The rationalist who desires to subject everything to human reason is thus faced with a real dilemma. The use of reason aims at control and predictability. But the process of the advance of reason rests on freedom and the unpredictability of human action.
And here we come to a vital difference between inanimate or even non-human living creatures, and man himself; for the former are compelled to proceed in accordance with the ends dictated by their natures, whereas man, “the rational animal,” possesses reason to discover such ends and the free will to choose.
Let me only point out one fundamental error in Hayek’s argument. If socialism’s central problem is the practical impossibility of concentrating decentralized knowledge in the mind of a single central planner, then it is difficult to explain why there are firms and why the owner of a firm does not face exactly the same problem as the central planner under socialism. The owner of a firm also cannot concentrate in his mind all of the decentralized knowledge of the particular circumstances of time and place of all of his employees. Nonetheless, the owner of the firm designs a central plan, and within the guidelines of this overall plan the firm’s employees then use their own decentralized knowledge to implement and execute this plan. And yet: the owner of a firm does not face the problems of the socialist central planner!
F.A. Hayek was notorious for his antipathy to what he characterized as French [easyazon-image-link asin="0226320847" alt="The Constitution of Liberty" src="http://ecx.images-amazon.com/images/I/41PFEjcEo%2BL._SL160_.jpg" align="right" width="104" height="160"]rationalism. This overly heroic idea of the human capacity to mold the world according to rational criteria, he believed, underpinned the bureaucratic, technocratic, central planner mentality that was at the heart of all statism. It was, to borrow a phrase, the will to power. Yet, it was a will always undermined by the impossibility of any single mind ever being able to grasp all the detail and complexity of the vast social phenomena that emerged through the reticulated interactions of spontaneous order.
Rothbard was severely critical of this attitude, which he considered at least prone to promoting quietism and apathy, and possibly even anti-human in its diminishing and discrediting of the defining human quality of rational judgment. [easyazon-image-link asin="0814775594" alt="The Ethics of Liberty" src="http://ecx.images-amazon.com/images/I/51KMR61Z60L._SL160_.jpg" align="left" width="106" height="160"]Through reason, he argued, humans determine the ultimate goals, via natural law, and exercise their essential capacity for reason in freely willing the realization of such goals. Clearly, for Hayek, such a critique would have been begging the question. Rothbard’s claim for an unbound rational will doesn’t refute Hayek’s position; it illustrates it. Refutation would have required something closer to the claim made by Rothbard’s comrade in arms, Hans Hoppe, in the third of the three quotations above. The very existence of vast businesses, the complexity and detail of which no entrepreneur or executive could fully hold in their mind, is submitted as evidence that the rational faculty, uniquely characteristic of humanity, was not subject to the limitations alleged by Hayek.
The problem is, though, Hoppe seems surprisingly ill-informed about the actual nature of such organizational practice; such large businesses over the last century in fact have become increasingly decided that highly centralized command structures do not work. Chain of command rigidity, feedback [easyazon-image-link asin="0300114648" alt="The Collaborative Enterprise: Managing Speed and Complexity in Knowledge-Based Businesses" src="http://ecx.images-amazon.com/images/I/51tVK4asK1L._SL160_.jpg" align="right" width="112" height="160"]bottlenecks, conformist culture, principal-agent dilemmas and more have presented challenges that central planning has proven unable to surmount. A vast range of strategies and tactics to decentralize, devolve, share responsibility, and outsource and/or pool innovation have been pursued precisely because of these failures of central planning in large companies. While the availability of automation and microprocessor-driven communication technology has facilitated these processes in recent decades, they can be traced back at least to the organizational modularization of General Motors and Chrysler in the 1920s. 
In the dispute between Hayek and Rothbard (and the defenders of each), it seems to me that both would have benefited from more closely heeding the use of the concept of rationality offered in by their common teacher, Ludwig von Mises. Early in his classic, Human Action (1963), Mises states: “rationalism, praxeology, and economics do not deal with the ultimate springs and goals of action, but with the means applied for the attainment of an end sought. However unfathomable the depths may be from which an impulse or instinct emerges, the means which man chooses for its satisfaction are determined by a rational consideration of expense and success.”
[easyazon-image-link asin="0865976317" alt="Human Action: A Treatise on Economics" src="http://ecx.images-amazon.com/images/I/41QSCQM5ouL._SL160_.jpg" align="left" width="107" height="160"]For Mises, being rational is exercising the most economic means of achieving the ends determined by one’s subjective preferences. The human animal’s actions to optimize its life potential, as perceived by it, is the only legitimate measure of rationality. This far more modest claim for rationality is not merely preferable for avoiding Hayek’s critique of rationalism, but it allows a use of the concept that simultaneously supports the link between rationality and freedom, while avoiding the link between rationality and the central planner’s pretense of omnipotence.
We are rational precisely to the degree that we exercise our own person to achieve our subjective preferences. Does this mean that our rational choices, our action, have no impact on or influence over others? Of course, not. However, surely we all know that our ability to rationally manage the actions and preferences of even those closest to us – spouses, business, partners, best friends, siblings, etc. – is always highly constrained. All other people have their own preferences, their own purposes and interests. Our non-coercive influence over even those closest to us is very limited. The further our actions are removed from this sphere of intimate commitment, the less and less effective can be our rationality in the management of others.
Seen through this lens, both Hayek and Rothbard have a valid point. The central planners cannot mold society to their own will and the degree to which they try is doomed to result in damage to human lives. That does not thereby mean though that rational choice is not possible, relevant or necessary in each person’s life. Indeed, the best outcome of spontaneous order will result from each person being as conscientiously rational, in the MIsesian sense, as possible. However, there is a further implication of this analysis that would certainly not be welcomed by Rothbardians (nor maybe Hayekians): the world does not lend itself to willful acts of rationally planned social change – however rigorously rooted in natural law.
Each individual’s application of rationality in their own actions radiates out into ripples of ever diminishing influence in the world. Very quickly, once spreading beyond the immediate reach of those precisely with emotional attachments to us, our ability to non-coercively affect the preferences and actions of others rapidly dissipates. Even coordinated and cooperative efforts are made among those with unique subjective preference hierarchies. Imagining that vast social change is easier to manage than a major business seems a little naive.
The model of a subversive vanguard that Rothbard adopted from the Marxian left is not consistent with libertarian principles or Misesian praxeology. An entirely different methodology is required to close that circle. For more on what such an approach might be, to move beyond this methodological dead end, stay tuned.
 The literature on this has become quite large by now. For an introduction, see Garicano (2000), Gilson et. al (2009), Heckscher (2007), Langlois (2002), MacDuffe and Helper (2006), Sabel (2006), Schwartz (2000), and Van Zandt and Radner (2001).
Garicano, L. (2000). Hierarchies and the organization of knowledge in production. Journal of Political Economy , 108, 257-284.
Gilson, R. J., Sabel, C. F., & Scott, R. E. (2009). Contracting for Innovation: Vertical Disintergration and Interfirm Collaboration . Columbia Law Review , 103 (3).
Hayek, F. A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press.
Heckscher, C. (2007). The Collaborative Enterprise: Managing Speed and Complexity in Knowledge-based Businesses. New Haven: Yale University Press.
Hoppe, H. (2004, September). Interviewed by Mateusz Machaj. Retrieved November 20, 2012, from hanshoppe.com: http://www.hanshoppe.com/wp-content/uploads/publications/hoppe_polish-interview.pdf
Langlois, R. N. (2002). The Vanishing Hand: The Changing Dynamics of Industrial Capitalism. University of Connecticut. Department of Economics Working Paper Series.
MacDuffie, J. P., & Helper, S. (2006). Collaboration in Supply Chains: With and Without Trust. In C. Heckscher, & P. S. Adler (Eds.), The Firm as a Collaborative Community: The Reconstruction of Trust in the Knowledge Economy. Oxford: Oxford University Press.
Mises, L. v. (1963). Human Action. San Francisco: Fox & Wilkes.
Rothbard, M. N. (2003). The Ethics of Liberty. New York: New York University Press.
Sabel, C. (2006). A Real Time Revolution in Routines. In C. Heckscher, & P. S. Adler (Eds.), The Firm as a Collaborative Community. Oxford: Oxford University Press.
Schwartz, M. (2000). Markets, Networks, and the Rise of Chrysler in Old Detroit, 1920-40. Enterprise and Society. March 1(1).
Van Zandt, T., & Radner, R. (2001). Real-time decentralized information processing and returns in scale. Economic Theory , 17, 497-544.