Popper and Poincaré’s findings limit our ability to see into the future, making it a very complicated reflection of the past — if it is a reflection of the past at all. A potent application in the social world comes from a friend of Sir Karl, the intuitive economist Friedrich Hayek. Hayek is one of the rare celebrated members of his “profession” (along with J.M. Keynes and G.L.S. Shackle) to focus on true uncertainty, on the limitations of knowledge, on the unread books in Eco’s library.
In 1974 he received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, but if you read his acceptance speech you will be in for a bit of a surprise. It was eloquently called “The Pretense of Knowledge,” and he mostly railed about other economists and about the idea of the planner. He argued against the use of the tools of hard science in the social ones, and depressingly, right before the big boom for these methods in economics. Subsequently, the prevalent use of complicated equations made the environment for true empirical thinkers worse than it was before Hayek wrote his speech. Every year a paper or a book appears, bemoaning the fate of economics and complaining about its attempts to ape physics. The latest I’ve seen is about how economists should shoot for the role of lowly philosophers rather than that of high priests. Yet, in one ear and out the other.
For Hayek, a true forecast is done organically by a system, not by fiat. One single institution, say, the central planner, cannot aggregate knowledge; many important pieces of information will be missing. But society as a whole will be able to integrate into its functioning these multiple pieces of information. Society as a whole thinks outside the box. Hayek attacked socialism and managed economies as a product of what I have called nerd knowledge, or Platonicity — owing to the growth of scientific knowledge, we overestimate our ability to understand the subtle changes that constitute the world, and what weight needs to be imparted to each such change. He aptly called this “scientism.”
This disease is severely ingrained in our institutions. It is why I fear governments and large corporations — it is hard to distinguish between them. Governments make forecasts; companies produce projections; every year various forecasters project the level of mortgage rates and the stock market at the end of the following year. Corporations survive not because they have made good forecasts, but because, like the CEOs visiting Wharton I mentioned earlier, they may have been the lucky ones. And, like a restaurant owner, they may be hurting themselves, not us — perhaps helping us and subsidizing our consumption by giving us goods in the process, like cheap telephone calls to the rest of the world funded by the overinvestment during the dotcom era. We consumers can let them forecast all they want f that’s necessary for them to get into business. Let them go hang themselves if they wish.
As a matter of fact, as I mentioned in Chapter 8, we New Yorkers are all benefiting from the quixotic overconfidence of corporations and restaurant entrepreneurs. This is the benefit of capitalism that people discuss the least.
But corporations can go bust as often as they like, thus subsidizing us consumers by transferring their wealth into our pockets — the more bankruptcies, the better it is for us — unless they are “too big to fail” and require subsidies, which is an argument in favor of letting companies go bust early. Government is a more serious business and we need to make sure we do not pay the price for its folly. As individuals we should love free markets because operators in them can be as incompetent as they wish.
The only criticism one might have of Hayek is that he makes a hard and qualitative distinction between social sciences and physics. He shows that the methods of physics do not translate to its social science siblings, and he blames the engineering-oriented mentality for this. But he was writing at a time when physics, the queen of science, seemed to zoom in our world. It turns out that even the natural sciences are far more complicated than that. He was right about the social sciences, he is certainly right in trusting hard scientists more than social theorizers, but what he said about the weaknesses of social knowledge applies to all knowledge. All knowledge.
Why? Because of the confirmation problem, one can argue that we know very little about our natural world; we advertise the read books and forget about the unread ones. Physics has been successful, but it is a narrow field of hard science in which we have been successful, and people tend to generalize that success to all science. It would be preferable if we were better at understanding cancer or the (highly nonlinear) weather than the origin of the universe.
[This is an excerpt from Nassim Taleb’s The Black Swan (p. 179). You can order his entire book here. You can visit his personal website here.]
Hi: I like your article. I would like to agree with your comport by disagreement with one element. Physics is not currently successful at describing processes-in my opinion. Two examples. Physics talks about dark matter and dark energy. The problem is from far out in space the use the red shift to conclude that everything is moving away from us faster and faster. There are several problems with this idea. 1. The red shift is accurate in a constant field. It is not valid in a variable field. Since they are ‘looking’ out many, many light years it is not reasonable to assume there is a constant field. If the Red shift is an error, there goes the whole shebang. Furthermore, because of the red shift physicists think the universe is accelerating apart. Constant acceleration requires a constant force. Since the masses are galactic the forces required to accelerate them must also be galactic. No known force is great enough so we have invented dark matter and dark energy. Now the crunch is: if all of that dark matter and energy intervenes then the red shift is certainly not a valid measurement. The whole structure collapses from self contradiction-but modern physics is still assuming the red shift is valid and etc.
So, Physics is no better than economics at predicting through complex systems.
I’ll stop at one example since that was pretty long. To summarize: the world is complex and chaotic at the large and the small. Planners probably have about the same odds as a coin flip of coming up correct. Surely the USSR’s dismal failure with their 5 year plans is a good object example. The Russian people are bright but the questions are profoundly difficult from either the past or into the future. Chance and hunches are probably about as good as technocratic planners. Ongoing resilience and persistence, not wondrous planning, are probably the valid factors of success in the economy. Thanks for your article, dlc
Totally agree, Dennis, thank you for your comments. Indeed, the same applies to many phenomena in natural sciences, just look at climate change for instance.