Self-Organization and Politics: Hayek and “Health” Economics

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Friedrich Hayek first began writing about economic self-organization in the early 20th century, before there was a cohesive science of complexity.  His writings paint a picture of economic life teeming with complex processes and complex interactions, giving rise to emergent organizational structures.  Hayek gave these collected structures the name “extended order,” and cautioned that the complexity of its origin prevents us from ever knowing in clear terms about its outputs, barring us from quantitative predictive economics. In relation to complexity, Hayek claims that we are fundamentally ignorant, and should therefore reign in our “fatal conceit” – the idea that we can use coercive force to induce self-organizing phenomena to take whatever form we would like.

Despite his claims regarding our inescapable ignorance about the specifics of complex phenomena, Hayek does assert that we can gain knowledge about the patterns that emerge.[1]  We can study their shape, their longevity, and their health.  Above all, we can – and must, Hayek insists – study the conditions under which differing patterns emerge and remain healthy.  It is these conditions that Hayek advises must be protected from the vicissitudes of our ignorance – especially when that ignorance is enshrined in public policy and expressed through coercive force.

Hayek’s warning concerning our ignorance of complex phenomena is both empirical and philosophical in nature – it refers not just to what we know at any given time but what we can know in principle. This larger theory concerning the ignorance humanity faces in respect to complexity is also expressed in his analyses of concrete economic phenomena.  The overall conclusion is that a diverse population of free economic agents is much more able to process complex phenomena than any centralized power.  Liberty and diversity are associated with capacities for adaptation – and for evolution.

Hayek’s dual assertion – of our fundamental ignorance concerning the specifics of self-organizing phenomena and our consequent need to study their patterns and general structures – should revive his work for a new century immersed in the ideas of complexity, while undermining the laissez-faire straw man that modern critics use to caricature his legacy.

 

Rules and Tendencies

Emergent patterns are often expressions of underlying rules or tendencies.  For example, the higher-order spherical structure of a soap bubble is the expression of the lower-order tendency of its parts to seek a reduction in surface tension.  The soap molecules collectively compute a solution to the problem of surface tension based on that “rule” of reducing it, and a spherical shape emerges.  From that point, the soap molecules forming the sphere are granted a new collective capacity for the duration of their emergent structure:  to float.

Likewise, Hayek states that “extended order” – his phrase for a collection of higher-order emergent social structures – depends on abstract rules and tendencies governing the lower-order behavior of individual social actors.  These rules and tendencies are the Rule of Law and traditional norms, respectively.  By virtue of their presence, Hayek states, society gains new capacities for evolution.

 

The Variable Production of Ignorance through State Action

Hayek claims in The Road to Serfdom that the health of extended order depends on the Rule of Law – the construction of clear abstract rules that apply equally to all citizens within a social order and which “do not aim at the wants and needs of particular people.”[2]   Through providing clarity and equality, rule of law establishes terms of engagement that can be depended on when engaging in economic activity.  This reduction of uncertainty in economic life reduces the ignorance under which economic actors must perform, as the set rules allow actors to “predict the behavior of those with whom they must collaborate” as well as the behavior of any governing body.[3]  That the rules be abstract and not specific is of high importance, and it should be noted that this parallels directly with Hayek’s ideas about our ignorance in relation to complex phenomena – Hayek insists that we restrict ourselves to making rules about what we can know, meaning general patterns of behavior and not specific situations, which could be infinite.  Abstract rules for abstract patterns.

He contrasts this approach with a planner or planning board, which makes “arbitrary,” specific decisions in relation to specific situations.  This approach increases uncertainty in economic life because it is far less predictable than behavior constrained by clear rules.  Without clarity or consistency, economic actors are left with a climate of greater ignorance.  As Hayek puts it, “The more the state ‘plans’, the more difficult planning becomes for the individual.”[4]

Hayek uses prices in The Road to Serfdom to illustrate this phenomenon concretely:

…because all the details of the changes constantly affecting the conditions of demand and supply of the different commodities can never fully be known, or quickly enough be collected and disseminated, by any one center, what is required is some apparatus of registration which automatically records all the relevant effects of individual actions and whose indications are at the same time the resultant of, and the guide for, all the individual decisions.

This is precisely what the price system does under competition, and which no other system even promises to accomplish.[5]

When price-setting is free within the terms of economic-engagement, each action of an economic agent contributes information concerning the valuation of a service or commodity. These valuations reflect differential need, supply, demand, or any of the infinite other possible criteria for valuation.  The power of these free relations between agents is that the specific source of valuation doesn’t matter – only the abstract pattern of differences of valuation.  From the aggregate of these differences, specific prices emerge which represent the information-processing power of all economic actors involved.

Contrast this to the actions of price-setting boards, whether state-sponsored or organized by private cartels.  In such situations, economic actors are left ignorant of the information that a freely fluctuating price represents.  As the possible grounds for valuation by economic actors is infinite, a finite regulatory body cannot possibly process that information in a manner more appropriate than the actors themselves.  Price-setting by board removes the most powerful information-processing aspect of extended order – its diversity of perspectives.  It is the differences in valuation between parties that accrete into a meaningful expression in the form of prices.

Hayek sees human diversity as indicative of the health of an economic ecosystem.  In fact, Hayek claims that extended order itself depends upon diversity and its attendant phenomena of specialization and intensification, which become self-stimulating by creating pressures for more diversity.  Diversity is a necessary initial condition for the pattern of extended order.  With a greater number of perspectives, economic actors can process more and different information, leading to a proliferation of taxa of valuation.[6]

In short, diversity undergirds economic evolution (emphasis mine):

Order is desirable not for keeping everything in place but for generating new powers that would otherwise not exist.  The degree of orderliness – the new powers that order creates and confers – depends more on the variety of the elements than on their temporal or local position.[7]

 

Protectionism vs. Evolution – Our Ignorance of the Scope of the Possible

Hasty actions taken in ignorance by singularly-powerful entities can wreak havoc on the health of economic systems.  For example, coercive actions by state authorities can serve as the role of stressor in economic ecosystems, driving the system into a sclerotic, regressive state that closes off opportunities for evolution.  Taxi medallion systems in major cities across the U.S. serve as an instructive example of this phenomenon.

As we have written about here before, a taxi medallion is a sort of license that authorizes a vehicle to operate as a taxi within a given city.  City taxi commissions install hard caps on the number of taxi medallions that are authorized, effectively limiting the number of vehicles that may legally be utilized for taxi services.  As of 2009, the number of authorized medallions in New York City was 13,273.[8]  The scarcity of NYC taxi medallions is so extreme that in 2011 two medallions – not taxis, just the license itself – were sold for $1,000,000 each.[9]

Taxi medallion regulations create incentives against diversity by pricing small-scale actors out of the market.  This happens in two distinct ways.  First, taxi medallion systems establish a hard cap on operating vehicles, turning the right to operate a taxi business into a privilege that can be granted to favored interests.  Secondly, these caps institutionalize artificial scarcity, causing the medallions themselves to be worth hundreds of thousands of dollars, redirecting flows of resources from diversifying forces such as immigrants entering the industry into the homogenizing loop of lobbying and cronyism.

In addition to creating such distortions and incentives towards regression within the known space of the taxi industry, these regulations are now being used to prevent evolution, seen in the success of many city taxi cartels in employing regulatory bodies to shut down the operations of innovative ride-sharing services such as Uber and Lyft.[10]

We see in the above examples protectionism or restrictionism – granting privileges against competitive forces to well-established economic agents at the direct expense of newer or less powerful enterprises.

The fate of Uber and Lyft in many cities exposes a strongly destructive interaction between our ignorance and the policy phenomena of protectionism:  arbitrary regulations created to control specific industries will be used to constrain or prevent novel economic actors.  We cannot know how today’s regulations will affect tomorrow’s bleeding edge of innovation.

We could call this the Problem of Novelty – we cannot know what exists until it exists – and we cannot know how constricting our policies will be towards novel structures until we see their suppressive tendencies in action.  Even more troublesome, novelty can emerge not just as new specific structures occupying existing roles, but as new roles altogether. This is a case in which perhaps Hayek did not go far enough in describing the range of our ignorance.  In regards to novelty, we are not just ignorant of the specifics but also of the possible patterns that may emerge.  Evolutionary phenomena reveal not just new structures, but new capacities, which open the possibility for altogether new spheres of action and new types of structures.  And just as we can never know ahead of time what marvelous new structures will emerge, we can never know what structures will never emerge because of our policy actions, taken in ignorance.

The policy phenomenon of protectionism is a clear example of state action taken against the health of extended order.  As Hayek puts it, “unintended consequences are paramount.”[11]  Ignorance is fundamental.  And by placing economic evolution in a vice, we place our understanding in a vice as well:

The great question at this moment is whether man’s mind will be allowed to continue to grow as part of this process or whether human reason is to place itself in chains of its own making.

What individualism teaches us is that society is greater than the individual only in so far as it is free.  In so far as it is controlled or directed, it is limited to the powers of the individual minds which control or direct it.[12]

It is for this reason that liberty – like diversity – is a necessary condition for economic evolution and economic health.  There is a clear link between liberty and the capacity for an economy to evolve and adapt.

 

Towards “Health” Economics

Hayek in our era is a frequent target for caricature.  Polemicists and scholars on the right and the left portray Hayek as a proponent of completely unsupported or unregulated economic life.  A common charge against his relevance is that he was associated with purely classical economics, and therefore with homo economicus and other targets of modern ridicule such as that of the “rational actor” or “rational market.”

But Hayek’s work paints a different picture.  Increasingly in his later work, Hayek speaks less as a neoclassical polemicist than as a student of self-organizing phenomena. This transformation hinges on his analysis of ignorance as a force.  Political scientist Jeffrey Friedman argues that Hayek had “moved away from the neoclassical orthodoxy by paying more than lip service to ignorance as an economic phenomena,” describing Hayek’s contribution to the science as a “cognitive turn.”[13]  This distance between classical economics and Hayek can be seen in his call in The Fatal Conceit­ to supplant Adam Smith’s “invisible hand” with an “invisible pattern.”[14]   In light of Hayek’s focus on patterns and on the conditions under which those patterns emerge, I would argue that Hayek’s measure of a self-organized economic structure would not be based on “rationality,” as his left critics claim, but on healthJust like any other dissipative structure, economic phenomena can choke and die if harmful conditions – such as a stultifying policy of protectionism – or persistent, deepening inequality – or a lack of economic mobility – arise.  To suggest that Hayek’s ideas can be boiled down to “neoclassical economics” is to erect a very tired straw man.

I am not, as many of his critics seem to be, convinced that Hayek would be against any and all action to reign in the private abuses against free competition that have been observed in 21st century capitalism.  Indeed, at several points – including within his infamous Road to Serfdom – Hayek explicitly distinguished between a principled classical liberal approach to economics on the one hand, and a vulgar “dogmatic laissez faire attitude” on the other.[15]  Hayek was no friend to cartels, monopolies, and legally privileged corporations.  Nor do I see Hayek’s viewpoint as self-limiting.  Despite the potency of Hayek’s ideas about human ignorance in the face of complexity explored throughout this piece, he nevertheless saw hope for that ignorance to be reduced over time, through developments in the science and philosophy of complexity (emphasis my own):

Predictions of a pattern are nevertheless both testable and valuable.  Since the theory tells us under which general conditions a pattern of this sort will form itself, it will enable us to create such conditions and to observe whether a pattern of the kind predicted will appear…

Though we may never know as much about certain complex phenomena as we can know about simple phenomena, we may partly pierce the boundary by deliberately cultivating a technique which aims at more limited objectives – the explanation not of individual events but merely of the appearance of certain patterns or orders…

Once we explicitly recognize that the understanding of the general mechanism which produces patterns of a certain kind is not merely a tool for specific predictions but important in its own right, and that it may provide important guides to action (or sometimes indications of the desirability of no action), we may indeed find that this limited knowledge is most valuable.[16]

Hayek’s policy prescription is clear: “Create such conditions.”  Operate at the correct level of emergence.  Vacate the absurd business of regulating alcoholic beverage sizes – or creating boards to arbitrarily decide the exact number of taxis that should be allowed to operate – or birthing bureaucracies to control the licensing processes for hair braiding – or any of the other Sisyphean practices that attempt to control the infinite specific details of economic life.  Do not kill what you are trying to birth or nurture by trying to force specific outcomes.  Create the necessary general conditions under which your desired pattern will emerge and remain healthy – then get out of the way, because you cannot possibly know what to do next.

 

 

 

 

 

[1] Friedrich Hayek, “Theory of Complex Phenomena” in Readings in the Philosophy of Social Science, ed. Michael Martin and Lee C. McIntyre, http://www.ucss.ge/publication/Week%2004.pdf.  Accessed May 26, 2014.

[2] Friedrich Hayek, The Road to Serfdom (Chicago, University of Chicago Press, 1944, 2007), 113.

[3] Ibid., 113.

[4] Ibid., 114.

[5] Ibid., 95.

[6] Friedrich Hayek, The Fatal Conceit: The Errors of Socialism (Chicago:  University of Chicago Press, 1988), 95.  “…this is so because diversity enables men to dispose of more information.”

[7] Ibid., 79.

[8] “Annual Report,” New York Taxi and Limousine Commission, http://www.nyc.gov/html/tlc/downloads/pdf/tlc_annual_report_2009.pdf.  Accessed May 26, 2014.

[9] Michael M. GrynBaum, “2 Taxi Medallions Sell for $1 Million Each,” New York Times, October 20, 2011, http://cityroom.blogs.nytimes.com/2011/10/20/2-taxi-medallions-sell-for-1-million-each/?_php=true&_type=blogs&_r=0.  Accessed May 26, 2014.

[10] Jim Epstein, “Woman With a Car vs. Washington D.C.’s Taxi Cartel,” Reason, May 13, 2014, http://reason.com/blog/2014/05/13/woman-with-a-car. Accessed May 26, 2014.

[11] Hayek, The Fatal Conceit, 71.

[12] Friedrich Hayek, Individualism and Economic Order (Chicago:  University of Chicago Press, 1948), Accessed May 26, 2014.  http://mises.org/books/individualismandeconomicorder.pdf, 32.

[13] Jeffrey Friedman, “Popper, Weber, and Hayek:  The Epistemology and Politics of Ignorance,” Critical Review 17 (2005), http://www.criticalreview.com/crf/pdfs/ignorance_article.pdf, 26, 37.  Accessed May 26, 2014.

[14] Hayek, The Fatal Conceit, 14.

[15] Hayek, The Road to Serfdom, 85.

[16] Hayek, “Theory of Complex Phenomena,” 63 -66.