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Thursday, June 16, 2016

When Spontaneous Disorder Makes Sense

Mess with Market Signals and Watch Chaos Emerge

If you lived in the old Soviet Union, you might have done seemingly irrational things like buying a burned-out light bulb from a peddler in Moscow’s Gorky Park or standing in line for hours to buy unknown goods that you might not even need. But your behavior would have been perfectly rational in the in the twisted context of socialism’s planned chaos. Think of it as “spontaneous disorder” — the opposite of what we enjoy in our free-market system.

When the Whole Is Greater Than Its Parts

The order that emerges from simple free market rules is amazingly complex, resilient, and efficient.

“Emergent order,” also known as “spontaneous order” or “self-organization,” results from the interactions between individual components or members of a network in which each member both receives and transmits information that causes other members to alter their behavior according to a set of rules. Myriad interactions between members create an order that was neither the intent nor the design of any single member.

Emergent orders exist in physical, biological, and social systems or networks. In his book National Economic Planning: What Is Left?, the late Austrian economist Don Lavoie used a termite nest to illustrate emergent order in biological systems. Termite nests and mounds are complex, highly functional structures that result from the actions of individual termites communicating with each other via chemicals known as pheromones. Termites secrete these chemicals in response to changes in their environment. Other termites, detecting the chemicals, alter their actions in response. The nest that results from the myriad interactions between termites is far more complex than what any individual termite could design or even comprehend. But block the termites’ pheromone receptors and you destroy the colony.

The old Soviet Union provided endless examples of emergent disorder.

A free market is an example of emergent order within a society. In a free market, individual actors work to improve their own and their families’ material and nonmaterial well-being (as they define them) and, as long as they follow a few simple rules — don’t steal, don’t cheat, don’t coerce — they benefit other members of society in the process. People in a market communicate via prices, which both influence and are influenced by their actions. Prices reflect the subjective and ever-changing values that millions of people place on the various goods and services exchanged in the market.

The order that emerges from simple free market rules is amazingly complex, resilient, and efficient. With neither a central plan nor a planner, scarce resources are automatically directed to entrepreneurs who use them more efficiently than their competitors to satisfy customers at lower costs.

Why Order Breaks Down under Socialism

A central plan can only disrupt the spontaneous order. Just as artificially introducing pheromones into a termite nest or blocking termites’ ability to either produce or detect the chemicals would disrupt — and possibly destroy — a termite colony, altering or eliminating price signals will disrupt or destroy an economy.

The old Soviet Union provided endless examples of emergent disorder. Why would anyone sell a broken light bulb, much less buy one? Well, a burned-out bulb could be smuggled into the buyer’s place of employment and then surreptitiously substituted for a good bulb, which was later smuggled out of the building. How else could one obtain a replacement light bulb in a country where goods were produced at the arbitrary command of a commissar rather than in response to consumer demand?

They could try to get one by waiting in line for hours — something people regularly did without even knowing what was being distributed. Anytime people saw a line forming at a store, they would queue up, reasoning that even if they had no use for whatever they ended up getting, they could trade it for something they needed. While this action was rational, it was terribly inefficient. People wasted untold time standing in lines waiting to procure goods that they would later barter.

Emergent disorder is not confined to dictatorships.

At one point, Soviet leaders decided to prove their country’s superiority by manufacturing more farm tractors than the United States, a goal they achieved shortly before World War II. Unfortunately, producing spare parts would have reduced the number of tractors manufactured, jeopardizing the goal — so, naturally, no spare parts were produced. Instead, functioning tractors had to be cannibalized to keep others running. Natural resources were wasted and pollution created to do nothing more than create countless tractors made useless because they had to be stripped of their fan belts, gaskets, or tires. In the end, the USSR had to use far more tractors to produce far less food than did the United States.

No commissar decided that burned-out light bulbs would be sold in Gorky Park. No one meant for perfectly good tractors to be used for spare parts. Soviet dictators surely never wanted their people to waste time standing in lines or bartering for needed goods. These emergent disorders were the result of countless people trying to improve their material and nonmaterial well-being within a system in which communication between individual actors was distorted if not illegal and in which the rules were complex and arbitrary.

American Disorder

Emergent disorder is not confined to dictatorships. In the United States, disorder emerges when the nation’s currency is manipulated — distorting prices and price signals — and when regulations force people to ignore market rules. The 2008 housing crash is an example. In response to the dot-com bust and again after 9/11, the Federal Reserve lowered interest rates — artificially reducing the price of money (or, more accurately, the price of time). Coincidentally, laws and regulations were enacted to encourage banks and mortgage companies to ease lending standards in an effort to make housing more affordable to the nation’s poor and disadvantaged. With mortgage rates at historic lows, buyers, investors, and speculators stampeded into the residential housing market.

Further fueling the artificial boom, Congress required the government sponsored enterprises, Freddie Mac and Fannie Mae, to purchase hundreds of billions of dollars in subprime loans from lending institutions, enabling the lenders to make even more such loans. When the Federal Reserve began raising interest rates, however, home prices fell. The housing market collapsed when people defaulted on their mortgages because they owed more on their homes than they were worth.

In a society, emergent order, or disorder, is driven by people’s desire to make themselves and their families better off. It occurs within whatever freedom people have or can carve out for themselves, and it occurs according to, or in spite of, a society’s rules.

Order emerges spontaneously in free market systems. But distort or eliminate prices or block communication channels, and it is not order but disorder that will emerge.

  • Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman