ABSTRACT
This chapter argues that in The Sensory Order and other work, F. A. Hayek provides a theory of cognitive activity from which it is possible to construct a theory of subjective economic expectations. The central problem addressed by The Sensory Order is the way cognitive mechanisms allow the individual to adjust his actions to deal more effectively with external reality. The chapter describes new classical economics, especially in regard to rational expectations (RE). The coherence of Hayekian expectations derives from the ‘constrained creativity’ suggested by Hayek’s cognitive theory. RE models assume that agents know the stochastic processes of the relevant model of the economy. This kind of structural knowledge allows them to generate unbiased forecasts of the model’s parameters. The kind of knowledge relevant to RE models is explicit, fully articulated and quantifiable knowledge. For Hayek, knowledge is embodied in the ‘rules of action’ involved in classification.
