The Philosophical Underpinnings of Markets Over Mandates

by Pete Geddes

I have several hockey-playing friends who simply cannot understand my opposition to government subsidies for “green” energy. They question my belief that the market process is likely to generate environmentally and ethically superior results and default to describing me as a “market fundamentalist.” If you find yourself in a similar situation, I’d like to offer the following for your consideration.

In addition to several empirical arguments against government intervention, I think it's important to explain the philosophical underpinnings for my preference for markets over mandates. I start with these insights from 1974 Nobel Laureate F.A.Hayek:

The knowledge problem

In modern societies, knowledge of time- and place-specific conditions is dispersed among millions of individuals. Consumers and producers communicate their desires through prices. Markets then allocate resources -- labor, capital, and human ingenuity -- in a manner that can’t be anticipated or mimicked by a central plan (or planner.)

This fundamental insight is found in Hayek’s essay The Use of Knowledge in Society."

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic.

This piece explains why large scale economic planning fails. It is because the social world does not consist of physical objects governed by simple laws of causality, but is a ‘kaleidic’ world inhabited by individuals with minds, whose inner recesses are inaccessible to the external observer, where knowledge is not ‘fixed’ and available to a single person or institution. (Another essential critique is found in the work of János Kornai.)

Here's an example from the American West: 
Between 1933 and 1938 the Columbia Basin Project (CBP) impounded water behind the Grand Coulee Dam. It was to provide irrigation and power to 100,000 family farms, and turn the desert of eastern Washington into lush farmland. Two generations later, only a few thousand farmers and corporations work the irrigated land--at great cost to taxpayers and the environment.
 What was the problem? Planners designed policies for an unknown future, the only kind we have. The CBP plans did not anticipate changes in technology such as the replacement of horses by tractors. The tractors, tillers, and harvesters all became much, much larger and faster. This led to huge consolidation rather than 40-acre farms. Social preferences are even more difficult to predict (e.g., for healthy runs of wild salmon instead of more dams for irrigation).

“Product of human action but not human design…”

My progressive friends are firm believers in the theory of evolution and are highly dismissive of alternative explains, except when considering social policy. I find this intriguing, but not surprising.

The idea that things exist in the world that are the product of human action but not human design is highly unintuitive. In Hayek’s 1967 essay, “The Principles of a Liberal Social Order,” he explores this:

Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence.
And Herbert Simon the first of two non-economists to win the Noble prize in economics, writes beautifully about this dichotomy in his book, The Sciences of the Artificial:
We have become accustomed to the idea that a natural system like the human body or an ecosystem regulates itself. We explain the regulation by feedback loops rather than a central planning and directing body. But somehow, untutored intuitions about self-regulation without central direction do not carry over to the artificial systems of human society… To my students a pattern implied a planner in whose mind is had been conceived and by whose hand it had been implemented. The idea that a city could acquire its pattern as naturally as a snowflake was foreign to them. They reacted to it as many Christian fundamentalists responded to Darwin: no design without a designer!
The market process and human freedom

Finally, in Hayek’s 1974 Nobel Memorial Lecture “The Pretence of Knowledge,” he expressed the connection between these ideas and the links to human freedom:

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson in humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
Markets are a decentralized process of discovery. The price system transmits information that spurs millions of individuals into action, harnessing their unique knowledge and talents. Through trial and error, experimentation and feedback, creative ideas emerge. This is certainly something to celebrate this holiday season.

Merry Christmas!