From the Division of Labour to the Division of Knowledge: Smith, Hayek and the Role of Reason in Social Coordination

Both Smith and Hayek are great spontaneous order theorists. To them, reason of the Cartesian type should never be regarded as sovereign in human understanding. To apply it as if it is the supreme principle in social interaction at the expense of knowledge of concrete circumstances held by the individuals will almost for certain bring us in the highest degree of disorder. Smith has famously said that “in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it”, and the crucial question for social philosophy is to explain how those different and dispersed knowledge of concrete circumstances can be coordinated into a more or less coherent order with better overall results in the absence of one centralized rational design. Indeed Hayek points out that it is Smith’s great achievement in recognizing the role played by abstract signals like prices in facilitating this necessary coordination.Smith is commonly credited to have demonstrated this coordination by means of his discussion of the division of labour in advanced society and the invisible hand explanation. This paper tries to argue that following in the footsteps of Smith, Hayek’s social philosophy has further improved on Smith’s understanding by adopting an epistemological approach in explaining the functioning of the spontaneous order. Hayek’s improvement can be spelt out in three ways. First, by developing a theory of philosophical psychology to demonstrate the constitutional limitation of human reason and the mutual dependence between the evolution of civilization and the human mind, Hayek has given one of the most powerful and dynamic critiques of Cartesian rationalism, which goes beyond Smith’s static presupposition of the impotence of reason in the face of human passion when it comes to determining human action.Second, by extending Smith’s understanding of the division of labour to that of the division of knowledge, Hayek manages to develop an elaborate theory emphasizing the central importance of the coordination of knowledge in social development on top of what Smith describes as the benefits (such as enhanced efficiency and invention) deriving from the specialization of the production process by producers under the division of labour. The kinds of knowledge involved in this coordination comprise not only those practical, subjective and local knowledge possessed by each and every individual, but also all kinds of abstract (and sometimes implicit) knowledge like price mechanism, general rules of conduct, conventions and other received wisdom of the traditional kind. Hayek’s emphasis on the division of knowledge may help tackle the so called Smithian paradox of the division of labour by highlighting the coordinating aspect of social skills and acquired rules instead of just concentrating on the isolated and narrow aspect of specialization.Third, Hayek’s emphasis on the coordinating function of abstract knowledge also helps avoid the sometimes confusing implication of divine intervention by Smith’s description of the “invisible hand of Jupiter” in explaining the formation and evolution of the spontaneous order. It also shows that references to the self-interested or egoistic nature of the individuals are not central to the invisible hand explanation.