
The Astonishing Fact Revealed by the Market Economy
The great economist Friedrich Hayek, a Nobel laureate, devoted his entire life to proving that the spontaneous order of the market is superior to the central planning of the economy. In his book entitled The Fatal Conceit: The Errors of Socialism (1988), he states that this is not an opinion, but an “astonishing fact”.
The work is devoted to explaining the reasons why, although it is easy to observe and understand, many people do not believe that the spontaneous order of the market is superior to central planning. After 1988, when the book was published, a change occurred. The fall of communism the very next year clearly highlighted the danger of a small number of people making economic decisions (determining what, how much, how and for whom to produce), which they then impose on society, silencing the preachers of central planning – at least for a while.
The collapse of communism, however, does not prevent a large part of the Romanian population from believing that “important” areas of economic and social life should be organized and administered by the state. People now accept that the market is necessary in certain sectors, but they believe that the main areas of economic and social life, such as health, culture, education, insurance, energy and, to a certain extent, even the mass media, should remain state-owned. Changing the mentality formed by long communist propaganda is, therefore, very difficult.
One can even reverse Hayek’s statement and say that the “astonishing fact” is that the majority of the population prefers statism and planning in all important areas of economic and social life. And this is not only in post-communist Romania, which is somewhat explainable. In the EU, for example, numerous politicians, businessmen and commentators argue that it is necessary to harmonize economic norms and regulations, social security systems, industrial policies, and so on, at European level.
The adherents of standardization and centralization imagine a “level playing field”, where all differences are attenuated, and competition is “fair”. They imagine a world in which everyone enjoys the benefits of competition, without having to put in the effort it requires. Needless to say, such a world does not exist and cannot exist.
The performance of the market economy is determined by two factors. The first lies in the fact that the decentralization of decisions largely solves the “knowledge problem”, which Hayek describes at length in his fundamental work “The Use of Knowledge in Society” (1945).
In autocratic systems of government, the decisions of the supreme leader or his acolytes are based on the knowledge possessed exclusively by the decision-makers at the top. In a decentralized or even atomized system, such as the free market economy, individual decisions are based on all the relevant knowledge that exists in the minds of all the people concerned, which may be in the millions. The two ways of making decisions cannot be compared in any way! Decentralized decisions, made by millions of people, use more relevant information than centralized decisions. As a result, on a societal scale, there are fewer errors.
The second factor is that the market-based economic system contains an invaluable element, namely an error-correction process. This is, in essence, a process of natural selection, created by freedom of choice. As a result of the competition that reigns in the market economy, errors are quickly detected and eliminated, and viable solutions are brought to light. Without competition, there is no other means of quickly discovering the inevitable errors produced by “our irreducible ignorance” (Hayek). The process of natural selection is found everywhere where there is life and does not need a level playing field. On the contrary, it works better the more diversity there is.
Decisions made by a small number of people and imposed on the majority of the population are of a completely different nature. The head of a family, a business or a state inevitably uses less information than the people in the group he leads. However, if the group is small (family, tribe, business, etc.), the leader may have access to relatively more relevant information than the group as a whole. In addition, the smaller the group, the more groups there are within the population in question and, therefore, the more competition between them. Therefore, the economy, as a whole, functions very well on the basis of autocratic structures (families, teams, businesses, etc.), as long as these elementary units are in competition with each other (not to mention private property, which is a very strong motivation and does not exist in the public sphere). On the contrary, the larger the units created by a centralized organization of the economy, the smaller the possibility of using relevant information and fair competition to ensure the correct functioning of the economic system as a whole. Errors accumulate – until the final collapse, as in the case of communism.
However, liberal ideas are shared by few people, and this is not only in post-communist Romania, where opinion polls show that nostalgia for the communist past is shared by a large part of the population (48.1% of those surveyed in an opinion poll conducted by INSCOP in November 2023). The explanation that Hayek gives for this other “astonishing fact” is that the moral values, which support the spontaneous order of the market (individualism, private property, freedom, responsibility, respect for the word given, compliance with contracts), are in contradiction with the moral values of the small primitive tribe, in which the psychology of people was formed over thousands and thousands of years, namely solidarity and altruism. However, the attempt to impose the values of small-group life on the scale of large society through the state destroys those values. Therefore, most people not only do not understand where their prosperity comes from, but even come to detest the moral values of the market economy on which their well-being and that of others is based.
In the literature, there are various explanations for this “astonishing fact”. The first is based on Hayek’s analysis in the aforementioned book and in his other works: the belief that political decisions can replace individual decisions and that there are formal and centralized solutions to all social problems. The second highlights the way the democratic political system works: it takes a certain time for political decisions to produce all their effects, and public opinion does not, as a rule, make the connection between wrong decisions made in the past and their disastrous results in the present. Finally, it is emphasized that the most common form of government is authoritarianism. History, not to mention prehistory, is full of examples of civilizations based on a system of government in which absolute power is held by an autocrat. Examples of free societies are very rare and, for some authors, on the verge of extinction. It is therefore not surprising that most people fear freedom, democracy and the responsibility that they entail.
However, there are two forces that work in favour of free society. One is the “astonishing fact” (but often unknown) that free society is more effective than despotism, and this not only in the economic field. The process of natural selection works in its favour in the long term in all spheres of social life. The second force is education: freedom is attractive, inter alia, through its results! Therefore, most people confronted with the “astonishing fact” that spontaneous order is superior to deliberate organization are willing to change their views. If they have not yet done so, it is because they have not really reflected on the subject. Through information and education, the process of natural selection can therefore be accelerated, which works to the benefit of the market economy, freedom and prosperity.
Note: the Romanian version of this article is available here.