The Online Library of Liberty

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• En Torno a La Funcion Del Capital, Joaquín Reig
• Reflections On the Keynesian Episode, W. H. Hutt
• Ludwig Von Mises and the Market Process, L. M. Lachmann
• Values, Prices and Statistics, Bettina Bien
• The Tax System and a Free Society, Oswald Brownlee
• How “should” Common-access Facilities Be Financed?, James M. Buchanan
• Pitfalls In Planning: Veterans' Housing After World War Ii, Marshall R. Colberg
• Presents For the Poor, R. L. Cunningham
• Restrictions On International Trade: Why Do They Persist? W. Marshall Curtiss
• “human Action”, E. W. Dykes
• The Genius of Mises' Insights, Lawrence Fertig
• On Behalf of Profits, Percy L. Greaves, Jr.
• Tax Reform: Two Ways to Progress, C. Lowell Harriss
• The Future of Capitalism, Henry Hazlitt
• Prices and Property Rights In the Command Economy, Arthur Kemp
• The Inevitable Bankruptcy of the Socialist State, Howard E. Kershner
• Entrepreneurship and the Market Approach to Development, Israel M. Kirzner
• The New Science of Freedom, George Koether
• Financing, Correcting, and Adjustment: Three Ways to Deal With an Imbalance of Payments, Fritz Machlup
• On Protecting One's Self From One's Friends, Don Paarlberg
• Recollections Re a Kindred Spirit, William A. Paton
• Ludwig Von Mises, William H. Peterson
• The Economic-power Syndrome, Sylvester Petro
• Ownership As a Social Function, Paul L. Poirot
• To Abdicate Or Not, Leonard E. Read
• The Book In the Market Place, Henry Regnery
• Lange, Mises and Praxeology: the Retreat From Marxism, Murray N. Rothbard
• The Production and Exchange of Used Body Parts, Simon Rottenberg
• The Education of Lord Acton, Robert L. Schuettinger
• Chicago Monetary Tradition In the Light of Austrian Theory, Hans F. Sennholz
• Hubris and Environmental Variance, Joseph J. Spengler
• An Application of Economics In Biology, Gordon Tullock
• What Mises Did For Me, John V. Van Sickle
• Economics In a Changing World, G. C. Wiegand
• Can a Liberal Be an Equalitarian? Leland B. Yeager
• The Political Economy of Nostalgia, Ramon Diaz

Hubris and Environmental Variance
Joseph J. Spengler

“Ancient Arrogance loves to bring forth A young Arrogance among the evils of men.”

AeschῩlus, Agamemnon.

Arrogance, C. M. Bowra has written in his The Greek Experience, “was regarded as the worst of evils,” in part because “it scorned the social obligations on which the city-state depended.” And F. A. Hayek has observed that “never will man penetrate deeper into error than when he is continuing on a road which has led him to great success.” One may ask, therefore, if the conjoining of these two observations has implication for the practitioners of social science, above all the economists.

Not until the second third of this century did confidence in the economist and his findings promote him into the hierarchy of policy formulators. Theretofore his role was predominantly advisory in nature and confined to the realm of microeconomics. Moreover, he did not find himself pressed to postulate a degree of fixity in economic relationships, corresponding in some measure to those on which an engineer counts when developing and executing plans in the world of structures.

I. Problem and Trends

Policy recommendations, together with suggestions for policy implementation, need to be in keeping with the degree of variance characteristic of the environment to which they are applied. The scientist finds himself in a sea of facts, always reducible in some degree to categories within which relations of varying degrees of exactness and stability are to be found. But this degree varies with category and science, ranging from marked to limited exactitude and stability. The policy maker finds himself constrained accordingly.

Among the conditions that distinguish social science from natural science, especially inorganic science, is the fact that the environment to which social science relates is subject to much more variance than that to which natural science, especially inorganic science, relates. It is much more difficult, therefore, to map models upon selected segments of the social environment than upon selected segments of the physical environment. The behavioral regularities which social scientists have “discovered” are less stable than those revealed by physical science. The capacity of the so-called “social engineer” to formulate and execute policy, be it economic or otherwise, is much more limited, therefore, than that of the engineer operating in the field of inorganic science or even in that of life science.

It is paradoxical that over the past several centuries the weight allotted to contingency by scientists and policy makers has not varied in the same degree in the realms of social and non-social science. This paradox is all the more striking in that today, more than ever before, man is alert to the stochastic aspects of his universe.

Consider the physical world. The universe to which Newtonian physics related and in fact ruled for two centuries was conceived of as a universe in which, as Wiener noted, “everything happened precisely according to law, a compact, tightly organized universe in which the whole future depends strictly upon the whole past.” Those accepting the Newtonian view had therefore to proceed as if physics were subject to precise laws susceptible of discovery and formulation even though the physical measurements of which man is capable are never absolutely precise. Of import here is the corollary that the engineer operating in a strictly Newtonian world can rule out the possibility of variance, together with the implications of variance.

The present century has witnessed a change in this vision of the physical world, a change inspired in part by questions raised in the preceding century and prompted by the spread of inquiry into neglected components of man's universe. For, after its reign of two centuries, the Newtonian view gave way to a view in which scope was allowed to probability, an element introduced by Willard Gibbs. Of some significance in the present connection is the emerging recognition of the role of chance even though physics as such relates largely to that which is sufficiently probable to be treated as certain. Of greater significance is the change produced in the scientist's image of his universe and of means appropriate to his accommodation to diverse components of this universe.

Given an invariant universe, subordination of this universe to man's purposes entails action based upon this invariance. But, given a universe subject to variance, subordination of it to man's goals entails compensatory adjustment to this variance. Such adjustment must be sought through servo-mechanisms. In most instances, however, the degree of variance encountered in the physical world is much less than that found in the social world; and when this variance is pronounced, it is essentially orderly in pattern, even though subject to the drift of time. What Lotka called “parameters of state” function as parameters whereas corresponding parameters in the social universe seldom stay entirely put and stable.

Turning now to the realm of social science as represented by economics, we find that in the work of Smith and his classical successors, the economy was viewed as a self-adjusting organization, an organization made up of small behaving units bound together by mechanisms which enabled men to adjust to each other and achieve a kind of state which, though essentially stable, did undergo change with the passage of time. Smith was writing at a time, of course, when Leibniz, Euler, and others were describing the world at large as under the empire of optimizing mechanisms.

Of concern here is the fact that Smith's view of the economic world was not Newtonian and mechanical. Smith's world was subject to variance and men supposedly adjusted their behavior accordingly. This world tended to function well so long as coalitions and monopolies were not allowed to develop, often with the connivance of the state. There was very limited scope in Smith's world, therefore, for salutory intervention by the state in economic life. Moreover, the state was viewed as the agent and servant of society, and not as its hortator and taskmaster.

Smith's image of the social world not only persisted in the works of his classical successors. It was also given new dimensions by the Austrians, most prominent and influential of the schools which paralled what might be called the neo-classical school of Marshall, direct continuator of the classical tradition. Indeed, Menger, founder of the Austrian school, emphasized the evolutionary adaptability of man's institutional structure to emerging needs and problems. For, while, as Louis Schneider summarises Menger's view, “functional institutions can be the product of deliberate reflection and planning,” they are more likely to be “spontaneous developments” rather than the creations of “human intention.” Illustrative was the institution of money.

The image of the economy as a homeostatic organization shot through with automatically responsive mechanisms did not undergo serious modification until in the 1930's. Then the vision of Smith, Menger, and Marshall began to give place to that of J. M. Keynes. Macroeconomics began to coexist with microeconomics and even partially to displace it as long regnant assumptions gave way to those undergirding the new vision. Objectives changed as well. It apparently came to be believed above all that, despite the variance-ridden character of man's economic environment, the economy could be kept within the conduit of “full employment” by economist-policy-makers, and at little or no cost to any elements in the population. In sum, whereas the natural scientists turned to cybernetics in the sense of servomechanisms, economists turned to cybernetics in the ancient meaning of Plato who had in mind both the art of steermanship and the art of government.

II. Caveats

Were Aristotle alive he would enter a caveat against the ascendancy of Plato's conception of cybernetics. Not only did he warn against looking for more precision than “the nature of the subject permits” (N.Eth., 1094^b). He also distinguished “scientific knowledge” from “practical wisdom” which underlay the art of government or politics. Of “scientific knowledge” he wrote: “We suppose ourselves to possess unqualified scientific knowledge of a thing, as opposed to knowing it in the accidental way in which a sophist knows, when we think we know the cause on which the fact depends, as the cause of that fact and of no other, and, further, that the fact could not be other than it is” (An. Post. 71^b). “Practical wisdom” to which “political wisdom” and the “art of politics” corresponded, Aristotle then pointed out, did not have to do with the invariable; rather it resembled “opinion” in being “about the variable,” about what “is capable of being otherwise.” Moreover, policy as expressed in law needed to reflect experience and judgment, ingredients of practical wisdom, rather than mere content of text-books and comparison of laws (N.Eth., 1140^a-1142^b, 1180^b-1181^b). And even then they could prove highly effective only if the political structure were adequate, that is, if the middle class held sway (Pol., 1295^a-1297^a) and (presumably) weight was attached to equity (Rhet. 1374^a-1374^b).

Success on the part of economists as of other social scientists eventually reduced their sensibility to dangers implicit in the reorientation of the role of the state and economic policy. Not much attention was paid to economists or other social scientists by policy-makers until in the 1930's. By then the number of economists had become much greater than before 1920 and governmental employment opportunities for them had begun to increase appreciably, at a rate that subsequently rose with the coming of World War II. Moreover, as noted above, the ascendancy of macroeconomics removed old constraints on the economic role of the state, theretofore largely restricted in times of peace to financing the polity and preserving an economic structure conducive to effective competition. Accordingly, despite continuation of variance in the economy and of imprecision in the measures obtained of macroeconomic relations and mechanisms, belief on the part of economists in their power to intervene salutarily at the macro-level increased greatly.

In the wake of this confidence there came into being an attitude, new to economics and never associated with microeconomics, an attitude reflecting confidence, perhaps overweening confidence remindful of hubris—in the capacity of economist-policy-makers to guide the economy costlessly along the path of full employment. One is reminded of the unprecedented enthusiasm for natural sciences in late-eighteenth and early-nineteenth century France, enthusiasm that, as Hayek points out, found expression in the Ecole polytechnique, source of “scientistic hubris” and contributor to the then emerging belief that technological education could provide the key to societal problems.

As has been suggested earlier, the effectiveness of interventionist macroeconomic policy turns on the degree to which the economy is subject to instable or relatively unknown variance, together with the degree to which account is taken of the constraints imposed on the behavior of variables by the current state of the parameters entering into economic equations or bearing upon economic policy. Firm and generally accepted knowledge regarding the quantitative values of temporal and other relations between macroeconomic components of the macroeconomy are not yet available, or when available, are not yet known to be stable or to vary in quite orderly and easily foreseeable ways. Information has not yet been acquired in adequate amount and under conditions enabling one to rule out the spurious and the specious and gain sufficient understanding of the relevant dynamics of the economy—perhaps because students of economic phenomena tend to be too involved in that which they are studying.

In the absence of the conditions requisite for establishing a basis for macroeconomic policy, one may inquire if there exists a sufficient consensus regarding sets of relations to permit the formulation of policy on the basis of consensus instead of upon a firm grasp of variance and its behavior. Such a consensus does not exist. Among economists there is not to be found a consensus comparable to that found among inorganic and (even) organic scientists—a lack associated with varying interpretation of the variance existing in the social and economic environment.

Absence of consensus has been well described by Peter Bauer in his essay in Roads to Freedom, the Festschrift honoring F. A. von Hayek. There Bauer shows how “a whole range of mutually interacting political and intellectual forces has promoted the spurious consensus in development economics, a consensus the conclusions of which are unrelated to reality.” Any extensive review of the literature will bear out Bauer's finding. He goes on to point out that “by acquiescing in the belief that development economics can appreciably promote the material progress of underdeveloped countries we have come to some extent to live beyond our intellectual incomes, and perhaps have even come to live on false pretences.... But the cost of the continued promotion of unwarranted expectations is certain to be very high.” Indeed, he adds, “the soul of a profession, as well as that of persons, can be lost in attempts to gain the world.”

An examination of the literature on monetary behavior and on the areas of policy of concern to the President's Council of Economic Advisers would reveal a similar lack of consensus. It should provoke inquiry into the degree to which policies endorsed by the Council have contributed to maintenance of employment and economic stability, given the structure of conditions within which policy recommendations have had to be carried out. A cursory comparison of the period 1904-29 with that of 1946-71 does not generate great confidence in the macroeconomic policies pursued in this country, or in the disposition of policy-makers to allow for conditions that might make for policy failure.

Given the absence both of invariance in the relevant economic environment and of consensus regarding what constitutes appropriate and administrable policy under changing existing conditions, one might expect that formulators and administrators of economic policy would be modest respecting what they can do. One is left with the impression, however, that such modesty is in limited supply, that progress in the realm of technical economic theory has generated a spirit of hubris that has infused the realm of administrative practice and made it insensible of the costs resulting.

III. Conclusion

It is to be inferred that a spirit of modesty better becomes the social scientist, especially the economist, than the spirit underlying what the Greeks called hubris. Otherwise, as Greek mythology had it, Nemesis could intervene and depress the degree of confidence men have in social science, especially economics, below the level warranted by the capacity of its practitioners to perform. Accordingly, given the large amount of instable variance in the economic environment and the impossibility of mapping macro-models and policy closely upon this economic environment, a dynamic rather than essentially fixed approach is indicated—one in keeping with the spirit of Smith's Wealth of Nations. When controls are indicated because of defects in the performance of the economy, it is desirable that these controls be as servo-mechanistic in character as it is economically feasible to make them. Then the controls put into effect will be responsive to variance in the economic environment. Under these circumstances so-called economic policy will not operate, as it often does today, to impose heavy and uncompensated costs on large segments of the population—witness the heavy burden placed upon fixed-income receivers by a policy of inflation pursued in the name of “growth” and the optimizing of a politically oriented employment statistic. Moreover, continuing observation of the response of the economy to policy expressed in servo-mechanistic terms will evoke the information essential to shaping policy in relatively costless and equitable form.