Lecture Four:  Spontaneous Order and the Use of Knowledge in Society

Sources used:  F. A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order and “Cosmos and Taxis,” in Law, Legislation and Liberty.

Definition:  Spontaneous order is a process.  A process by which, because it is not controlled by any central planning agent, is “spontaneous.”  And which, because it generates and spreads information of time and circumstance which allows some individuals to coordinate their plans with other people, is a kind of order.  The order displays a pattern or a discernible relationship among the elements that make up the order. 

Spontaneous Order

There are two kinds of order in society:

1.       Thought out, planned, implemented.  An organization.

Examples:

2.       Independent of anyone overseeing or directing it.  This order arises spontaneously and is not the result of anyone’s conscious deliberation.  It is “the result of human action but not of human design.”

There are discernible patterns but no one oversees these patterns.

Examples:

Not all complex phenomena are always spontaneous and abstract.  But the more complex the order is that we want, the more we shall have to rely on spontaneous forces to bring it about.  Our minds simply can’t handle the complexity.

Features of a Spontaneous Order

1.       The degree of complexity is not limited to what the human mind can master.

Example:  A market:

2.       Does not fulfill any particular plan or purpose.  In other words -- the order emerges because of the actions of the individuals within the order - each pursuing their own purposes - but there is no overall purpose to the order.

Example:  Money

Hayek distinguishes between (in "The Use of Knowledge in Society"):

Economy – individual’s economizing behavior in relation to his budget and his personal hierarchy of ends. 

For example, as we have discussed: “Maximize utility subject to a budget constraint.”  Becomes a mechanical problem once all of the possible outcomes and the budget are given.  Or maximize profit or minimize loss (all constraints given).  Again, simply a problem of calculating the answer.

                        And

Catallaxy – the complex phenomena of market activity, where there are many individuals interacting, each pursuing his own particular ends.

Catallaxy is means related, while economy is ends related.

There is no "calculation" in the way there is with economy or economizing.  There is complex interaction -- that cannot be determined or planned beforehand.

            So the maintenance of the social order is achieved, though not with intention, through the purposive behavior of individuals within the system. 

            Individuals within the order only have to overlap a small amount (only have to be similar in a small way) for an order to be created.

            It is through economizing behavior of individuals that the “catallactic” order emerges.

3.       There can be a high degree of planning or organization within the spontaneous order.  But the order itself is not planned.

            Example:  Individuals and managers within firms, for example, plan.  But that does not mean that the order that is created by their actions (and the actions of others) is planned in any way.

4.       Because of its complexity, a spontaneous order cannot be controlled to the extent that an organization or planned order can be controlled.

Control is restricted to the abstract, at the level of the “rules of the game.”

The more simple the system, the greater the degree of control can occur at the level of specific detail.

A director of a play can direct Betty to kiss Bob at a specific moment in time.  Because the control is possible, the outcome of the direction is what was intended.

When a spontaneous order is “controlled” there are always unintended consequences of the direction – because of the complexity of the system.  Nobody has the knowledge of how the system came about to begin with or how it will emerge in the future.  Without this knowledge, “successful” direction is impossible.

5.       The kind of order that evolves in a spontaneous order is defined in the process of its emergence.  So, without the process of its emergence there is no spontaneous order.  This is why we can never know what an order will or should look like separate from its emergence.

The kind of order that evolves depends on the process by which it is achieved.  The “end state” (which never really occurs in some final stage) cannot be separated from the process.

Therefore we should pay important attention to the “rules of the game” or the general rules that govern the process.  Because the order that emerges depends upon the rules under which the individuals are acting.

 The Rules

However, we should not jump to the conclusion that the general rules are the result of design.

Hayek – these rules themselves develop spontaneously!

Example:  Common law tradition – where law evolves case by case as judges pass rulings based on precedent, rather than (civil) legislative law, which is implemented by dictum.  Or customs, traditions, even rules that emerge within groups of friends, etc.

So can we always tell what rules emerge spontaneously and what rules do not (but are shocks or interventions to the system)?

Must look at the past.  Sometimes very difficult to tell whether something is part of a system or a shock to it.

Take, for example, the complex cultural order that exists at any given time.  Say, the cultural order regarding “discriminating” behavior towards a certain group in society.  This can be “cultural” and systemic.  So how might this change over time?

When Rosa Parks refused to obey the bus driver’s order that she give up her seat in the “colored” section to a white passenger, after the white section was filled– was that part of the system, or was that a shock to the system from the outside?

What do you think?

“Forced busing,” on the other hand – pretty clear that that is an outside shock to the system.

Or what about the outcomes of a complex society generally – a society that includes both spontaneously generated (endogenous) changes and legislated (exogenous) changes.  How can we determine if an outcome is due to the spontaneous changes or the legislated ones?

Very difficult!

Take income inequality.  Is that due to the market process acting as a spontaneous order – or is it due to the political order under which the spontaneous market order now operates? The political rules are operating alongside the market rules.  Which creates the greater inequality of income?  Neither?  The interaction of the two?

So –

A spontaneous order will result in both cases – whether the rules are themselves spontaneous evolutionary orders or legislated.  The question is though – how will these orders differ? 

So economists should focus their attention on:

1.       How does a complex order evolve?

2.       Once evolved, how does it work?

In that order!

This means that Institutions (rules broadly defined) are very important:

According to Austrian economists, markets are evolutionary processes – and should be studied as such.

Institutional and historical factors in economic analysis are important.

Institutions determine the kind of order that evolves and how it will function.

Institutions such as money, law and ethics are the result of an evolutionary process.

This means that change is always taking place.  And change is not a “bad” thing – it simply happens.  But to understand how and why the change happens, we must study it (not assume it away in a steady-state world).

According to Hayek – a moral order must precede a market order.  (Respect for property rights, for example). 

    Isn't he just saying that certain rules must exist for a market order to emerge?

As Mises explained – property rights evolve out of the implication that individuals can better their condition through exchange and social cooperation – property rights are an important part of that process of exchange and social cooperation and therefore came spontaneously.

So basically we study the unintended consequences of human action!  Meaning – we study what has evolved from human action – but not of human design.  Each of us acts to “remove felt uneasiness”– and this complex process of acting and interacting creates an order than none of us could have ever planned or designed.  In a sense, that’s what makes it so “beautiful” (commentary by Deb).

The Market as a Spontaneous Order

Now let’s focus specifically on the market as a spontaneous order and see how it functions –

When speaking of an economy – we are speaking of coordination of resources with wants, for example.  Adam Smith’s “invisible hand.”

Is this preferable?  Depends upon what one wants (as always).

Technically speaking, however -

What a planned or controlled economy can’t do (because it is not a spontaneous order) - with respect to coordinating resources with individual wants:

1.       Determine prices which would tend to coordinate supply with demand

2.       Generate new information based on the subjective values of the individuals acting in the market

3.       Allow for new innovation and entrepreneurship, the direction of which is designed to meet individual wants

We will discuss this in detail when we look at the “economic calculation” debates - especially as discussed by Mises and Hayek as per Keynes and others.

In order to really understand the market as spontaneous order, we have to look again at knowledge.

The Use of Knowledge in Society

The data the economy uses are never for a whole society given to a single mind (or even group of minds).  It is:

a.       Complex/dispersed throughout society

b.      Subjective/individual

So the economic problem becomes one of using this knowledge which is not given to anyone in its totality.

This is knowledge of “particular circumstances of time and place.”  As contrasted with “scientific” knowledge:

Economic problems arise because of change.  With change, the data changes and plans must also change.  A central mind could never deal with this change.

So according to Austrians, ultimate decisions must be left to the people who are familiar with these circumstances if the knowledge they have is to be utilized in the economy.

Keeping this in mind -

So let’s begin by looking at the institutions associated with a market order:

Again, must start with the moral order or ethics

·         Respect for private property rights – without private ownership in the means of production there can be no market for the means of production.

Without a market, there are no prices

Without prices there is no rational economic calculation (can’t calculate profits and losses for example) - more on this later

So prices are the knowledge holders in a market order – they include what we might call “social knowledge.”

            The knowledge or “data” imbedded in prices are never “given” to a single mind – the knowledge is very complex.

So the economic problem is not one of allocating “given” resources – but how to secure the best use of resources for ends only the individuals know!

How can we make the best use of individual knowledge – or how well does a system turn individual knowledge into social knowledge?  Social knowledge can then be used by others in decision making.

This is the knowledge of “the particular circumstances of time and place.”  Every individual has this knowledge – it is subjective.  Use of this knowledge can only be made if decisions are left to the individual and with his active cooperation.  And this all changes with time.

This knowledge, by its nature, cannot be conveyed to any central authority in statistical form  -- planning, therefore, will fail (to meet even the basic necessities of life) from this point of view.

This is why Hayek calls for very general rules – not specific ones. 

General rules allow people to make their own decisions, etc.  Very specific rules prohibit that.  Kind of like the difference between “macro” management and “micro” management.

Decentralize and leave decisions to the “man on the spot” most familiar with changes around him so we can take advantage of the knowledge the man on the spot knows.  But this man also makes decisions on information – he needs to fit his decisions into the whole pattern of changes of the larger economic system.

How does this happen?

Prices act to coordinate the separate action of individuals in the economy in the same way that subjective values help the individual to coordinate the parts of his plan.

Example from Hayek:  Tin

Assume a new use (somewhere in the world) has arisen that is in high demand.

All the tin users need to know is that some of the tin they used to consume is now more profitably employed elsewhere – so they economize tin.  There is no need for the great majority of them to know where the more urgent need has arisen.  Some know of the new demand and fill it – the effect will rapidly spread throughout the system and influence not only all the uses of tin but also substitutes and substitutes of substitutes and complements, and so on. 

All of the happens without the great majority knowing anything about the original cause of these changes.

As Hayek puts it:  “The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.” (p. 87)

Subjective values remain important.  Individuals remain important.

“The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.” (p. 86)

Individual participants need to know very little in order to take the right action.  This is how the order develops – unplanned by anyone.

The knowledge is a function of the process of interaction – we can never know the outcome of a process before the process takes place!!

The market seems to abandon communal goals altogether and work its own “logic” on social transformation without need or appeal to any communal will.

Perhaps this is what bothers some people – they don’t like markets because there is no “communal will” but simply individuals using their own individual wills. 

This leads to what Hayek calls “the pretense of knowledge.”

or

“The scientistic attitude” – economists (and others) attempting to control the order – believing they have the knowledge to do so.

But

We know general conditions, but never specifics.

Attempting to control the order will change the order.  Unintended consequences.

Good or bad? 

DO ICE FOUR