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Spontaneous Order vs. Centralized Control

The following is a transcript of this video.

“Many of the greatest things man has achieved are the result not of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand.” (F.A. Hayek)

It is common these days to assume that what stands between chaos and an adequately functioning society, are politicians and bureaucrats, who design institutions, create laws, impose regulations and direct markets. But is this really the case? Or rather, as the quote by the Nobel prize winning economist, F.A. Hayek suggests, is it possible that much of the beneficial order we see in societies is the result of forces independent of the will of those in power?

This video will examine spontaneous order, which is order that emerges in society in a bottom up manner, absent of any individual or group exerting top-down control. The existence of such order, which is hardly acknowledged in present day discussions of social order, lends credence to the idea that society would be far better off without states attempting to exert top-down control on what are highly complex systems.

The idea of spontaneous order has roots stretching back to the ancient Greeks, but it was not until the Scottish Enlightenment of the 1700s, epitomized by the work of Adam Smith that the idea really gained traction. The most famous definition of spontaneous order was put forth by a contemporary of Smith, Adam Ferguson, who defined it as order which is the product of human action, but not of human design.

In other words, spontaneous orders, consist of rules, institutions, practices, and other social phenomena, which develop not as a result of intentional planning by any person or group, but as unintentional consequences which emerge from the interactions of individuals left free to pursue their own plans.

Matt Ridley in his book The Evolution of Everything helps further explain what spontaneous order is by contrasting it with other types of order:

“Our language and our thought divide the world into two kinds of things – those designed and made by people, and natural phenomena with no order or function. . .The umbrella that keeps you dry in a shower of rain is the result of human action and human design, whereas the rainstorm that soaks you when you forget it is neither. But what about the system that enables a local shop to sell you an umbrella, or the word umbrella itself, or the etiquette that demands that you tilt your umbrella to one side to let another pedestrian pass? These – markets, language, customs – are man-made things. But none of them is designed by a human being. They all emerged unplanned.” (The Evolution of Everything, Matt Ridley)

To better understand how order can emerge unplanned in society, it will be helpful to look at the example of free markets. Free markets are what emerge when people are  free to own property and make use of that property in the manner they choose, so long as they do not initiate force or fraud against the person or property of others. With this in mind, a free market can be defined as the network of voluntary exchange which arises when freedom of this type is respected.

Markets are not completely free these days as coercion is omnipresent in markets across the globe. Coercion occurs when one party gives up their property not because they believe that they will gain by doing so, as would be the case with a voluntary exchange, but because they are threatened with the use of force. Governments make use of coercion in markets to tax and regulate virtually all elements of economic activity.

In terms of markets what needs to be recognized is that the larger the realm of voluntary exchange, the greater the degree of emergent bottom up order, while the greater the use of coercion to thwart voluntary exchange, the more this order is impeded.

When individuals are left free to plan their own lives, own property, and participate in voluntary exchange, a mechanism emerges to harmonize the plans of market participants. This mechanism, called the price system, is the array of prices that emerge as market participants repeatedly exchange sums of money for units of goods or services over time.

No matter what form of economic system a society adopts, be it socialism, feudalism, or one based on free markets and a price system, such a system must somehow cope with scarcity – or the fact that goods and services are limited while desires for them are not.

In a free market changes in the scarcity and abundance of goods are signalled by changes in prices. These price changes provide market participants with important information to help them plan their lives in an ever changing world.

Edward Stringham expands on this important role of the price system by writing:

“The world is constantly changing, but market prices provide continually updated information and incentives to help people to coordinate over time. Prices help producers see how much consumers value the cost of inputs and how they value the end products. Profits and losses provide constant feedback to help producers see if they are providing goods that consumers value. Prices also act as signals to other producers to encourage people to get into or out of a particular market. This coordination process works over a very large scale in very complex societies, as anonymous producers produce products that meet the needs of anonymous consumers on the other side of the globe.” (Private Governance, Edward Stringham)

Now a crucial point that Hayek and others have made is that a free market price system promotes a beneficial order that is impossible to replicate by top-down, centralized control. Those who attempt to engage in centralized control are hindered by what is known as the knowledge problem, or the inability to make use of the voluminous knowledge needed to coordinate an economy.

An ordered, and hence prosperous, economy, requires that market participants make use of what Hayek called knowledge of particular place and time, or in other words contextual knowledge held by specific market participants about the goods and services which they as consumers or producers are interested in. A price system, being a decentralized mechanism, is able to make use of this dispersed knowledge as it is reflected in the patterns of buying and selling of interconnected market participants.

A centralized body on the other hand faces insurmountable difficulties obtaining and making proper use of this knowledge. In addition to the fact that much of the knowledge needed to coordinate an economy is dispersed among a huge number of different people, much of the knowledge used by market participants is incommunicable being implicit in their actions and attitudes, or as Karl Polanyi put it “We can know more than we can tell.”

In effect government control of an economy replaces a mechanism that makes use of the knowledge of millions or billions of people, depending on the extent of the market, with control by a relatively small group of politicians and bureaucrats whose knowledge is severely limited. With nothing effective to replace the price system with, socialist countries – as evidenced by the collapse of the Soviet Union and the despair that exists in countries such as North Korea – can never be as prosperous as countries which have freer markets. Ironically, while many who support socialism are also champions of economic equality, history has shown that when countries try to stamp out the spontaneous wealth generating process associated with free markets they create the worst type of inequality possible; a society where the masses starve while the central planners live like royalty.

With this in mind, an interesting question arises: if those of the spontaneous order tradition are correct in their belief that the price system is the best mechanism to promote the social cooperation needed to generate a beneficial order in markets, why are so many intellectuals and elites such strong advocates of government intervention, and even socialism?

In his work, Intellectuals and Society, Thomas Sowell examined this interesting question.

One reason for this belief, Sowell suggests, is that in many cases people are simply unaware of the amount of knowledge a price system takes into account relative to the minute amount of knowledge that government officials can utilize.

Intellectuals hold what Sowell calls special knowledge, which is knowledge of a particular academic field. This knowledge, however, is but a tiny subset of the entire realm of knowledge. The far larger realm consists of what he calls mundane knowledge – which is knowledge held by so-called ordinary people, people such as plumbers, convenience store owners, seamstresses, landscapers and many, many others. The crucial point Sowell makes is that while in general the special kind of knowledge held by intellectuals is usually viewed as more valuable due to its scarcity and its perceived difficulty to obtain it is by no means true that this knowledge is more consequential in its real world consequences. Rather mundane knowledge, being the overwhelmingly larger realm of knowledge, is absolutely crucial for the coordination of markets.

Those intellectuals who fail to recognize this suffer from what Hayek called a fatal conceit whereby they believe that the relatively limited special knowledge they possess can produce more beneficial outcomes than a mechanism that takes into account the knowledge of all market participants. Such intellectuals often try to support this position by suggesting that the only alternative to the top-down planning they propose is chaos, completely ignoring the existence of spontaneous order and in the process using Orwellian double-speak to portray central planning as the path to order and prosperity.

Sowell explains:

“Despite the often express dichotomy between chaos and planning, what is called “planning” is the forcible suppression of millions of people’s plans by a government-imposed plan. What is considered to be chaos are systematic interactions whose nature, logic and consequences are seldom examined by those who simply assume that “planning” by surrogate decision-makers must be better.” (Intellectuals and Society, Thomas Sowell)

These days, the belief that politicians and bureaucrats can produce better outcomes than those achieved by spontaneous forces is rarely questioned. Government is looked upon to solve all problems while many are completely blind to the fact that so much of the beneficial order they see around them emerged spontaneously.  Languages,  the use of money,  systems of morals and etiquette,  the order of markets,  bodies of law (such as common law), and the decentralized growth of the internet are all the result of spontaneous forces.

What is ironic about this situation is that most of the people ignorant regarding the existence of spontaneous order in society, fully embrace the theory of evolution which shows that the order which emerges in the natural world is not the result of any designer.

But having cast away the god of nature these people have turned around and made a god of the state.

Further Readings