Competition Is Cooperation

"The pricing process is a social process. It is consummated by an interaction of all members of the society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want-satisfaction, and the determination of the share of each individual. These three events are not three different matters. They are only different aspects of one indivisible phenomenon which our analytical scrutiny separates into three parts. In the market process they are accomplished uno actu. Only people prepossessed by socialist leanings who cannot free themselves from longing glances at socialist methods speak of three different processes in dealing with the market phenomena: the determination of prices, the direction of productive efforts, and distribution."

—Ludwig von Mises, Human Action

TGIF: The Knowledge that Only Free Markets Disclose

As a follow-up to my recent article about F. A. Hayek's classic article "The Use of Knowledge in Society" (1945), I thought it worth extending Hayek's exploration of this area of social theory. In 1968 the Nobel laureate-economist delivered a lecture in German known in English as "Competition as a Discovery Procedure." It's an alluring title, and anyone concerned with what makes for a good and prosperous society should be familiar with Hayek's basic point.

Hayek gets right to it. He notes that standard macroeconomists are guilty of having "investigated competition primarily under assumptions which, if they were actually true, would make competition completely useless and uninteresting." By that, he meant, "If anyone actually knew everything that economic theory designated as 'data,' competition would indeed be a highly wasteful method of securing adjustment to these facts."

In other words, if all the "data" were actually accessible data, solving society's scarcity problem would be a piece of cake, at least if the government's computer was powerful enough. (I'm led to understand that, fortunately, many economists have advanced since he gave this lecture, probably in part because of his challenge.)

"Hence," Hayek went on,

it is also not surprising that some authors have concluded that we can either completely renounce the market, or that its outcomes are to be considered at most a first step toward creating a social product that we can then manipulate, correct, or redistribute in any way we please.

Unfortunately, lots of such people are still around today.

Hayek (like his teacher Ludwig von Mises) knew that he needed to show that Adam Smith's "system of natural liberty" performed a critical service to mankind that could not be otherwise performed: the production of knowledge that is needed in a changing world of scarcity in which each individual must make plans but also be ready to adjust his or her plans in light of what other free individuals are doing. And that's what Hayek did, building on Mises and others. Hayek made contributions to the economic, or "practical," case for freedom that have been woefully unappreciated. The Austrian school of economics that Hayek was part of needs to be discussed more than ever.

Just as any sort of contest would be pointless if we infallibly knew the outcome in advance, Hayek wrote, so would marketplace competition. He considered "competition systematically as a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used." (Emphasis added.)

(Although, Hayek's German title, Der Wettbewerb als Entdeckungsverfahrenh, has been translated as "competition as a discovery procedure." I regard the word process as more appropriate because, unlike procedure, it suggests improvisation, spontaneity, and serendipity. Hayek's work overflows with an understanding of what he called spontaneous, or unplanned, order.)

Hayek reiterated his theme from "The Use of Knowledge in Society" even as he extended it. He wanted to know how can we even identify goods apart from what the market discloses over time through free producer and consumer action.

Which goods are scarce, however, or which things are goods, or how scarce or valuable they are, is precisely one of the conditions that competition should discover: in each case it is the preliminary outcomes of the market process that inform individuals where it is worthwhile to search. Utilizing the widely diffused knowledge in a society with an advanced division of labor cannot be based on the condition that individuals know all the concrete uses that can be made of the objects in their environment. Their attention will be directed by the prices the market offers for various goods and services.

Bottom line: government administrators may be able to give orders, but they cannot benefit the population. The Soviet Union no doubt used up resources making things that few people wanted. Hayek went on:

This means, among other things, that each individual’s particular combination of skills and abilities—which in many regards is always unique—will not only (and not even primarily) be skills that the person in question can recite in detail or report to a government agency. Rather, the knowledge of which I am speaking consists to a great extent of the ability to detect certain conditions—an ability that individuals can use effectively only when the market tells them what kinds of goods and services are demanded, and how urgently.

It's not magic that produces the knowledge that makes abundance possible for everyone. It's freedom of action, contract, and private property in a legal-political environment in which people peacefully and cooperatively pursue their happiness. The discoveries Hayek was talking about can take place only when people can 1) freely produce and offer products and services to others and 2) freely buy or not buy according to their own judgment. This includes labor services. Without that freedom, which is limited if not precluded by central planning and less-comprehensive regulation, an economy cannot be expected to benefit a large population.

The full case for a free society obviously has a rights-based, or justice-based, component, We are reasoning social beings who seek happiness. And the also has an important epistemic component, which Mises, Hayek, and others have laid out. We want justice for all individuals, and we want them to flourish. In a world of scarcity and dispersed and tacit knowledge, the free market is required. The moral is also practical.

TGIF: Liberty as a Problem-Solving Process

Strictly speaking, liberty isn't the solution to problems. It's what creates the framework in which solutions can be discovered. That is an important distinction because it reminds us that advocates of full-blown liberty do not offer the world a problem-free society but "only" a society in which problems are discovered and problem-solvers are mobilized as quickly, fairly, and efficiently as impossible.

To get this point across to students in lectures, I used to quote the the title of a 1970 hit record: "I beg your pardon, I never promised you a rose garden." Social troubles will not disappear with the emergence of full freedom, but the chances of spotting and addressing them will be maximized in the most just way. That's the best we can hope for in a world of scarcity and uncertainty. On the other hand, that's not too shabby, is it?

What makes this happen? The answer can be captured in a single word: incentives. In a free society people are rewarded--they profit--by spotting and solving problems or correcting errors, before others have done so. Self-interest is further aligned with the interest of others.

This aspect of social life has been developed for many decades by the most important economists, among whom I would spotlight those of the Austrian school. In the 20th century they include Ludwig von Mises, F. A. Hayek, Israel Kirzner, and Murray Rothbard, followed by a couple of later generations of social scientists who continue to work in this tradition.

If the incentive system is to work, people need to be free to offer solutions. The scientist Joseph Priestley (1733–1804), in writing about education, wrote that to discover the best methods, we need an environment characterized by "unbounded liberty, and even caprice." As Priestley also put it, "Now, of all arts, those stand the fairest chance of being brought to perfection, in which there is opportunity of making the most experiments and trials." (I wrote about Priestley's radical advocacy of freedom in education in Freedom and School Choice in American Education.)

The logic behind Priestley's idea isn't complicated. We don't always know if a method of accomplishing something will work--however good it may look on paper. It has to be tried. Since that's the case, we need a highly decentralized environment in which ideas can be tested. (I don't like the word system for what I have in mind because that suggests an overall design rather than what Hayek called "spontaneous order.") In a centralized system, trial and error would be dicey since the inevitable mistakes would be committed on a large scale, with little chance for individuals to opt out. But in a decentralized environment, mistakes are necessarily contained, readily observed by others, and then corrected by those who offer a different product or service.

Government agents face different incentives since government usually is the only game in town. In fact, they face perverse incentives: politicians and bureaucrats may prosper by the existence and even the exacerbation of problems. If an agency is failing, the solution most often is to appropriate more money! And since government centralizes approaches to problems, mistakes are committed on a large scale, especially when they are undertaken at the national level. Federalism can reduce the scale of error, but not nearly as much as the free market can because state and local governments lack other features of the marketplace.

This point turns the spotlight on another aspect of a free society: competition. Competition is what happens with one person thinks he or she has a better way of doing something than someone else does. The way to find out is to offer it to the public. This shows that competition and cooperation are two sides of the same coin, not opposites. But if the government erects obstacles to upstart competitors, the it throttles the process, and better ways of addressing problems are left on the shelf, if undiscovered at all.

Hayek called competition a "discovery procedure," which gets at a crucial point. I call competition the "universal solvent." We can find a similar idea in John Stuart Mill's On Liberty, in which he extols the truth-discovering value of the radically free exchange of ideas. (My favorite line from that book: "He who knows only his own side of the case, knows little of that.")

Freedom and competition make possible discoveries that would not have been found otherwise precisely because it is only in that environment--the market order--that people encounter circumstances and alternatives with respect to which they will demonstrate in action their true preferences--preferences they might not have expected to demonstrate. This is part of what is meant by "spontaneous order." For this reason, government planners cannot hope to simulate market outcomes. The planners are barred from ever knowing what would have happened if people were left free. As James Buchanan pointed out:

I want to argue that the “order” of the market emerges only from the process of voluntary exchange among the participating individuals. The “order” is, itself, defined as the outcome of the process that generates it. The “it,” the allocation-distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no order.”

...Individuals do not act so as to maximize utilities described in independently-existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of “as if” functions that are maximized. But these “as if” functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.

Much more could be and has been said on this subject, but the upshot is this: the best way to expose and correct problems and errors is to leave people free.

Competition, Cooperation, and Conformity

The opposite of competition is not cooperation (which is a complement of competition) but conformity.