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The Knowledge We Have Lost in Information: The History of Information in Modern Economics

Author(s):Mirowski, Philip
Nik-Khah, Edward
Reviewer(s):Caldwell, Bruce

Published by EH.Net (November 2017)

Philip Mirowski and Edward Nik-Khah, The Knowledge We Have Lost in Information: The History of Information in Modern Economics. New York: Oxford University Press, 2017. x + 298 pp. $35 (hardback), ISBN: 978-0-19-027005-6.

Reviewed for EH.Net by Bruce Caldwell, Department of Economics, Duke University.
In the wonderfully–titled The Knowledge We Have Lost in Information, Philip Mirowski (University of Notre Dame) and Edward Nik-Khah (Roanoke College) offer a revisionist interpretation of the development of economics in the post-war period. A central thesis is that the rise and reification of the information concept is “the pivot point around which economics, computation, and politics revolved” (p. 29). I will first summarize telegraphically their history of the development of economic theory and its effect on the behavior of economists, then turn to their larger narrative, in particular the role played by F. A. Hayek and neoliberalism in their story.

The information concept as presented by the authors is multivalenced. After noting Hayek’s early work on the knowledge problem (how can social coordination occur in a world of localized and dispersed knowledge?) and the incubation of a neoclassical approach to information at the Cowles Commission, the authors trace the emergence of three later traditions within economics, each having its own unique approach to the treatment of information. These modalities differ according to how information is modeled and the significance that each accords to agents’ knowledge. The Walrasian school, associated with Leonid Hurwicz’s work on mechanism design, treats information as a valuable thing that agents possess. The game-theoretical Bayes-Nash school views knowledge as something arrived at by induction and which is tacit or inaccessible to agents. Finally, the Experimental school views information as something computable, and, in the light of the outcomes of zero-intelligence agent experiments, believe that when the structure of the market is right, agents’ knowledge is irrelevant.

Crucially, these changes in the way that economists view knowledge affected how they came to see their own roles. While the first school saw their job as helping agents to collect and use knowledge, and the second as helping agents infer what their knowledge was, the third stopped worrying about agents’ knowledge altogether and focused on creating boutique markets. This has had some troubling consequences: “over time, economists have relinquished a concern for ensuring that markets give people what they want, and increasingly insist that they can make markets produce any desired outcome regardless of what people want” (p. 158). Mirwoski and Nik-Khah illustrate this with examples of Economists Behaving Badly (that is, privileging favored groups) in their roles as expert advice givers and market creators in both the private and public sectors.

The chapters that cover this material are at times dense going, and because they hew to a particular narrative thread certain nuances among and within schools must be forgone. That said, the authors offer a technically sophisticated and well-argued account of recent developments in economics that is worthy of careful consideration. One hopes that contributors to the various schools might themselves be induced to offer responses to their history.

One surprising element of their story is the major role they accord F.A. Hayek. It is well known that Hayek’s writings about the knowledge problem during the socialist calculation debate and in subsequent work — especially his 1945 piece, “The Use of Knowledge in Society,” which invariably is cited by information theorists as a jumping off point for their own contributions — provided a challenge that inspired Hurwicz and others. Furthermore, economists who prefer market over legislative solutions to all manner of problems — and this evidently includes those “designing” markets — also typically invoke his name. But the authors assert more. Perhaps most important for their account is the claim that changes in mainstream economics mimic changes in Hayek’s own thoughts about knowledge. This becomes more meaningful when one realizes that Hayek is a founding father of neoliberalism. In their view the neoliberal project is hostile to democracy and aims to use the power of a strong state to impose market solutions on people, regardless of what people want. One begins to see the connections. Recent developments in economics reflect not just Hayek’s views on knowledge, but may also reflect the logical conclusion of his political views.

Little of this is convincing to this reader. The authors’ evidence for matching up Hayek’s writings on knowledge to the three strands of thought appears meagre. The link between Hayek and Hurwicz’s use of the notion of information has some surface plausibility, but only because later information theorists in the neoclassical and Walrasian traditions cite Hayek’s 1945 article, where he describes the price system as “a mechanism for communicating information” (Hayek [1945] 2014, 100). Hayek’s support for the second strand is based on his later description of knowledge as tacit and inaccessible, which they link to his book The Sensory Order. There is considerable disagreement in the secondary literature about how Hayek’s difficult book on the foundations of psychology relates to his economics, but references to knowledge, tacit or otherwise, are absent from it (one need only check the index), and how this might link up to the concerns of game theorists is obscure. Their suggestion that his description of how brain pathways might function has political implications is laughable (p. 69). Moving to the third strand: in his 1968 essay “Competition as a Discovery Procedure” Hayek made the commonsense observation that the market process and price system help individuals to discover what goods are scarce and coordinate dispersed knowledge. By adding the bracketed phrase [Epistemology is governed by] to a series of sentences taken from the essay, they credit Hayek with making the epistemological claim that “there exists a species of knowledge not ‘known’ to any individual human being at all” (p. 70), which supposedly links him to the boutique market designers of the Experimental school. Of course, future knowledge is not known to anyone today, but their interpretation is that the knowledge Hayek was describing is that which is known today by the Market, rather than by people — hence the confidence placed in the market by the designers. The authors cite a single sentence from The Fatal Conceit (his last book) where Hayek uses the word “information” rather than “knowledge” — this in a sentence where the word knowledge appears twice in titles of articles — as constituting “his frank admission that his system did not congeal around the concept of information until rather late in his career” (p. 66). (I conjecture that Bill Bartley, who edited the book and knew little economics, substituted the word “information” for “knowledge” simply to avoid using the latter three times in a sentence.) But anyway, none of the positive evidence that they present for their claims seems to me to be very compelling.

The authors also ignore or dismiss inconvenient facts. Hayek criticized Hurwicz and Arrow (Hayek [1982] 1984, 60-61) as well as game theory (Hayek 1983, 190), and his criticisms of equilibrium theory and the theory of perfect competition directly opposed the sort of modeling strategies exhibited in the various strands of information theory (Hayek [1948] 2014, [1981] 2012). In his later writings Hayek was hoping to develop a theory of the market process, and went not in the direction of more elaborate descriptions of information, but tried to articulate a theory of complex phenomena, all of which is ignored (for more on this see Caldwell 2015). Later Austrians repeatedly distinguish between information and knowledge in ways uncongenial to their interpretation (Kirzner 1997, Thomsen 1992, Loasby et. al. 2005). The notion that “the Market alone can arrive at Truth” (p. 242) flies in the face of Austrian emphases on subjectivism and methodological individualism.

As for Hayek’s neoliberalism: the authors list “six important tenets” of that doctrine (p. 54-59). I have disagreed before with Mirowski’s characterizations of ideas that he claimed people like Hayek and Friedman held (Caldwell 2011), so will be brief here. In The Constitution of Liberty Hayek argued that one of the benefits of liberty is to allow people to make use of local knowledge, which is one reason why free societies are so productive. In their tenet three, the authors conclude that Hayek valued liberty instrumentally for its effects on the use of knowledge. This ignores the larger point of the book that liberty, the goal of a free society, consists in reducing coercion of people by others as much as possible. (The liberal solution is to give the state a monopoly on coercion, and then impose constitutional limits on it, to limit its own coercive power.) This overriding concern for reducing coercion does not sit well with the narrative here, in which economists putatively influenced by Hayek fully embrace the engineering mentality, designing markets to deliver the goods to paying clients and subtly “nudging” the ignorant into preferred ways of behaving. Also unmentioned is that Austrian followers of Hayek are among the most vociferous critics of the “nudge” philosophy, on freedom grounds. Tenet six discusses how revising the criminal law is also central to neoliberalism, and that “neoliberal policies lead to unchecked expansion of the penal sector, as has happened in the United States” (p. 58). This is fanciful. The expansion in the prison population in the United States is tied to an unsuccessful war on drugs that has been criticized by libertarians since I was in college. Hayek and other neoliberals were throughout their careers opponents of police states, and Hayek railed against the engineering mentality, but in this upside down world these become central elements of his preferred outcome.

All of this suggests that the book would have been stronger had the authors simply left off trying to pin Hayek down to some doctrine labeled “neoliberalism” and to then implicate new developments in economics by tying them to him. Indeed, I suspect that Hayek would agree with many of their criticisms of the new developments in economics, at least as they have described them. Perhaps this simply indicates that the authors have themselves succumbed to his influence?

References:

Caldwell, Bruce. 2011. “The Chicago School, Hayek, and Neoliberalism,” in Robert Van Horn, Philip Mirowski, and Thomas Stapleford, eds. Building Chicago Economics: New Perspectives on the History of America’s Most Powerful Economics Program. Cambridge: Cambridge University Press, pp. 301-34.

_____. 2015. “F. A. Hayek and the Economic Calculus,” History of Political Economy, vol. 48, March, pp. 151-80.

Hayek, F. A. [1945] 2014. “The Use of Knowledge in Society,” reprinted in The Market and Other Orders, ed. Bruce Caldwell, vol. 15 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press, pp. 93-104.

_____. [1948] 2014. “The Meaning of Competition,” reprinted in The Market and Other Orders, ed. Bruce Caldwell, vol. 15 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press, pp. 105-16.

____. [1981] 2012. “The Flow of Goods and Services,” reprinted in Business Cycles: Part II, ed. Hansjoerg Klausinger, vol. 8 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press, pp. 331-46.

____. [1982] 1984. “Two Pages of Fiction: The Impossibility of Socialist Calculation,” reprinted in The Essence of Hayek, ed. Chiaki Nishiyama and Kurt Leube. Stanford: Hoover Institution Press.

_____. 1983. “Nobel Prize Winning Economist,” ed. Armen Alchian. Oral History transcript no. 300/224, a transcript of an interview conducted in 1978 under the auspices of the Oral History Program, University Library, UCLA.

Kirzner, Israel. 1997. “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature, vol. 35, March, pp. 60-85.

Loasby, Brian, et. al. 2005. “The Distinction between Knowledge and Information in Economics,” Econ Journal Watch, vol. 2, April.

Thomsen, Esteban. 1992. Prices and Knowledge: A Market-Process Perspective. London: Routledge.
Bruce Caldwell is the Director of the Center for the History of Political Economy at Duke University and is the author of Hayek’s Challenge: An Intellectual Biography of F. A. Hayek (Chicago, 2004).
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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):20th Century: WWII and post-WWII