By Bruce Caldwell
Three thinkers who have written about the ideas that are most likely to spur bottom up improvement in peoples’ everyday lives are Friedrich Hayek, Frédéric Bastiat, and Adam Smith.
What they wrote so long ago still resonates today, but for our purposes let’s concentrate mostly on one. The social theorist and Nobel laureate in economics Friedrich A. Hayek was a bottom-up thinker par excellence. You need not take my word for it; just look at his own:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions.”
Hayek believed a well-functioning market system allows individuals to make use of dispersed and localized knowledge.
He was right.
Top-down policies often result in terrible (if unintended) consequences. Agricultural price supports, for example, cause too many resources to be used to produce farm goods and this misallocation can lead to further policies to try to correct for the mistake — some quite absurd, like paying farmers to take land out of production.
Hayek also demonstrated how flexibly adapting market prices help people to make the best use of knowledge. Ever-changing market prices both reflect the decisions of millions of market participants based on their own local knowledge, and enable the market participants to make better decisions by providing them with knowledge about relative scarcities of the goods and services that matter to them.
The system thus promotes the effective use of resources and of people’s knowledge.
This progress occurs without government directive. As Frédéric Bastiat pithily observed in the nineteenth century, “Paris gets fed” every day despite the fact not one market participant was actually tasked with feeding Paris.
What about when markets go awry? Aren’t top down solutions called for in the event of a market failure? Often, even here, the answer is no.
Hayek was particularly worried about the effects of money on the larger system. He had lived through the Austrian hyperinflation of the 1920s and saw the damage that excessive money creation could do. But he was equally worried about the attempts of top-down reformers to improve the economic system through the exercise of conscious control.
Why? Because such reforms can interfere with the system’s ability to respond to changing knowledge. They also typically require that government regulators have more knowledge than they can ever possibly possess. In a world of dispersed and rapidly changing knowledge, market competition is often the best “regulator.”
Top down policies also often lead to the favoring of one group of people over another.
Like Adam Smith before him, Hayek was sometimes suspicious of who the true beneficiaries were when regulation was undertaken to serve “the public interest.” Trade protectionism, industrial policy that picks winners and losers, and regulations that restrict entry into professions are defended as benefiting society, but usually they just benefit the people who lobby for it.
Antitrust is another example. It can be used to promote competition, but it can also be used by failing firms to punish those who better serve the consumer. All such policy abuses are examples of the sort of crony capitalism or political favoritism that Hayek spent his life criticizing.
To substitute the planning of officials for the day-to-day planning of individuals also interferes directly with the bottom-up nature of a competitive market system. As Hayek astutely observed, “the more the state ‘plans,’ the more difficult planning becomes for the individual.”
The fact is, bottom-up solutions help to drive progress and innovation. In The Constitution of Liberty, Hayek spoke eloquently about the creative power of a free civilization. Individuals who are left free to experiment stumble upon discoveries as they adapt to an ever-changing world.
Discoveries are not planned; quite the contrary. As Hayek reminds us, “humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunities for accidents to happen.”
That accidents might lead to progress is, of course, inconceivable to a top-down planner.
Hayek is most famous for his critique of socialism, which takes top-down piecemeal planning and extends it to the economic system as a whole. Recent polls have found a majority of college students prefer socialism to capitalism. This finding suggests students do not understand the textbook definition of socialism — state ownership of the means of production — and are also ignorant of the track record of regimes that have embraced central planning.
Worse than ignorance of history and economics, however, is that these students have not been educated about the bottom-up virtues of a well-functioning market system. In that regard, economists, policymakers, and teachers have failed them.
We must correct that because Hayek’s words are as true today as they were when he wrote them so many decades ago.
Bruce Caldwell is a research professor of economics and director of the Center for the History of Political Economy at Duke University. He is the general editor of The Collected Works of F.A. Hayek and co-author of Hayek: A Life, 1899-1950 , which will be published in November 2022 by the University of Chicago Press.
This viewpoint is part of an ongoing series that discusses the principles that unlock human potential. Find links to the entire series here.