Friday, August 3, 2012

Hayek - The Pretense of Knowledge

The foundations for Acemoglu and Robinson's book - Why Nations Fail include: Spontaneous order Emergent and evolutionary processes Path Dependence The role of informal institutions The role of formal institutions Moreover, the book also seems to be informed by a humility and recognition of the limits of the economic way of thinking founded in the Hayekian view of the: Pretense of Knowledge In his Nobel lecture, Hayek reminds the audience: "This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes." Acemoglu and Robinson make every effort to avoid the fallacy that seems to bedevil social scientists in there exploration of power, prosperity and poverty. This subtitle, echoing Smith, outlines the argument that political institutions and the informal norms that shape these institutions are a useful place to begin a quest to understand the outcomes at macroeconomic level - prosperity (Nogales, Arizona) v poverty (Nogales, Sonora). Here in Arizona, we are as familiar with this natural experiment and in Chapter 1, Acemoglu illustrates Spontaneous order, Emergent and evolutionary processes, Path Dependence, The role of informal institutions and The role of formal institutions and, how over time, outcomes can be radically different for a beginning homogenous group separated by opposing institutions. A note, this is a work attempting to understand reality, not a theoritical polemic. Therefore, while one might prefer a society of anarchism or central control and obviously Nogales (or Korea) do not illustrate any theoritical preference.

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