About the “Terrible, Horrible, No Good, Very Bad Idea”
In a column last week in The Week, Damon Linker does a good job at showing how difficult it can be to understand an uncomplicated (if not simple) idea. Linker’s column is some sort of hit piece on libertarianism through attacking an economic concept because it was explicitly discussed by the classical liberal Nobel laureate FA Hayek. “W.W” at The Economist blog responds well to the ridiculousness of Linker’s attempted attack, so I don’t have to. However, I would like to continue on points brought up by “W.W.” that are important – and show a fundamental (yet erroneous) bias that is so common that it might be a human trait: the bias toward intentional design.
It is true that Hayek has already discussed many of the issues involved in both planned and spontaneous orders as well as our biases toward their understanding (see e.g., Law, Legislation and Liberty vols 1-3), but I think Mises provides a better explanation to the phenomenon of “order” as well as a greater and more productive understanding for it.
Economics is by far the social science that has adopted this elemental idea that any undirected “system” will, assuming there are no exogenous changes, eventually lead to repeatable, stable, or even unchanging patterns. Whether we refer to these patterns as orders or patterns or designs or systems, the point is that by studying the economic like any other system, there is a tendency toward a pattern inherent in the seeming chaos. This is the idea of “equilibrium,” which unfortunately has been so exaggerated and obscured in modern economics that it is both ridiculed and useless.
Yet equilibrium means simply that there is an imagined (not existent) “end point” toward which all economic actions (if not subject to additional changes) tend. This equilibrium can be represented by the long-term or final “market price,” which necessarily reflects all present wants. This final price is where a maximum of wants are satisfied, among both buyers and sellers.
Obviously, if this point is reached there will be no more change since any action can only bring about a worsening of someone’s position. Equally obvious is that this end point is not “real” in the sense that it will not and cannot be reached, since preferences change along with changes in technology, knowledge, policy, and so on. So the market process “aims” for a moving target.
For whatever reason, this idea is ridiculed by the economically illiterate (including people like Linker) who almost without exception create straw men that are then bastardized before they move in for the kill. I’m not sure what a bastardized straw man, even though it has undoubtedly been killed, has to do with economics, but we are supposed to (I think) take these attacks seriously.
But let’s look at the basic idea again – the idea that there is a natural state of rest toward which changes tend. It is neither uncommon nor strange. A river might have a strong current, torrents, and waterfalls, and it might even change its path – yet the water always tends toward and will eventually find rest at the lowest reachable point. Even children know this, and playfully experiment with it by pouring water into a created landscape in their sandboxes or ditches.
The idea is also a fundamental assumption in astronomy and any other science studying changes (which would be all of them). Remember Newton’s three laws of motion? The assumption behind all of them is that movement has to do with some kind of force, and that without force there will be no movement. The natural state is rest. This not only applies to dogs left alone, which will invariably soon fall asleep, but to all objects in the physical world – including beings.
Acting requires force. Change requires force. Then obviously if we take any buzzing jumble of movement and cut the supply of this force, it will eventually find a state of rest. It will also find the state of rest where all other forces are evened out. Balls in a bowl will move in crazy patterns as long as the bowl is shaken, but as soon as it is put down the balls will end up at the lowest point in the bowl that they can reach without expending more energy. (The force of gravity pulls them down.)
This is why it is so darn laborious to bring a rock from the bottom of the valley to the top of a mountain: you need to expend energy to overcome the naturally existing gravity. Try taking the rock with you on your way down, and you’ll see it is much, much easier.
The particular orbits of planets around the sun are (as far as we can tell) the same year in and year out, and will remain unless there is other force pushing them out of their current paths. Note that this is not a forceless situation, but a situation involving several forces – and they’re in equilibrium! Release any other force big enough to change something in our solar system, and it will upset the present order. But it will also – eventually – bring about a new order, unless some other force is introduced (or removed).
This is how long-lasting boundaries between kingdoms were (or could have been) established a long time ago: the monarchs fought each other to expand their realms, but where they were equally strong they eventually subsided in their efforts to agree on a mutually acceptable midpoint. This is what negotiation is about, and what Aristotle’s ethics of the “golden middle” is about: the extremes will eventually balance out at a point of rest that is better than the changing back and forth as well as the constant tension.
It is also what, though perhaps implicit, is behind JS Mill’s argument for free speech: only by letting everybody speak their mind can we eventually figure out what is the correct, proper, and factual view. We arrive at the truth by letting all arguments be heard so that we can find the balance. See how this simple and age-old idea applies to dead bodies in space as well to human society and prospering? It is such a fundamental and obvious idea that nobody ever thought of disregarding it – through the centuries, we have only expanded its application.
But for some reason this does not apply to economics (or perhaps more accurately: political economy). Here it mysteriously turns into a “terrible, horrible, no good, very bad idea” (Linker’s words).
Of course, there is no saying that we cannot do better than whatever emerges spontaneously. We can choose to expend energy in order to bring about a different state of things – but this always comes at a cost. This is what institutions are all about: they may emerge spontaneously through individuals choosing paths of lesser (not necessarily least) resistance and thereby bringing about patterns that minimize costs (a Hayekian point); they can also be designed in order to avoid large costs (as in the case of property rights, to borrow a point made by The Economist‘s “W.W”).
Looking at what might emerge spontaneously (or how existing orders work), or whether certain designs are at all possible to bring about and sustain, are indeed at the very core of economics. It is neither terrible, horrible, nor a bad idea. It is the proper way of dealing with the world and society – and a good way of avoiding unnecessary costs.
Structured, rational thinking about community, cooperation, and the market