Wednesday, December 14, 2011

Open Societies and Spontaneous Orders by Richard M. Ebeling

[The following is a review of Popper, Hayek and the Open Society by Calvin Hayes (London/New York: Routledge, 2009) 284 pp. $150. It originally appeared in Freedom Daily (January 2012) published by The Future of Freedom Foundation in Fairfax, Virginia.]

Friedrich A. Hayek and Karl Popper were two of the most influential and internationally recognized critics of totalitarian collectivism in the twentieth century. Hayek's The Road to Serfdom (1944) and Popper's The Open Society and Its Enemies (1945) helped change the intellectual climate at a time when it was presumed that various forms of socialism soon would completely triumph over limited government, free markets, and individual freedom.

Both Hayek and Popper were Austrians by birth, almost the same age, and graduated with doctoral degrees from the University of Vienna in the 1920s. But they never knew each other, even in the relatively small and interconnected intellectual circles of interwar Vienna.

Hayek left Austria in 1931 for a teaching position at the London School of Economics, and only heard about Popper when his fellow Austrian economist, Gottfried Haberler, suggested in 1935 that he read Popper’s recently published book, The Logic of Scientific Discovery. With the darkening clouds of Nazism over Central Europe, Popper left Austria in 1937 for a teaching position in New Zealand. After corresponding during the Second World War, Hayek helped arrange a teaching position for Popper at the London School of Economics, as well.

In The Road to Serfdom, Hayek tried to show how the rise of socialist ideas in late nineteenth and early twentieth centuries Germany had prepared the political and economic foundations for the Nazi rise to power in the 1930s; and how similar socialist trends in Great Britain and the United States might, likewise, threaten those countries with political and economic tyranny.

Popper’s Open Society and Its Enemies traced the origins of collectivist despotism to its ancient philosophical roots in the writings of Plato, who Popper considered to be the intellectual father of both communism and fascism. He also argued that Marx’s materialistic determinism closed the door to any political system of freedom.

Calvin Hayes’ recent book, Popper, Hayek and the Open Society analyzes what he sees as the strengths and weaknesses of their respective defenses of human freedom. Popper and Hayek, each in his own way, made a case for liberty on the basis of the limits of man’s knowledge.

Karl Popper and the Fallibility of Human Knowledge

In the immediate aftermath of the First World War, Hayes explains, Popper became disillusioned with his earlier attraction to Marxism. What bothered him was the fact that no matter what happened, the cleaver Marxist theoretician always seemed to be able to show that it “confirmed” and “proved” Marx ‘s predictions of the coming collapse of capitalism to be correct.

He also was bothered by some of the, then, current trends in the philosophy of science that argued that the truth of a hypothesis was corroborated by the method of verification. That is, the more times a hypothesis passes the rigor of scientific testing, the more we can be confident that it is correct.

In The Logic of Scientific Discovery (1934) and Conjectures and Refutations (1963) Popper reasoned that no matter how many white swans one may search for and see, this in itself does not prove the hypothesis that all swans are white. The discovery of one black swan would prove the hypothesis to be wrong. Hence, the proper scientific method should be based on the construction of conjectures that are open to refutation and falsification.This, he said, should be considered the benchmark of intellectual integrity and honesty.

Such a view, by necessity, must result in us accepting the fact that all of our knowledge and beliefs are tentative and, in principle, open to being proven wrong or less than fully correct at some point in the future. Indeed, in his essays on The Poverty of Historicism, Popper had argued that predicting the future was logically impossible.

If we make one reasonable assumption, that human knowledge grows over time, then there is no way for any human being to successfully predict the future, since that would require him to know "today" that which he will only learn, discover, and know "tomorrow." You cannot already have "tomorrow's" knowledge "today," (otherwise it would already be part of "today's" knowledge). Hence, you cannot fully know what you or others may do that ends up shaping the future, because that will partly depend upon knowledge that is only acquired over the process of time.

The “open society,” Popper reasoned, must be one that allows for error, reconsideration, and a multitude of minds at work in the pursuit of always potentially fallible knowledge. The collectivist social engineers, Popper insisted, suffered from an arrogance of presuming to know the truth required to reconstruct society “according to plan,” with little thought that their conceptions of a “good,” or “just,” or “perfect” society might be flawed or incorrect.

Friedrich Hayek and the Decentralized Knowledge of Society

Hayek’s focus in essays collected in Individualism and Economic Order (1948) and The Counter-Counter Revolution of Science (1955), and in his two master political works, The Constitution of Liberty (1960) and Law, Legislation, and Liberty, 3 vols. (1976-1979), was the fact that matching society’s division of labor is an inescapable division of knowledge. Hayes summarizes Hayek’s argument that human knowledge is multi-layered, often difficult to measure or fully articulate, and dispersed among the members of humanity in a way that cannot be collected, integrated or coordinated even by “the best and the brightest” of human minds.

Hayek concluded the only successful manner in which all this knowledge can be brought to bear so all in society might benefit and take advantage of all that other human beings know and can effectively apply in productive ways is to coordinate their actions through the competitive price system of an open, and functioning market economy. This, Hayek insisted, is why socialist central planning is inherently unworkable.

The Role of Tradition in Science and Society

Hayes also emphasizes that both Popper and Hayek considered that it is impossible to understand or analyze either natural or social phenomena without taking some aspects of the existing order as “given.” These serve as the starting points for studying nature or society. Thus, both of them argued that science and the study of society could not do without some sense of intellectual and cultural “tradition.” In the study of nature, this is the “taken-for-granted” theories and hypotheses of science that form the starting points for critical investigations, including any new conjectures and attempted refutations challenging parts of the existing body of scientific knowledge.

Societal traditions Hayek argued, represent the cumulative experience and wisdom of countless generations, out of which have evolved the “rules” and patterns of human association. They incorporate more knowledge than any one man or one generation could ever know or understand. They form the basis of the foundational elements of the “spontaneous order” of society, in the context of which each new generation lives, acts, thinks and innovatively changes things in incremental ways that transform those human institutions, but often in a manner that only will be appreciated or fully understood long after those changes have been at work.

The Limits of Human Knowledge and the Case for Freedom

A central element to Calvin Hayes’ analysis of Popper and Hayek is to ask how a “positive” case can be made for limits on government control, intervention, or redistribution on what are primarily “negative” arguments about the limits of human knowledge, in the way that both Popper and Hayek basically presented their defenses of freedom.

Hayes suggests that if it can be shown that these limits on human knowledge and knowing are inescapable to the human condition, then it might be justifiable to reason from an “is” to an “ought.” If, as Popper insisted, it is a fact that man cannot be certain of what he may learn tomorrow that might falsify what he believes today, then it would be wrong to replace an “open society” with a “closed” one that imposed a single totalitarian plan on society, under the presumption that some can know enough today to centrally direct everyone’s lives into the future.

And if, as Hayek strongly argued, society is a “spontaneous order” that no one with their inescapably limited, individual knowledge, can ever fully understand or successfully redesign without leaving out much of the knowledge possessed by others that the planner can never hope to know or appreciate, then it would wrong to impose economic central plans or try to redistribute wealth according to some presumed God-like wisdom and knowledge of what would be “fair” in terms of some standard of each receiving their “just rewards” from a paternalistic government.

Thus, Hayes concludes, “negative” insights into the inherent limits of man and his mind, may provide a “positive” case for political and constitutional restrictions on the powers, duties and responsibilities of governments. And it may show, even more strongly, how insightful and important Popper and Hayek have been in the modern battle of ideas over freedom versus force in society.

Wednesday, December 7, 2011

Game Theory and the Dark Side of Envy by Richard M. Ebeling

[The following is a review of Robert Leonard, Von Neumann, Morgenstern and the Creation of Game Theory (New York: Cambridge University Press, 2010) 469 pp. $55. It originally appeared in Freedom Daily (October 2011), published by The Future of Freedom Foundation in Fairfax, Virginia.]

Economist Oskar Morgenstern is best known as the co-developer, with mathematician John von Neumann, of game theory. Game theory emerged out of curiosities about the logic and strategies of games such as chess, where each player must take into consideration the plans and possible moves of an opponent if he is to have any success in winning the game. It culminated in the 1944 publication of Morgenstern and von Neumann’s book, The Theory of Games and Economic Behavior.

It has been applied to the planning of military strategy, as well as for attempting to design or anticipate competitive moves by rivals in the marketplace. Its most famous construction is what is called “the prisoner’s dilemma,” in which two suspected criminals are offered, separately, a lower sentence if one of them confesses and “rats out” the other first. Neither could be convicted if both of them kept their mouth shut, but since neither one can be sure that the other won’t take the deal, they both end up confessing.

It has also been used to explain the logic of cooperative behavior in the marketplace of exchange. In his 1984 book, The Evolution of Cooperation, for example, Robert Axelrod, explained that when people participate in or anticipate multiple trading opportunities with others, there emerge incentives to neither cheat nor deceive. Game theory experiments showed that most people implicitly operate in terms of a psychology of “tit-for tat.” That is, each trader will be honest and reliable in his dealings as long as his trading partner acts the same way. If “Sam” cheats or is in any way dishonest, then “Bob” will “retaliate” in kind. But if “Sam” learns his lesson and starts acting honestly again, then “Bob” will reciprocate, and mutually beneficial and honest trade will be restored.

The logic is that when individuals realize that there are long-run gains from “repeat business” with the same trading partners, it becomes costly to try to obtain short-run gains by acting dishonestly against them. Thus, in the long run, market interactions reinforce and teach the value of honest behavior and good manners.

Robert Leonard’s book, Von Neumann, Morgenstern and the Creation of Game Theory, is an outstanding example of scholarship, matched by an easy flowing writing style that explains often difficult and complex mathematical and logical problems that led up to the development of game theory. It is told in terms of the separate biographies of Von Neumann and Morgenstern who, in fact, had virtually no contact with each other until they were both at Princeton University starting in the late 1930s.

But what I would like to focus on in the remainder of this review is the evolution of Oskar Morgenstern’s ideas in this process, because what is less well known is that Morgenstern was a prominent member of the Austrian School of Economics before the Second World War.

His first book was on Economic Forecasting (1928), which unfortunately has never been translated into English. He presented a biting and insightful analysis as to why quantitative models would never be able to successfully predict the economic future. His three fundamental arguments were (1) that historical events are too unique and interdependently complex to be reducible to statistical probability analysis; (2) any public forecast easily will result in people taking the forecast into consideration, and therefore acting in ways different than what the forecast presumed; and (3) how individuals act is dependent on their expectations of how they expect others to act, and understanding and interpreting people’s subjective meanings and intentions is not readily reducible to strictly quantitative categories and classifications for statistical study.

Leonard traces out the development of Morgenstern’s thinking in the 1920s and 1930a under the influence of Austrian Economists such as Ludwig von Mises and Hans Mayer, and his friendship with Karl Menger, Jr., the son of the founder of the Austrian School.

But what he also brings out is how Morgenstern increasingly turned against his “Austrian” roots, ridiculing in print Mises’s views on economic theory and policy, and telling his various economist friends that he considered F. A. Hayek’s work on money and business cycles to be “worthless” – some of the very contributions that resulted in Hayek being awarded the Nobel Prize in Economics in 1974!

Even worse, after 1934, with Hayek now a professor at the London School of Economics, and Mises teaching in Geneva, Switzerland, Morgenstern attempted to portray himself as the “leader” of the Austrian School in an Austria that was now a fascist-type authoritarian dictatorship. He worked as a senior advisor to the Austrian government, often offering policy advice far removed from a free market perspective. And in his 1934 book, The Limits of Economic Policy, he expressed impatience with democratic government compared to an authoritarian system. (When the book appeared in English in 1937, he deleted its anti-democratic passages.)

In addition, Leonard points out that Morgenstern’s diary from this period is sprinkled with often heavily anti-Semitic sentiments, in spite of the fact that many of the members of the Austrian School at this time were Jewish (including Mises), and who had been among those encouraging and supportive of his own work and professional advancement.

Finally, while during his life-time Morgenstern was hailed as the co-developer of game theory, Leonard makes it clear that in fact virtually all of its theoretical formulations and strategy constructs in their 1944 book was the work of von Neumann (also of Jewish ancestry). Morgenstern’s contribution was mostly a couple of chapters showing the possible applications of game theory to economics. Leonard quotes Morgenstern’s diary that he often could barely keep up with von Neumann’s mathematical expositions.

I had the privilege of having Oskar Morgenstern as a professor at New York University just before his death in 1977. He was an excellent lecturer, and very generous with his time to share his ideas and memories of the “old Vienna days,” with someone interested in the history of the Austrian School.

This is what made Leonard’s book so much of a shock. It shows an unflattering, dark side of a fascinating man. A man who, at least during that earlier period between the two World Wars, too frequently demonstrated envy, arrogance, and prejudice against some of the very people who helped make his own professional success possible.