D E F I N I N G
F R E E D O M
15
I
Thoughts on an ever-changing market system By Bruce Caldwell
began studying the writings of Friedrich A. Hayek, the social theorist and Nobel laureate in economics, back in the 1980s and quickly became hooked. My initial interest was in his insights about the limits of economic science, that when dealing with an ever-changing complex adaptive system like the economy, the sort of prediction and control we might hope to exercise over it is severely limited. In Hayek’s words: The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account. As an economist, I was trained to recognize that a free-market system is an effective means for allocating resources, but that it can be plagued by “market failures” that require government intervention. Hayek’s writings suggest additional reasons both to favor a market system and to be skeptical about the effectiveness of government intervention. His insight that a well-functioning market system allows individuals to make use of dispersed and localized knowledge comes into play in both respects. Mainstream economists have long criticized policies that involve price-fixing because, though politically popular, such policies have adverse unintended consequences in terms of efficiency. For example, agricultural price supports cause too many resources to be used to produce farm goods,
46 www.alumni.duke.edu/magazine
a misallocation of resources. This can lead to further policies to try to correct for the mistake, some quite absurd—like paying farmers to take land out of production. Hayek’s work supplements such basic economic reasoning by showing how flexibly adapting market prices also help people to make the best use of knowledge. Ever-changing market prices both reflect the decisions of millions of market participants, decisions made on the basis of their own local knowledge, and enable the market participants to make better decisions by providing them with knowledge about relative scarcities of the goods and services that matter to them. The system promotes the effective use of resources and of people’s knowledge. It is crucial to note that none of this happens because of some government directive. As Frédéric Bastiat pithily observed in the nineteenth century, “Paris gets fed” every day, through the freely made decisions and efforts of millions of market participants, none of whom has the job to feed Paris. Of course, sometimes markets go awry. Hayek was particularly worried about the effects of money (which he once dubbed a “loose joint”) on the larger system. He had lived through the Austrian hyperinflation of the 1920s and saw the damage that excessive money creation could do. But he was equally worried about the attempts of reformers to improve the economic system through the exercise of conscious control. Such reforms can interfere with the system’s ability to respond to changing knowledge. They also typically require that government regulators have more knowledge than they can ever possibly possess. In a world of dispersed and rapidly changing knowledge, mar-
In a world of dispersed and rapidly changing knowledge, market competition is often the best “regulator.”
