One of the aspects of capitalism and the free market that the typical lay person finds difficult to comprehend is the fact that the complex structure of work, production, distribution, and trade could possibly take place without some kind of centralised, directing authority in order to co-ordinate everybody’s efforts. Wouldn’t there just be chaos and mal-coordination with everyone trying to make their own, independent plans if there is nobody at the tiller to steer the giant ship?
This fallacy stems from the belief – accentuated by holistic concepts such as aggregate, pseudo-statistics like “GDP” or “the national income” – that what we refer to as “the economy” is some kind of enormous machine that has “input”, with a single operator “processing” these “inputs” into “outputs”.
In fact, rather than being one giant, amorphous blob “the economy” is made up of millions and millions of independent, unilateral acts of production and two-way trades, many of which will never have anything to do with each other. I may sell an apple to my neighbour for 10p in London; another person may sell an orange for 20p to his neighbour in Manchester. Neither of the two pairs of people has ever met, nor need any of them have any involvement with the exchange of the other pair; and yet both exchanges would be regarded as part of “the British economy” in mainstream discourse.
Rather than being a top-down operated machine, “the economy” is a bottom up network of independent transactions – motivated by the ends desired by each and every one of us rather than by some bureaucrat – joined together only through the communication of the price system. All of the trades together, stimulated by varying and changing desires and ends that people seek, will have a constant and unceasing influence on the prices that regulate the supply of goods relative to their demand. Ironically, it is precisely because of such complexity – the so-called “knowledge problem” – that the attempts of any central authority to control and direct it are nothing short of futile. Even worse, however, is the fact that without market prices generating profit and loss such an authority would have no rational guide to apportion resources to where they are most needed. This is what Ludwig von Mises established in his Economic Calculation in the Socialist Commonwealth, a work that was published at the birth of the world’s greatest collectivist experiment – the Soviet Union – and foresaw its ultimate failure.
An oft-heard complaint, particularly from the left, is that “globalisation” – by which we mean economic globalisation, characterised by increased trade across borders, as opposed to political globalisation, which is increased co-operation between states and/or the consolidation and centralisation of state entities – has led to a decimation of local communities and economies. All that this means, however, is that the market for goods has simply expanded so that one can source one’s needs from pretty much anywhere on the globe. It is still the case that the driving force of demand is not global or holistic – it resides very locally in every individual person’s tastes and desires. Such complaints therefore fail to recognise the irony in calling for a very distant and hardly local entity – the state – to halt globalisation and expanding markets by replacing what individual, local people desire with its own ends.
This myth, of course, goes further than economics and has more than seeped into philosophy as well, stemming from a basic misunderstanding about what is required for the human race to live in peace and harmony. Such peaceful co-existence does not demand that we all pursue the same ends or ultimate goals, follow the same plan or sing from the same hymn sheet; nor do we need some centralising authority to prevent “discordance” between the actions of one person and another. Rather, what is required is that we can each follow our own plans while not conflicting with the plans of others.
This is precisely the great achievement of the institution of private property. Recognising that all conflicts have their origin in the contest over physical goods, an exclusive right is granted to the first user-producer (or to the recipient of the good in a voluntary exchange) so that he may fulfil his ends without molestation from other people; and that other people can use the goods for which they are the first producer-user without interference from him. Any person arguing in favour of “one direction” and “harmony” at the behest of centralised control really means that everyone else’s plans should be overridden, with force, by his own. Indeed, in contrast to voluntary exchange, every transaction that is compelled by the state requires there to be at least one loser, one person who does not want his funds directed to the ends desired by the state. Rather than producing harmony what results is bitterness and frustration from at least one part of the population whose needs are denied in order to serve the needs of another part. Furthermore, aside from the economic chaos that such a system brings, rather than inspiring such qualities as productivity, self-reliance, hard work, prudence, patience and responsibility, the resulting social disorder instils, in their stead, laziness, apathy, conflict, corruption, impatience and cynicism – hardly the human qualities that one would wish to exemplify as the hallmarks of a “peaceful” and “harmonious” society.
True harmony can be brought about only by allowing each and every individual to pursue his own ends with the scarce resources over which he has lawful ownership, while allowing everyone else to do the same – permitting the human race to flourish peacefully and devoid of conflict. Not only does the state fail to aid this process, it is the active cause of its destruction – and the sooner we recognise this then the closer we will be to building a lasting peace and prosperity.
Next week’s myth: Capitalism is Exploitative