Sunday, July 22, 2012

Lessons from Hayek

There are at least two excellent economics lessons to be derived from the Hayek quote below.
1. Ludwig von Mises (and others, of course, such as George Reisman) always stressed that economic knowledge is accumulated over the millennia and can be considered in the same way as the accumulation of physical capital. We all are heirs to the discovery of fire and the invention of the wheel, for example.
2. There are many stages to the production process. Each economic actor needs to master only his specific stage by producing goods and services desired by the next stage of production. No one needs to master or can master all stages of production. The coordinating mechanism is the interest rate, also known as the rate of return, for each stage of production.

Thus, the old adages of "tend to your own knitting" and "mind your own business" take on added respect. We also see the folly of interest interventions by central banks. These interventions thwart the coordinating process relating to the stages of production. Thusly, businesses are encouraged to invest for the sake of investing per se and not for the sake of meeting real market demands.

The Latest from Cafe Hayek

Quotation of the Day…
Posted: 21 Jul 2012 04:38 AM PDT

… is from pages 149-150 of the 1979 Liberty Fund edition of Hayek’s 1952 study, The Counter-Revolution of Science (footnote excluded):

We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we are doing. Though our civilization is the result of a cumulation of individual knowledge, it is not by the explicit or conscious combination of all this knowledge in any individual brain, but by its embodiment in symbols which we use without understanding them, in habits and institutions, tools and concepts, that man in society is constantly able to profit from a body of knowledge either he nor any other man completely possesses. Many of the greatest things that man has achieved are the result not of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand. They are greater than any individual precisely because they result from the combination of knowledge more extensive than a single mind can master.

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