The Pretence of Knowledge - Part 4

Some economic problems are just annoying. But this one is dangerous.

This is part of HayekGPT, where I use ChatGPT to rewrite Friedrich Hayek’s most important economic works in plainspoken English — not summaries, but full translations as if Hayek were speaking directly to today’s readers.

This is Part 4 of The Pretence of Knowledge, his 1974 Nobel Prize lecture.

You can find [Part 3 here].
You can find [Download the full PDF here].

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Some economic problems are just annoying. But this one is dangerous.

The belief that only measurable things matter — that only what can be counted should count — has done real damage. The best example is the current crisis of inflation and unemployment.

Economists have mostly ignored what I believe is the true cause of widespread joblessness. Why? Because it does not show up clearly in the data. There’s no neat line on a graph to prove it. So instead, most economists focus only on surface-level trends they can measure.

That obsession with numbers has shaped policy. And the result? Things have gotten worse.

To be fair, the theory I believe explains unemployment is limited. It can only tell us what kinds of events we should expect, not exactly what will happen or when.

But here’s the truth: I would rather have a theory that is partly right and admits what it doesn’t know, than one that looks perfect on paper but turns out to be wrong.

When a theory fits scientific standards — neat, numerical, tidy — it can gain a lot of respect. But if it’s based on false assumptions, it becomes dangerous. That’s exactly what we’re seeing now.

Here’s the real tragedy.

The very policies that today’s “macro-economic” theory recommends to fight unemployment — like pumping more money into the system — have created a problem that will soon make unemployment much worse.

Here’s how it works: when the government keeps adding more money, it creates temporary demand in certain parts of the economy. That draws in workers and resources to meet that demand. But this demand only lasts as long as the money keeps flowing — or even keeps accelerating.

Once the money slows down, those jobs vanish. The result isn’t just high employment for a little while. It’s a bad mix of employment — people doing jobs that can’t last.

To keep those jobs going, inflation must keep rising. Eventually, that leads to chaos. We’re now stuck. Large-scale unemployment is coming not because someone decided to fight inflation by cutting jobs, but because the entire system was built on an illusion that could never last.

I need to wrap up this practical example — not because it’s unimportant, but because it shows something deeper.

These economic problems didn’t come from politics alone. They came from bad thinking about science itself.

In economics and in other social sciences, ideas that look scientific are often the most misleading. People see data, graphs, and formulas, and they think, “This must be solid.” But it’s not. There are limits to what science can do in a world shaped by human choices.

Still, many people don’t want to hear that.

Why? Because science has delivered so many miracles. The progress in physics, chemistry, and biology has changed the world. So it’s no surprise that people hope science can also reshape society from the top down.

Some economists — especially the younger, more impatient ones — dream of controlling society like an engineer controls a machine. They believe we can plan everything. Predict everything. Fix everything.

But social science is different.

Unlike physics, it doesn’t give us power without limits. It doesn’t let us mold the world however we want. And it certainly doesn’t follow recipes.

Science isn’t just a set of tools. It’s a way of thinking. If we copy the surface — the math, the charts, the language — without understanding the substance, we end up pretending to know things we don’t. And that false confidence is dangerous.

Core Ideas from Part 4

1. No one knows enough.
   The knowledge needed to run an economy isn’t held by any one person or group. It’s scattered across millions of individuals, shaped by time, place, and circumstance. No central authority can gather it all.

2. Prices are signals, not statistics.
   Every price reflects countless bits of information about supply, demand, and value. Interfering with prices—through inflation, subsidies, or controls—breaks the communication system that helps people make good decisions.

3. Math can mislead.
   Just because a model is full of equations doesn’t mean it understands the real world. Economists often pretend to have precise knowledge, but the economy is too complex, too dynamic, and too human for that.

4. Stimulus can backfire.
   Pumping money into the economy may create short-term activity, but it often sends people and resources in the wrong direction—into jobs or investments that only make sense while the stimulus lasts.

5. Top-down control leads to breakdown.
   Trying to steer the economy from above creates fragile systems. Real progress comes from letting people act freely and adapt to changing conditions—bottom-up, not top-down.

6. Good policy starts with humility.
   Leaders should recognize the limits of their knowledge. Instead of trying to manage outcomes, they should create conditions for people to thrive: sound money, free markets, and the rule of law.