Fifty years ago today, the great economist and political philosopher F. A. Hayek was awarded the Nobel Prize in Economic Science. He used it as the opportunity to deliver a blistering lecture on ‘The Pretence of Knowledge’ — arguing that economists knew far less than they thought they knew, and that it was very cheeky of them to call economics a ‘science’ at all.

The award came, after all, in the mid-1970s, a decade marked by considerable economic turbulence, including oil price shocks, stagflation and unemployment. That was the legacy of twenty-five years of centralised ‘economic planning’ and Keynesian policies that saw government intervention as the way to manage the upswings and downswings of economic cycles. (The trouble was that politicians found it much easier to do the spending bit than the cutting-back bit.) 

I remember Hayek telling me that the success of an economy was probably inversely proportional to the number of economists it had. And when the professional wisdom of the greater majority was as wrong as it was, that should come as no surprise.

His Nobel lecture ‘The Pretence of Knowledge’ searingly critiques the assumptions underpinning economic planning and highlights the limitations of knowledge in the context of complex economies. 

At the heart of his argument is the idea that knowledge is scattered, partial, fleeting and often mistaken. So how are central planners to deal with that? And there is just so much information in a modern economy — millions of buyers, millions of sellers, millions of products and processes and distribution chains that are local and national and international — all of which is relevant to how things turn out. No single individual or institution, observed Hayek, could ever possess all the information needed to make fully informed economic decisions for a whole society. Rather, the relevant information is dispersed among countless individuals, each with their own unique and focused insights and knowledge of their personal values and circumstances. It is this diverse spread of information that feeds the market economy and steers production to the goods and services that people want; not what planners might think they want.

To Hayek, the problem of creating a rational economic order was not the planners’ focus on steering production and distribution. It was a problem of knowledge — what should be produced and to whom it should be distributed. That is a problem that markets solve minute by minute, across the world, and very efficiently. No government planner could compete with that.

Hayek warned that economists’ and politicians’ belief in their ability to control economic outcomes is a dangerous illusion. They neither understand the details of how economic life works, nor can they predict it (as genuine scientists might predict the natural world). Their ‘pretence of knowledge’ makes them overconfident of their powers to manipulate economic systems, resulting all too often in unwelcome and unanticipated results. Their interventions (such as wage and price controls) disrupt market signals, leading to gluts and shortages, waste and inefficiency. 

Hayek was in no doubt too that the assumption of the supposed experts that they can dictate the best course of action for society could lead to increasing authoritarianism as decision making shifts from individuals to the authorities. The threat to individual freedom is obvious. 

As contemporary politicians expand government into more and more corners of our lives, Hayek’s warning from 1974 becomes increasingly important. To put it simply, economists and politicians must realise the limits to their knowledge — and should have a lot more humility about that fact.