What Does the Market Process Do?

|Peter Boettke|

I am currently reading Tim Harford, Adapt: Why Success Always Starts with Failure (2011).  I am a huge fan of Harford, and have recommended his books on many occasions and to many different audiences.

I have just started this book, but it doesn't disappoint right from the start.  Harford's explanation of the market economy is one of adaptive efficiency; one that stresses failure as much as the lure of pure profit.  As he states: "The lessons seems to be that failure is fundamental to the way the market creates sophisticated and wealthy economies." (p. 10)  Markets don't avoid failure, but somehow "Failure in market economies, while endemic, seems to go hand in hand with rapid progress." (p. 11).  It is the failure to adapt to failed experiments in economic organization that is the problem with non-market systems, whereas markets compel participants to continually adapt to shifting conditions and to update quickly to the feedback provided.  Non-market systems are often immune (or at least partially immune) to feedback and the necessity of adapting.

This is really brilliant stuff, written in an engaging style full of relevant examples.  If you want to read economics that is both penetrating and wonderfully written, then Tim Harford is as good as it gets (I'd list Matt Ridley's The Rational Optimist up there as well).

As Coordination Problem readers will have noticed I have mentioned Dick Cornuelle's work often these past few weeks.  As I've mentioned, Dick was a very close friend and mentor of mine.  He was also a fascinating window through which to view Misesian economics.  Dick was a student of Mises before Rothbard, before Sennholz, before Kirzner.  He also devoted his work to a wider audience, and to a field not traditionally studied by economists.  But he was a market process theorist and he did emphasize the adaptive efficiency of the market economy.  Consider the following from De-Managing America (1975):

The economic process is usually explained in terms of profit motivation and competitive discipline, so we get the impression that the process communicates instructions like "Work hard and don't waste anything." But Adam Smith's invisible hand does much more than stimulate effort and penalize waste.  It works as a master arranger or harmonizer of diverse human effort and it works without control. The invisible hand that coordinates the economic process holds neither a carrot nor a stick.  It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them. ...

The free economic process shows each participant how to find his own way into a useful position in the larger mosaic. ... The way this happens in practice is illuminated by the concept of feedback ... (pp. 85-86)

If I was to restate my question from the previous post about Robert Clower, then it would be focused on this issue of feedback and adaptation that are required for economic coordination to be obtained in a way that result in progress and prosperity.  Why is it that a book like Harford's (or Cornuelle's) seems to capture the complexity of the economic system and its strength and weaknesses so much better than our formal theories are capable of doing.

Comments

[Brad]

Harford's new book sounds a lot like Lee and McKenzie's old book Failure and Progress.

[Martin]

A theory has to use jargon to restrict the meaning of a word to just one. A book can use plain english with as its 'drawback' that as readers we can read all kinds of things into it that the author did not intend.

You once said to read Mises as a Hayekian, and Hayek as a Misesian, are you not reading Hartford, as an Austrian?

[Troy Camplin]

Because complexity is, well, more complex than formal theories can ever capture?

In any case, failure too is a discovery process. You have to know what doesn't work as well.

[Katalog firm]

Yes Harford`s new book souns like Lee

[Peter Boettke]

The Lee and McKenzie book is _great_, Harford's book is a different take on a similar point so well worth reading. In fact, it is sort like Lee and McKenzie meets David Warsh's old book on Economic Complexity updated with modern examples.

I don't read Harford as an "Austrian", but I do read him as a sensible economist. I very much like his body of work.

[McKinney]

Mark Twain: "With a hundred words to do it with, the literary artisan could catch that airy thought and tie it down and reduce it to a concrete condition, visible,
substantial, understandable and all right, like a cabbage; but the artist does it with twenty, and the result is a flower."

The original purpose of studying great literature was to learn how to produce flowers instead of cabbages.

[Perplexed Hayekian]

"Your pet troll is smearing me with falsehoods again, guys."

I think you mean I'm smearing you with what you think.

[hayeking]

transact cost is nothing but coodinative cost

[Mathieu Bédard]

Sounds interesting. Is there anything on limited responsibility and legal personality?

[Troy Camplin]

Afew more than 20 words, but I nevertheless hope it's a flower:

http://theliteraryorder.blogspot.com/2011/05/creative-destruction.html

[Troy Camplin]

McKinney,

Your Twain quote inspired:

http://theliteraryorder.blogspot.com/2011/05/austrian-economics-and-literature.html