Matthew Kibbe is a doctoral student in economics at George Mason University, assistant editor of Market Process, and senior economist at the Republican National Committee in Washington, D.C. This essay won the second prize in FEE’s 1988-89 essay contest, “Why Choose Freedom?”
On coming to Paris for a Visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sons did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect. On the other hand, eighty departments have worked today, without cooperative planning or mutual arrangements, to keep Paris supplied. How does each succeeding day manage to bring to this gigantic market just what is necessary—neither too much nor too little?
How is Paris fed? For Bastiat, the answer to this seemingly complex puzzle was simple: Freedom ensures that Paris is fed. More specifically, an individual’s freedom to think, choose, act, and trade with other individuals provides the basis for individual prosperity and social cooperation under a system of law. By striving to satisfy his own needs and wants, the free individual helps others—often without ever having intended to do so.
This “simple” understanding of the market order was by no means originated by Bastiat. In 1776, Adam Smith employed the now famous analogy of the “invisible hand” to describe the social process by which the individual, when left alone, is “led . . . to promote an end which was no part of his intention . . . . By pursuing his own interest [the individual] frequently promotes that of the society more effectually than when he really intends to promote it.” The result of this process is peaceful co-existence among millions of individuals; or, better yet, “cooperation in anonymity.”
However, it was not until after Bastiat’s death in 1850 that a general theory of Adam Smith’s “invisible hand” explanation was developed by the Austrian economists. Carl Menger demonstrated how social institutions (particularly money) emerge in a society as a result of each individual’s participation in the market. The actions of “erring, bumbling man” were in turn guided by these institutions.
Ludwig von Mises considered this interplay between purposive individuals and social institutions to be the necessary condition for successful economic coordination in an uncertain world. Money and money prices served as the indispensable “guide amid the bewildering throng of economic possibilities.”
No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightway evident judgments of value without the aid of some system of computation. The distribution among a number of individuals of administrative control over economic goods in a community of men who take part in the labor of producing them, and who are economically interested in them, entails a kind of intellectual division of labor, which would not be possible without some system of calculating production and without economy.
Each individual, because of this “intellectual division of labor,” possesses a great deal of information which is known to him alone. The steel worker in Pennsylvania, the securities broker in New York, the farmer in Iowa, the business manager in California, and every other individual within society is privy to “the knowledge of the particular circumstances of time and place.” Institutions such as money prices allow the individual to communicate this unique, personal knowledge to the unknown others in society. Through constant changes in price, the market enables each individual to engage in a free, unspoken dialogue with other individuals. It is this process which allows successful economic coordination to take place.
E A. Hayek, a student of Mises, told the hypothetical story about a drop in the market supply of tin to elucidate this communicative process between the individual and his unknown fellows. Suppose that either a new use for tin has been discovered or that an important producer’s ability to provide tin on the market has declined. Either way, tin is now more scarce. Some consumers of tin, because of their proximity to and knowledge of the impetus of the change, are immediately informed of the new situation. Through their subsequent actions, these few individuals influence the price of tin. Without anyone intending to help others, the information of the new scarcity of tin is spread through the price system. Signaled by the rising price of tin, the vast majority of tin consumers, not privy to the direct knowledge of time and place, are “told” that they must somehow economize their own use of tin. “The marvel is that in a case like [this] of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.”
Now imagine the constant flux of a real economy, where changes in tastes, new technological discoveries, and an almost infinite number of other changes—both large and small—occur every minute. Each individual is continuously engaging in an unspoken dialogue with millions of other individuals, simply by choosing and acting. The smooth complexity of such a system is both overwhelming and beautiful.
Unfortunately, as Hayek points out, the opponents of freedom have altogether failed to appreciate or understand the nature of this “simple” insight. “Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence.” Without an understanding of how the “invisible hand” of the market operates, complexity is mistakenly seen as chaos.
The raison d’être of Marxism is, and always has been, the replacement of production for exchange, which is directed by the “blind forces” of the market and money prices, with comprehensive, rationally coordinated planning by a central authority. Freedom and free exchange will be replaced with direct control over the means of production. Only then will the needs and wants of the people be satisfied. Or so the story goes.
But how would a central authority ever know what the constantly changing needs and wants of the people actually are? Such knowledge can only exist in a market and in market prices. Political orders, no matter how carefully calculated, are no substitute. Without the freedom to act and choose, there is no basis for producing anything. In a command economy, there can be no dialogue between individuals except within the strictly limited bounds of time and place. As Mises put it, advanced economic production would be “unworkable.”
What all would-be planners—the mercantilists, the protectionists, and the socialists—fail to see is that the market process is not chaotic at all. Through the unspoken dialogue of prices, individuals in the market are able to communicate and coordinate their activities in a way that is both peaceful and prosperous. Freedom works. Or, from Frederic Bastiat’s point of view, Paris is sleeping peacefully, and Paris is fed.