The Limits of Human Understanding

The knowledge problem is more than a pet theory among economists. It is a biological fact:

[T]he capacity of any explaining agent must limited to objects with a structure possessing a degree of complexity lower than its own. If this is correct, it means that no explaining agent can ever explain objects of its own kind, or of its own degree of complexity, and, therefore, that the human brain can never fully explain its own operations.

-F.A. Hayek, The Sensory Order, 185.

This implies that the human brain is therefore incapable of fully understanding society, currently comprised of more than 7 billion separate human brains–none of which can fully understand themselves, not to mention their 7 billion colleagues.

The Sensory Order is a work of theoretical psychology. But it has very clear empirical implications for economics, not to mention policymakers and regulators. Think of this limitation as a reason why the law of unintended consequences continues to have so many real-world examples.

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