The Black Market for Credit

December 19, 2008 at 23:48 | Posted in economy, inflation, interest rates, payday loans | Leave a comment

The current credit crisis seems to me like a perfect illustration of what happens when the governmnet tries to establish price ceilings for goods in high demand and low supply. One of the effects is scarcity: if banks are supposed to lend at effectively zero, they will refuse unless forced to by the government. That’s no different from farmers refusing to sell their grain at government mandated prices below the free market price. 


But – does this mean there is no credit available? I don’t think so – if I went to the local Money Mart, I could get credit on the spot. At a price. Not the fictional interest rate set by the government, but the interest rate agreed to by free actors in a free market. Granted, many people who use payday loans are high-risk folks who take drugs, gamble, and are otherwise indulging in that most expensive of hobbies – stupidity. So one should not be surprised that these folsk are charged pretty stiff interest rates.

But, it is no longer only druggies and gamblers who use these services, but increasingly middle class folks as well. And to make matters even more interesting, the effective cost of borrowing from banks seems to be going through the roof as well.

It’s easy to decry the payday loan folks as loan sharks, and to seek some kind of political solution. But this misses the basic problem that the price of credit is far above the official interest rate. High average interest rates mean at least two things. The first, and most obvious, is that there is a growing number of people who are unlikely to pay back the money they are lent. Interest rates are compensation for risk, and the higher the risk, the greater the interest rates. More and more people likely to declare bankruptcy is clearly not an indicator of a stable economy. 

The second is less obvious – and I may be wrong about this – but rapidly rising interest rates can also mean that lenders feel the need to protect themselves against inflation. Charging the official interest rate would not be profitable even if the debtor was completely solvent and guaranteed his job for many years to come. Lenders not only have to secure themselves against the risk of individual debtors going bankrupt, but also against the effects of inflation.

So, maybe the interest rates charged by payday loan operators – when averaged out over the entire economy – are also an indicator of inflation? Maybe even a better indicator of inflation than many others? I haven’t given much thought to how one could calculate this, but maybe somebody smarter than I – and with access to good data – could.

One thing, however, is clear: there is no difficulty to get credit – if you are willing to pay the market interest rate. The reason banks are not lending is that they are not willing to lend at the ‘official rate’. Go to your local bank and offer them 30 percent interest, and I’m sure you’ll get a loan (provided you have collateral). After all, if your local payday loan operator will be more than happy to lend you money for the right price – why wouldn’t banks with their much greater resources want a piece of the action as well?

If you want a loan, you can have one – just be willing to pay the market price.

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Want some part of the stimulus action? Apply with this form.

December 18, 2008 at 02:05 | Posted in Canada, economy, satire, stimulus, Terence Corcoran | Leave a comment
Canada’s own brilliant libertarian – Terence Corcoran – with a major national soapbox – the Financial Post – cooked up this little beauty. What more can be said?
(Click for full view)

It’s your own fault if you get killed by the RCMP

December 14, 2008 at 03:11 | Posted in Dziekanski, Police Violence, RCMP | Leave a comment

When the killing of a Polish immigrant by the RCMP made headlines around the world last year, many people hoped that this might lead to some kind of positive within Canada’s iconic police force. Well, these hopes are squashed for the time being. Read on.

No charges for RCMP in airport Tasering

‘THEY BLAMED HIM,’ MOTHER SAYS

Polish immigrant Robert Dziekanski is secured by airport police on the floor of the Vancouver airport in this video footage from Oct. 14, 2007.

Jolts not direct cause of death, review finds

Dec 13, 2008 04:30 AM


WESTERN CANADA BUREAU CHIEF

VANCOUVER–The mother of a Polish immigrant who died after being hit with a Taser by the RCMP at the Vancouver airport said yesterday she is angry that officials seem to be blaming her son for the tragedy.

Yesterday, prosecutors announced there would be no charges against any of the four RCMP officers who confronted and used a Taser to stun Robert Dziekanski before he died in October 2007.

A review by prosecutors said Dziekanski, 40, was a panicked alcoholic possibly in a state of delirium at the time. The review also concluded his death was not directly caused by the Taser jolts but they were one of several contributing factors, along with heart disease, alcohol withdrawal, the stress of being restrained and a decreased ability to breathe due to an officer kneeling on him, said Stan Lowe, a spokesperson for the B.C. Criminal Justice Branch.

Pathology reports show that Dziekanski, who did not have any alcohol or drugs in his system at the time of the shooting, died of a cardiac arrest.

“I’m so angry and so disappointed,” said Zofia Cisowski, Dziekanski’s mother, in an interview from her home in Kamloops, B.C. “There is nothing now for me. Nothing. They blamed him and said he died of a heart attack and he was an alcoholic. What does that have to do with him being shot?”

Cisowski, 71, waited for hours for her son at the Vancouver International Airport on Oct. 14, 2007, but was told that he never arrived on his flight from Poland. The two failed to connect with each other because of miscommunication and security barriers at the airport.

A frustrated Dziekanski, who could not speak English and was petrified of flying, was left wandering at the airport for hours. Around midnight, RCMP officers were called to the international arrivals area after a 911 call of a disturbance.

They confronted Dziekanski, and within 24 seconds of their encounter, one officer, identified yesterday for the first time as Const. Millington, took out his Taser gun and used the weapon on the unarmed man.

The province’s attorney general, Wally Oppal, said in an interview that after a thorough and independent review of the evidence provided by the RCMP, which had conducted its own investigation, the conclusion was unanimous.

“There was not a substantial likelihood of conviction,” said Oppal.

The three possible charges against the four officers were assault, assault with a deadly weapon and manslaughter.

Poland’s consul general in Vancouver said it’s up to the Braidwood Inquiry, a provincially appointed commission, to find the answers that are still missing.

“My government expresses great disappointment that there are no charges,” said Tomasz Lis.

The Braidwood Inquiry is scheduled to begin again in mid-January after being delayed twice this fall after the RCMP refused to testify at the public inquiry because of the criminal investigation.

RCMP assistant commissioner Al MacIntyre said yesterday the four officers involved in the Tasering incident will be testifying when the inquiry resumes.

Two of the officers involved have been transferred to detachments in the east, while two remain in British Columbia. One officer, Corp. Monty Robinson, is under suspension for an unrelated incident after a Jeep he was allegedly driving while off-duty struck and killed a young man in the suburb of Tsawwassen two months ago. Robinson is scheduled to appear in court in January to face charges. Police recommended he be charged with impaired driving causing death.

Supt. Wayne Rideout, who was in charge of the Dziekanski investigation, said despite initial reports that the weapon was deployed twice, investigators subsequently learned it had been fired five times.

Rideout said RCMP could not correct that misinformation until now because of the ongoing criminal investigation

 ===

The one little detail that makes little sense to me is this: how come Canada approves the immigration of a man who speaks neither of the official languages? 

December 14, 2008 at 03:06 | Posted in Uncategorized | Leave a comment

How a Soviet Officer Saved the World

December 14, 2008 at 01:57 | Posted in Uncategorized | Leave a comment

At last, I have internet again. But, I can’t think of anything decent to blog about today, so this unfortunately little known story should do. 

‘I Had A Funny Feeling In My Gut’; Soviet Officer Faced Nuclear Armageddon

The Washington Post

February 10, 1999, Wednesday, Final Edition

BYLINE: David Hoffman, Washington Post Foreign Service

It was just past midnight as Stanislav Petrov settled into the commander’s chair inside the secret bunker at Serpukhov-15, the installation where the Soviet Union monitored its early-warning satellites over the United States.

Then the alarms went off. On the panel in front him was a red pulsating button. One word flashed: “Start.”

It was Sept. 26, 1983, and Petrov was playing a principal role in one of the most harrowing incidents of the nuclear age, a false alarm signaling a U.S. missile attack.

Although virtually unknown to the West at the time, the false alarm at the closed military facility south of Moscow came during one of the most tense periods of the Cold War. And the episode resonates today because Russia’s early-warning system has fewer than half the satellites it did back then, raising the specter of more such dangerous incidents.

As Petrov described it in an interview, one of the Soviet satellites sent a signal to the bunker that a nuclear missile attack was underway. The warning system’s computer, weighing the signal against static, concluded that a missile had been launched from a base in the United States.

The responsibility fell to Petrov, then a 44-year-old lieutenant colonel, to make a decision: Was it for real?

Petrov was situated at a critical point in the chain of command, overseeing a staff that monitored incoming signals from the satellites. He reported to superiors at warning-system headquarters; they, in turn, reported to the general staff, which would consult with Soviet leader Yuri Andropov on the possibility of launching a retaliatory attack.

Petrov’s role was to evaluate the incoming data. At first, the satellite reported that one missile had been launched — then another, and another. Soon, the system was “roaring,” he recalled — five Minuteman intercontinental ballistic missiles had been launched, it reported.

Despite the electronic evidence, Petrov decided — and advised the others — that the satellite alert was a false alarm, a call that may have averted a nuclear holocaust. But he was relentlessly interrogated afterward, was never rewarded for his decision and today is a long-forgotten pensioner living in a town outside Moscow. He spoke openly about the incident, although the official account is still considered secret by authorities here.

On the night of the crisis, Petrov had little time to think. When the alarms went off, he recalled, “for 15 seconds, we were in a state of shock. We needed to understand, what’s next?”

Usually, Petrov said, one report of a lone rocket launch did not immediately go up the chain to the general staff and the electronic command system there, known as Krokus. But in this case, the reports of a missile salvo were coming so quickly that an alert had already gone to general staff headquarters automatically, even before he could judge if they were genuine. A determination by the general staff was critical because, at the time, the nuclear “suitcase” that gives a Soviet leader a remote-control role in such decisions was still under development.

In the end, less than five minutes after the alert began, Petrov decided the launch reports must be false. He recalled making the tense decision under enormous stress — electronic maps and consoles were flashing as he held a phone in one hand and juggled an intercom in the other, trying to take in all the information at once. Another officer at the early-warning facility was shouting into the phone to him to remain calm and do his job.

“I had a funny feeling in my gut,” Petrov said. “I didn’t want to make a mistake. I made a decision, and that was it.”

Petrov’s decision was based partly on a guess, he recalled. He had been told many times that a nuclear attack would be massive — an onslaught designed to overwhelm Soviet defenses at a single stroke. But the monitors showed only five missiles. “When people start a war, they don’t start it with only five missiles,” he remembered thinking at the time. “You can do little damage with just five missiles.”

Another factor, he said, was that Soviet ground-based radar installations — which search for missiles rising above the horizon — showed no evidence of an attack. The ground radar units were controlled from a different command center, and because they cannot see beyond the horizon, they would not spot incoming missiles until some minutes after the satellites had.

Following the false alarm, Petrov went through a second ordeal. At first, he was praised for his actions. But then came an investigation, and his questioners pressed him hard. Why had he not written everything down that night? “Because I had a phone in one hand and the intercom in the other, and I don’t have a third hand,” he replied.

Petrov, who was assigned to the satellite early-warning system at its inception in the 1970s, said in the interview that he knew the system had flaws. It had been rushed into service, he said, and was “raw.”

Petrov said the investigators tried to make him a scapegoat for the false alarm. In the end, he was neither punished nor rewarded. According to Petrov and other sources, the false alarm was eventually traced to the satellite, which picked up the sun’s reflection off the tops of clouds and mistook it for a missile launch. The computer program that was supposed to filter out such information was rewritten.

It is not known what happened at the highest levels of the Kremlin on the night of the alarm, but it came at a climactic stage in U.S.-Soviet relations that is now regarded as a Soviet “war scare.” According to former CIA analyst Peter Pry, and a separate study by the agency, Andropov was obsessed with the possibility of a surprise nuclear attack by the West and sent instructions to Soviet spies around the world to look for evidence of preparations.

One reason for Soviet jitters at the time was that the West had unleashed a series of psychological warfare exercises aimed at Moscow, including naval maneuvers into forward areas near Soviet strategic bastions, such as the submarine bases in the Barents Sea.

The 1983 alarm also came just weeks after Soviet pilots had shot down Korean Air Lines Flight 007 and just before the start of a NATO military exercise, known as Able Archer, that involved raising alert levels of U.S. nuclear forces in Europe to simulate preparations for an attack. Pry has described this exercise as “probably the single most dangerous incident of the early 1980s.”

A Crumbling Warning System

The Soviet-era antimissile early warning system has deteriorated and some experts say it is disintegrating. Because of malfunctioning satellites, Russia now is blind to any hostile missile launches for several hours in each 24-hour period, and the ground-based radar warning system shows at least two gaps, one expert says.

Orbiting satellites

Satellites in high elliptical orbits around Earth scan Earth’s edge against black background of space for hostile missile launches.

Problem: Only three such satellites are active; the last was launched in May 1998. This leaves serious gaps in the Russian early-warning system and increases the risk of miscalculation on whether a satellite signals a real missile launch or a false alarm.

Geostationary satellites

Satellites in geostationary orbit are synchronized with Earth’s rotation and monitor a fixed location.

Problem: Only two such satellites are active; last launch, in April 1998, apparently was unsuccessful.

Radar warning system

A ground-based radar system watches for missiles rising above the horizon and is supposed to spot the missile several minutes after the satellites have spotted it.

Problems: The ground-based warning system also has problems. One radar in Latvia was closed last August, apparently leaving a large gap in radar coverage. Another gap exists to the east, from the Pacific, where U.S. Trident submarines patrol.

 

 

Hayek’s Nobel Prize Acceptance Speech

December 8, 2008 at 00:10 | Posted in Uncategorized | Leave a comment

I’m still not fully set up for the internet, so please be patient. In the meanwhile, enjoy this classic.


The Pretence of Knowledge

[Lecture to the memory of Alfred Nobel, December 11, 1974]

The particular occasion of this lecture, combined with the chief practical problem which economists have to face today, have made the choice of its topic almost inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”[1] I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.


The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.

This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of aprima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.

The correlation between aggregate demand and total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard there may thus well exist better “scientific” evidence for a false theory, which will be accepted because it is more “scientific,” than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.

As a profession, economists have made a mess of things.

Let me illustrate this by a brief sketch of what I regard as the chief actual cause of extensive unemployment — an account which will also explain why such unemployment cannot be lastingly cured by the inflationary policies recommended by the now fashionable theory. This correct explanation appears to me to be the existence of discrepancies between the distribution of demand among the different goods and services and the allocation of labor and other resources among the production of those outputs. We possess a fairly good “qualitative” knowledge of the forces by which a correspondence between demand and supply in the different sectors of the economic system is brought about, of the conditions under which it will be achieved, and of the factors likely to prevent such an adjustment. The separate steps in the account of this process rely on facts of everyday experience, and few who take the trouble to follow the argument will question the validity of the factual assumptions, or the logical correctness of the conclusions drawn from them. We have indeed good reason to believe that unemployment indicates that the structure of relative prices and wages has been distorted (usually by monopolistic or governmental price fixing), and that to restore equality between the demand and the supply of labor in all sectors changes of relative prices and some transfers of labor will be necessary.

But when we are asked for quantitative evidence for the particular structure of prices and wages that would be required in order to assure a smooth continuous sale of the products and services offered, we must admit that we have no such information. We know, in other words, the general conditions in which what we call, somewhat misleadingly, an equilibrium will establish itself; but we never know what the particular prices or wages are which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are in which we can expect the market to establish prices and wages at which demand will equal supply. But we can never produce statistical information which would show how much the prevailing prices and wages deviate from those which would secure a continuous sale of the current supply of labor. Though this account of the causes of unemployment is an empirical theory — in the sense that it might be proved false, e.g., if, with a constant money supply, a general increase of wages did not lead to unemployment — it is certainly not the kind of theory which we could use to obtain specific numerical predictions concerning the rates of wages, or the distribution of labor, to be expected.

Why should we, however, in economics, have to plead ignorance of the sort of facts on which, in the case of a physical theory, a scientist would certainly be expected to give precise information? It is probably not surprising that those impressed by the example of the physical sciences should find this position very unsatisfactory and should insist on the standards of proof which they find there. The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e., with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables. Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons.

In some fields, particularly where problems of a similar kind arise in the physical sciences, the difficulties can be overcome by using, instead of specific information about the individual elements, data about the relative frequency, or the probability, of the occurrence of the various distinctive properties of the elements. But this is true only where we have to deal with what has been called by Dr. Warren Weaver (formerly of the Rockefeller Foundation), with a distinction which ought to be much more widely understood, “phenomena of unorganized complexity,” in contrast to those “phenomena of organized complexity” with which we have to deal in the social sciences.[2]

Organized complexity here means that the character of the structures showing it depends not only on the properties of the individual elements of which they are composed, and the relative frequency with which they occur, but also on the manner in which the individual elements are connected with each other. In the explanation of the working of such structures we can for this reason not replace the information about the individual elements by statistical information, but require full information about each element if from our theory we are to derive specific predictions about individual events. Without such specific information about the individual elements we shall be confined to what on another occasion I have called mere pattern predictions — predictions of some of the general attributes of the structures that will form themselves, but not containing specific statements about the individual elements of which the structures will be made up.[3]

This is particularly true of our theories accounting for the determination of the systems of relative prices and wages that will form themselves on a well-functioning market. Into the determination of these prices and wages there will enter the effects of particular information possessed by every one of the participants in the market process — a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain. It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons, than any one person can possess. But because we, the observing scientists, can thus never know all the determinants of such an order, and in consequence also cannot know at which particular structure of prices and wages demand would everywhere equal supply, we also cannot measure the deviations from that order; nor can we statistically test our theory that it is the deviations from that “equilibrium” system of prices and wages which make it impossible to sell some of the products and services at the prices at which they are offered.

“This failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences.”

Before I continue with my immediate concern, the effects of all this on the employment policies currently pursued, allow me to define more specifically the inherent limitations of our numerical knowledge which are so often overlooked. I want to do this to avoid giving the impression that I generally reject the mathematical method in economics. I regard it in fact as the great advantage of the mathematical technique that it allows us to describe, by means of algebraic equations, the general character of a pattern even where we are ignorant of the numerical values which will determine its particular manifestation. We could scarcely have achieved that comprehensive picture of the mutual interdependencies of the different events in a market without this algebraic technique. It has led to the illusion, however, that we can use this technique for the determination and prediction of the numerical values of those magnitudes; and this has led to a vain search for quantitative or numerical constants. This happened in spite of the fact that the modern founders of mathematical economics had no such illusions. It is true that their systems of equations describing the pattern of a market equilibrium are so framed that if we were able to fill in all the blanks of the abstract formulae, i.e., if we knew all the parameters of these equations, we could calculate the prices and quantities of all commodities and services sold. But, as Vilfredo Pareto, one of the founders of this theory, clearly stated, its purpose cannot be “to arrive at a numerical calculation of prices,” because, as he said, it would be “absurd” to assume that we could ascertain all the data.[4]Indeed, the chief point was already seen by those remarkable anticipators of modern economics, the Spanish schoolmen of the 16th century, who emphasized that what they called pretium mathematicum, the mathematical price, depended on so many particular circumstances that it could never be known to man but was known only to God.[5] I sometimes wish that our mathematical economists would take this to heart. I must confess that I still doubt whether their search for measurable magnitudes has made significant contributions to our theoreticalunderstanding of economic phenomena — as distinct from their value as a description of particular situations. Nor am I prepared to accept the excuse that this branch of research is still very young: Sir William Petty, the founder of econometrics, was after all a somewhat senior colleague of Sir Isaac Newton in the Royal Society!

There may be few instances in which the superstition that only measurable magnitudes can be important has done positive harm in the economic field: but the present inflation and employment problems are a very serious one. Its effect has been that what is probably the true cause of extensive unemployment has been disregarded by the scientistically minded majority of economists, because its operation could not be confirmed by directly observable relations between measurable magnitudes, and that an almost exclusive concentration on quantitatively measurable surface phenomena has produced a policy which has made matters worse.

It has, of course, to be readily admitted that the kind of theory which I regard as the true explanation of unemployment is a theory of somewhat limited content because it allows us to make only very general predictions of the kind of events which we must expect in a given situation. But the effects on policy of the more ambitious constructions have not been very fortunate and I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false. The credit which the apparent conformity with recognized scientific standards can gain for seemingly simple but false theories may, as the present instance shows, have grave consequences.


In fact, in the case discussed, the very measures which the dominant “macroeconomic” theory has recommended as a remedy for unemployment — namely, the increase of aggregate demand — have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate — or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.

I must, however, now leave these problems of immediate practical importance which I have introduced chiefly as an illustration of the momentous consequences that may follow from errors concerning abstract problems of the philosophy of science. There is as much reason to be apprehensive about the long-run dangers created in a much wider field by the uncritical acceptance of assertions which have the appearance of being scientific as there is with regard to the problems I have just discussed. What I mainly wanted to bring out by the topical illustration is that certainly in my field, but I believe also generally in the sciences of man, what looks superficially like the most scientific procedure is often the most unscientific, and, beyond this, that in these fields there are definite limits to what we can expect science to achieve. This means that to entrust to science — or to deliberate control according to scientific principles — more than scientific method can achieve may have deplorable effects. The progress of the natural sciences in modern times has of course so much exceeded all expectations that any suggestion that there may be some limits to it is bound to arouse suspicion. Especially all those will resist such an insight who have hoped that our increasing power of prediction and control, generally regarded as the characteristic result of scientific advance, applied to the processes of society, would soon enable us to mould society entirely to our liking. It is indeed true that, in contrast to the exhilaration which the discoveries of the physical sciences tend to produce, the insights which we gain from the study of society more often have a dampening effect on our aspirations; and it is perhaps not surprising that the more impetuous younger members of our profession are not always prepared to accept this. Yet the confidence in the unlimited power of science is only too often based on a false belief that the scientific method consists in the application of a ready-made technique, or in imitating the form rather than the substance of scientific procedure, as if one needed only to follow some cooking recipes to solve all social problems. It sometimes almost seems as if the techniques of science were more easily learned than the thinking that shows us what the problems are and how to approach them.

“To entrust to science … more than scientific method can achieve may have deplorable effects.”

The conflict between what in its present mood the public expects science to achieve in satisfaction of popular hopes and what is really in its power is a serious matter because, even if the true scientists should all recognize the limitations of what they can do in the field of human affairs, so long as the public expects more there will always be some who will pretend, and perhaps honestly believe, that they can do more to meet popular demands than is really in their power. It is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science. The enormous publicity recently given by the media to a report pronouncing in the name of science on The Limits to Growth, and the silence of the same media about the devastating criticism this report has received from the competent experts,[6] must make one feel somewhat apprehensive about the use to which the prestige of science can be put. But it is by no means only in the field of economics that far-reaching claims are made on behalf of a more scientific direction of all human activities and the desirability of replacing spontaneous processes by “conscious human control.” If I am not mistaken, psychology, psychiatry, and some branches of sociology, not to speak about the so-called philosophy of history, are even more affected by what I have called the scientistic prejudice, and by specious claims of what science can achieve.[7]

If we are to safeguard the reputation of science, and to prevent the arrogation of knowledge based on a superficial similarity of procedure with that of the physical sciences, much effort will have to be directed toward debunking such arrogations, some of which have by now become the vested interests of established university departments. We cannot be grateful enough to such modern philosophers of science as Sir Karl Popper for giving us a test by which we can distinguish between what we may accept as scientific and what not — a test which I am sure some doctrines now widely accepted as scientific would not pass. There are some special problems, however, in connection with those essentially complex phenomena of which social structures are so important an instance, which make me wish to restate in conclusion in more general terms the reasons why in these fields not only are there only absolute obstacles to the prediction of specific events, but why to act as if we possessed scientific knowledge enabling us to transcend them may itself become a serious obstacle to the advance of the human intellect.

The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables — either particular facts or relative frequencies of events. This may even be the ultimate reason why we single out these realms as “physical” in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events — although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories. They are due to the chief problem which arises when we apply our theories to any particular situation in the real world.

“If we are to safeguard the reputation of science … much effort will have to be directed toward debunking such arrogations, some of which have by now become the vested interests of established university departments. “

A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions — with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

A simple example will show the nature of this difficulty. Consider some ball game played by a few people of approximately equal skill. If we knew a few particular facts in addition to our general knowledge of the ability of the individual players, such as their state of attention, their perceptions and the state of their hearts, lungs, muscles, etc. at each moment of the game, we could probably predict the outcome. Indeed, if we were familiar both with the game and the teams we should probably have a fairly shrewd idea on what the outcome will depend. But we shall of course not be able to ascertain those facts and in consequence the result of the game will be outside the range of the scientifically predictable, however well we may know what effects particular events would have on the result of the game. This does not mean that we can make no predictions at all about the course of such a game. If we know the rules of the different games we shall, in watching one, very soon know which game is being played and what kinds of actions we can expect and what kind not. But our capacity to predict will be confined to such general characteristics of the events to be expected and not include the capacity of predicting particular individual events.

This corresponds to what I have called earlier the mere pattern predictions to which we are increasingly confined as we penetrate from the realm in which relatively simple laws prevail into the range of phenomena where organized complexity rules. As we advance, we find more and more frequently that we can in fact ascertain only some but not all the particular circumstances which determine the outcome of a given process; and in consequence we are able to predict only some but not all the properties of the result we have to expect. Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear — relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.

Of course, compared with the precise predictions we have learned to expect in the physical sciences, this sort of mere pattern predictions is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is precisely the belief that in order to have a claim to be accepted as scientific it is necessary to achieve more. This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights. But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based — a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.



If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever-growing power which the advance of the physical sciences has engendered and which tempts man to try, “dizzy with success,” to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

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