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F. A. Hayek : economics, political economy and social philosophy
Boettke P., Palgrave Macmillan, London, UK, 2019. 323 pp. Type: Book (978-1-137411-59-4)
Date Reviewed: Jul 13 2020

Understanding and modeling complex phenomena, including businesses, requires abstraction: “the process of suppressing irrelevant detail to establish a simplified model, or the result of that process” [1]. As noted by F. A. Hayek, the purpose of a (high-level) model of a complex domain is to “bring about an abstract order--a system of abstract relations--concrete manifestations of which will depend on a great variety of particular circumstances which no one can know in their entirety” [2]. These considerations are (or ought to be) well known to good business and other system modelers, and the book under review clearly demonstrates Hayek’s contributions to systems thinking in general and to modeling of complex phenomena of society in particular.

As Boettke shows, in studies of complex phenomena of society, Hayek always distinguished between general patterns (“all that is characteristic of those persistent wholes which are the main object of our interest because a number of enduring structures have this general pattern in common and nothing else”) and the specifics--“the knowledge of time and place”--that are dispersed throughout the economy and therefore cannot be known in totality to any one person or entity. This distinction does not hold for phenomena studied by natural sciences that “can be described by relatively simple formulae” [3], and therefore reductionism [4]--be it mechanical, physical, or even biological--does not work for the explanation and modeling of complex phenomena.

While discussing a lot of sources, regretfully, Boettke does not explicitly mention the great Hayek’s paper [3] (note “the” in its title), although he does refer time and again to Hayek’s notes about the fallacies of reductionism (“abuse of reason” when it is supposed, for example, that human agents behave like omniscient automata following explicit formal rules) in dealing with economics. For an important example, “price determination modeled as a simultaneous system of equations within a perfectly competitive economy” is totally inadequate because “an equilibrium state of affairs with a set of corresponding optimality conditions” means that “no agent within the system has any incentive to change,” and institutions like money, contract enforcement, and so on are not needed.

Hayek’s observation is in excellent agreement with the explanations about equilibrium by Ludwig von Mises [5], “the great system builder, [who] provided Hayek with [the] research program” of the study of social cooperation. Although Boettke describes Hayek’s contributions only in the social science area, they are obviously relevant for systems thinking in general (including, for example, biology [6] referred to in Hayek’s generic paper). In economics, Boettke emphasizes that “Hayek’s depth and breadth was probably unmatched among 20th century economists and was more in keeping with the grand tradition of moral philosophy and political economy as it was practiced from Adam Smith to John Stuart Mill.” Indeed, there are dozens of appropriate references to and quotes from Adam Smith in Boettke’s book that remain as relevant now as they were in the 18th century.

Boettke properly criticizes those who “never read Hayek in any depth, but only read the slogans associated with [his work].” While Hayek’s well-written papers are usually rather terse, “my experience in teaching professionals in a university environment suggests that many students ... quickly understood and gave many examples of concepts and situations discussed by [Hayek] that have been around in the students’ professional (including failed and “almost successful” projects), learning, and, often, personal lives” [7].

Hayek observes that “market prices as conveyors of dispersed economic information” are not the sum of past costs but the guide to future action; however, knowledge of the current prices is “a very small section of the problem of knowledge”: the knowledge of “how different commodities can be obtained and used and under what conditions they are actually obtained and used” is of utmost importance, and this brings us to the need to be explicit about “the institutional framework within which economic activity takes place”--in other words, the basics of the business domain. In particular, “economic patterns are not invariant to institutional context” (which obviously may and does change). Hayek also states that economic participants’ valuation is subjective and the assumption that people’s knowledge corresponds with the objective facts of the situation is incorrect and “systematically leaves out what is our main task to explain.” On a related note, Hayek stresses that if social phenomena were to be consciously designed by those who, to quote Adam Smith, believed that they could “arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard,” there would be no room for theoretical sciences of society.

The concept of complex orders dealt with by Hayek and referred to by Boettke is well known to business modelers, perhaps under the name of “business domains,” and the primacy of stable business domain modeling over volatile business process modeling has been described in many sources, notably Dines Bjørner [8] and others. The system of fundamental concepts used in such modeling has been presented, for example, in the Reference Model of Open Distributed Processing (RM-ODP) [1].

Business modeling requires, among other things, articulating and explicitly recognizing tacit assumptions. This need is also emphasized by Boettke, who observes that Hayek “was not afraid of asking questions that might not have definitive answers”--an attitude that regretfully has not been common in “mainstream” business modeling (and “mainstream” economics that, for example, “assume[d] that people are not people ... [and] threw out the entrepreneur from their models a long time ago” (Per Bylund). Moreover, Boettke shows, to rephrase his approach that to understand a complex phenomenon one needs to start from the first principles, that is, from the basics of the corresponding business domain, and for economics, these basics have been clearly described by Hayek. In doing so, he uses such fundamental concepts as composition and emergent properties of the composite (independently defined in [1]), and Boettke properly observes that “the complex structures of society are the composite of the purposive behavior of individuals [but] not the result of conscious human design.”

While substantial portions of Boettke’s book deal with applied modeling, particularly problems of public policy and even politics, his general approach and narratives associated with Hayek’s contributions are clearly described and perfectly understandable to a nonexpert in economics. And it is interesting and instructive to observe that some recent articles, such as [9] in Financial Times, are not completely satisfied with “mainstream” economics characterized by “precise equations and predictions” that may not be adequate for understanding and decision making, and so a human-centric vision of economics needs to be created (although Hayek and Mises, who created this vision some time ago, are not mentioned in the article).

I wholeheartedly recommend this book.

More reviews about this item: Amazon

Reviewer:  H. I. Kilov Review #: CR147014 (2009-0206)
1) ISO/IEC. Information technology - Reference Model of Open Distributed Processing. Part 2: Foundations (ITU-T X.902 ISO/IEC 10746-2), http://www.rm-odp.net/files/X.902-2009.pdf.
2) Hayek, F. A. New studies in philosophy, politics, economics, and the history of ideas. Routledge, London, UK, 1978.
3) Hayek, F. A. The theory of complex phenomena. In: The critical approach to science and philosophy. 332-349, Routledge, New York, NY, 1999.
4) Koestler, A.; Smythies, J. R. (Eds.) Beyond reductionism: new perspectives in the life sciences. Hutchinson, London, UK, 1969.
5) Von Mises, L. Human action: a treatise on economics. Yale University Press, New Haven, CT, 1963.
6) Hayek, F. A. The sensory order: an inquiry into the foundations of theoretical psychology. Routledge & Paul, London, UK, 1952.
7) Kilov, H. Business modelling: understandable patterns, practices, and tools. In: Behavior modeling - foundations and applications. 3-27, Springer, 2015.
8) Bjørner, D. Domain models of “the market”—in preparation for e-transaction systems. In: Practical foundations of business system specifications. 111-144, Kluwer Academic Publishers, 2003.
9) Tett, G. How to put some heart into rational economics. Financial Times, Nov. 20, 2019, https://www.ft.com/content/95fe0a3e-0b27-11ea-bb52-34c8d9dc6d84.
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