Order Defined in the Process of Its Emergence

|Peter Boettke|

James Buchanan wrote among the best page in economic theory penned in the last 50 years in my opinion. As he explained:

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."

What, then, does Barry mean (and others who make similar statements), when the order generated by market interaction is made comparable to that order which might emerge from an omniscient, designing single mind? If pushed on this question, economists would say that if the designer could somehow know the utility functions of all participants, along with the constraints, such a mind could, by fiat, duplicate precisely the results that would emerge from the process of market adjustment. By implication, individuals are presumed to carry around with them fully determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront. As I have noted elsewhere, however, in this presumed setting, there is no genuine choice behavior on the part of anyone. In this model of market process, the relative efficiency of institutional arrangements allowing for spontaneous adjustment stems solely from the informational aspects.

This emphasis is misleading. 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.

The point I seek to make in this note is at the same time simple and subtle. It reduces to the distinction between end-state and process criteria, between consequentialist and nonconsequentialist, teleological and deontological principles. Although they may not agree with my argument, philosophers should recognize and understand the distinction more readily than economists. In economics, even among many of those who remain strong advocates of market and market-like organization, the "efficiency" that such market arrangements produce is independently conceptualized. Market arrangements then become "means," which may or may not be relatively best. Until and unless this teleological element is fully exorcised from basic economic theory, economists are likely to remain confused and their discourse confusing.

Explaining the spontaneous order of the market economy is one of the primary tasks of the economist according to Buchanan.  But so few economists really understand the implications of the basic Smithian insight about the "invisible hand".  This disjoint between what is really valuable about the science of economics conceived of as a public science, and what modern economists know and do, is one of the sources for the intellectual edge one can sense when studying the works of James Buchanan.  Too few economists understand basic economics as Buchanan pointed out in such classic works as Public Principles of Public Debt (1962), Cost and Choice (1969) and in the essays that comprised What Should Economists Do? (1979).

Russ Roberts is one economist who understands basic economics and strives to rid our professional and public discourse of confusion over these basic issues.  Recently he gave a lecture on "The Deepest Thing We Know."

Comments

[McKinney]

The problem for most people is that Smith’s invisible hand is a paradox: competition (chaos) in a free market reduces greed better than government measures intended to do it.

The great psychiatrist Viktor Frankel discovered the principle of paradoxical intention in human behavior that he used to treat problems like stuttering, sleeplessness and phobias. For stutterers he would tell them to try to stutter next time they were talking in front of a group of people. For people who couldn’t sleep, he advised them to try to stay awake as long as possible. He encouraged people with fear of heights to climb tall things.

He also applied it to sports: teams who focused on winning usually lose because the players need to be focused, confident and relaxed to win and fixating on winning destroys all three. He encouraged coaches and players to fixate on playing their best and not care about winning.

In markets, less organization produces better organization. In helping the poor, those nations that were most blind to the needs of the poor lifted more people out of poverty while those fixated on helping the poor only made everyone poor.

[Mario Rizzo]

The implications of this are profound. It means that welfare economics in its usual sense is impossible. We cannot judge an outcome by the degree to which it satisfies the individual's preferences. They do not underlie our behavior. They do not stand outside of it. We cannot look at behavior here and decide how it measures up (cf: behavioral economics). Preferences are an ex post rationalization of behavior. They are not noirmative but descriptive. Some neoclassical economists hold to this today (Gul and Psendorfer, for example).

But the implications of this go further: it means that any equilibrium must be at best a pattern equilibrium -- no one can precisely predict preferences at the moment of choice. I discussed this in my comment which appears right after Buchanan's in this issues of the Literature of Liberty. I'll blog on this in a day or so at ThinkMarkets.

Thank you, Pete, for bringing this up -- I had forgotten all about it!

[Barkley Rosser]

While I fully agree that the question of emergent order is profoundly important and serious, I always find it a bit amusing when someone announces that they have discovered "the deepest think we know," whatever it is, hack, cough.

[Mario Rizzo]

We don't know the really deepest think -- it is too deep.

[Greg Ransom]

The issue is changes is "theory" laden changes in judgment and the growth of understanding and "tastes", the issue is not "free will".

Buchanan writes,

" 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."

[Troy Camplin]

McKinney is absolutely correct. Paradox underlies all complex, self-organizing processes. It drives complexity, emergence, creativity, growth. Complementary opposites have to be in balance. Chaos gives rise to complex macro-order; order gives rise to macro-chaos. The more you try to control a complex system, the less orderly and controllable it becomes. Unless you understand these things, you do not and cannot understand the economy. You are just talking about silly simulacra taking place in cloudcuckooland.

[Xerographica]

Here's my conundrum. I argue that if people truly understood how the invisible hand works then they would actively promote tax choice...

http://en.wikipedia.org/wiki/Tax_choice

Yet, I'm really the only person actively promoting tax choice. Hence, I'm really the only person that truly understands how the invisible hand works.

Heh! Ack! That can't be right though! Yet, none of you guys that have to understand how the invisible hand works (horseshoes/hand grenades) have ever come out either for or against my conclusion.

It's a juicy paradox! I LOVE the suspense.

Is it because you guys have your reputations to worry about? Kinda like how David Graeber perhaps might have been fired from Yale because he is an anarchist?

[Eric Evans]

Xerographica, please enlighten us humble country folk on what exactly the "invisible hand" is.

[Xerographica]

Eric Evans, hah! If I was any good at explaining to humble country folk exactly what the "invisible hand" is...then I probably wouldn't be the only one actively promoting tax choice.

But don't let that stop me from trying to show it to you. On this page I've compiled a long list of people's responses to tax choice...

http://pragmatarianism.blogspot.com/2012/01/unglamorous-but-important-things.html

The more responses you read...the more visible the invisible hand will become. If you can't clearly see the invisible hand after reading all those people's responses...then go ahead and ask friends/family/coworkers/dates/strangers what would happen if taxpayers could choose which government organizations received their taxes. Start compiling your own list of responses...and don't stop asking people until you can see the invisible hand as clearly as you can see your own hand.

When that happens then you can give me a hand trying to explain to humble country folks exactly what the "invisible hand" is. Because...two heads are better than one.

[Eric Evans]

Well, first of all, I think virtually everyone who frequents this blog would agree that taxes are not a voluntary exercise (although some out in the world still imagine them to be). Furthermore, in many cases, the government allocates those tax dollars towards goods/services the vast majority of the public doesn't want nor need, and even if the government happens to provide services that consumers would desire anyway, there's no guarantee (much less incentive) that the services the government decides to supply creates the most value to those consumers. So on those two points alone, the "invisible hand" does not apply. The dollars we are taxed for are not naturally finding their way to their most efficient use.

So onto "tax choice," from your own Wikipedia link:

"...the theory that taxpayers should have more of a say how their individual taxes are allocated."

This theory assumes two things:

1) All citizens must pay taxes.
2) The government retains ultimate authority over how those tax dollars are allocated.

So to that end let's establish one fact: there is no contract (tax form legal garble notwithstanding) that specifies that we agree to pay taxes to the government, much less that we agree on terms as to how much, how and when they should be paid or for what services. We are forced to pay this money, however much they want, whenever they want for whatever they want, and once that money is out of our hands it's out of our control.

So the government in effect extorts money from people, like the mafia or a gang extorting "protection" payments. Taking that into consideration, the concept of "tax choice" is analogous to asking your extortionist to spend the money he's extorted from you only with certain businesses out of respect. There's no control there at all on the part of the extorted; once the extortionist pockets the money, it is his and he will do with it as he pleases.

If the extortionist happens to do what you like, that does not suddenly transform the extortion payments into voluntary, mutually beneficial transactions. You are still not in control of your own money, and thus it does not have the possibility of seeking that which would provide the most value to you. Therefore, the "invisible hand" still does not apply to "tax choice".

[Daniel Kuehn]

On Mario's point -
I think it's very important here to distinguish between preferences, and the utility functions that economists use to characterize those preferences ex post. These are two quite different things. I agree with Mario that we need to be suspicious of welfare analysis for this reason. My view is that a lot of welfare economics is... if not useless... just a rule of thumb contingent on strong assumptions or value judgements at best.

This is because of what Buchanan highlights here (that we really aren't utility maximizers - we are situational choosers and we don't have thes things called "utility functions"). It's also because of more traditional IUC concerns.

[Xerographica]

Eric Evans, in a tax choice system people would directly allocate their taxes. Meaning, at anytime throughout the year you could go to the Environmental Protection Agency website and submit a payment. The EPA would then send notice of your payment to the IRS.

People would still of course have the option to just give their taxes to congress. Maybe some people like having public goods personal shoppers?

As is mentioned on the tax choice page on Wikipedia...people would able to boycott any government organization for any reason. Pacifists could boycott the military and anarcho-capitalists could boycott the IRS.

If you read people's responses on this page...
http://pragmatarianism.blogspot.com/2012/01/unglamorous-but-important-things.html
...it should be painfully clear that the obstacle to tax choice has nothing to do with logistics and everything to do with the simple fact that people do not understand how the invisible hand works. That's only half the story though...

Look at this poll I started asking people interested in politics whether they understand how the invisible hand works...

http://www.debatepolitics.com/general-political-discussion/118164-does-invisible-hand-work.html

One out of three participants believe that they completely understand how the invisible hand works. This is a perfect example of Friedman's radical ignorance. People think they understand how the invisible hand works when really they do not. The most effective and efficient way to discern whether somebody truly understands how the invisible hand works is to ask them whether taxpayers should be allowed to directly allocate their taxes.

The beauty of tax choice is that it would make the invisible hand a topic of national debate. On one hand we would have 538 congresspeople... and on the other hand we would have 150 million taxpayers. Which hand would win? The invisible hand of course!

How could 538 congresspeople allocate resources more efficiently than millions and millions of taxpayers could? How could somebody you've never met know your preferences better than you do? It wouldn't even be much of a debate. It would be a schooling. Unfortunately, I can't call this class to session on my own!

[Eric Evans]

First of all, let me apologize to Mr. Boettke. I did not intend that this side issue would be tantamount to hijacking the comments of this blog post. That said, this will be my final word on the subject.

"...in a tax choice system people would directly allocate their taxes."

I hope you realize that this statement begs a rather large question, which is 'Why be taxed at all then?' If "tax choice" is going to make the government function as if they're a business entity, why stop short of actually making them function like a business entity then?

"...people would able to boycott any government organization for any reason. Pacifists could boycott the military and anarcho-capitalists could boycott the IRS."

There would be no need to tax you if all the money was going to things each individual wanted anyway; we would give of our money freely and voluntarily. The whole point of a tax is for the government to acquire funds to pay for things individuals wouldn't otherwise want.

"...it should be painfully clear that the obstacle to tax choice has nothing to do with logistics and everything to do with the simple fact that people do not understand how the invisible hand works."

I'm afraid you're not quite clear on the concept of the invisible hand yourself, which reveals itself in your poll question. The invisible hand does not "work," it is a term that describes the free market process. It refers to how goods and resources seem to allocate themselves to their most useful purposes in the market and in turn benefit society as a whole, whether or not the market participants themselves intended as such. Voluntary market transactions guided by price signals produce the best results.

How do you plan to get the best results from money you don't even have (and by and large never had) in your possession? You don't even have a real claim to those funds, merely a series of receipts to say that they were taken. The government will allow you a claim on those funds if it suits them, but if they got themselves into a fiscal pickle they will gladly tell you where you can stick your claim.

"How could 538 congresspeople allocate resources more efficiently than millions and millions of taxpayers could?"

And again, if that's the case then why should they even be taxpayers to begin with?

[Richard Ebeling]

We seem to have gotten away from the original comment from James Buchanan towhich Peter Boettke was drawing our attention.

I would just suggest to those interest in the theme to also to read the feature article on 'Spontaneous Order' by Norman Barry, which was the stimulus for Buchanan to make his observations. It is outstanding on the history and meaning of the concept, including in its "Austrian" variation in Menger and Hayek.

And I would also highly recommend Norman Barry's 1988 monograph on "The Invisible Hand in Economics and Politics" (London: Institute of Economic Affairs). He offers a clear and insightful treatment of the important distinction between "end-state" versus "process" analysis. And the importance of this distinction for theoretical and historical analysis, and for normative policy views.

Norman Barry was an excellent political philosopher who had a brilliant grasp of economics. He was also one of the first to write a book-length analysis of Hayek's political and economic ideas shortly after Hayek was awarded the Nobel Prize. The book is still worth carefully reading.

Richard Ebeling

[Xerographica]

Eric Evans, how is it hijacking if we are talking about the invisible hand?

You have the theory that there is 0 consumer demand for what the government currently supplies. If you think that your theory is actually a fact...then this provides Mr. Boettke with an important insight into where there's much needed room for improvement.

Let's say though that your theory does indeed happen to be a fact. Can you please explain to me why consumers (taxpayers) would not boycott all the government organizations one by one out of existence? If the private sector is adequately satisfying the taxpayers' needs for A, B, and C...then why would any taxpayers allocate any of their hard earned taxes to the public provision of A, B and C?

How do you behave as a consumer? After you purchase a car do you immediately go out and purchase another one? After you purchase a computer do you immediately go out and purchase another one? Is your answer to both questions "yes"? If so...then we've revealed the fact that your needs were not adequately satisfied the first time around. Does it matter if I believe that you really only need one car or one computer? Nope...not in the least bit.

If taxpayers' needs for a good are truly being adequately satisfied by the private sector then they would have absolutely no reason to use their hard earned taxes to also "purchase" that good from the public sector. If they do happen to "purchase" that good from the public sector then guess what? The private sector is obviously failing to satisfy their needs for that good.

http://www.debatepolitics.com/general-political-discussion/118935-why-your-partner-cheating-you.html

Economics is the study of scarcity and that's exactly what we're talking about here. Bastiat's opportunity cost concept relates to your true values/priorities and Hayek's partial knowledge concept relates to all the information that you have access to. Bastiat and Hayek provided those extremely powerful and important tools to help us understand how the invisible hand efficiently allocates scarce resources.

Therefore, it can't get any more on topic than this!

The question still remains though...if Buchanan truly did understand how the invisible hand works...then why didn't he ever advocate that taxpayers should be allowed to choose which government organizations receive their taxes? That's what makes this entire thing so JUICY!

My guess is that he didn't stand on the right shoulders. Bastiat stood on Smith's shoulders...then Hayek climbed up and stood on Bastiat's shoulders...and then I'm just the midget that climbed up to stand on Hayek's shoulders. The analogy doesn't quite work but I just like it for the funny imagery.

Wait a second though...when Buddha was talking about the blind men each touching different parts of an elephant...and Socrates was saying..."...it seems that I am wiser than he is to this small extent, that I do not think I know what I do not know"...then how are their ideas really fundamentally that different than Bastiat's Seen vs the Unseen...or...Hayeks' Conceit vs Humility...or Smith's Invisible Hand?

What ties it all together is the recognition that our perspectives are extremely limited. With that idea in mind...do you have any idea what the proper scope of government is?

[Mario Rizzo]

"My view is that a lot of welfare economics is... if not useless... just a rule of thumb contingent on strong assumptions or value judgements at best."

Daniel Kuehn is completely correct on this point. I have been studying this stuff for years and now in connection with behavioral economics. The value judgments run deep but most economists won't admit this or try to wiggle out of it. I find it deeply disturbing.

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[Daniel Kuehn]

So Mario -
One thing I've struggled with is how valid the compensating variations stuff is.

THAT seems more palatable to me than a lot of welfare economics. The point is, if you've got preference relations that can translate tradeoffs into dollars, it seems perfectly legitimate to discuss surpluses and losses and compensation in dollars.

Of course what you can't do is translate that back into welfare claims (well, you can - but once again you have to make strong assumptions to do it).

But otherwise compensating variation discussions seem OK to me.

I don't know if that's right, though.

[Daniel Kuehn]

Granted, I also get wary of taking the welfare-economics-skepticism point too far. It makes talking about the market's allocative efficiency tough.

Anyway - I'm not and will not be a theoretical microeconomist, so I have the luxury of propounding on the problems of welfare economics every once in a while, while still using pseudo-welfare economics talk to defend markets.

[Xerographica]

If anybody is interested, a fellow over at the Mises forum picked up where Eric Evans left off...

http://community.mises.org/groups/politics/forum/topic/eric-evans-and-xero-discuss-the-invisible-hand/

James Rick said, "Mostly becasue niether Jesus or Buddha ever actually said anything about an invisible hand."

But if we consider Buddha's parable of the blind men and the elephant...can there be any other conclusion besides the invisible hand? Can you derive the visible hand from Buddha's parable? Can you say, "well, one blind man can see enough to impose his views onto another blind man."?

Would Buddha have agreed with Rothbard's willingness to press a button that would have instantly destroyed the state in one fell swoop? Or would he have agreed with Milton Friedman when he very strongly emphasized, "If we can’t persuade the public that it’s desirable to do these things, then we have no right to impose them even if we had the power to do it."

[Greg Ransom]

Daniel nails it.