Pretense of Knowledge
The Great Depression brought about the era of government “fixes” to the economy. President Herbert Hoover responded aggressively to the downturn, using his political power to try to reverse the economy’s free fall. When that didn’t work, President Franklin D. Roosevelt doubled down on those activities, creating the most interventionist federal government our nation had ever seen. He put together what The New York Times dubbed the “Brain Trust,” a group of university professors who thought to remake the economy into one controlled and planned by the central government. They sought to fix prices and wages, create jobs through infrastructure spending, stimulate consumer spending via relief programs, and regulate every sector of the U.S. economy. Despite the Depression lingering for all three of his terms, Roosevelt’s interventionist ways have influenced our government’s actions in every decade since the Depression ended.
There were some economists who pushed back against this newfound attraction to central planning. In 1974 one such economist, Friedrich Hayek, won the Nobel Prize in economics, and his acceptance speech has become a seminal work on experts’ hubris.
By the 1970s the economics profession had progressed a lot since the Depression years, devising complex mathematical models which they used to influence government policy. In his speech, Hayek complimented these models but pointed out how limited they really were, describing the popular notion that complicated statistical modeling could be used to plan the economy as a “Pretense of Knowledge.”
He compared the economy to a sports game, saying through study and observation we can begin to understand what it takes to win the game, but even the savviest experts can’t use this knowledge to predict the outcomes. He said,
“If we knew a few particular facts in addition to our general knowledge of the ability of the individual players, such as their state of attention, their perceptions and the state of their hearts, lungs, muscles, etc., at each moment of the game, we could probably predict the outcome. Indeed, if we were familiar both with the game and the teams we should probably have a fairly shrewd idea on what the outcome will depend. But we shall of course not be able to ascertain those facts and in consequence the result of the game will be outside the range of the scientifically predictable, however well we may know what effects particular events would have on the result of the game.”
Each March brings us the college basketball tournament, and along with it the filling out of brackets. Millions of brackets are filled out, attempting to predict the winners and losers among 68 college basketball teams. There are experts in the field filling out brackets, those who watch hundreds of games during the season and study player tendencies and coaching ability. Invariably, these brackets wildly differ, even among the experts. Even with all they know about the teams and players, even with all the statistical analysis afforded analysts in today’s world, there is little agreement among the experts, and by the end of the tournament, there are a lot of busted brackets.
In other words, our knowledge of how things work and what our economy needs has greatly expanded and continues to grow. But for our politicians to claim they have a Rooseveltian “Brain Trust” of experts who are so smart they can pull a lever or two and manage our enormously complicated economy is hubris. It is a pretense of knowledge. But that certainly doesn’t stop them. As Hayek noted,
“[S]o long as the public expects more there will always be some who will pretend, and perhaps honestly believe, that they can do more to meet popular demands than is really in their power.”
Take note of the stimulus bill of 2009, with its accompanying predictive graphs of what the unemployment rate would be with and without the trillion dollars of government spending to direct the economy. The administration brought in some of the brightest and most well-respected minds in economics, who brought to bear all their sophisticated statistical modeling to predict how the economy would perform. And they failed miserably. Within months, those graphs were wildly inaccurate. Our government tried a multitude of bailouts and stimulus spending programs, mostly to no avail. Unemployment stayed stubbornly high and economic growth was anemic.
This has been the fate of nearly every major federal legislation that purports to fix the economy. As long as we expect these actions to work where none has before, there will always be someone there promising to solve our problems. The economics profession is fascinating and able to offer many important insights, but let us be wise enough to understand what it can and cannot do.
Speech: Friedrich August von Hayek Nobel Prize Speech
Article: Economic Paper
Blog: Quantitative Easing Enriched Banks At The Expense Of Households