CHAPTER 6-5  

               CONTROL AND FREEDOM IN SOCIETY - II

      SOCIETY AND ECONOMY AS SPONTANEOUSLY EVOLVED SYSTEMS

     A nation is vastly larger and more complex than is any 
business firm (though some companies are larger than some 
countries in revenue, and even in number of personnel.  More 
important than size is complexity.  Multiplicity of goals is a 
crucial complicating factor.  A business can consider itself to 
have the single goal of profit, or it may choose to consider a 
few other goals such as employee welfare, civic welfare.1  In contrast, 
unless the society takes as its ideology some Hegelian or mystic belief that the state itself is an entity whose size or power or 
cultural influence should be maximized, every individual in the society has a set of personal goals which must be considered in an 
overall decision about how a country is to be governed.  
     Methods that will not work well in a large and complex modern society, suffice for smaller groups such as the family or tribe 
are appropriate for smaller groups.  In a small family, the "mother" can know the tastes and schedules of the members of the 
family, and can therefore choose a menu and mealtimes rather well from the point of view of all members of the family; the 
"father" can know who most needs new tools, and who can best perform the various chores.  But knowledge of others' desires quickly 
becomes more and more difficult as the size of the group increases.  This implies that decentralized decision-making becomes more 
attractive as the group increases in size.  
     Difficulty of knowing the particular productive skills of the members of the group, and their work interests, also operates 
to increase the relative value of decentralization as the group increases in size.  Every group requires a mechanism that decides 
who will do which job.  If individuals do not select for themselves through a market system among the choices offered by 
organizations, the government will have to match people and jobs -- as is the case with new high-school and university graduates 
in China, who are assigned to jobs by government agencies.       When a society does subordinate all else to achieving a single 
goal, as happens in wartime, organizing not only the military services but also the economy by central planning and command may 
(or may not) yield superior results to a price-directed enterprise system.  Indeed, this explains why an otherwise-backward and 
inefficient society such as the Soviet Union can compete as well as it does with the United states in the military realm or in 
sports.  This success has unfortunately led many people to conclude by analogy that a command system can also compete successfully 
with an enterprise system in non-military realms.  ("We will bury you", said Nikita Kruschev.) 
     Let us now focus on the economic sub-system of societies. 
     Until the advent of Communism in the USSR in 1917, all economies had developed almost wholly as a result of individual 
investment decisions in a regime of private ownership, free markets, and uncontrolled prices.  Yes, there have always government-
owned enterprises, especially in transportation, and there have been government regulations of some business practices -- 
including wage and price controls -- for at least the past 4000 years (Schuettinger and Butler, 1979).  And under systems of 
feudal ownership of farmland, peasants were hardly free.  Yet before 1917 no country had central planning and control of 
production, or unified ownership of land and capital.  It was taken for granted that the initiative for opening and closing 
enterprises would come from private individuals. 
     Socialist thinking of the 19th Century (see Hayek, 1952, Part 2) concluded that government ownership would increase 
efficiency and equity by substituting "rational" planning and large-scale enterprises for an enterprise system.  This system is 
termed a "command" economy because instructions about who is to produce what come from a central authority.  
     Persons who consider themselves the "social engineers" of such command systems usually take physics as their model.  In that 
science, the number of crucial variables is far smaller than in economics, and their interactions are simpler.  To understand the 
movement of a billiard ball you need take into account only the table, the force of the stick, the weight of the balls, and the 
initial position of the balls.  But to fully understand and predict the behavior of a single economic actor in a market, you would 
need to know all the contents of all the participants' minds, and all the interactions among them.  But the individual does not 
need most of this knowledge in order to do her/his business successfully. 
     Integral to the thinking of those who favor a command economy is concern about what they perceive to be the "chaos" of an 
"uncontrolled" economy and society.  Perhaps this fear of "chaos" arises out of the "engineering" bent of mind which transfers the 
idea of planning from the individual enterprise (where it is inevitable and necessary) to the context of an economy, without even 
questioning whether this is a sensible intellectual transfer.  Another impetus to centralized control is lack of belief in the 
rational capacity  of individuals, and of people's willingness to exert their rationality -- especially individuals with less 
education and wealth than the person who is doing the worrying.  People who espouse central planning also tend to believe, as 
Hayek paraphrases W. C. Mitchell, that "since man has himself created the institutions of society and civilization, he must also 
be able to alter them at will so as to satisfy his desires or wishes" (1979, p. 3). 
     But this lack of confidence in private initiative does not accord with experience.  Certainly there are individuals who 
cannot well fend for themselves.  But anyone who has close acquaintance with squatter settlements in, say, Latin America, or with 
immigrants who have come to the United States with no skills or even knowledge of the language, has learned that these people get 
themselves organized as individuals and as groups, and pursue their and their families' lives with intelligence and energy, in the 
main.      It is also clear from the example of the printing industry in the preceding chapter that the absence of central 
direction does not mean "chaos."  Indeed, chaos almost never is met with in an economy, though it is constantly worried about by 
politicians.  Chaotic conditions are only found in suddenly-arising situations such as a gold rush or a government homestead land 
sale, in the nineteenth century in the U.S. West.  And the chaos only lasts briefly.  Because individuals and businesses can reap 
windfall benefit from a disequilibrium, they rush to exploit it, and by so doing they remove the disequilibrium and transform 
chaos into order and stability.  That is, true chaos represents a terrific economic opportunity, and as soon as entrepreneurs 
respond to the opportunity, the chaotic elements disappear into an orderly market pattern. 
    Nor is confidence in the power of "rational" central planning warranted by their results.  For some years now, there has been 
ample statistical proof that planned economies are far less efficient than are market-oriented economies, in addition to providing 
the most important benefit of freedom.  But in the 1980's the abysmal failure of Communism became unmistakable with the collapse 
of the Eastern European economies.  So goes one more idea cooked up and perpetuated (and still taught in American universities) by 
those with too much faith in their own reason and too little faith in the accumulated patterns of human experience.      Most 
interesting about a command economy are the two reasons why it cannot succeed in achieving economic efficiency -- the lack of 
incentive by individuals to invest their energies and their talents in producing goods that other people are willing to pay for, 
and the inability of a centrally-planned system to take advantage of the information that individuals possess about the special 
productive characteristics of the people and equipment with which they work, as well as information about the demand for goods and 
services in their locality.  This theoretical explanation for this failure of central planning has been known since David Hume and 
Adam Smith, and it was refined into modern form by Karl Menger, Ludwig von Mises, and Friedrich Hayek.  
     Even in principle, the amount of knowledge necessary to run a modern economy efficiently on the command principle exceeds the 
possibility of collection of information by any central planning organization.  Efficient central planning would require complete 
understanding of the operation of the entire mechanism as it now exists, as well as the process by which each aspect got to be 
what it is. If it makes sense to rank impossibilities, this would be far more impossible than gathering the information necessary 
for efficient control of every car in highway traffic. 
     Interestingly, the more advanced the society, the more difficult it is to control it efficiently with central planning, and 
the more crucial is decentralization.  This contradicts the intuition that greater complexity requires a higher degree of planning 
and organization; that may be true for most sub-groups and enterprises with a society, but not for the society itself.  Nor does 
the great computational power of the supercomputer alter this conclusion.  No conceivable amount of computing power could possibly 
ascertain and sort out all the changes in preferences and circumstances as they happen instantaneously. 
     To recognize and accept this limit on our human capacities requires a certain amount of humility.  Many find intolerable 
Hume's dictum that though the evolution of society takes place by human action, its basic structure has not -- and cannot -- 
advance solely by overall human design.  Our society was not constructed from scratch by a mastermind, nor could any mastermind 
have conceived its fullness and richness.  People do not enjoy recognizing and accepting our inevitable ignorance and fallibility 
which follows inexorably from the wide dispersion of information and knowledge among the participants in our society and economy.  
And our traditions and values cannot be fully understood because they evolve by a survival process of trial-error-success. 
     This does not imply that careful, thoughtful persons and groups cannot make changes in the society that will improve it. 
Rather, it implies that changes should be made with due recognition of the complexity of the system, and of the possibility that 
some patterns that seem to be useless or counter-productive may have hidden uses.  It implies proceeding with extreme care in 
dumping existing patterns of organization.  Again in Robert Frost's words, one should try to find out why a fence was put up 
before tearing it down.     
     It is important to understand that the problem of effectively organizing a country is not the problem of learning how to 
carry out centralized control more effectively, as soviet reformer Mikhail Gorbachev still seemed to think that it is, as of 1988.  
     With a grin and a wink, the Kremlin boss flattered one      capitalist tycoon at his table, General Motors chairman      
Roger Smith, declaring that the Soviet economy should be run      more efficiently -- "just like GM!"  Newsweek, December 21,      
1987, p. 15. Gorbachev's vision is central control with efficient coordination.  But effective centrally-controlled organization 
is impossible in principle because of the lack of coordination that only a market provides.  Only a market can equate supply and 
demand effectively.  Until this fact is recognized and acted upon, the USSR will not be able to improve its inefficiency.     
     The vast, widely-dispersed knowledge about individuals' preferences and abilities is communicated automatically in a 
decentralized society through the price signals that are transmitted by markets.  The entire intricate system is built up 
spontaneously by people responding only to the signals in their own spheres.  Any barrier to signals passing unimpeded introduces 
distortion into an economy and interferes with its efficient working.  Such distortion is a malign effect of regulations that 
forbid individuals from freely setting prices and supplying goods according to the demands of the public.  Business people who 
conspire to fix prices in an industry similarly interfere with price signals and the working of the price systems.       Even a 
command economy such as the Soviet Union continues to be, as of 1990, needs price signals to indicate to potential purchasers 
which goods are available in larger and smaller supply.  It is a major defect of command economies that they do not have markets 
to generate such price signals automatically.  Socialist economies often are forced to refer to prices set in market economies. 
For example, the prices Eastern European countries charge each other for such commodities as oil and natural gas are set on the 
basis of world market prices.  The prices themselves may be the most important product that command economies cannot produce. 
     A second fatal flaw of socialism is its abnegation of human property and work incentives.  For example, for the North Korean 
communist party, "Market incentives ...are bourgeois ideas, to be stamped out.  People should work hard because they are building 
communism, not because of some special reward for hard work." (Wall Street Journal, Aug 15, 89, p 1). 
     Different views of the role of private property follow from different views of how malleable is human nature.  For 
Mandeville, Hume, and Smith (as for Locke) the origin of their interest in economics and society was their interest in human 
nature.  They sought to understand human nature.  (In contrast, for Godwin, Marx, Engels, Lenin, and their followers, the focus of 
interest is how to change human nature.) 
     The importance of the malleability of human nature in socialist theory is revealed in the USSR's bizarre and tragic course of 
action with respect to the study of genetics, and especially the Lysenko incident.  The USSR was willing to pervert that entire 
scientific field to fight against the idea that some human propensities might be affected by a person's genetic makeup.  (I note 
this even though I think there is little or no reason to believe that children's mental capacities are genetically connected to 
their parents' capacities, which does not include the effect of parental influence after birth.  Of course this proposition is 
exceedingly difficult to test, and in no way suggests that genes do not not influence mental capacity.  I shall amplify this 
complex assertion elsewhere.) 
     Even in the U. S., private property became less respected in the 1960's. Often after a riot it was written that "only" 
property was damaged, as if property does not matter much.  But property rights are fundamental to any society.  And property 
includes not just physical goods, but also intellectual property.  Property, and the rules surrounding property and business 
activity, are the substrate for market activity.  As Hume and Smith pointed out, if there is no protection for property, there is 
no liberty.  Property is not just wood and concrete and paper and steel; it is the right to arrange one's life, privacy, and work 
in such ways as one chooses, free of the interference of others.      
Other Effects of A Market-Directed Economy

     When thinking about an economic system, one must consider not just what we want of an economy, but what we want of a society.  
     A market system certainly has drawbacks.  Most obvious is that some people do not fare relatively well -- in both market and 
non-market societies.  A market society may, however, tax incomes and wealth, and redistribute as much as the public decides to 
those who do not receive what is considered sufficient income from the market.  There is nothing inconsistent between a market 
system and building a safety net.  This point is either not understood or is willfully obscured by many advocates of more 
government control of the economy. 
     There are many ways of redistributing to the poor, however.  Most consistent with a market system is simply giving money to 
poorer people, as much as the society deems they should get, rather than a system of special handouts of shoes or food or housing 
or milk for the children.  
     Another drawback of a market system is lack of perceived fairness.  A saintly religious woman may receive $10,000 year for 
running a hospice for people dying of cancer, and the only two-time Nobel winner -- who has changed the lives of the world with 
transistors and may change it even more with the results of his later work -- may make $100,000 per year (a guess), whereas a 
basketball player may earn $3 million per year and an investment banker $500 million in a year.  There is no obvious connection 
between reward and merit or virtue.  That is, there is a breach between "use value" and "exchange value".   
     This non-equality of virtue and reward, and the inequality among persons, are part of the overall pattern in life. Some 
people are born beautiful and others ugly, some short and some basketball-tall.  We hanker for a system that would allocate income 
by "intrinsic" merit.  But any system intended to do so would produce results even less appealing than the results of a market 
system.  Who would adjudge merit -- productivity and morality?  Imagine the arguments. A major drawback of any alternative to the 
market system is that the results would not be automatic, but would be subject to the judgments of committees and bureaucrats, all 
with their own standards of merit and their own personal interests.  Nevertheless, this lack of perceived fairness of a market 
system is a major problem for a market-based society. 
     If wages set by the market do not determine where a person will work, some arbitrary power must do so.  Remember how in 
Communist China people who graduate from high school or college cannot freely choose the jobs that they like.  They must sign up 
on lists, then wait for months or years until bureaucrats assign them jobs by some process aimed at matching industrial needs and 
the applicants' abilities.  Graduates must go where they are sent, to the city or to the country side.  In practice this means 
that the most desirable jobs are arranged by family or friends or by bribes.      A market system can aim to achieve equality of 
opportunity, which certainly is a wonderful goal if you care about human liberty.  A market system cannot achieve equality of 
results.  Equality of results requires that the society treat people unequally, and that is not compatible with equality of 
opportunity, by definition. 
     Milton Friedman emphasizes that the main benefit of a market economy is the freedom and liberty that accompany it.  The 
argument is strong and persuasive that there cannot be personal freedom without economic freedom, and economic freedom implies 
free market relationships.  The economic productivity benefits of a market system are a bonus for those of us who care most about 
individual liberty.  Friedman (and I) would be for a market system even if it was less efficient.  In addition, a market system 
offers the best protection of the economic situation of minorities, as well as of their liberties.      Another disadvantage of a 
market system is the absence of treatment fitted to individuals' needs in the way that a family or small society can provide for 
its members.  The related advantage is the greater sense of justice in the Anglo-Saxon fashion of treatment by rules rather than 
authorities; this is a major gain conferred by a market system.  Those who hanker for the sort of justice promised (though not 
actually brought about) by socialist societies -- treatment based upon need -- may not agree that in this respect the market 
enhances fairness and personal freedom.  A market society offers personal liberty in the sense that an individual can know what 
the rules are, and behave according to them, without having to worry about having his or her fate depending upon a personal 
relationship with arbitrary authorities.      The main direct economic advantage of a larger impersonal society is that it makes 
possible the multitudinous activities which support large-scale production of a variety of technologically advanced commodities.  
And as noted earlier, only such a society offers individuals a wide range of opportunities to sell their skills freely. 

                           REFERENCES

Hayek, Friedrich, New Studies in Philosophy, Politics, Economics, and the History of Ideas (Chicago: CUP, 1978)

Schuettinger, Robert, and Eamonn Butler, Forty Centuries of Wage and Price Controls (Ottawa, Ill:  Caroline House, 1979)
Hayek, Friedrich, The Counter-Revolution of Science (Indianapolis:  Liberty Press, 1952/1979)


                            FOOTNOTE

     1Whether a firm should take into account goals other than 
profit is a thorny question whose answer is less obvious than 
many assume it is. 
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