 Hayeks Price Fan Simile: The Seeds of the Economy of Knowledge? - Journal of Private EnterpriseCategories: Fall 2019 Capitalism Economy of KnowledgeDavid Chandler Thomas, Ball State Universityindex.php?actionajaxrsGDMgetPagersargsJournal of Private Enterprise Vol 34 No 3 Fall 2019 PARTE4.pdfrsargs0TheJournalofPrivateEnterprise343,2019,4358HayeksPriceFanSimile:TheSeedsoftheEconomyofKnowledge?JamesMcClureBallStateUniversityDavidChandlerThomasBallStateUniversity___AbstractFriedrichHayeksresearchfocusshiftedfromaformalanalysisofthecapitalstructureintheearly1930stothestudyoftheeconomyofknowledgein1945.Henever,asitistoooftensaid,abandonedeconomics.TheabandonmentnarrativeimpedesunderstandingofAustrianeconomicsgenerallyandHayeksworksmorespecifically.Towardcorrectingthefalsenarrative,weexploreconnectionsbetweenhis1945thesisandthepricefansimilehesetoutin1931tofacilitateunderstandingoftheroleplayedbyemerginginputpricesasmorecapitalisticmethodsofproductionareadopted.Expandingonthepricefansimile,wealsoseektodeepentheunderstandingoftheallocativemarvelthatpricesachieveinthefreemarketsystem,and,consequently,theutterimpracticalityofusingsocialistcalculationinplaceofthefreemarket.___JELCodes:B25,B53Keywords:F.A.Hayek,pricefansimile,economyofknowledge,capitalisticproduction,divisionoflabor,divisionofknowledgeAdamSmithfamouslyarguedthatthegreatestimprovementsintheproductivecapacityofmankindwereduetotheexpansionandever-greaterrefinementsinthedivisionoflabor.Hayeksimplypointedoutthatthedivisionoflaborimpliesalsoadivisionofknowledge...Hayekneverabandonedeconomics.PeterBoettke2017I.IntroductionFromtheearly1930sto1945,FriedrichHayeksresearchoncapitalstructureandmarketequilibriumgavewaytoaninvestigationoftheeconomyofknowledgethatmarketpricesmarvelouslydeliverharmonizingthediverseindividualplansofmarketparticipants.Ofthisperiod,Hayeklatersaidthatheleftpureandnarrowtheory,orindex.php?actionajaxrsGDMgetPagersargsJournal of Private Enterprise Vol 34 No 3 Fall 2019 PARTE4.pdfrsargs144McClureThomasTheJournalofPrivateEnterprise343,2019,4358technicaleconomics,topursueanexplanationofhowanoverallorderofeconomicactivityisachievedwhichutilizedalargeamountofknowledgewhichwasnotconcentratedinanyonemindbutexistedonlyastheseparateknowledgeofthousandsormillionsofdifferentindividualsHayek1967,pp.9192.TheseexcerptsarepartofalengthyHayekquotationthatBruceCaldwellhighlightedastheepigraphofhisseminalarticlein1988,HayeksTransformation.Caldwell1988,p.538aptlyconcludes:Becausehefeltthatthecoordinationproblemwassocrucial,Hayekultimatelyturnedawayfromtechnicaleconomictheorytosearchforsolutionsemphasisadded.OnlyincautiousreadingsofCaldwellthatomitthequalifiertechnicalhaveledtothefalse,unqualifiedconclusionthatHayekabandonedeconomics.1Forexample,Skidelsky2006,2018,p.87,perhapsaftermisreadingCaldwell,maintainsthatHayekeventuallyabandonedeconomicsforpoliticalphilosophy.BoettkesdisagreementwithSkidelsky,andwithallwhosayHayekabandonedeconomics,isthateconomicsisdefinedsonarrowlyastoexcludetheinstitutionaltraditionwithinwhichAdamSmith17761976theorizedthatthedivisionoflaborislimitedbytheextentofthemarket.Smithsdiscovery,Boettkeexplains,inspiredHayeks1937workonthedivisionofknowledge,leadinghimstraightforwardlyintoinvestigationsoflaw,legislation,andliberty:Hayeksepistemicinstitutionalism,asarticulatedinthe1930sand1940s,providedthefoundationforhisownreconstructionandrestatementofliberalpoliticaleconomyasevidencedinTheConstitutionofLibertyandLaw,LegislationandLibertyBoettke2017.Thispaperpresentsother,complementaryreasonstothinkthatHayekstransitionfromthe1930sthroughthe1940swasanythingbutanabandonmentofeconomics.OurreasonstracetoapricefansimilethatHayekusedin1931todrawattentiontotheimportantroleplayedbyinputpricesasafreemarketeconomysproductionbecomesmorecapitalistic.LeveragingHayeks1937,1945workonthedivisionandeconomyofknowledge,werevisithis1931discussionofthepricefan.Withthebenefitofhindsight,thepricefansimilesuggestsitselfasaprecursortoHayekseconomyofknowledgethesis.ThepricefansimileisnotonlyvaluablefordeepeningunderstandingofHayekschangeinfocus,butalsoforits1Readtogether,CaldwellandHayekmakeitclearthatratherthanabandoningeconomicsperse,Hayekmerelyleftbehindthenarrow,purist,technical,equilibriummodelspopularamongeconomistsofthepre-1940sera.index.php?actionajaxrsGDMgetPagersargsJournal of Private Enterprise Vol 34 No 3 Fall 2019 PARTE4.pdfrsargs2McClureThomasTheJournalofPrivateEnterprise343,2019,435845ownsake,asawaytoillustratetheinterconnectednessofthedivisionofknowledge,theeconomyofknowledge,andthedivisionoflabor.Theremainderofthepaperisorganizedasfollows:section2tracesHayeks1945economyofknowledgethesistohis1937critiqueoftheformaleconomicanalysisoftheeraforitsfailuretoaccountfortheproblemofthedivisionofknowledge.Section3revisitsHayeks1931pricefansimile,toexplainitsconnectiontoHayekssubsequentworkandtoexpanduponthesimileinordertoovercomethetrepidationheexpressedin1931longbeforehisresearchfocusshiftedtotheeconomyofknowledgein1945.2Section4exploresthebroaderimplicationsofthepricefansimilethedivisionandeconomyofknowledgethathavebeenachievedbyourextensivemarketsystem,makingitobviousthatsocialistcalculationisimpossible.Section5concludes.II.FromtheDivisionofKnowledgetotheEconomyofKnowledgeIn1937,inEconomicsandKnowledge,Hayekbeginstodiscusstwoquestionsabouttheassumptionsandoperationalismofformalequilibriumeconomics,settingsetuphisworkontheeconomyofknowledgenearlyadecadelater.First,towhatextent,Hayek1937,p.33asked,isittruethatformaleconomicanalysisconveysanyknowledgeaboutwhathappensintherealworld?Hecontendeditisonlyinsofarasweareabletofillthoseformalpropositionswithdefinitestatementsabouthowknowledgeisacquiredandcommunicatedthatformalequilibriumanalysis...canbeturnedintopropositionswhichtellusanythingaboutcausationintherealworld1937,p.33.Second,Hayek1937,p.43wonders:Whatcouldbethereasonforconcernwithafictitiousstateofequilibrium?Theonlyjustification,hereasons,istobringforthverifiablepatternpredictionsregardinganempiricaltendencytowardsequilibriump.44.Here,Hayekputsforwardachallengetocreateoperational2Atthispointthesimilebecomesliabletomisleadanditisimportanttokeepinmindallthetimethatthefanreferstopricerelationshipsonly,butthatthelengthofthestructureofproductionwillmoveinthereversedirectioncomparedwiththewidthofthefan.Whenthepricefanopens,thestructureofproductionisshortened,andviceversa,writesHayek19312012,p.261,fn.5.ThistrepidationmayexplainwhyHayekneveragaininhiscareerrevisitedthissimile.InthispaperweresurrectittounderminethefalsenarrativethatHayekabandonedeconomicsandtoprovideavisualillustrationofthelinkagesbetweenmarketsize,thedivisionofknowledge,andtheeconomyofknowledge.index.php?actionajaxrsGDMgetPagersargsJournal of Private Enterprise Vol 34 No 3 Fall 2019 PARTE4.pdfrsargs346McClureThomasTheJournalofPrivateEnterprise343,2019,4358hypothesesabouttheconditionsunderwhichtheknowledgeandintentionsofpurposesofthedifferentmembersofsocietywillcomemoreandmoreintoagreement,or,alternativelystated,theconditionsunderwhichtheexpectationsofthepeopleandparticularlytheentrepreneurswillbecomemoreandmorecorrect.Puttingitinthenegative,Hayek1937,p.43criticizedtheformaleconomicsoftheerabecauseithadsimplyassumedthatthesubjectivedata,thedividedknowledgedispersedacrossthemanyindividualmindsofthoseinsociety,coincidewiththeobjectivefacts.Inthisway,economicshadjumpedoveranessentiallink1937,p.52,overlookingtheproblemofthedivisionofknowledgeaproblematleastasimportantastheproblemofthedivisionoflabour1937,p.49.Hayekhighlightedtwoavenuesbywhichtheproblemofthedivisionofknowledgehadbeenjumpedover.Onewasviatheassumptionthateverybodyknowseverythingtoevadeanyrealsolutionoftheproblemthattheypretendtosolve,namely,howthespontaneousinteractionofanumberofpeople,eachpossessingonlybitsofknowledge,bringsaboutastateofaffairsinwhichpricescorrespondtocosts,etc.,andwhichcouldbebroughtaboutbydeliberatedirectiononlybysomebodywhopossessedthecombinedknowledgeofallthoseindividuals1937,p.49.Thesecondavenue,bywhichthedivisionofknowledgeproblemwasjumpedover,wasbytheinsidiousleapinapplyingtheequilibriumanalysisofanisolatedindividualtotheanalysisofthesituationinasociety1937,p.39.By1945,Hayekhadabandonedtechnicalequilibriumeconomicmodelingentirely.Hislastattempt,publishedin1941asThePureTheoryofCapital,wasinfactonlythefirsthalfofagreatbookthatheintendedtoassuagethecriticsofhis1931bookPricesandProduction.Asked,WhatmessagedoyouwanttoconveyinthatbookThePureTheoryofCapital?heresponded:Toputitbriefly,IthinkitsthatwhileBöhm-Bawerkwasfundamentallyright,hisexpositionintermsofanaverageperiodofproductionwassooversimplifiedastomisleadintheapplication.AndthatifwewanttothinktheBöhm-Bawerkideathrough,wehavetointroducemuchmorecomplexassumptions.Onceyoudothis,thethingsbecomesodamnedcomplicateditsalmostimpossibletofollowit.Hayek1994,p.141Title Hayeks Price Fan Simile: The Seeds of the Economy of Knowledge?AuthorsCreators: James McClure, Ball State UniversityKeywords: F. A. Hayek, price fan simile, economy of knowledge, capitalistic production, division of labor, division of knowledgeMcClure, James; Thomas, David Chandler 2019. Hayeks Price Fan Simile: The Seeds of the Economy of Knowledge?. The Journal of Private Enterprise, 343: 43-58. 