between the first and the other orders. The third form of order
had, in fact, a heuristic function because it helped to make statements
about mental processes. By introducing this order Hayek tried to avoid,
on the one hand, postulating that the act of thinking required a distinct
mind in the sense of "'substance", implying a kind of "materialistic"
theory (ibid.: 177). On the other hand, he tried to take into account
that "we cannot directly observe how this order is formed by its physical
elements, but can only infer it" (ibid.: 178).
He proposed that perception is the result of a kind of"classification"
and thereby a formation of relationships between sensory impressions.
But classification becomes possible only when an appropriate classifi-
cation scheme already exists. This may be illustrated by an example
H a y e k (ibid.: 186) used: A machine which should classify objects
according to their lengths must be able to distinguish between different
lengths. Every object has only one length, whereas the machine requires
a scheme to classify all objects. Hence the apparatus of classification
must be of a higher degree of complexity than is possessed by the
objects that it classifies. In the same way, classification as a mental
process must be based on a scheme which is more complex than the
attributes of the selected parts of the external world, according to which
a mental act is performed. Consequently, perception always represents
an interpretation. It is an attempt to assign selective sensory impres-
sions to one or more classes of a classifying system that has been
previously developed. Furthermore, this means that the attributes
which we assign to parts of our perceived external world are not attri-
butes of the parts themselves but are relationships, which we define
through classification. Hayek presumed that he was in accordance with
Popper (and so with Kant) in stating that everything we know about
our external world is to be considered mere theory (ibid.: 143). The
only thing in which a confrontation with the external world can result
is an alteration of these theories. At the same time, this means that
our whole perception is "abstract" and that a differentiation from
"concrete" does not make sense in this context.
2. Subjectivity of Knowledge
The second result, related to the nature of perception, concerns the
condition of knowledge. If perception and interpretation are identical
225
and abstract, which means that they are not an exact reproduction of
reality, the brain performs continuously a reduction in the complexity
of reality. Neither all of the attributes of parts of the external world
(to which our own body with its perceived functions belongs also) nor
the real attributes and their interactions are registered. Only certain
"aspects", which represent presumed relationships to other objects
resulting from an earlier classification, are registered (ibid.). Earlier
neurosensory "experiences", as well as the knowledge stored in models
or "Gestalt"-attributes are starting points for further perceptions and
for possible adjustments through reclassification. Complexity reduction
of the external world and reclassification contain a substantial amount
of creativity and thereby a high degree of unforseeability. They provide
for an evolutionary and selective perception, permitting an adjustment
to the external world and its permanent changes.
In this context, Hayek (ibid.: 144) contrasts current perceptions with
"memory images." The current perceptions are always connected with
these images and thereby interpreted. In this way, current perceptions,
of whose partial or incomplete character we are usually little aware,
can be brought together and "filled in". At the same time, current
perceptions can also have the effect of complementing existing images. 2
This accounts for both the subjectivity and the evolutionary character
of our knowledge.
3. Acquisition of Knowledge, Self-reference, and Self-explication
The third result deals with the properties of the classification process
leading to an acquisition of knowledge, and with what can be conjec-
tured from this, regarding human cognitive possibilities. On the physical
level Hayek traced the process back to complex interactions between
neurons. Every individual develops a sensory system as a result of
differing sensitivity of fields of neurons to various stimuli that are
characteristic for that person's history. It partly builds on innate "link-
ages", reflecting a kind of pre-sensory experience of the human race
2 This mental process, described by Hayek, has much in common with the one lucidly
sketched and skillfully applied by Bouiding in his Image ([1956] 1977). Considering
Hayek's hypotheses about the structure and the functioning of the brain, there exists at
least a resemblance to some basic propositions made by the evolutionary theory of
cognition developed by Maturana, Varela, von Glasersfeld, von Foerster and others, a
line of research which began around 1970. They also stress that the human brain is a
closed system which leads to self-reference and limits self-explanation.
226
COGNITION. COMPETITION, AND CATALLAXY
(ibid.: 104). The system is able to register the relative frequency of

the interaction between the parts of the sensory system and external
impulses (e.g. visual stimuli). On a higher sensory level, it allows to
perform "multiple classification" (ibid.: 51). It retains which neurons
responded simultaneously to extern~ impulses and how frequently
they did so in the same or a similar manner. Thereby, a neurosensory
explanation of mental order can be given, i.e. of our capacity to general-
ize, and to learn (ibid.: 56), as well as to establish rules, and to identify
regularities in the external world including our own interactions with
it.
From this formulation, two questions arise: (1) What are the more
detailed, exact regularities under which these neurosensory and mental
processes take place? (2) Is it possible that the human brain can fully
explain its own operations? Hayek's answers are implied in the pre-
sumed principle of classification and in the necessity that the brain
itself must develop all classification processes (it is self-referring and
self-explanatory). This means that the explanation of every single men-
tal process contains references to other mental processes. And since
any classification must be based on a system of a higher order, a
complete self-explanation of the operation of the human brain is impos-
sible. What remains possible is an explanation of the principle, of the
modus operandi. 3 If we cannot observe mental processes directly as a
result of the functioning of the neuronal system, and thus cannot provide
a physical explanation of what we are thinking, the human mind as a
whole and all mental processes must remain phenomena of a special
kind despite their physical conditioning (ibid.: 191).
The limits of self-explanation of the brain, the subjectivity of knowl-
edge, and the evolutionary quality of cognition (based on reduction of
complexity of the outside world by selective perception) show the
completeness of H a y e k ' s break from Cartesian epistemology. Cognition
and knowledge cannot be explained with general and necessary axioms.
3 Hayek agreed with Hume and Kant that the human brain is not completelyexplain-
able by itself. Yet, with regard to the ability of causal thinking he differs from both of
them. In the terms of a metaphor used by Hume and Kant, Hayek made an attempt to
tow the Humean ship of scepsis from the sand bank, where it was found by Kant who
wanted to leave it there to rot (Kant [178311911: 262). But Hayek did not confide in a
mate who follows the principle of a-priori. Instead, he wanted to replace metaphysics
with neurophysiology.
227
CONSTITUTIONALPOLITICALECONOMY
It is impossible to take the position of an observer completely indepen-

dent of his own cognitive history. Eventually, all knowledge is subjec-
tive and limited. But its constitutional limitation cannot itself be speci-
fied because this would require more knowledge than there is available.
4. Unconscious Knowledge and Progress of Civilization
The fourth result deals with the distinction between behavior that
is based on conscious mental processes and that which is based on
unconscious mental processes (ibid.: 132ff.). While these categories
overlap, at every point in time only a limited range of sensory experi-
ence, which leads to models or memory images, is consciously recalled
(and can be recalled) in preparation for a certain behavior. Unconscious
and half conscious elements can also enter the mental process. More-
over, processes that have been fully conscious may temporarily recede
into a semiconscious or subconscious condition, perhaps subsequently
to approach full consciousness again. Hayek describes this observation
by way of an analogy in which the conscious experience resembles
the mountain tops which tower over the moving clouds. Although the
mountain tops are visible, their relative positions to one another are
determined by the invisible substructure of the mountain chain (ibid.:
139).
Both categories are also related to a distinction that became increas-
ingly important for Hayek: the unconscious knowledge in contrast to
the conscious knowledge of the rules of successful conduct. At least
part of this knowledge is physically based on the pre-sensory or innate
" l i n k a g e s " (Hayek [1952] 1976: 167). Unconscious knowledge is
expressed in the possession of a practical skill (e.g. bicycle riding). The
theoretical basis of this skill is one which we cannot necessarily, even
in part, explain after reflection. Later on, Hayek referred to language
as another example of unconscious knowledge ([1963] 1967: 45). We
are sometimes able to identify linguistic mistakes without being able
to explain the grammatical rule that is being violated. The same holds
true for a sense of justice. We know what just conduct is and can identify
offences against these unformulated rules without being necessarily able
to specify or describe them discursively. In all these cases, however,
neither the possibility of error nor the incentive for adaptive learning
is excluded.
From a knowledge-oriented perspective, perception as well as action
based on unconscious rules are of crucial importance. It seems that
228
we know more than we can explain. More important with regard to

expediency, however, is the relief function that results from uncon-
scious thinking and acting. Many tasks of perception and action can
be performed with correspondingly fewer mental processes. Hayek
emphasized this ([1945] 1948: chap.4, 88) and quoted the mathematician
and philosopher Whitehead:
It is a profoundly erroneous truism . . . . . that we should cultivate the
habit of thinking what we are doing. The precise opposite is the case.
Civilization advances by extending the number of important operations
which we can perform without thinking about them.
This increasing routine stands for a growing experience that can be

used later on as soon as it is coded in rules. However, for complex
and evolutionary systems this does not mean that the need for conscious
problem solving decreases. It is rather the routine that makes progress
of civilization possible because it permanently allows new problems
(whose deliberate solutions can support further routines) to be taken
on. Nevertheless, routines may eventually have to be modified as a
response to new developments.
5. Cognition and Society

The fifth result, which goes beyond the perspective of The Sensor3,
Order, establishes the connection between Hayekian epistemology and
the social sciences. The step from what we can know about perception
and behavior to what we can say about man's interaction with others,
that is about social settings, must start with the perceiving individual.
Hayek ([1952] 1964: 211, n. 32) describes the starting point as follows,
The position of man, midway between natural and social phenomena--
of the one which he is an effect and of the other a cause--brings it about
that the essential basic facts which we need for the explanation are part
of common experience, part of the stuff of our thinking.
As to nature, Hayek found in The Sensory Order that human beings

cannot separate themselves far enough from it to be able to explain
themselves and their own mental development in a completely indepen-
dent way; there are natural limits to self-explanation. Considering soci-
ety, man as an observer also remains a cognitively closed system. This
means, in regard to others, "that we group their actions, and the objects
of their actions, into classes or categories which we know solely from
the knowledge of our own mind" ( Hayek [1943] 1948: chap.3, 63). The
229
more similar others are to us when dealing with each other and physical
objects in a purpose-oriented way, the more successful these "anthro-
pomorphic" approaches are. a
An important implication is that there are no "objective" social facts.
Definitions of objects and actions are based on opinions or intentions
of those who act. This subjectivity as well as its reference to culture
were illustrated by Hayek with many examples, ranging from objects
which are used as money in different cultures to customs and the use
of mimic and language as means of communication. Already from this
perspective, the task of the social sciences cannot be to "explain" the
actions of others because empirically, we can only test how much
their actions correspond with our own thinking. And even then, a
correspondence of thinking can not be reliably discerned. This does
not rule out that we, as economists, engage in activities dealing with
the logic of choice as a conscious mental process. Yet, with the derived
results actions are not predictable. In this way, merely possibilities of
conscious actions can be explored. But it cannot be the objective of
the social sciences, including economics, to explain conscious human
action. This task, Hayek ([1952] 1964: 39) agreed with Robbins, should
be left to psychology.
What is left for the social sciences to explain? Obviously nothing
which goes beyond the mere application of logic if it would hold that
all observable structures of interaction are attributable to conscious
designs of order. Consequently Hayek stated, "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 requires
theoretical explanation" (ibid.). His contention was that the spontane-
ous order of human interaction as the object of inquiry of the social
sciences generally does not allow an analytical procedure, similar to
the one appropriate in parts of the natural sciences. Hayek tried to
illustrate this by restructuring a problem of explanation taken from the
natural sciences in a way appropriate to the social sciences. In his
example, a physicist would have the task to explain the interaction of
atoms. But he would merely be allowed to examine the inner parts
of the atoms and this only within the possibilities of his analytical
4 However the "verstehende" or "composite" method leads to difficulties in an

empirical science (e.g., Graf 1978: 13ft.). In order to guarantee testability of a statement,
conventions must be agreed upon, of how the topic of analysis should be visualized.
230
instruments. Furthermore only a limited number of observations of

how a few atoms interact would be possible, so that the diversity
of conditions under which atoms can actually interact would remain
unknown to him. Experiments with lumps of material would not be
allowed. The physicist could then model structures of connected atoms
in a combinatorial way in order to find those combinations that corre-
spond as closely as possible to the few observations that he knows
belong to a large and complex macro-cosmos. The acquired, humble
knowledge of the micro-cosmos would not allow him to systematically
predict the results of further observations. A confirmation of the sup-
posed regularities through controlled e x p e r i m e n t s could not be
obtained. But, refutations would always be possible through observa-
tions which are not compatible with his theory. This illustration of the
problem for the physicist must be further complemented by assuming
that the atoms themselves are evolving systems. The "organized com-
plexity" (e.g. Hayek [1975] 1978: 26) referring to the natural scientist
Weaver) results not only from the fact that the observed structures
depend on the attributes of the atoms and their relative frequency, but
also on how they are linked together, thereby increasing the already
existing complexity.
The attempt to solve the so defined problem led to Hayek's theory
of complex phenomena ([ 1964] 1967), to his explanation of its principle
with regard to social phenomena, to predictions of structures or pat-
terns, and to the identification of constraints that contribute to the
formation of structures. This allowed him to formulate testable negative
hypotheses stating those events whichmgiven the constraints--are not
likely to occur. Finally, and as a result of the evolutionary perspective,
the dependence of the stability of structures of interactions on the
capacity of its elements to adapt gained importance.
II. Hayekian Epistemics and Political Economy
The far-reaching consequences for economic theory and political

economy, which follow from The Sensory Order as well as from closely
related works, can be illustrated by referring to some of the central
issues raised in Hayek's work since the 1930s.
231
1. Collectivist Economic Planning
Hayek's essays on collectivist economic planning marked the begin-

ning of a lifelong preoccupation with socialism and its underlying theo-
retical conceptions. They would soon lead him to the devastating con-
clusion that socialism corresponds to a progressive abuse of reason
([1952] 1979: 9).
With respect to the economics of socialism, Hayek basically restated
the early criticism by Mises (1920). This is particularly true for the first
two of his articles (Hayek [1935] 1948: chap.7, 8) whereas the third
article (Hayek [1940] 1948: chap.9) aims more at a reinforcement of
the epistemological problem related to socialist conceptions. Mises'
central argument, which, even after Hayek's efforts, was not recognized
by his critics and was still not fully appreciated "after the war, can be
reduced to the following: In a non-stationary, evolutionary economy,
it is impossible for a planning authority to let itself be guided by what
forms the essential basis of successful economizing in society: the
knowledge of opportunity costs of resources. 5 In economic theory the
discussion was led in the wrong direction by Dickinson (1933) when
he used the general equilibrium as a reference system for the evaluation
of the feasibility of collectivist economic planning. 6 It is quite fascinating
to observe how long the discussion remained deadlocked on this point.
This happened, even though Hayek, like Mises, strived to explain that
the logical frame of general equilibrium theory contains abstractions
that are inadequate guides to actual economic conduct. In a real econ-
omy, facing permanent and unpredictable change, the main issue is not
to find out shadow prices for a "given" stock of resources at "given"
production techniques and utility functions. Under real conditions,
these prices are not equivalent to opportunity costs. Opportunity costs
do not refer to more or less known variables, but reflect competing
5 Cf. Rothbard (1976: 73f.) who used an elaboration on the concept of opportunity
costs by Buchanan, which illustrates its subjectivist character very well.
6 He argued (1933: 246f.): "Capitalist Society, with its deviations from equilibrium
due to inequalities in individual income, to competition, to monopoly, and to the mutual
ignorance of entrepreneurs' activities, is a very imperfect approximation to the economic
ideal. The beautiful systems of economic equilibrium described by Wieser, Marshall and
Cassel are not descriptions of society as it is but prophetic visions of a socialist economy
of the future."
232
subjective e x p e c t a t i o n s a b o u t returns. And these e x p e c t a t i o n s are

formed vis-h-vis a veil of structural uncertainty in the sense of Knight.
U n d e r evolutionary conditions, all economic decisions are specula-
tive. Such decisions will involve cautious balancing o f risks and profit
opportunities regarding the use o f resources only if the responsibility
for the corresponding decisions is clearly assigned and if there is compe-
tition for resources. This is why Mises stressed the incentive quality
of private property, the controlling function of competitive capital mar-
kets, and the role o f capitalists and entrepreneurs. It explains also why
H a y e k discussed in such detail the totally different role o f a business
administrator under socialism ( 1935: chap.8, 173ff.; [I 940] 1948: chap.9,
194f.).
In later discussions, neither the incentive nor the knowledge problem
was taken up. T h e discussion remained within the logic framework o f
general equilibrium theory. First, the practical impossibility of solving
the computational problems inherent in applying the general equilibrium
concept through a central planning committee was admitted. However,
H a y e k (ibid.: 181ff.) pointed out that this had already been recognized
by Pareto, who also identified the knowledge problem and emphasized
that its solution can only be delivered by the market. 7 H a y e k extended
Pareto's knowledge argument and illustrated it with many examples
([1935] 1948: chap.8, 153ff.). Thereby he tried to show how extremely
important it is for a successful division of labor to build up and use
subjective knowledge and to react on the small and diverse changes
that continually o c c u r in an economy. The knowledge o f these particular
circumstances of space and time as well as the skills of every individual
7 It belongs to the peculiarities of this debate that Lange ([1965] 1977),after his attempt
to solve the problem by introducing an as-if competition, considered it an essential
limitation of the market, "that it expresses the problem of economic accounting exclu-
sively in static categories, that is as an equilibrium problem" (ibid.: 326). Because of
this confusion of model and reality, he concluded that mathematical programming should
take care of the long term problems. The computer "fulfills the function, which the
market was never able to exercise" (ibid.: 327). It is surprising that a similar evaluation
of the computer has been made by Arrow when referring to the pre-war calculation
debate. And it is quite difficult to reconcile this line of reasoning with his growing
awareness of the significanceof the limits of knowledge: "Indeed, with the development
of mathematical programming and high-speed computers, the centralized alternative no
longer appears preposterous. After all, it would appear that one could mimicthe workings
of a decentralized system by an appropriately chosen centralized algorithm" ( Arrow
1974: 5).
233
represent far more relevant information than a planning committee can

ever acquire and process. Furthermore, central planning has to be
based on statistical aggregates which cannot be formed without incur-
ring losses of information. With recourse to The Sensory Order, Hayek
(1988: 79) summarized his fundamental criticism to the effect that even
as it is impossible for the human intellect to explain itself, likewise it
is impossible to explain or predict the results of the interaction of a
great number of brains.
As-if competition--the way out propagated by Taylor, Lange, Lerner
and others--was characterized by Mises ([1940] 1980: 638) in his drastic
way as follows,
One wants to abolish private ownership, the exchange of goods and ser-
vices, the money and the market prices, in order to let people play private
ownership, bartering of goods and the development of prices afterwards.
Hayek, like Mises, criticized the model of competitive socialism for
its use of a logic of stationary equilibrium. Such logic leads to an
illusionary accuracy of the cost notion (cf. [1935] 1948: chap.8, 167ff.)
which, for example, served as a basis of the Lange-Lerner criterion.
Likewise, it "allows isolation of intertemporal allocation from the "com-
petitive solution" with no apparent consequence. Hayek also pointed
out that the failure of dealing with the incentive qualities of private
ownership results from the fact that institutions play no role in equilib-
rium theory. And he stressed and demonstrated through many examples
"that no other process was conceivable which would in the same way
take account of all the relevant facts as did the pricing process of the
competitive market" (Hayek [1935] 1948: chap.7, 143). To substantiate
this statement was Hayek's central concern in his subsequent research
in economic theory.
2. Economics and Knowledge
Hayek's article with the same title ([1937] 1948: chap.2) marks the
beginning of these substantiations. They necessarily deal with the
assumptions and statements referring to knowledge as well as with the
conceptions of the economic process that form the basis for conven-
tional equilibrium theory. The results that he obtained were also rele-
vant to the discussion of conceptions of socialism, because, as shown
above, the discussion of collective economic planning was conducted
predominantly with reference to the equilibrium theory which was and
still is perceived as a general theory.
234
H a y e k ' s fundamental criticism o f the general equilibrium theory,

which remained essentially unanswered, amounted to the contention
that this central paradigm o f neoclassical economics is conceptionally
unsuitable to contribute to an explanation o f the coordination of actions
o f decentralized, autonomous economic decision makers. The theory
simply misjudges what H a y e k ([1937] 1948: chap.2, 50), in line with
Mises, termed " t h e problem o f the division of knowledge" and charac-
terized a s " the really central problem of economics as a social science".
The misjudgment is reflected in the failure to distinguish between, (1)
the problem o f how an individual decision maker coordinates his own
economic activities, and (2) the problem of how economic activities of
autonomous decision makers are coordinated through market activities.
The first problem can be treated, as H a y e k (ibid.: 35ff.) stressed, as
an equilibrium problem, by asking which actions of individuals, based
on their respective situations and personal knowledge, can be consid-
ered to comprise elements of consistent economic plans. 8 In equilibrium
theory, however, the second problem is likewise seen as a problem of
rational choice. That would only be adequate if (1) the " d a t a " on which
the individual actors base their plans would be generally known facts
in the sense of the natural sciences, and (2) for a scientific observer
these " d a t a " would be just as accessible as the personal circumstances
of the observed actors. Under these conditions, the position of the
observer corresponds to that of a perfectly informed central planner.
The economic coordination problem would be formulated as a problem
o f rational choice. 9
If, on the other hand, the economic process is analyzed not " from
a b o v e " but rather in an adequate way " f r o m b e l o w " (Hayek [1968]
8 Nevertheless, Hayek did not always apply the equilibriumnotion in the same manner.
That is also true for his "tendency towards equilibrium" (cf. on this point Loy 1988:
96).
9 The criticism should be moderated by conceding that equilibrium theory does not
claim to show how a coordination of the individual plans is brought about, i.e. it clearly
is not a market process theory. However, that does not fundamentally alter the basic
problem that neoclassical modelling always requires the existence of an equilibrium of
individual plans. Whether this equilibrium condition is explicitly formulated or whether
a model is set up first and then tested with regard to equilibriumproperties is of secondary
importance. The model clearly does not account for the division of knowledge regardless
of how formally demandingit is in other respects. The market process as a self-coordinat-
ing process (cf. part 11.4)that is based on limited subjective knowledge, becomes inacces-
sible in this conceptualization.
235
1978: 185), the individuals as conceptualized in The Sensory Order are

brought into focus. It must be asked with regard to the coordination
activities as elements of a division of labor: (I) How are the individuals
induced to procure knowledge, (2) how is subjective knowledge dissem-
inated about such economic situations as may be useful to others for
their dispositions, (3) how is the utilization of this knowledge controlled
to avoid subjective miscalculations, and (4) how are the allocative
effects of such errors limited? Hayek's answer was: through competi-
tion as a discovery procedure. Competition provides opportunities for
individuals to take advantage of personal knowledge, and disseminates
information through prices "in coded form" (Hayek 1976:117) without
requiring full knowledge of the whole process.
In this way, Hayek set forth a framework for the analysis of market
processes that differs completely from the one that dominates conven-
tional microeconomics. This applies also to competition theory, which
is usually considered a part of price theory. His change of perspective
is best illustrated by two unconventional statements. The first statement
concerns the well-defined space of goods that is characteristic for the
concept of the perfectly informed observer, and it makes this notion
practically obsolete.
But which goods are scarce goods, or which things are goods, and how
scarce or valuable they are--these are precisely the things which competi-
tion has to discover. It is the temporary outcome of the market process
which tells the individual what he or she should search for [Hayek (1968)
1978: 181].I~
With the second statement, efficiency beyond the individual logic of

choice becomes an irrelevant concept. " I f we do not know the facts
10 One of the typical misunderstandings of the neoclassical approach is to define the

coded information of prices in a way which allows to decode them with regard to
explanatory, objective, facts (e.g., Radner 1979). But only for a few actors is it usually
important to find out exactly why a price has changed. What is usually most important
is only that actors evaluate this coded signal from the perspective of their own circum-
stances and respond to it by market actions. Similarly, attempts to endow the actors
with imperfect information present an inadequate approximation of the real problem.
Every information deficiency of this kind can only be modeled by assuming that there
is a scientific observer who has a superior knowledge, which enables him to specify the
informational deficiencies of the observed actors. If the actors would reach the same
level of knowledge, any deficit would become logically impossible to handle in a model
and we would find ourselves in the strange world of rational expectations.
236
we hope to discover by means of competition, we can never ascertain

how effective it has been in discovering those facts that might be discov-
ered" (ibid.: 180). That means, at the same time, that "in those cases
in which it is interesting, the validity of the theory can never be tested
empirically" (ibid).
With regard to the research program of conventional equilibrium
theory, Hayek stressed repeatedly,
The problem is thus in no way solved if we can show that all the facts,
if they were known to a single mind (as we hypothetically assume them
to be given to the observing economist), would uniquely determine the
solution; instead we must show how a solution is produced by the interac-
tions of people each of whom possesses only partial knowledge [Hayek
(1945) 1948: chap. 4, 91].
The view "from a b o v e " by a kind of "free-floating intelligentsia"

(Hayek [1952] 1964: 90) characterizes the conventional concept. It is
quite adequate for handling problems like those that engineers con-
front. 11 But, when applied to questions of the social sciences, this
way of thinking becomes a "scientistic method" (ibid.: 15) since it is
inadequate with regard to the objects of research. Because of that, it
provokes all the dangers for freedom which can result from "construc-
tivist rationalism".
In the case of a market system, the scientistic method leads to the
theory of "market failure" and only too easily to a nonchalant plea for
a supposed "failure" to be compensated by government intervention.
The view that informs such plea can hardly escape from being blamed
of representing a "Nirvana-approach" (Kapp, Demsetz).
Considering socialist systems, the engineering concept of purpose-
rationality is part of the corresponding history of ideas. The"scientistic
hubris" (Hayek [1952] 1964: I05), that is characteristic for this way of
11 Partial market analysis can be used to illustrate this point. Its explanatory and
predictive power grows with the scope and intensity of regulation imposed on these
markets. The more the behavioral possibilities of the participants are reduced to those
of strongly constrained economizers, the more the partial system can be handled as a
purely logical problem. Closure of the system means that the development of new possibil-
ities to trade becomes hampered. As a consequence it becomes more and more difficult
for the system to increase its complexity. Compared with an unregulated system, it is
forced into a stationary state, which facilitates further interventions. It is exactly this
shaping of a system that facilitates the successful application of an equilibrium-oriented
approach for analytical as well as for forecasting purposes.
237
thinking when applied in the social sciences, may be at the same time
one of the intellectual sources of tyranny in a socialist economy. Dickin-
son was well aware of this danger, as Hayek noted ([1940] 1948: chap.9,
203), and he tried to avoid it by propagating competitive socialism.
But, the tyranny became just as much historical reality as the economi-
cal failure of socialism, which proved to be what Hayek always pre-
sumed: a fundamental epistemological error.
3. The Errors of Macroeconomics
For Hayek, the errors of macroeconomics ~2and their consequences

for economic policy arose from the application of the scientistic method,
especially from the extension of equilibrium theory to economic aggre-
gates as they are mainly found in national income accounts. The princi-
pal error is to interpret analytically as causal relations the macro-rela-
tions derived within the framework of definitions of accounting. This
would have been acceptable to Hayek if it had aimed at the production
of "rules of thumb for the development of predictions with insufficient
information" (Hayek [1968] 1969: 252). In macroeconomic theory, how-
ever, these relationships are interpreted as an expression of the average
or representative behavior of individuals with regard to classified
actions (i.e. investing, consuming, exporting). "Theoretical macroeco-
nomics is in many regards nothing else but microeconomics in the
language of macroeconomics."~a
Objections against such interpretations could not be raised if the
macroeconomic quantities and relationships were the result of a consis-
tent aggregation of corresponding microeconomic quantities and
microrelationships (causalities). However, this is definitely not the case.
12 This is a subtitle in one of the Ludwig von Mises lectures delivered by Hayek
([1978] 1983: 24).
13 The statement is taken from a textbook (Richter, Schlieper, Friedmann 1981: 97)
in which reservations about the results of macroeconomics are carefully set out. However
these reservations are watered down later on (ibid.: 98): "Aggregation is basically per-
formed according to the corresponding analytical question, which is a procedure applied
in general when constructing models. Hence aggregation is nothing special or possibly
disturbing for those who attempt to explain problems in the real world". Another German
textbook reads simply as follows: " T h e so-called aggregation problem in macroeconom-
ics is assumed either solved or considered as irrelevant; a satisfactory solution of this
problem can only be provided by a microeconomic total analysis (~ la Walras) which is
completely inoperational for a macroeconomist (Claassen 1980: 5).
238
A microfoundation of macroeconomics can only be imagined under

very extreme abstractions, even if it were based on a neoclassical
understanding of economic observations. The impossibility of a micro-
foundation in the above sense means that macroeconomic equilibrium
concepts which rely on plan consistency, are purely fictional. If, in
addition, the actors are observed from the perspective of The Sensory
Order it might become understandable why Hayek presumed that state-
ments of macroeconomic theory do not actually possess scientific attri-
butes (ibid.: 253).
Macroeconomic reductionism was unacceptable to Hayek. The evo-
lutionary dynamics of the process of competitive price formation that
results from the interaction of individuals who act according to specific,
continually changing circumstances remained to him analytically inac-
cessible by this method. For him, the law of large numbers, which
provides the foundation for reductionism and is a pre-condition for
econometric estimates, was not applicable to phenomena of organized
complexity. Without permanent and stable relationships between aggre-
gates or averages, it seemed impossible to him to replace specific cir-
cumstances with statistical probabilities (Hayek [1978] 1983: 25). I4 The
permanent coordination through market activities--Hayek's "catal-
laxy"--lets, as Leijonhufvud ([1976] 1981: 323) put it, a modern econ-
omy become " a highly improbable structure." The required analytical
approach resembles the one applied in modern microbiology, where
one asks, for example, how it is possible that such an improbable
structure of molecules as a cell maintains itself. Hayek would have
agreed with Leijonhufvud's reasoning (ibid.: 328) that Keynes would
have come to completely different conclusions if he had begun with
the question, " H o w is it conceivable that activities are ever reasonably
coordinated?" instead of jumping immediately to the question " H o w
has the system failed?" The latter perspective probably would have
led him to the idea that symptoms like unemployment are due to coordi-
nation failure. The required communication between the actors fails to
bring about coordination because the necessary information or signals
are not given (ibid.: 332).
14 In macroeconomics, it is at least admitted in principle, "that the reductionist

aggregation concept is the more appropriate, the less the structures of important aggregate
factors change and the more similar the individual ways of conduct are" (Bliimle and
Patzig 1990: 623).
239
Competitive price formation as a process of communication com-

prised the core of Hayek's criticism of the ideas of Keynes and even
more of macroeconomics as it was worked out later on.15 In his Treatise
of Money (to which Keynes [1931] reacted in a prejudiced, almost rude
way) Hayek (1931) followed already the Austrian tradition in developing
his argument, basing it on the idea that changes in the production
structure are induced by changes in the structure of prices. These
changes take place permanently, both on a large scale as well as on a
small scale. The neglect of this fact as a result of only considering
aggregates can lead to fallacious conclusions. Hayek's critique of
Keynes General Theory and the ensuing macroeconomic theory can be
summarized in three central objections: 16(1) The concept of aggregate
demand is a misleading oversimplification, which has inflationary
results when applied to employment policy, and is, at best, of limited
value in a depression; (2) The problem of unemployment is a result of
price signals that have been distorted through manipulation of the level
of real wages and also of a distortion of the wage structure by cartels
operating on the labor market; 17(3) The statistical ex post construct of
the price level can induce monetary policy makers to neglect the price
and wage structures as signals in their varying flexibility up until rigidity.
It can even lead them to an attempt to outmaneuver these signals.
The fascination that Keynesian theory and macroeconomics held for
economists, politicians, administrators, and the electorate lies in its
reductionism and measurability, as well in the observability of the
statistical artifacts on which it is based. Within the economics profes-
sion it nurtured thoughts about gaining greater recognition by moving
closer to the " h a r d " natural sciences, to become at least a kind of
15 This distinction appears important and has been repeatedly made by Hayek. To
quote an example: " . . . it is rather an irony of fate that Keynes should have become
responsible for this swing to macro-theory, because he thought in fact rather little of the
kind of econometrics which was just then becoming popular, and I do not think that he
owes any stimulus to it" (Hayek [1966] 1978: 284).
16 They cannot be set out here. A collection of corresponding texts from various
publications of H a y e k , which is still worth reading, has been edited by S.R. Shenoy
(Hayek 1972).
17 Hayek saw a change of course in Keynes after his "Economic Consequences of
the Peace" (1919): " . . . h e began with the recognition that it was necessary to lower real
wages, came to the conclusion that this was politically impossible, and finally convinced
himself that it would be vain and even harmful" (Hayek [1976] 1978: 199).
240
"intermediately hard science" (Samuelson, [1947] 1965: 9). 18 In the

same vein, it appeared to be quite legitimate to ask, " . . . i f we wish
to model the economy we live in, should we not use whatever informa-
tion we have about the way its agents actually b e h a v e ? " (Tobin 1980:
35). An attempt at doing so, however, carries the danger that whatever
is measurable almost automatically is considered relevant. From collec-
tions of statistically reduced results of human action one could construct
an order of the economic process that would not have any intelligible
connection with the complex market process, safe for the tempting
advantage of transparency.
The scientistic error made in macroeconomics also nurtured the hope
to be able to manipulate the economic process in order to achieve
collective goals. These goals are given priority over those goals that
guide the market participants when trading under competitive condi-
tions. Possible deviations from these goals can then be interpreted by
politicians as an offence of market actors against the common weal,
which may be used to justify punishment through taxation. In his pref-
ace to the German translation of the General Theory (1936), Keynes
involuntarily pointed out a danger that can come from the "pretence
of knowledge" (Hayek [1975] 1978) in macroeconomics. He expressed
the supposition that his production theory, as a whole, can be more
easily adapted to the conditions of a total state than the theory which
was developed under the conditions of free competition and of a high
degree of"laissez-faire."19 A danger, which may be less disquieting at
first sight, is that macroeconomic aggregates can be related to organized
interest groups whose members contribute by their actions to the mea-
sured aggregates. This can tempt politicians to involve representatives
of these groups in policy formation and to give them some responsibility
for the attainment of macroeconomic goals. As a result, a kind of
corporatism can easily emerge. Its democratic legitimacy is highly dubi-
ous, and in practice it tends to promote collective irresponsibility.
18 However, it appears necessary to point out that Hayek did not deny that mathemat-
ics can be a useful tool in economics. But he had reservations as to how it was used
(cf. [1978] 1983: 23): "They [the founders of mathematicaleconomics]understoodmuch
better than their successors that algebraic mathematical formulae are the pre-eminent
method for describingabstract patterns without assumingor possessing particular infor-
mation about the specific magnitudes involved. One great mathematician has indeed
described a mathematician as a maker of patterns. In this sense mathematics can be
very helpful to us."
19 This was noted by Hayek ([1952] 1967: 346, Appendix).
241
Income policies and so-called social compacts based on macroeconomic

prescriptions, which have failed wherever they have been tried, are
only a mild indication of what must be expected if the formation of
economic policy is handed over to cartels of politicians and functionar-
ies of vested interests.
4. Order of Law and Order of Actions

Hayek's attempt to explain how it is conceivable that the activities
of autonomous decision makers are ever reasonably coordinated, led
him to the process of competitive price formation involving the discov-
ery, utilization, and assessment of knowledge that nobody can know
or has to know in its entirety. "From below," prices and their changes,
as well as the objects to which they refer, resemble the mountain tops
in the earlier analogy; the overcast mountain chain resembles the quest
for a theory of order, as expressed by Hayek in the following question:
"What kind of regularities in the conduct of human beings must exist,
in order that the reactions of every one of them in circumstances known
to him lead to an order of the whole?" (Hayek 1967a: 206). This question
must be asked, last but not least, because market prices are the result
of contracts whose initiation, negotiation, and execution depend in
many ways on expectations of a conforming behavior among actors
who frequently are strangers to each other. Similarly, actors can expect
that, with the acquired objects, they can pursue their own objectives
at their discretion without interference from others.
Hayek's explanation offered a theory of institutions and was, there-
fore, pioneering in economics, z~ It produced intellectual difficulties
because it did not--as Hayek (1967a: 197) rightly presumed--corre-
spond with "deep rooted inclinations of our thinking," that "whenever
we find an order, we try to trace it back to the design of an ordering
agent." The neoclassical equilibrium-oriented reconstruction of market
results and their assessment with regard to efficiency are an expression
of this habit of thinking and of the analytical difficulties which it entails.
In this case, the role of an organizer is performed by the hypothetical
20 The basic elements were already formulated in " O r d e r of Law and Order of
Actions," (1967a) a contribution to a lecture series of his Freiburg faculty during the
winter term 1966/67 as well as in some other articles within this period. The period began
with his "Kinds of Order in Society" ([1963] 1964) and culminated in the first volume
of "Law, Legislation and Liberty" (1973).
242
Walrasian auctioneer, who determines in advance through a "tfitonne-

ment" the equilibrating and efficiency-oriented price signals. Taking
into account how the market participants are modeled (i.e., the assump-
tions about rationality and competition), the signals correspond to the
orders of a perfectly informed central planner. 2~ This should also help
to understand why the discussion of collectivist economic planning
took the previously outlined course.
The difficulties in understanding the difference between a spontane-
ous and a planned order of human interaction--between "cosmos"
and "taxis" (Hayek 1973: chap.2)--are also reflected in the understand-
ing of the complementary systems of rules of conduct. According to
their function, the rules conducive to a market system as a spontaneous
order must both allow individuals to pursue their own objectives by
making use of their subjective knowledge and stabilize their expecta-
tions to an extent that promotes coordination through transactions. In
order to allow this, the system of rules must, above all, effect what
Hume ([1888] 1989: 526) described as "the stability of possession, of
its transference by consent, and the performance of promises." The
required rules are only in part contained in formal private law. In
addition, many rules of customs, morals, and habits come into play,
as do individual experiences, that make it easier to form reliable expec-
tations about the conduct of others (cf. Hayek 1967a: 209). The attribute
of many of these rules relevant to their functioning in the above sense
is their abstractness or, more precisely, their universalizability. 22 This
21 This is not meant to be a malicious imputation,just as it was not intended by Hayek.

It should rather be understood in the following sense: "The hypothetical assumption,
customarily employed in theoretical descriptions of the market process (descriptions
made by people who usually have no intention of supporting socialism), to the effect
that all such facts (or 'parameters') can be assumed to be known to the explaining
theorist, obscures all this and consequently produces the curious deceptions that help
to sustain forms of socialist thinking" (Hayek 1988: 86).
22 Such rules are (1) general, because they are valid for an unknown and unspecified
number of people and cases (Hayek 1973: 50); (2) open, because they merely state those
actions, which are not allowed, leaving it open to develop and to use new ways of action
which comply with the rules, and (3) distinct, because it can be expected, that it is
possible for individuals to identify those practical situations in which the rules are binding.
However it should be pointed out that Hayek also used a much more demanding interpre-
tation of universalizability (e.g., Hayek 1976:27 ff.) by requiring every single rule to be
consistent with all the other rules securing a catallaxy. Although essential, in many cases
this property can only be tested through a process of trial and error if one does not want
243
means that they must state constraints with regard to possible actions
under circumstances that are unknown in advance and that it is justified
to expect that these constraints will be respected. Hayek argued (ibid.:
216) that only such rules allow the development of a "Great" society,
"which did no longer presuppose that concrete common purposes are
pursued but rather allowed people not known to each other to pursue
diverging objectives and nevertheless take advantage of mutual use of
subjective knowledge."
Like others of Hayek's findings, this result has dramatic conse-
quences for economics. Welfare economics becomes questionable in
many respects. The constrained maximization of a welfare function
must fail not only due to unsolvable aggregation problems, but also
because of our constitutional ignorance. Furthermore, it sets a concrete
target for the economic process which no one pursues. Even if this
would merely be done for analytical reasons, namely to test the overall
expediency of market systems, the attempt would fail because, as was
already pointed out, efficiency judgements beyond the level of individ-
ual choice are meaningless due to the unsolvable knowledge problem.
According to Hayek, the methodological principle of institutional
neutrality of the analysis (e.g. Sohmen 1976: 439) proves to be untenable
in welfare economics as well as in traditional allocation theory. If
institutions are understood as rules, then it is their very information
content in the form of expectation-stabilizing constraints of possible
actions, that makes possible the development of the catallaxy and the
extended order of the "Great" society. Furthermore, it should not be
overlooked that observing rules that are often unconsciously learned
during the process of socialization has a liberating effect for all actors.
These rules reflect the experiences and knowledge of many.
One cannot separate the question about the institutions from "pure
theory," if one wants to explore which institutional arrangements would
lead to the deduced results (cf. again Sohmen 1976). As Hayek convinc-
ingly demonstrated, the spontaneous as well as the planned order
require very specific rule systems. In the first case, these rules promote
the agreement between equals, and in the second they are instructions of
a superior organizer.This distinction is similar to the difference between
to pretend to know more than there is to know. This, in turn, fits very well into Hayek's
optimistic interpretation of the evolution of common law, an optimism which may not
be generally acceptable.
244
"nomos" and "thesis" in law (Hayek 1973: chap.5, 6). An instrumental-

ization of the rule systems in the sense of the above question is only
possible when applying the scientistic method. But this led, as shown
above, to the cul-de-sac of competitive socialism and promotes an
institutional pragmatism that is adverse to a market order.
Finally, the principle of institutional neutrality of the analysis proves
to be a misleading reaction to the discussion of the problem of value
judgements in economics. The principle reflects the attempt to proceed
in welfare economics with a minimum of fundamental Paretian value
judgements that are presumed to be generally acceptable. 23 However,
according to Hayek's analysis (e.g., 1973: chap.5; 1976: chap.8), the
market system as an order of actions is not based only on a rule system
with specific attributes. It also has desirable normative properties in
that it serves the freedom of the actors through rules of just conduct.
The extent to which this abstract goal will be reached is determined
by how feasible it is to use the rules to prevent conflicts by protecting
individual spheres of influence and to secure cooperation among indi-
viduals in those cases where it appears desirable to them in view of
their own purposes and the specific circumstances under which they
operate. Because they have to be appropriate to purposes and circum-
stances, which no one can know in their entirety, the rules cannot be
designed in order to achieve concrete results. But in this case, they
no longer allow generally valid judgements regarding the results they
eventually help to bring about, results which could further the accep-
tance of the rules. Many rule-oriented actions will have unintentional
side-effects which would be thought of as unjust if they were brought
about intentionally. An order of action produces many changes which
would be classified as unjust if they were the result of human design.
Only in a society of omniscient persons could such injustices possibly
be avoided because the individuals would have the foresight and the
means to do this. In the real world, abstract, end-independent rules
represent an adaptation to our ignorance (Hayek 1976: 39), and thus
to our inability to bring about conditions that would always be consid-
ered as just.
23 To an immanent criticism of the "widely accepted" Paretian value judgement cf.

Nath (1969: chap.6). A radical criticism, which, in many points, comes close to Hayekian
concepts came from Rowley and Peacock (1975).
245
With regard to value judgements, this means that if the research

object, the spontaneous order, is the result of complying with rules of
just conduct, it would be an inappropriate abstraction to refrain from
dealing with norms. Moreover, under these circumstances it is possible
to derive further rules without committing a naturalistic fallacy. If the
order of action is presumed to be worth keeping, it can be a topic of
scientific endeavor to clarify whether further norms are compatible
with the rules and the continuance of the order (Hayek 1967a: 228). In
fact, the most frequently articulated notion of justice--social justicem
aims at specific results and is therefore the least compatible with free-
dom as the norm of the nomos, a norm that is not set by anyone. For
Hayek (1960: 54) freedom is an "artifact of civilization" that allows
man to break the chains of small groups, and which arose through a
process of cultural evolution characterized by rule-abiding conduct.
5. Between Instinct and Reason
The interpretation of freedom as an artifact of civilization may well
make some idealists shudder. However, it was Hayek's very intention
to promote the understanding of freedom with his Constitution of Lib-
erty (1960) and not "to fire enthusiasm" (ibid.: 6). It induced him to
emphasize the expediency of freedom. This again could be demon-
strated from the perspective of the knowledge problem.
Freedom, as an artifact of civilization, becomes understandable with
the help of the "twin ideas of evolution and of the spontaneous forma-
tion of an order" (Hayek [1967] 1978: 250). Regarding the spontaneous
order, it was Mandeville who wittily and provocatively helped this idea
to secure prominence with his Fable of the Bees. Hayek paid tribute
to Mandeville in an unusual way: "I do not intend to pitch my claim
on behalf of Mandeville higher than to say that he made Hume possible"
(ibid.: 264). Spontaneous orders like the language and the catallaxy are
based on rules that are, with the words of Ferguson, "the results of
human action but not of human design" (Hayek 1967c). In the stratifica-
tion of the human rules of conduct, they lie between those of instinct
and reason. 24 Accordingly, they are neither genetically propagated nor
developed or adapted consciously for concrete purposes. They are also
24 The first chapter of The Fatal Conceit (1988) is titled "Between Instinct and Rea-
son." There Hayek stressed once again that the customs and traditions which lie between
instinct and reason are the result of cultural evolution, a proposition which representatives
of constructive rationalism must consider with contempt.
246
neither "natural" nor "artificial," but rather are the result of cultural
evolution. During the process of evolution, behavioral practices were
discovered that often broke from tradition but prevailed. The reason
for this was that the groups that followed the emerging rules prospered
better than others without knowing how far they owed this prosperity
to their compliance with such rules of conduct (Hayek, e.g. 1979: 159).
Hayek argued in the tradition of the Scottish moral philosophy that
civilizations in which freedom-oriented abstract rules of conduct could
prevail prospered because they favored the "process of adaptation and
learning" (Hayek 1960: 40) to a high degree. This focus on abstract
rules increased the chance both of arriving at new solutions for old
problems and of gaining the esteem of others for something completely
new through experimentation. The fact that everyone has limited
knowledge proved to be less hindering, the more societies trusted in
the independent and competitive efforts of many to stimulate the gener-
ation of " w h a t we shall want when we see it" (ibid.: 29). Hayek
attempted, by examining the development of the European civilization
(beginning with its Mediterranean roots), to test how "the expansion
of order into the unknown" (Hayek 1988: 38) is determined by the
development of the freedom-conforming rules of conduct including
private ownership (i.e., 1988: chap. 2, 3). 25
His historical findings were that freedom (also in intercultural com-
parison) proved to be expedient or successful in the sense that it secured
more than just the survival of a growing number of people. However,
how can the required compliance with the rules of proper conduct be
explained? This question is of particular interest in light of the fact that
recent work in institutional economics has made use of game theory
to model prisoner's dilemmas to show that the observance of rules
between strangers is a rather exceptional phenomenon from the per-
spective of purpose-rationality. Hayek presumed that freedom is never
possible without deep-rooted convictions that help to secure the obser-
vance of rules against opportunism (Hayek 1960: 62).26 Behind these
25 His results, partly obtained with the method of"conjectural history" (Hayek 1967b:
75; 1988: 69), correspond in some respects to explanations which Jones (1981) offered
for the European Miracle as well as to Rosenberg's and Birdzell's (1986) explanations
of How the West Grew Rich.
26 Therefore, Hayek (1970: 28, n.4) played with the idea of choosing Max Weber's
value-rationality as a category to be distinguished from purpose-rationality. However,
he found that the Weberian term of purpose-rationality was still too close to the term
purpose-rationality as it is used in economics and whose misuse he wanted to criticize.
247
convictions stand values, which themselves are, like morality, products

of civilization (ibid.: 35), with the further result that there is no universal
ethics. 27 But with that result, we are once again directed to cultural
evolution.
Indeed, as Hayek pointed out (e.g., [1967] 1978: 264), the idea of
evolution had already been pursued in the social sciences by Herder,
Savigny, Humboldt, and their intellectual forefathers Mandeville,
Hume, and Vico before Darwin introduced it into the natural sciences.
However, it did not progress in the social sciences to the degree it did
in biology. Though the re-import from biology triggered a widespread
discussion in the form of social Darwinism, the latter was not a convinc-
ing social theory due to its concentration on the genetic element and
hence the biological (Hayek 1979: 154). Economics was no exception
to the slow cognitive progress in considering evolutionary phenomena,
even when it dealt with innovation. As a characteristic evolutionary
phenomenon, innovation should have permanently challenged the pre-
vailing scientific approach. Even Schumpeter himself, who brought
innovation to the forefront, did not attempt to integrate it in his theory of
development. Instead, he treated innovation as an exogenous variable.
Only recently have there been serious efforts to integrate evolutionary
thoughts into economics. 28 In this context and with regard to the origin
and the diffusion of innovation, The Sensory Order, with its emphasis
on learning and creativity, as well as "competition as a discovery
procedure" as a means of dissemination and assessment of knowledge,
could provide useful insights.
Hayek's actual hypothesis with regard to evolution, however, aimed
at the origin, diffusion, and stabilization of rules of conduct and their
supporting morale as the foundations of cultural development. 29Consid-
ering the course that the discussion of evolution has taken in the social
sciences it seems that Hayek's evolutionary concept is still not fully
27 It is last but not least religion which can help support compliance. Hayek (1988:
chap. 9) underlined his corresponding views with the following quotation from Adam
Smith (1759): "Religion, even in its crudest form, gave a sanction to the rules of morality
long before the age of artificial reasoning and philosophy."
28 Witt (1991) has provided a reflective survey of these still tentative, heterogeneous
efforts.
29 Cf. the epilogue in Hayek 1979 (153ff.) as well as Hayek 1967b, 1988 (esp. chap.1
and 8).
248
appreciated and developed. 3~ His central proposition concerning the

cultural evolution o f rule systems was the principle of " g r o u p selec-
t i o n . " The systems themselves are the result of historical coincidences
and of unconscious learning and adaptation o f rules by group members.
Thereby, those rule systems prevailed that enabled one group to better
adapt to unpredictable circumstances than other groups. In an early
phase o f social development, superiority manifested itself in a way that
the respective group could outgrow the organizational limitations of a
small group. T o allow this, it had to offer, as in later phases, particularly
good chances for sustainable population growth, including immigra-
tion. 31
B e y o n d some impressively formulated aspects, H a y e k ' s evolution
theory is hardly elaborated upon. H e n c e , he could not sufficiently take
into account some of its implications. 32 In the meantime, a variety
o f questions have been raised, and strong criticism expressed. 33 This
ensuing discussion cannot be taken up here, though one point should
be mentioned. It is particularly important because H a y e k himself made
recommendations for institutional reforms, ranging from a monetary
system (1978b) to a model political constitution (1979: chap.17). This
shows that despite the process of evolution, he saw opportunity for a
conscious shaping o f institutions. That applies not only to political
institutions but also to rules o f the order of actions, on which he, above
all, oriented his evolutionary thinking. Otherwise, he could have no
longer considered it " a special quality o f the rules of law, that we can,
to a certain extent, shape them so that they lead, in connection with
30 To establish this kind of theory may be particularlydifficultbecause of the prevailing

scientific standards. Hayek (1988: 61) summarized them as follows: "These declarations
[of faith in modern science and philosophy of science], definitions, postulates, have
created the impression that only that which is rationallyjustifiable, only that which can
be experienced, only that which can be surveyed, deserves belief." To impose such
standards does not only hinder the analysis of the limits of our knowledge. It also
obstructs the access to phenomena that lie between instinct and reason and that, as
Hayek presumed, are of great importance for cultural evolution (ibid: 62).
31 Hayek stressed (1988, p. 132): "It is not the present number of lives that evolution
will tend to maximize but the prospective stream of future lives."
32 He himself conceded this at the end of the quoted epilogue(Hayek 1979: 176): "In
concluding this epilogue I am becoming increasingly aware that it ought not to be that
but rather a new beginning." His later considerations helped to bring him only a little
bit further.
33 Cf. Radnitzky (1984), Vanberg (1986), Voigt (1991), Witt (1989).
249
the other rules and in the expected real circumstances to a formation

of an overall order" (Hayek 1967a: 209).
This merely indicates that--as Hayek (1988: 25) wrote in reference
to Popper--cultural evolution simulates Lamarckism. The basis on
which we can try intelligently to shape rules of conduct must remain
tradition: 34 the knowledge which originates and is passed on in a way
placed between instinct and reason.
6. The Atavism of Social Justice
Hayek left no doubt that he advocated the catallaxy of capitalism,
which he considered as the result of cultural evolution. He supported
this order of actions due to the high degree of freedom that it contains
and requires. However, he also stressed that he wanted to avoid the
naturalistic fallacy of proposing that group selection would produce
results that are necessarily "good. ''35 But after a long preoccupation
with this order based on evolving traditions as well as with the designs
of constructivist rationalism, he was convinced, "that if we discard
those traditions out of ill-considered notions, . . . , of what is to be
reasonable, we shall doom a large part of mankind to poverty and
death" (Hayek 1988: 27).
This danger cannot be thought of as a thing of the past only, because
recently almost all socialist systems collapsed in a dramatically short
period and left behind poverty and destruction that, at least temporarily,
dumbfounded even the ardent socialists in capitalist countries. Hayek's
warning can still be interpreted in that sense although he expressed it
almost four decades ago in The Road to Serfdom ([1944] 1962). He
dedicated it to the socialists of all parties explicitly not out of scorn
(Hayek [1956] 1967: 216). Hayek held the view that socialism as a model
of society that had enjoyed support in Western countries, was largely
discredited a century after the Communist Manifesto, not only in the
United States. However, in his opinion, that did not justify compla-
cency. Already in the middle of the economic boom after the war, he
34 Hayek (1979: 167) paraphrased this walk on the edge between a use of reason and
a pretense of knowledge as follows: " W e must build on tradition and can only tinker
with its products."
35 " I do not claim that the results of group selection of traditions are necessarily
" g o o d " - - a n y m o r e than I claim that other things that have long survived in the course
of evolution, such as cockroaches, have moral value" (Hayek 1988: 27).
250
feared that socialism would be replaced with a " h o d g e podge of ill-

assembled and often inconsistent ideals" under the-label o f the welfare
state. And this state would have to be carefully assessed as to whether
its results would be quite similar to those of genuine socialism (ibid.:
221).
H a y e k spent a large part o f his social philosophical efforts to follow
up on this suspicion. The result can be summarized by using some of
his own formulations: " T h e atavism o f social j u s t i c e , " " t h e pretence
of k n o w l e d g e , " as well as " t h e fatal defect of the prevailing form o f
d e m o c r a c y " tend to cause a "decline of the l a w , " which together with
informal traditions, is indispensable as a system of rules for the catallaxy
o f capitalism .36
According to H a y e k , statements o f social justice are expressions of
both instinctive and intellectual revolts. They are directed against both
the abstract rules o f just conduct, whose origin lies between instinct
and reason, and the results of their compliance. The statements reflect
either ignorance or rationalist criticism o f the finding that cultural evolu-
t i o n - a s pointed o u t - - b e c a m e possible when the rules of conduct broke
away from being directed to concrete purposes. This enabled the divi-
sion o f labor based on the pursuit of a multitude o f individual objectives
and the use o f dispersed personal knowledge, leading to a process that
no one can survey in its entirety. The results of this process can be
considered neither just nor unjust. They must be considered as legiti-
mate to the extent to which they are a consequence of the observance
o f rules of just conduct (e.g., H a y e k 1976: 70). As pointed out before,
the rules are not iegitimized by an evaluation of particular results which
they may help to produce. Rather, they evolved as rules o f experience
and their compliance allowed a kind of pattern prediction in the sense
that they tend to protect others from harm. 37
36 The formulation used to outline Hayek's thesis, refers to titles of essays (Hayek
1978a; 1975), to parts of a sub-title (Hayek 197: 3), and to a chapter title (Hayek 1960:
chap. 16). The references are at the same time pieces of work, in which Hayek explained
the corresponding elements of his thesis. In addition, the followingpublications, referring
to this problem, should be mentioned: Hayek 1976 (esp. chap. 9, I1) and 1988 (esp.
chap. 4--7).
37 This interpretation of Hayek's concept followsan understandingofjustice as devel-
oped by Adam Smith ([1759[1976: 167): "Mere justice is, upon most occasions, but a
negative virtue, and only hinders us from hurting our neighbor. The man who barely
abstains from violating either the person or the estate, or the reputation, of his neighbors,
has surely very little positive merit. He fulfills,however, all the rules of what is peculiarly
calledjustice, and does every thing which his equals can with propriety force him to do,
251
The revolt of instinct was carried by ideas that were characteristic

for a closed household-economy and for a tribal society. In these socie-
ties, a commonly accepted hierarchy of goals was followed and the
returns were divided according to common ideals of "equality, value,
and merit" (Hayek 1958). The revolt of reason can be based on the
considerable organizational success, that became possible for mankind
through the use of reason. This success tends to promote an exaggera-
tion of the possibilities for shaping a society in a rational way. 38
If concepts of social justice are applied to the results of an order of
actions, it becomes unavoidable to set goals for this order. However,
the spontaneous order is a self-organizing structure (Hayek 1979:
chap. 12). It is characterized by self-coordination and self-control
through processes of competitive price formation, and is based exclu-
sively on attempts of individual actors to reach self-set goals. Whether
an actor will succeed cannot be forecast in detail, but rather depends
on his good luck and skill. His intention and self-assessment are not
the deciding factors, but rather the valuation of the individual perfor-
mances by standards and circumstances of others which must remain
largely unknown to him. 39 This harms only too easily the feelings and
convictions of value and merit of the household economy and the tribal
society. "The game of catallaxy" (Hayek 1976:115) turns out not to
be open to rationalist attempts to introduce notions of social justice.
This was even the experience made, for example, in welfare economics,
although--as pointed out before--the exchange economy had already
been inadequately modeled as an organization and thus, in principle,
allowed to set social goals. The unsuccessful search for means of redis-
tribution, which would affect the efficiency of the economy as little as
or which they can punish him for not doing." Contrary to this, distributive justice
corresponds to what he called "benevolence" or "beneficence" (ibid.: 436), whereby
"beneficence is always free, it cannot be extracted by force" (ibid.: 160).
38 As Hayek (1988: chap. 4) demonstrated through quotations from well known scien-
tists like Monod, Einstein, and Born, this kind of intellectual nalvet6 or even arrogance,
combined with a striking lack of knowledge in economics can be found with unusually
intelligent people. A thorough and impressive documentation of the rationalist hubris
can be found in Hayek ([1952] 1964, Part 2).
39 This leads to the following principle of individual action (Hayek (1958: 20f.): "If
people should use their knowledge and abilities, they should not allow themselves be
guided by what others think about the way they achieved their objective, but solely by
what others think about the expected results."
252
possible, was only a symptom of the impossibility to separate "alloca-

tion" and "distribution. ''4~
To postulate purposes for a catallaxy, which should express notions
of social justice, is necessarily in contradiction to such an economic
system. In addition, it presupposes an external observer who compares
and rates chances to earn an income as well as obtained income posi-
tions of individuals and of social groups. Attempts to define social
justice contain exactly this. Thereby the task of interpreting social
justice is assigned to democratically iegitimized organizations which
provide such an interpretation through acts of legislationfl
Thus the interpretation and realization of social justice is handed
over to the political process. This process, however, is governed by
its own characteristic regularities which only too often are overlooked
or discarded. In this case, democracy is seen not merely as a process
to bring about collective decisions and as a means to hold to the mini-
mum the tension between freedom and political rule. Instead, in the
tradition of Rousseau positive value is attached to the democratic pro-
cess as such, which gives rise to the expectation that to extend the
process to further areas of society must be a good thing because democ-
racy in itself is good (Hayek 1960: 104).
From the perspective of atavistic instincts, the democratically orga-
nized welfare state becomes, in the eyes of many, a good father of the
family who determines the economic fate of the members of society,
i.e. last but not least the type and amount of income, thereby balancing
need and merit (Hayek 1960: 240f.). In many respects, this is an illusion.
With social justice, the state is obliged to a goal that, in the catallaxy,
is an empty but sweet-sounding phrase to many. In view of the continual
change in the material conditions of society, it becomes possible to
40 The attempt to put a completely defined norm of distributive justice into practice
in an uncompromising way had for Hayek (1960: 100) a clear consequence: "'The principle
of distributive justice, once introduced, would not be fulfilled until the whole society
was organized in accordance with it. This would produce a kind of society which in all
essential respects would be the opposite of a free society--a society in which authority
decided what the individual was to do and how to do it."
41 That is also expressed in a frequently quoted definition of a social state by Zacher
(1977: 154). According to this definition, a social State is presumed to be a State. which
evaluates, secures and alters economic and economically conditioned circumstances
with the objective to guarantee everyone a worthy existence, and to remove or control
differences in the standard of living.
253
give the phrase a new concrete meaning whenever this appears desirable
to politicians and vested interests. The hope to realize politically defined
goals both exaggerates the ability to achieve concrete results and under-
states the likelihood of undesirable side-effects; these effects give rea-
son for further complaints about social injustice and provoke further
interventions. Finally, obliging the state to pursue the goal of social
justice does not take into account the conditions for political actions
in a democracy as we know it. Politicians, even if they had clear ideas
of social justice and despite their far-reaching authority, do not have the
autonomy to pursue these ideas "because they can maintain themselves
only by giving their supporters what they want" (Hayek 1979: 16).
The alarming consequence, which, for Hayek, resulted from the
political process, was the decline of the law of the catailaxy. The
abstract rules of private law, which help to secure its functioning,
become partly concrete as well as restricted in their scope through
public law. 42 This happens in order to manipulate the results of the
catallaxy in the interest of individuals and groups, who, by political
decision, are considered to have a need for particular protection and
social welfare.
Hayek (e.g., [1944] 1962: 89; 1976: 87) granted that there may be
convincing reasons to assure "outside of and supplementary to the
market system" a protection against severe deprivation in the form of
a guaranteed minimum income to all. Independent from the fact that
the modalities of such a protection require clarification, the experiences
with social security systems, shows that it would not remain a minimum,
due to the characteristic quality of the political decision making process.
Further, it is secured knowledge of the economic theory of politics that
social justice is one of the key-arguments that are instrumentalized in
the competition for political positions and power. With the help of the
42 It is particularly problematic but at the same time very convenient for political
actors, that the price, which must be paid for this kind of restrictions of freedom, can
be rarely specified clearly enough in advance: "Since the value of freedom rests on the
opportunities it provides for the unforeseen and unpredictable actions, we will rarely
know what we lose through a particular restriction of freedom. Any such restriction,
any coercion other than the enforcement of general rules, will aim at the achievement
of some foreseeable particular result, but what is prevented by it will usually not be
known. The direct effects of any interference with the market order will be near and
clearly visible in most cases, while the more indirect and remote effects will mostly be
unknown and will therefore be disregarded" (Hayek 1973:56 f.).
254
argument of social justice, many groups are, in one form or another,

granted exceptions to the rules of the catallaxy. The results of this are
equally well known: It leads to distortions in the system of price signals
which, in turn, disturb the process of self-coordination. Furthermore,
public restraints on competition, which are introduced with the same
intention, tend to hinder the process of self-control of the catallaxy,
and they do this more lastingly and effectively than private restraints
to trade. However, the ensuing problems in the labor and goods markets
are not identified as results of ill-conceived interventions. Instead,
efforts are made to neutralize these side-effects with further interven-
tions. As an additional consequence, the state has an increased need
for funding, whose sourcing is typically combined once again with the
objective of redistribution. At the same time, consideration to and
pressure from vested interests can prevent the law of the catallaxy from
being complemented in conformity with the system where it appears
necessary, as, for example, in environmental protection.
All of this supports Hayek's initial suspicion that in the welfare state
a tendency towards socialism is present, although it is not necessarily
intentional. For him, it was the result of a defect in the constitution
of the prevailing form of democracy. The rules governing political
competition are insufficient. Even if political actors would prefer to be
limited in their scope of action in the interest of a functioning catallaxy
and the preservation of freedom, they cannot refer to a restraining
constitutional rule or a superior judiciary authority that could protect
the legislature from becoming a "slave" of interest groups (Hayek
1979:11).
This finding induced Hayek (1979: chap.17) to propose a "'model
constitution." Above all, it served to explain the "fatal defect of the
prevailing form of democracy" through a contrasting constitutional
arrangement. 43 Hayek saw the defect in that there is, in principle,
no effective limitation to the activity of the state. As a consequence,
parliament has not only continually lost its classical control functions,
but is, at the same time, under permanent pressure to use legislation
to add to the activities of a government that it recruits itself. Thus,
parliament resembles an unlimited sovereign. But, the sovereign is a
poor king; he lost his autonomy long ago to parties and interest groups.
43 Hayek stressed this purpose of his "ideal constitution," but also its possible proto-
type function for countries without strong constitutional traditions (Hayek 1979: 107).
255
With his model constitution, Hayek pursued the objective to establish

a government under the law, to limit the state to the classical tasks of
the constitutional state (Rechtsstaat). 44 Above all, this should be
achieved by establishing an independent chamber to control parliament
and government including the possibility of rescinding laws. The discus-
sion of his proposal 45 as well as the underlying theoretical conception
belong to the stimulating elements of constitutional economics as a
newly developing line of research. 46
IlL Epilogue
Reconsidering Hayek's rich scientific harvest, it is probably justified
to argue that he could not always penetrate in depth the many fields
of research in which he scored striking and often revolutionary results.
But in doing so, he opened up new avenues worth further exploration.
Major issues have already been identified when presenting his achieve-
ments. Hence they will be only briefly recalled without surveying the
present state of the art: (1) Hayek's adaptation of the principle of
falsification to complex phenomena by proposing the concept of pattern
prediction, appears to be of crucial importance to economics as an
empirical science, although it still begs many questions as to its opera-
tionality. (2) In his theory of cognition he convincingly stresses the
subjectivity and the limitations of knowledge. This makes a thorough
revision of the notion of rationality in economics unavoidable. (3) Com-
petition as a discovery procedure is more than a challenge to stationary
equilibrium theory. To turn it into a powerful theory of the market
process requires integrating coordination costs, i.e. those costs of infor-
mation that have to be incurred both when transacting and when setting
up and running organizations like firms. (4) Competition as a possible
and desirable outcome of the use of the freedom to act differs signifi-
cantly from the neoclassical understanding of competition which still
dominates antitrust policy. As a consequence it is necessary to assess
44 In such a state, the society and hence also the economy would be a private law
society in the sense of B6hm ([1966] 1989).
45 For a discussion c.f. Rupp (1979), Vanberg (1981), Nienhaus (1982), Hoppmann
(1987).
46 Cf. the attempt of Buchanan (1990), to outline the research program of "Constitu-
tional Economics" or "Constitutional Political Economy."
256
anew the need for and the legislative and judiciary handling of such a
policy. (5) Evolution turned out to be very difficult to cope with in
market process theory and perhaps even more so with regard to institu-
tions to which Hayek's major evolutionary argument referred. But
since it is a basic feature of societal development, it can no longer be
abstracted from and may, if pursued, give a fresh impulse to historical
analyses in economics. (6) Hayek's focus on the phenomenon of order
in general and on the catallaxy in particular proves to be of crucial
importance in the present discussion of transformation of socialist sys-
tems. But much remains to be done with regard to the institutional
framework of the catallaxy, including a serious effort to cope with the
normativity of rules. (7) Hayek was one of the first who recognized
the danger of creeping socialism and of the constitutional problem of
democracy which it reflects. But the agenda of unsettled issues in
constitutional political economy is still growing despite of or just
because of the growing analytical efforts.
Hayek himself frequently said that he believed to have made one
discovery and two inventions in his lifetime. He considered his discov-
ery to be "the realization that the price system is a communication
system, that allows human beings to adjust to events and circumstances
which are unknown to them" (Hayek 1980: 38).
The discovery was--as shown--the result of his lifelong preoccupa-
tion with the problem of the limitations of human knowledge. In order
to make this discovery possible, he had to ask the unconventional
question of how people not only deal with their constitutional ignorance,
but also how they were able to outgrow the various kinds of limitations
of primitive societies. His preoccupation with this question also moti-
vated him strongly to admonish the destructive consequences of an
overestimation of human reason. With his findings, he ran into impru-
dence and opposition. His attempt to find answers to unconventional
questions made him a source for revolutionary developments in eco-
nomic theory. His warnings of a hubris of reason turned out to be fully
justified.
As his two inventions, he pointed at his proposition to break the
state monopoly of money supply in favor of competing moneys, and
to his "proposition for a reconstruction of democracy" (ibid.: 40), with
which the degeneration of the welfare state and a creeping socialism
could be avoided. The two inventions provide answers to questions
which firmly belong to constitutional political economy as a research
257
p r o g r a m . T h e y h a v e b e e n b o r n o u t o f H a y e k ' s d e e p c o n v i c t i o n that
freedom as the source of European civilization must and can be secured.
I n this f e a r a n d h o p e , he p r o b a b l y c o u l d h a v e , in r e t r o s p e c t , a g r e e d
w i t h a n a d v o c a t o r o f f r e e d o m w h o w a s a l s o h i g h l y e s t e e m e d b y him:
F o r myself, looking back now from the extreme end of my task and seeing
at a distance . . . . . I am full of fears and of hopes. I see great dangers
which may be warded off and mighty evils which may be avoided or kept
in check; and 1 am ever increasingly confirmed in my belief that for
democratic nations to be virtuous and prosperous, it is enough if they will
to be so (de Tocqueville [1840] 1968: 916).
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262

Cognition, Competition, and Catallaxy in Memory of Friedrich August Von Hayek

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Cognition, Competition, and Catallaxy in Memory of Friedrich August Von Hayek

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CONSTITUTIONAL POLITICAL ECONOMY, VOL. 4, NO. 2.

COGNITION, COMPETITION, AND CATALLAXY

The curious task of economics is to demonstrate to men how little they

*This article is the extended version of a paper presented at the Hayek-Symposium

The present essay is designed to recall some of the cornerstones of

(ibid.: 104). The system is able to register the relative frequency of

It is impossible to take the position of an observer completely indepen-

we know more than we can explain. More important with regard to

This increasing routine stands for a growing experience that can be

5. Cognition and Society

As to nature, Hayek found in The Sensory Order that human beings

4 However the "verstehende" or "composite" method leads to difficulties in an

instruments. Furthermore only a limited number of observations of

II. Hayekian Epistemics and Political Economy

The far-reaching consequences for economic theory and political

1. Collectivist Economic Planning

Hayek's essays on collectivist economic planning marked the begin-

subjective e x p e c t a t i o n s a b o u t returns. And these e x p e c t a t i o n s are

represent far more relevant information than a planning committee can

H a y e k ' s fundamental criticism o f the general equilibrium theory,

1978: 185), the individuals as conceptualized in The Sensory Order are

With the second statement, efficiency beyond the individual logic of

10 One of the typical misunderstandings of the neoclassical approach is to define the

we hope to discover by means of competition, we can never ascertain

The view "from a b o v e " by a kind of "free-floating intelligentsia"

3. The Errors of Macroeconomics

For Hayek, the errors of macroeconomics ~2and their consequences

A microfoundation of macroeconomics can only be imagined under

14 In macroeconomics, it is at least admitted in principle, "that the reductionist

Competitive price formation as a process of communication com-

"intermediately hard science" (Samuelson, [1947] 1965: 9). 18 In the

Income policies and so-called social compacts based on macroeconomic

4. Order of Law and Order of Actions

Walrasian auctioneer, who determines in advance through a "tfitonne-

21 This is not meant to be a malicious imputation,just as it was not intended by Hayek.

"nomos" and "thesis" in law (Hayek 1973: chap.5, 6). An instrumental-

23 To an immanent criticism of the "widely accepted" Paretian value judgement cf.

With regard to value judgements, this means that if the research

convictions stand values, which themselves are, like morality, products

appreciated and developed. 3~ His central proposition concerning the

30 To establish this kind of theory may be particularlydifficultbecause of the prevailing

the other rules and in the expected real circumstances to a formation

feared that socialism would be replaced with a " h o d g e podge of ill-

The revolt of instinct was carried by ideas that were characteristic

possible, was only a symptom of the impossibility to separate "alloca-

argument of social justice, many groups are, in one form or another,

With his model constitution, Hayek pursued the objective to establish

Arrow, K. E. (1974) "Limited Knowledge and Economic Analysis." American Economic

Hayek, F. A. ([1968] 1978) "Competition as a Discovery Procedure." In: F. A. Hayek

Leijonhufvud, A. ([1976] 1981) "Schools, 'Revolutions' and Research Programmes in

Voigt, S. (1991) "'Die evolutionsorientierteTheorie der Verfassung--Bemerkungenzum

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