Horwitz - From The Sensory Order to the Liberal Order

Review of Austrian Economics, 13: 23–40 (2000) c° 2000 Kluwer Academic Publishers From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism⁄ STEVEN HORWITZ sghorwitz@stlawu.edu Associate Professor of Economics, St. Lawrence University, Canton, NY 13617, USA Abstract. Hayek’s arguments for a constitutionally constrainted government are consistent with, and to some extent rest upon, his work in theoretical psychology. By exploring his view of the mind in The Sensory Order, we can see the psychological and epistemological underpinnings of Hayek’s belief in the mind’s limits and the indispensibility of spontaneously emergent social institutions. The Austrian view of microeconomic coordination is a logical outgrowth of Hayek’s theory of mind. Constraints on government are necessary not because self-interest leads rational government actors into temptation, but because even altruistically-motivated actors are epistemically unable to intervene effectively in spontaneously emergent institutions. JEL classification: B31—History of Thought—Individuals. Introduction Much of the voluminous literature on the social theory of F. A. Hayek has focused on his economics or his politics, or the relationship between the two. A far smaller proportion has explored the relationship between his work in the Austrian tradition in economics, his defense of political liberalism and his work in theoretical psychology and philosophy. In this paper I wish to argue that the view of the human mind he offers in his work on theoretical psychology, The Sensory Order, is crucial to understanding both his economics and his politics, and makes use of a theoretical perspective parallel to them. The argument Hayek offers for constitutional constraints on the size and scope of government is intimately linked with his description of the limits of the human mind. Human actors require constitutional constraints because we are epistemologically unable to generate social order in any other way. Hayek’s work parallels that of a long line of thinkers dating back at least to the Scottish Enlightenment, which sees human actors as having limits to their individual abilities, but playing roles as component parts of larger institutions and systems that make it possible to maximize social cooperation.1 Humans are more the product of social and natural systems ⁄A previous version of this paper won second prize in the 1994 Friedrich A. Hayek Fellowships essay contest sponsored by the Mont Pelerin Society. That version was presented at the Society’s international meeting in Cannes, France in September of 1994. The author thanks the Mont Pelerin Society and St. Lawrence University for making that presentation possible. Comments and suggestions have been happily received from Peter Boettke, David Prychitko, Roger Koppl, and Bill Butos, as well as seminar participants at the University of Quebec at Montreal, particularly Robert Nadeau and Robert Leonard. In addition, an anonymous referee’s comments were extremely helpful and thought-provoking in revising this paper. 24 HORWITZ than are those systems the products of human design. As such we need to respect these systems and understand the limits to our ability to manipulate and change them.2 Hayek’s work offers an alternative to the scientifically untenable view of mind often implicit in the work of those who favor comprehensive government planning or piecemeal government intervention as well as the view held by many defenders of the market among neoclassical economists. By recognizing and integrating the roles of contextual knowledge, institutional evolution, and spontaneous order in both his economics and social theory, Hayek’s liberal vision of a constitutionally constrained government emerges quite easily. What Hayek offers is a theory of the market that does not rest on the rationalist foundations that have been soundly criticized by many on the left and right. As such, it also offers an alternative to neoclassical economics as a means for illuminating the benefits of the market economy and the liberal order. The Limits of the Human Mind As Butos and Koppl (1993:307n4; see also Butos and Koppl (1997) and 1999) point out, Hayek’s theory of mind has been largely neglected, which is particularly surprising given the extensive literature on his papers of the 1930s and 40s that dealt with economics and knowledge. What is also surprising about this neglect is how easily Hayek’s theory of mind fits into his economic and social thought. Ultimately, Hayek’s conception of the human mind is that it is a spontaneous order much like the various social and economic phenomena he has explored in other works. An important implication of this conception is that the human mind can never be fully known by the human mind, i.e., there are insurmountable limits to our ability to know, predict, and control the mind. These limits preclude a rationalist understanding of the world that sees the mind as set apart from, and completely determining the direction of, physical and social processes. Hayek’s most complete version of his theory of mind appears in The Sensory Order (Hayek 1952a). The question he wants to address there is the desire to “know the kind of process by which a given physical situation is transformed into a certain phenomenal picture” (Hayek 1952a:7). Put another way, why is the way we perceive the world through our senses different from the way we might describe that world in the language of science? An answer to either question will be a start toward a theory of how the mind operates. For Hayek, the mind is the result of twin processes of evolution. To some extent the phys- ical structure of the brain has evolved in certain shared ways that are reflected in the strong consistencies in perception among most humans. At the same time, the environment and ex- periences of particular people will lead individual minds to evolve in distinct directions and guide perception in different ways. For example, the experience of learning one’s mother tongue clearly shapes one’s perception of the world.3 As we move through our lives, the various experiences we encounter all affect our mental evolution and development so that at any given point, the mind can be seen as the product of these historical and experiential events. Thus mind is a cultural product that evolves from a particular physical structure.4 Hayek would agree with so-called “materialists” in maintaining the physical basis of the order we call mind, but he would depart from their belief that the mind can be reduced to physical phenomena. The self-organizing properties of mind take it beyond our ability to understand in physical terms, despite its ultimately material basis.5 HAYEK’S NON-RATIONALIST LIBERALISM 25 What mind does, according to Hayek (1952a:48ff), is to serve as a classification process. To recognize something as a distinct sensory “datum,” it must be differentiated from other sensations flowing in. Hayek’s theory suggests that the mind has evolved to perform exactly this function—the mind is “a process which creates the distinctions in question” (48). The various combinations of neural firings that comprise a given mental event have evolved as the means by which we interpret the world. The mechanism of that evolution is the success of any given picture of the world in guiding our action in that world. Sets of classifications that do not successfully guide action (i.e., ones that do not in some sense correspond to the physical world), will prevent the organism whose actions are being guided from thriving. Classification processes that survive are those that have in some way corresponded to external events. Hayek (1952a:112–118) uses the metaphors of “map” and “model” to describe the mental order more precisely. The “map” refers to the semipermanent neural connections and link- ages the brain has built up as the result of past experience. In some sense it is the classifying structure that drives mental functions. The “model” refers to “the pattern of impulses which is traced at any moment within the given network of semipermanent channels” derived from the specific environment in which the person is currently placed (114). The map generates the model. Based on previous sensory experience, the mind gives us a model of the present environment that serves as the backdrop for classifying incoming sensory information in the current context. The model is also forward-looking in that it enables the actor to anticipate the likely consequences of both his own actions and external events. Hayek envisions a feedback process between the two, as input from the various existing environments can eventually change the map, while the map is what creates any specific model. Again, the mind is both the product of experience and experience’s classifier. Hayek has frequently pointed to David Hume and Immanuel Kant as the two primary influences he has inherited from the liberal tradition. From Hume comes Hayek’s emphasis on spontaneous order and the empirical basis of society and morality. From Kant comes Hayek’s emphasis on freedom and the importance of universal rules of justice. Chandran Kukathas (1990) interprets Hayek’s enterprise as one that attempts to bridge Hume and Kant into an integrated theory of the liberal order. Kukathas believes that this attempt is ultimately a failure as those two perspectives cannot be reconciled. For our purposes here, it is worth noting that Hayek’s theory of mind is a specific instance where he has (at least implicitly) brought Hume and Kant together. For Hayek, the mind has “categories” in the Kantian sense. Mind is a classification system, where those classifiers are part of the structure of the mind, and not the world itself. However, there is a Humean aspect to the story, as Hayek’s theory of mind denies that these Kantian categories are a permanent part of the physical structure of the mind. Rather the categories are the product of biology interacting with empirical experience, that is, they evolve as the particular human actor grows and learns. Hayek’s theory of mind tries to provide an empirical explanation for the source and continuing evolution of those a priori categories. In that way, he is trying to straddle the epistemological space between Hume and Kant. The mind, for Hayek, is the reason that the world is “presented” to us as organized and sensible, rather than a chaotic blur of random images and movement. Note, however, that the orderliness of our perception of the world is a product of the mind, and explicitly not, for Hayek, a feature of the world itself. The physical world, described at the atomic level, is not 26 HORWITZ sensible or orderly. Our phenomenal understanding of it is orderly because what the mind does is order sensations—hence, the “sensory order.” As Butos and Koppl (1993:308n5), point out, the mind does not construct interpretations of reality, rather “the mind is an interpretation of reality.” The mind does not, on Hayek’s account, translate sensations into a mental picture, it is the means by which we classify things as sensations in the first place. Hayek argues that one of the most important implications of this theory is that we can never fully explain our own minds. Logically, if the mind is the way in which we classify the world around us, we can never “step back” and attempt to view the mind itself as a sensory input. To borrow an analogy from Michael Polanyi, one cannot examine one’s spectacles while simultaneously wearing those spectacles. Hayek (1952a:185) makes this point more generally: any apparatus of classification must possess a structure of a higher degree of complexity than is possessed by the objects which it classifies : : : therefore, the capacity of any explaining agent must be limited to objects with a structure possessing a degree of complexity lower than its own. Therefore, Hayek (185) concludes, “there also exists : : : an absolute limit to what the human brain can ever accomplish by way of explanation.” The best that we can do is to understand some of the rules by which mind operates and offer an “explanation of the principles” (Hayek 1967a) of the sensory order. For Hayek, mind is a set of dispositions or expectations about the world. The map is what enables the classification of incoming sensory data, generating the model. This suggests that much of what we know about the world is in the form of theories rather than brute facts. What we know, from experience, are sets of expectations about particular types of situations and how best to act in them. Those expectations and the implied actions are well described as conjectures in Popper’s sense of the term; what we know is what we think will happen, based on experience. As we shall see later, viewing knowledge as expectations and conjectures links up with Hayek’s long-standing emphasis on the role of rules in generating social order. That claim is no less true of the mind, where rules (“what we think will happen in situation x”), in the form of the map-model interaction, generate the sensory order. We do not know the world in all of its details, and it will be the case that, as with any rule, there will be cases where our conjectures will be inaccurate in certain specific instances. Hayek’s theory of mind can also help us to understand why people make mistakes and how they can learn from them. In a later section, we shall contrast this Hayekian perspective of limited knowledge, and rule-based behavior with the rationalist model associated with mainstream economics, and much of rational choice theory more broadly. Although Hayek’s theory of mind is important in its own right, the linkage between that theory and Hayek’s economic and social theories is what constitutes his true contribution. One of the central implications of his theory of mind is that not all human knowledge can be explicitly articulated: If it should turn out that it is basically impossible to state or communicate all of the rules which govern our actions, including our communications and explicit statements, HAYEK’S NON-RATIONALIST LIBERALISM 27 this would imply an inherent limitation of our possible explicit knowledge : : : (Hayek 1967b:60). The limits of explicit human knowledge form the basis for Hayek’s economic and social thought and are the crucial difference between his approach and that of both socialism and modern neoclassical economics. Epistemology, Economics, and the Economy For Hayek, social coordination processes and the institutions that comprise them are ulti- mately about the communication and use of knowledge (Hayek 1948:91). The problem of social coordination is how best to discover and utilize the diverse and fragmentary pieces of knowledge embedded in individual minds. In much the same way that classical eco- nomics focused on the role of markets in coordinating the division of labor so as to promote economic growth, Hayek emphasizes the division of knowledge inherent in complex so- cial orders and argues that spontaneously evolved institutions, such as the market, are the only real way to achieve the epistemological coordination necessary for economic growth.6 The necessary role of spontaneously evolved institutions is that only they can enable us to make use of the knowledge possessed by individual economic actors, because, as has been pointed out in the previous section, a substantial portion of that knowledge is tacit and cannot be consciously known and communicated linguistically.7 A Hayekian economic theory would therefore recognize the limits of rational choice and understand the role that undesigned social institutions play in facilitating economic order by enabling us to act on the basis of incomplete and inchoate knowledge and correct the errors we will inevitably make. Hayek’s work in the Austrian school of economics offers the core concepts of just such an approach. In particular, Hayek’s rejection of the neoclassical emphasis on maximization and equilibrium points toward a Hayekian alternative to the overly rationalist neoclassical paradigm. Hayek’s earliest work in economic theory was more closely wedded to ideas that are now essential to neoclassicism. His early monetary theory was articulated in the language of equilibrium, though he was frequently at pains to emphasize the various disequilibrium processes of adjustment central to modern markets.8 It is not until the mid and late 1930s that Hayek begins to assess more critically the direction neoclassicism was taking. It is important to note that this reassessment takes place on epistemological grounds. As Bruce Caldwell (1988; see also Foss (1995)) has argued, Hayek’s (1937) paper “Economics and Knowledge” can be seen as the beginning of Hayek’s “transformation.” What arguably sparked this turn, and the other papers on knowledge that were part of it (Hayek 1948), was Hayek’s ongoing participation in the socialist calculation debate. As both a liberal and an economist, Hayek was probably caught off guard by Oscar Lange’s (1936) attempt to employ the tools of neoclassical microeconomics in the service of defending the feasibility of public ownership of the means of production. Until Lange’s paper, Hayek likely saw himself as using what he perceived to be accepted “mainstream” economic theory to argue against the earlier socialist and market socialist proposals. Only when faced with Lange’s “general equilibrium market socialism” is Hayek confronted with a possible tension 28 HORWITZ between his liberalism and his self-understanding of his own approach to economics.9 It is not long afterward that the papers on knowledge appear and soon after that when Hayek dramatically reduced his output of technical economics. The issues that were specifically so perplexing about Lange’s proposal were those con- cerning knowledge and the role of equilibrium. As Hayek (1948:188) pointed out in his response to Lange: “It is difficult to suppress the suspicion that this particular proposal has been born out of an excessive preoccupation with problems of the pure theory of station- ary equilibrium.” What was at issue was whether the assumptions made by neoclassical theory could be so easily transferred to Lange’s Central Planning Board. The mathematics of general equilibrium theory require that the observing economist: 1) treat the firm’s cost and revenue curves as given and known; 2) treat the consumer’s preferences as given and known; and 3) treat the quantity of available resources as given and known. Based on those givens, consumers are assumed to maximize utility while producers are assumed to maximize profits. With those assumptions, and a few other more technical ones, it was theoretically possible to solve for an equilibrium vector of prices. What Lange essentially argued was that the assumptions needed for equilibrium in the market, were the same needed for a planning board to achieve equilibrium and allocate resources efficiently. For Lange, this argument was enough to conclude that planning was feasible, at least in theory. The source of both Hayek’s objections to the Lange argument, and his later distancing from neoclassicism, is in “Economics and Knowledge” (1937). He argued that economic equilibrium had to be defined in terms of the knowledge held by economic actors and was that state of affairs where all actors’ plans could be successfully executed. Equilibrium requires that each actor has enough knowledge to have correct expectations of the future, including the actions of other choosers. For Hayek, the theory of economic equilibrium at best described the endpoint of some process of social learning. The problem is that we do not have a satisfactory description of the social learning taking place during the competitive process that might lead to the equilibrium result. We needed to fill in the empirical missing pieces about ho