Library represents the market order

Individual Action and the Market Order

Austrian Economics

“We were the first to assert that the more complicated the forms assumed by civilization, the more restricted the freedom of the individual must become.” – Benito Mussolini


What follows is primarily a theory of society that attempts to understand the forces that guide, or ought to guide, the individual and endeavors to derive a general truth from this view of society. The basic assertion is that there is no other way to develop an understanding of societal outcomes but through first understanding individual action and what may guide such behavior. This argument is contrary to the collectivist theories of society which assert to know the whole of society as if the whole of society exists outside the individuals which comprise them. Simply by tracing the joint effects of individual actions, we soon find that the institutions and monuments of human achievement which have risen in society through time came about void of some arbitrary organizing will or directing mind. 

There is little doubt that Adam Smith’s main interest was not with what man may achieve when he was at his best but rather with man’s opportunity to do harm when at his worst. The most important aspect of what he and his followers advocated was that the individualistic system is a system under which corrupt, or ill-intentioned men can do the least amount of harm. It does not depend on society finding good and perfect men to run it for the proper functioning, or on all men becoming better than they currently are. It makes use of every individual in all their given variety and complexity. Smith’s aim was a system under which it would be possible to grant freedom to all rather than one that restricts freedom.

Thus, the goal of Smith was to find a set of institutions that would persuade man by his own choice to contribute as much as possible to the needs of all others. He discovered that private property rights and the market order did provide such motivation and to a much greater extent than previously understood. He made no claims that the system was perfect or lacked room for improvement and was more than aware of the conflicts of individual interests. However, an indisputable fact remains which cannot be altered. By itself it is sufficient basis for the conclusions of the theory. That fact is the limits of man’s knowledge and interests and that he cannot know more than a tiny part of the whole of society. All his motives are constructed with the simple knowledge of what only affects the small sphere in which he finds himself. This is true whether he is completely selfish or completely altruistic. His range of vision is limited to the needs of a narrow circle which make up only a small fraction of the needs of all members of society. The question is not whether man ought to be guided in his actions by those immediate needs that only he can know and care for but whether he should be made to do what seems proper in the eyes of another who supposedly possesses a larger comprehension on the effects his actions have on society.

Man must be free to maximize his own knowledge and skill, he must be allowed to be steered by the particular things of which only he knows and of which he cares, if he is to contribute as much as possible to society. The only issue left is how this small set of concerns, which do in fact determine individual action, could be made to cause people to voluntarily contribute as much as possible to needs which lay outside of their own narrow range of vision. To the chagrin of the collectivists, what was found was that the market became, as it evolved, the most effective method for inducing men to voluntarily take part in a social process more complex than he could comprehend. It was through the market that he was made to contribute to ends beyond his own purpose. 

If we put it simply by saying that individuals are and ought to be guided by their own self-interests, it will be misconstrued as saying individuals ought to be guided by their own greed and selfishness. What we mean is they ought to be allowed to endeavor for what they think is desirable. The source of this argument is the fact that nobody can know who knows best and the only way forward is if all individuals voluntarily participate in a complex social process in which everyone is allowed to freely maximize their own gifts and knowledge to try and find out what each can do. To remain free, the scope of responsibility must be freely chosen. Responsibility must not take the form of designation or assignment by some arbitrary authority to some end which he is forced to attempt to achieve for the benefit of the “collective”. Nor can responsibility take the form of allocating to him resources selected by some authority.

Taken from the cognizance of the dispersion of individual knowledge across time and space and that no one individual can know all there is to be known in order to allocate all resources according to their respective demands, at the proper time and location in the proper quantities, the logical conclusion is that strict demand for severe constraints on the use of coercive political power is required. The case for the individualistic order rests on the fundamental contention that what in the opinion of the majority can be brought about only through conscious control, can be better accomplished by the voluntary and spontaneous collaboration of individuals. The harsh limitation on the use of coercive power in conjunction with the freedom to maximize knowledge and skill thus frees up an almost unlimited scope of human ingenuity. 

One critical element remains that deserves attention – the necessity that relative payment for the different uses of individual abilities correspond to the relative benefit these abilities provide to others and that payment also corresponds to the objective outcome of individual efforts. The only mechanism with the ability to satisfy these conditions is the competitive market. However, the impersonal, random outcomes generated through the market order often conflicts with our own personal sense of justice. If freedom of choice is to remain intact, it is inescapable that each individual must bear the risk attached to that choice and that the reward in return must not be attached to intentions, but to the value provided to others. We must accept the unchangeable fact that the preservation of individual freedom is incompatible with an arbitrary view of social justice.

The fundamental assumption is that the infinite mix of individual gifts, knowledge, circumstance and skill cannot be known by any one individual or controlling authority. All individuals are unequal in their gifts and inclinations. Therefore, the differentiation of individual functions do not need to be determined by some arbitrary governing authority as would be necessary if we were all made to be equal. After creating formal equality of the rules and applying them equally to all, we can leave each individual to find their own path. We must come to the realization that the spontaneous, uncontrolled and unforced endeavors of free individuals are all that is both necessary and conceivable for producing the complex order of economic activity that makes human progress achievable. 

Jon McDonald


Jon currently works in the energy industry in Houston and has a masters in energy economics from Rice University.

Follow on twitter @Jonnymack1010

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