Hayek’s Transformation on Knowledge in Economics

“Economics and Knowledge,” which Hayek published in 1937, signified a break with his past thinking and was a decisive new beginning in his methodological approach. Hayek had always been deeply interested in the methodological and philosophical aspects of social thinking. This article, both in Hayek’s mind and as others read it, marked the start of a transformation in Hayek’s intellectual journey. He came to share the methodological skepticism so typical of the Austrian School, which threw the theoretical possibility of knowing society into doubt. The weaknesses in the economic method of equilibrium that Hayek described concerned the “assumptions about foresight.” Hayek referred to both the absolute need to extend the static equilibrium method to dynamic situations if we wanted a satisfactory description of reality, and to the related need to have knowledge about individuals’ expectations. Moreover, equilibrium theory, described by Hayek as the “system of tautologies,” usually applied to an individual, while the extension of the theory to many individuals and their interactions remained inapplicable.