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May 08, 2008
Happy 109th, Fritz!
Don Boudreaux
F.A. Hayek was born on this day in 1899. To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:
Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.
Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.
Posted by Don Boudreaux in Complexity and Emergence, Seen and Unseen, The Economy, The Future, Trade | Permalink
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Comments
"..unforeseeable changes in the particulars that a high degree of predictability.."
He sees the unseeable when he predicts greater pedictability.
He is simply stating that as long as Jensen's inequality holds, we will approach the limit of accuracy. But his theory, beyond that, does not tell us when we reach the limit of accuracy and a new configuration is needed. If he is defining a limit on certainty, then take a shot a bounding the uncertainty.
Posted by: Matt | May 8, 2008 12:47:55 PM
My piece to Hayek is here:
Posted by: John V | May 8, 2008 4:27:10 PM
He's saying that "orders" (overall results) become apparent (predictable) if and only if they spring from the bottom up through a complicated web of interactions that cannot possibly be guided or confined.
This is my attempt to translate Hayekian thought for the day.
Posted by: Unit | May 8, 2008 10:20:28 PM
Happy Birthday F A Hayek,
Posted by: chandra | May 8, 2008 11:36:29 PM
"...complicated web of interactions..."
Maybe in Hayek's time, but given the original investment, assuming no monopoly and efficiency then information theory gives you a lower bound on the web, both structure and activity.
Posted by: Matt | May 9, 2008 12:31:50 AM
I have yet to see any information theorists striking it rich on the stock market and retiring. I suspect that while there is in fact less than infinite uncertainty, there is also very far from enough certainty to be able to push X buttons to get Y results. That seems to have been pretty well demonstrated through history.
Posted by: Hammer | May 9, 2008 8:43:43 AM
Hammer,
I do not think so.
Look at the string of growth and recessions, Mankiw published the chart.
The information theorist, many of whom work as quants, can see the economy counting down to extreme accuracy, then comes a reorg.
The information theorist does know when it is recession time before the rest of us.
Posted by: Matt | May 9, 2008 8:59:08 AM
When Hayek discusses "predictability", he is careful to limit his definition to "patterns" or a "general order" that will "form itself", and warns against anyone being able to predict specific outcomes. He are two quotes from Law, Legislation and Liberty, v. I:
"The theory of evolution proper provides no more than an account of a process the outcome of which will depend on a very large number of particular facts, far too numerous for us to know in their entirety, and therefore does not lead to predictions about the future. We are in consequence confined to 'explanations of the principle' or to predictions merely of the abstract pattern the process will follow.""... we shall be able to predict only the general character of the order that will form itself..."
What Hayek is saying, thus, in terms of "predictability", is that the order that emerges without government interference will be more natural, like a frog that develops in an unpolluted lake. You might not know exactly what it will look like, or how big it will grow, but it will be possible to predict that a certain froggy pattern will form itself. Government is nuclear waste dumped into that lake, and because of its interference it will be impossible to predict even the pattern or shape of the mutated frog monstruosity that will thus be formed.
Posted by: Fabio Franco | May 9, 2008 10:16:45 AM
