The Hayek Fallacy

Adrian Vermeule is John H. Watson Professor of Law, Harvard Law School. His book Law and the Limits of Reason is now available. He has also written, Mechanisms of Democracy: Institutional Design Writ Small (2007) and Terror in the Balance: Security, Liberty and the Courts, co-authored with Eric A. Posner (2007).  In the post below Vermeule looks at F. A. Hayek.

In the current economic crisis, a small group of unelected bureaucrats effectively sets policy. The group includes Henry Paulson, the treasury secretary, and Ben Bernanke, the chair of the federal reserve. Is it desirable for major questions of economic policy to be decided by a small group of people? Indeed, many observers think that Bernanke has consistently followed Paulson’s lead. On this view, national economic policy is in effect set by a single person. Is this acceptable? And what are the alternatives?

These questions are addressed in one of the most widely-praised articles of the twentieth century: “The Use of Knowledge in Society,” published by F.A. Hayek in 1945. Hayek argues that the “economic calculus” of the marginalist economists does not provide an answer to the “economic problem of society.” The basic problem, Hayek argues, is that “the data from which the economic calculus starts are never for the whole society given to a single mind which could work out the implications and can never be so given” (emphasis added; internal quotation marks omitted). Because society’s problem is to “utiliz[e] … knowledge which is not given to anyone in its totality,” there is a problem with centralized planning, defined as planning “by one authority for the whole economic system” – what Hayek repeatedly refers to as “the planner.” As against this, Hayek favors “decentralized planning by many separate persons.” The key consideration is whether it is feasible to “put at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals.” Hayek thinks it is not feasible, so that competition and the price system are indispensable. The “single mind” of “the planner” cannot account for the tacit knowledge, and knowledge of local conditions changing over time, that the price system automatically takes into account.

Yet who were the theorists who believed the contrary? The article does not identify even one. Although it is true that some socialist economists spoke of “the central planner,” or of a centralized computation of resource allocation, this was mostly a methodological shorthand, not a serious claim. There is a reason for the straw-man quality of Hayek’s argument: neither socialist economists nor democratic theorists commonly believe that “the planner” or a “single mind” will make laws or choose policies – not even if that single mind is some sort of huge, personified leviathan-mind. Leaving aside the socialists as of mainly historical interest, let us focus on the democratic theorists. A large and important subset of these are themselves in the business of figuring out how a collective group of minds can best use their multiple perspectives and private information. These democratic theorists see the epistemic virtues of democracy precisely in the fact that democracy organizes and draws upon the information and insights held by the collective, through some mix of deliberation or voting or both. The Marquis de Condorcet‘s famous Jury Theorem underscored that under well-defined conditions a group whose average competence is better than random will be more likely to make accurate decisions, through majority voting, than will even the single best mind in the group. John Dewey saw democracy as the application of “organized intelligence” to public matters, through free inquiry and common deliberation. Likewise, the pre-eminent critic of parliamentary democracy, Carl Schmitt, captured the classical democratic view perfectly when he described democratic parliaments as “the place in which particles of reason that are strewn unequally among human beings gather themselves and bring public power under their control.”  In this picture — held in common by Condorcet and Dewey, democracy’s most optimistic proponents, and Schmitt, its most piercing critic — what democracy does, through both voting by citizens and lawmaking by elected representatives and specialized bureaucracies, is to aggregate information and reasoned argument into decisions superior to those a single mind would reach. Of course Condorcet and Dewey, not to mention Schmitt, disagree about many things, not least the role of deliberation in politics. Yet none of them suggests that laws or policies should be chosen by some “single mind”; indeed their view is exactly the contrary.

The basic problem with “The Use of Knowledge in Society” is what we might call the Hayek Fallacy: a false comparison between the aggregate product of many minds and the product of a single mind. Perhaps that comparison is relevant in special contexts, such as the question whether a judge or a jury should be responsible for the verdict. However, in a comparison between markets and either socialist or democratic lawmaking – the major comparison that concerned Hayek – the comparison is not relevant and Hayek’s argument is not relevant either. Hayek went astray by reifying or personifying “the planner” or the “single mind” who choo ses policies, and then overlooking that in any recognizably complex modern state, especially democratic states, policies are chosen by highly complex institutional structures and processes that themselves aggregate multiple sources of information.  None of this is to say anything substantive about when or under what conditions collective or democratic policymaking will better aggregate and utilize dispersed information or tacit knowledge than the market will. It is to say that Hayek’s analysis cannot help us figure out those questions.

Versions or relatives of the Hayek Fallacy pop up in many other contexts. One important context is the comparison between lawmaking by common-law courts and lawmaking by legislatures. In the sharpest case for this comparison, the issue is whether a vague or ambiguous or highly general written constitution – like the United States Constitution – should be given content by judges deciding constitutional cases in common-law style over time, or rather by legislatures and presidents enacting laws and making rules to which the judges defer. Here the Hayek fallacy is to say that the aggregate wisdom of many judges over time, drawing when appropriate upon the aggregate wisdom of broader social traditions and norms, will outperform “the lawmaker,” whose epistemic capacities are inferior. The problem is that there is no such “lawmaker.” Rather there is a large modern legislature with many hundreds of members, who in turn draw upon the expertise of thousands of staff and upon information supplied by the bureaucracy, citizens, and interest groups. Moreover, the legislature can delegate, as appropriate, to a gigantic cadre of agencies who themselves use expert panels and citizen input to formulate policies.  The litigation process might or might not outperform this massively complex, integrated lawmaking machine in constitutional matters, if we judge performance on the sort of epistemic or informational grounds Hayek favors. However, a comparison between the many minds of the judges, on the one hand, and some personified lawmaker, on the other, contributes nothing. In modern lawmaking, that comparison is never at issue.