All Commentary
Thursday, April 7, 2011

Not Everything Is a Market

On organizations and orders.

It often seems that libertarians (especially ones who are well read in economics) think every social phenomenon under the sun can be understood in the same sorts of terms used to analyze markets. For example, we talk about our families, our workplaces, and even our interpersonal relationships in terms of incentives, knowledge, profits, self-interest versus altruism, and so forth.  And there’s no doubt that the “economic way of thinking” can be valuable in understanding all kinds of human behavior, including those listed above. As someone who has written on the economics of the family, I can hardly deny that basic point.

However, treating everything like a market can lead us into serious error as well. The problem is that it ignores a key distinction we find in F. A. Hayek (and implicitly in Mises) between what he called “organizations” and “orders.” Many of the social institutions in which we act on a daily basis are not unplanned orders like the market. Rather they exhibit a much greater degree of human intentionality and design, and are often simple enough to think about holistically, which we cannot do with the market.

Hayek’s distinction between orders and organizations rests on a number of other distinctions, the most important of which is whether the entity in question has a single, unified end or is a process by which numerous individuals pursue their own different ends. A business, for example, tends to have a single end: profits. A sports team has a single end: winning. Markets, like other spontaneous orders, have no single purpose of their own; rather they are rule-structured processes by which individuals or groups can pursue their own ends. Businesses may try to maximize profits, but markets don’t “try to do” anything.

Face to Face

Most such organizations are fairly simple, and people’s interactions with people are face to face. With a unified end, this simplicity makes it easier to decide how resources should be allocated toward that agreed-on end without some equivalent of the market — or even self-interest. For example, in the family parents know their children well enough to decide how resources should be parceled out. We don’t normally require children to make bids, and no internal price system is needed. The intimacy of organizations not only enables us to act altruistically, such organizations actually seem to function better when altruism plays a big role.

Contrary to Ayn Rand’s worldview, where all human interaction is modeled on the self-interested trader, a more Hayekian perspective can recognize that context matters and self-interest isn’t always appropriate.

Because social orders depend only on agreement about rules not ends, they are also capable of supporting a much larger and more complex set of participants and preferences than are organizations. We can therefore never get to know personally, as Adam Smith put it, more than a small portion of the people on whom we depend in a commercial society. This anonymity means we cannot learn directly what will benefit others. Thus we rely on self-interest coordinated by the rules of the order to generate socially beneficial results. Hayek said that if we could know directly what others wanted and the system were simple enough, altruism would work just as well as, if not better than, self-interest.

Delicate Relationships

This difference between organizations and orders matters for two reasons. First, Hayekians should be skeptical of trying to organize intimate organizations as if they were markets. As Hayek argued, this can “crush” the delicate relationships on which those intimate organizations depend. Such organizations work better when they invoke cooperation and collaboration — or sometimes hierarchy — in the service of an agreed-on end. They don’t do well when we turn individual self-interest totally loose, unless they are so large that they look more like an order rather than an organization.

The second reason is that attention to the difference might stop libertarians from trying to invoke self-interest as both “efficient” and “moral” in every situation. Libertarianism does not require acting in our narrow self-interest in a family or a firm, and there’s nothing unlibertarian about behaving altruistically and having concern for the whole in such organizations. Self-interested behavior in intimate orders is rude and often immature, and trying to rationalize it by one’s political philosophy makes one look narcissistic and narrow-minded. Understanding the Hayekian distinction between orders and organizations can help libertarians avoid both bad social theory and bad social behavior.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.