From Smith to Menger to Hayek:

Liberalism in the Spontaneous Order Tradition

(forthcoming in The Independent Review, 6 (1), Summer 2001)

 

 

Steven Horwitz

Department of Economics

St. Lawrence University

Canton, NY 13617

Tel (315) 229-5731

Fax (315) 229-5819

Email sghorwitz@stlawu.edu

 

December 2000

Final Version

 

 

A version of this paper was given as the 1999 Frank P. Piskor Lecture at St. Lawrence University.  I thank my SLU colleagues Ansil Ramsay and Jeff Young as well as Peter Boettke, Karen Vaughn, Don Lavoie and participants at the J. M. Kaplan Seminar in Political Economy at George Mason University for comments on earlier drafts of the lecture version.  Comments on the present version were happily received from Alastair Dow and other participants at the 1999 History of Economics Society meetings in Greensboro, NC.

Introduction

            Thinkers from both the political left and right have begun to make an increasing number of critical comments about the Enlightenment and the political liberalism that is normally associated with it.  Many of those criticisms center around the concern that the tradition of Enlightenment Liberalism presents a view of human beings that portrays them as hyper-rational and/or overly atomized.  The view of knowledge and social interaction they associate with Enlightenment Liberalism is deemed to be out of touch with more recent conceptions of human agency and community.  The problem with such criticisms, however, is that they tend to conflate the various strands of Enlightenment Liberalism.  In particular, the critics are often insufficiently aware of the work of thinkers associated with the liberal tradition emerging out of the Scottish Enlightenment.  The differences between the Scottish variant of Enlightenment Liberalism and the English and French versions are ones that render the Scottish version more immune to some of these criticisms.  Specifically, the Scottish tradition’s emphasis on spontaneous order and its conception of market exchange as a form of communication give it a distinct approach worth exploring.[1]       

This version of liberalism can be understood as both a research program in the human sciences (including both the traditional social sciences, but also history, philosophy, linguistics, and the non-biological aspects of psychology), and a political philosophy focused the relationship between the individual and the state.  Of course those two things are connected, as the political philosophy tends to flow out of the social scientific analysis.  More specifically, this tradition is centered around the concept of spontaneous order. Spontaneous orders are, in the words of Adam Ferguson, “the products of human action but not human design.”  Spontaneous orders are those practices, rules, institutions, etc., that have developed not because human actors rationally foresaw their likely benefits and deliberately, consciously constructed them, but rather as unintended consequences of various human actors pursuing their various purposes and plans. 

            This theme is most present and best developed in the work of three different theorists, one from each of the last three centuries:  Adam Smith in the 18th century, Carl Menger in the 19th, and F. A. Hayek in the 20th.  These three thinkers are all part of a continual line of intellectual inquiry comprising a distinct approach to social analysis and the most desirable political order.  As is clear in their work, a spontaneous order approach to the study of human action will lead to a focus on three things:  the limits of human reason due to the inarticulate nature of much human knowledge, the institutional arrangements that evolve to enable humans to overcome dispersed and tacit knowledge, and the processes by which the evolution of said institutions are facilitated or hampered.

 

The Spontaneous Order Research Program in Smith, Menger, and Hayek

            As a research program, liberalism in the spontaneous order tradition attempts to understand how social formations can arise as the unintended consequences of human action.  At a more philosophical level, it offers reasons why we should expect to find that those social formations are the results of human action but not human design.  The conception of the individual shared by the most important thinkers in this tradition is one that suggests that it is the limits to human knowledge and reason that necessitate the use of social institutions to achieve social order.  At a less general level, this version of liberalism tries to understand how current and past social institutions arise as spontaneous orders and how they serve to coordinate the diverse plans and preferences of human actors.  Research in this tradition is a matter of offering explanations of the operations of such institutions, in terms of their enabling us to overcome the limits to our individual knowledge, and showing how such institutions have evolved and emerged historically.

 

            Adam Smith

            This tradition begins in the 18th century with the original group of thinkers associated with the Scottish Enlightenment:  Adam Smith, Adam Ferguson, David Hume, Bernard Mandeville, and others.  Smith’s much-maligned metaphor of the “invisible hand” has become the most commonly recognized example of the reasoning associated with this tradition.  In fact, Smith, in his major works, only used the term “invisible hand” three times.  However, the same idea is present explicitly in the work of Ferguson and Mandeville, and strongly suggested in various places in Hume and the other Scottish thinkers.  What all this work had in common was the suggestion that humans could be taken as they are and that, with the appropriate set of institutions, society could both ensure against the worst behavior of humans and channel our self-interest in ways that would benefit others, if only unintentionally.  In the famous passage invoking the invisible hand, Smith (1976 [1776]: 477-8) argued:

By preferring the support of domestic to that of foreign industry, he intends only his own security;  and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain;  and he is in this, as in many other case, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was no part of it.  By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.

 

For Smith, the need to rely on self-interest as a motivator for desirable unintended consequences increased as social relationships became less personal and more anonymous.  In dealing with people one knows in some depth, the roles of sympathy and fellow-feeling would be stronger, in addition to knowing more about what sorts of things would benefit the other.  Prior to his famous discussion invoking the appeal to “self-love” as the way we get our products from the butcher, baker, or brewer, Smith (1976 [1776]: 18) offers an explanation as to why appeals to self-interest are necessary:

A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him.  Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will.  He has not time, however, to do this on every occasion.  In civilized society he stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.

 

The appeal to self-interest is our best way to convince others to do what we wish when do not know them well enough to appeal to their fellow-feeling for us.

            Altruistic behavior is often talked about in terms of providing individuals with the incentives to act in ways that benefit others.  Although that is surely a problem, the bigger issue faced in an anonymous social order is how one would know what is in the best interest of the other.  Inside a face-to-face group such as an extended family or a tribal group, such knowledge is often possible, but in the more anonymous world of “civilized society,” such direct knowledge of the “other” is almost always unavailable.  It is for this reason that Smith thinks appeals to self-interested exchange are both necessary and beneficial. 

            It is also of note that Smith (1976 [1776]: 17) links the “propensity to truck, barter, and exchange” with the “faculties of reason and speech.”  The link is that both are forms of persuasion.  As the quote above notes, the problem Smith identifies is how to convince others to do what we wish.  Reason and speech are one way (and a very useful way when the other person is known to us and within speaking or writing range), but inducing them through their self-interest is another, and the latter is necessary when the others who we aim to convince are the anonymous others of a broad social order.[2]  As we shall see in the much later work of Hayek, this notion of market exchange as a form of communication became central to his version of the liberalism that emerged from the Scottish Enlightenment.  However, from the beginning of this tradition, it was clear that the issue of how to ensure social order in an anonymous world was central:  “In this sense, Smith’s entire program may be viewed as his trying to understand how people contstruct morals and institutions which make self-interested cooperation among distant strangers a productive and beneficial activity” (Young 2000: 14).

            It is important to note that Smith and the other Scots did not think the beneficence of the invisible hand operated in any and all circumstances.  Rather, the channeling of self-interest into the social good would only occur under the right set of social institutions.  It might well be the case, and in fact was the case in the mercantilist systems Smith was criticizing, that self-interest could lead to harmful consequences.  Where the positive law does not conform with the laws of justice, in Smithian terminology, the possibility of self-interest creating social harm is present.  As Young (2000: 10) argues, “Indeed bringing positive law into conformity with the laws of justice is the central policy problem of The Wealth of Nations.”  When that conformity occurs, the benefits of a self-interested division of labor will be fully reaped.  Despite these crucial insights, the ability of Smith to  understand and explain these spontaneous ordering processes of society, and the role of institutions in facilitating them, was somewhat limited by the constraints of Classical economics, particularly cost of production theories of value.  Fully overcoming that limitation had to wait another hundred years.

 

            Carl Menger

            The next major advance in this tradition came with the work of Carl Menger, writing in Vienna in the 1870s.  As the history of economics is normally told, Menger along with William Stanley Jevons in England and Leon Walras in France, simultaneously discovered the principle of marginal utility.  Of the three, it was Menger who most emphasized the role of subjective evaluation.  While Jevons and Walras focused on marginal utility as a mathematical concept (the first derivative of a total utility function), Menger was interested in explaining how human valuation set into motion the competitive discovery process of the market.  In his Principles of Economics (1981 [1871]), Menger clearly understood how market prices, and other market phenomena, emerged as unintended consequences of these subjective evaluation processes. In Menger’s book, he builds toward market prices rather than posing possible prices and constructing demand and supply schedules from them, as is the modern practice.  As the economist Hans Mayer argued, Menger’s theory is a theory of price formation, not price determination.[3]  It is about the market process, not a mathematical equilibrium.

            In his Investigations into the Method of the Social Sciences with Special Reference to Economics (1985 [1883]), Menger defended this approach as part of a broader research program in the social sciences.  It is in that book that he becomes the outstanding 19th century representative of the spontaneous order tradition of liberalism that orginated with the Scots.  He (1985: 146) poses there what is sometimes called the “Mengerian” question:  “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?”  This is but a somewhat amplified statement of the invisible hand idea of the Scots.  Menger was interested in providing what he termed “compositive” explanations of social and economic institutions.  He contrasted these with “pragmatic” explanations, which focus on how particular institutions have been intentionally designed for particular purposes. 

Menger’s famous theory of the origin of money is often held up as the exemplary spontaneous order explanation.  It is worth a brief review as it illustrates several of the key parts of the Mengerian approach to social science and is also example of what Mayer (1994 [1932]: 57) called a “genetic-causal” rather than a “functional” theory. People who wish to trade but have no money will first attempt to barter, but, as the standard textbook story goes, the absence of a double coincidence of wants will make barter difficult. Eventually some actors realize that they will be more likely to make trades if they can acquire goods that other people desire.  So begins a process of cultural interpretation, where various people are trying to best understand the subjective preferences of others.  Those who acquire goods that have greater subjective value to more “others” will make more exchanges more easily, and thus get “wealthier.”  As they do, their choices will be observed and imitated by others, who will also start trying to use those goods as media of exchange.  As the number of media gets smaller, the demand for each grows, making each one that much more suitable as a medium of exchange.  After some time, this process converges to one (maybe two) good(s) that are subjectively highly desired and can meet the minimal physical requirements of a money (relatively scarce, storable, portable, divisible, etc.).  At the end of this process, the good that is left is considered a generally acceptable medium of exchange, or money.

            Notice the spontaneous order elements of this account.  Money is a product of human action not human design.  The only behavioral assumption we need to make is that people will trade to acquire the goods they wish to consume and would like to make those trades as easily as possible. The key is that the actors need never be conscious of the fact that they are helping to create money.  In fact, how could they be, if they do not even know what money is?  The institution of money is thus an unintended consequence of human action/exchange.  Or more precisely, it is human action that initiates a discovery process that results in the creation of an institution that none of the actors could have intended or perhaps even imagined.  Menger’s theory starts with the notion that valuation is based on the subjective perceptions of individuals and ends with an emergent institution that is thoroughly social. Once money emerges, it, like all other institutions, constrains behavior by virtue of the advantages of participating in an inter-subjectively created institution. 

While Smith and the Scots understood this process in its broadest outlines, Menger began to fill in some of the details.  In particular, Menger bridges the space between Smith and Hayek by reorienting Smith’s discussion of economic progress away from the division of labor alone and toward knowledge more broadly.  In the opening chapter of the Principles, Menger begins his discussion of the causes of economic progress with a review of Smith, and then points out that the division of labor alone cannot explain all economic progress.  He (1981 [1871]: 74) concludes that discussion by arguing that “Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”  In that sense, Menger pushes the Scottish tradition forward toward Hayek.[4]

 

            F. A. Hayek

            Hayek would take this tradition even further in the next century.  His extension of these ideas would come in two major ways.  First, he provided an epistemological backdrop for spontaneous order explanations, and liberalism more broadly, that was only hinted at in the Scots and Menger.  Second, he would clarify the role played by economic institutions, particularly market prices, in bringing about the spontaneous ordering processes of the market, and the social world more broadly.

            Hayek’s main contribution to the liberal tradition begun by the Scots was to emphasize the epistemic limits to humanity’s ability to consciously design and direct our institutions and their outcomes.  For Hayek (1945: 77), the problem facing the creation of economic or social order

is determined precisely by the fact that the knowledge of the circumstances of which we much make use never exists in a concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

 

In other words, knowing precisely how resources should be allocated, or what sorts of social practices or norms would serve us best, would require that we attempt to bring together in one place the bits and pieces of knowledge possessed by separate people, families, or firms.  Hayek’s argument is that the relevant knowledge they possess simply cannot be centralized in the hands of one person or group who could then make determinations of what is better or worse.  To the contrary, what is needed is a set of institutions that enable the possessors of knowledge to make that knowledge socially available for use by others in forming their own plans and intentions.  For Hayek, the problem of social and economic order is a problem of communication.  The human condition is one of partial, fragmentary, and often incorrect knowledge.  We need ways of communicating that allow us to learn from each other, and through such learning processes, discover progressively better ways of doing things. This, of course, fits with Smith’s insight, noted earlier, about the way in which exchange is an extension of reason and speech.[5] 

            Hayek complicates this story one more level however.  He further argued, especially in his work after World War II, that the knowledge necessary for knowing how to, for example, optimally allocate resources, was of a sort that could not be communicated through statistics or language.  As part of his life-long criticism of those who wished to apply uncritically the methods of the natural sciences to the question of social order, Hayek pointed out that objective, articulatable knowledge, including economic statistics, was not the only kind of knowledge relevant for economic activity.  He first makes this point clearly in 1945, when he emphasizes the role of “the knowledge of the particular circumstances of time and place” (1945: 80).  So much of the  knowledge relevant for social coordination is, for Hayek, irreversibly contextual.  In his later work, he added that much of the relevant knowledge might also be tacit, or inarticulate. 

            Tacit knowledge comprises those things that we know, but that we cannot articulate.  For example, most people know how to keep their balance on a bicycle.  In doing so, they are implicitly solving some fairly complex physics equations, yet almost no one can actually articulate, or much less solve, those equations as they ride.  Or, more mundanely, think about how even young children can speak sentences that are pretty much grammatically correct without having any conceptual knowledge of the rules of grammar.  This is Gilbert Ryle’s famous distinction between “knowing how” and “knowing that.”  Knowledge of this sort is ubiquitous in the social world.  The problem is finding some way that enables us to make this knowledge available to others so that they can make use of it, even though we are apparently denied the use of natural language or mathematics to do so.

            Hayek also provided an answer to this question.  In the context of economics at least, competition within well-structured legal and political institutions provided the way for this communication process to take place because the prices generated by market competition served as socially accessible proxies for that tacit knowledge.  When actors make decisions to buy and sell, they are communicating through action, rather than the written or spoken word or number, their knowledge and preferences concerning the goods in question.  The movement of prices in one direction or another provides indirect access to the knowledge of other people, and allows actors to coordinate their behavior with that of others, without the need for centralized direction. As Hayek argued in 1945 (1945: 86), market prices bring “about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”  In other words, the price system enables us to spontaneously generate order by providing us an institutional process for overcoming the unavoidable dispersion, contextuality, and tacitity of our knowledge.[6]

The Role of Institutions in the Scottish Tradition

The role of institutions has become central to modern work in the spontaneous order tradition emerging out of the Scottish Enlightenment. Smith, Menger, and Hayek recognized that, because detailed knowledge of others is denied to us due to the sheer size and anonymity of modern society, people need ways of coordinating their behavior through the use of social norms, rules, and institutions. In the words of Ludwig Lachmann (1971: 50), institutions, as understood in the Weberian tradition,

enable each of us to rely on the actions of thousands of anonymous others about whose individual purposes and plans we can know nothing.  They are nodal points of society, coordinating the actions of millions whom they relieve of the need to acquire and digest detailed knowledge about others and form detailed expectations about their future action.

 

Lachmann ties the role of institutions into our previous discussion of divided and contextualized knowledge. Lachmann suggests that Weber's theory of institutions sees all economic and social institutions as communication processes that make our diverse, and often tacit, knowledge socially usable.

This aspect of institutions figures prominently in modern work that sees institutions as “interpersonal stores of coordinative knowledge” (Langlois 1986a: 237).  Institutions thus limit what we need to know in order to act successfully.  Institutions allow us to form more accurate expectations about the behavior of others without detailed knowledge of them. For example, by everyone agreeing (whether explicitly or tacitly) on a particular practice, we no longer have to out-guess or out-strategize other actors.  The classic example of these so-called coordination problems is which side of the road to drive on.  As long as all agree, the particular choice is irrelevant.  A rule about which side to drive on reduces the need to figure it out on a case by case basis.  Important in this formulation is that by removing some elements of social interaction from conscious deliberation, institutions free us to focus on other situations that lack institutional solutions:

the existence at higher levels of institutions that stabilize the environment and reduce environmental entropy effectively frees behavioral entropy for use at lower levels.  In a stable regime, the agent's reliability is high enough that he can add new actions to his repertoire...at lower levels (Langlois 1986b: 186-87).

 

By serving as coordinative nodes, institutions reduce the knowledge needed to execute our plans, and enhance our ability to execute those plans successfully.

Of further interest to this tradition is the question of how institutions come about.  In short, many institutions emerge as the unintended consequence of successful individual acts of rule-following behavior.  That is, not only do institutions contribute to the larger spontaneous order of society, they are themselves often spontaneous orders.  Individuals trying to improve themselves construct plans of action and attempt to carry them out.  Individuals will continue to use modes of behavior that are successful and will treat them as “rules-of-action” as to how to behave in certain circumstances.  To the extent that the ways of behaving exhibited in the successful plans can be observed by others, they will be imitated, increasing the number of actors behaving in those particular ways.  As this imitation process continues, and the number of users of particular rules increases, people learn to expect similar behavior from others.  A larger number of rule-followers makes using the rule more attractive to potential newcomers as more users means more opportunities to use the rule as a predictor of behavior, enhancing the likelihood of coordinated outcomes.[7] When the behavior in question is so widespread that we can call it “generally accepted,” the rule has become a social institution.  Lachmann (1971: 68) explains this process:

Successful plans thus gradually crystallize into institutions....Imitation of the successful is, here as elsewhere, the most important form by which the ways of the elite become the property of the masses....Institutions are the relics of the pioneering efforts of former generations from which we are still drawing benefit.

 

As should be clear, this is just a more generalized statement of Menger’s theory of the origin of money discussed earlier.

            Once such institutions are in place, they constrain our behavior, if not our very ways of thinking, in important ways.  We are born into a social world full of various norms, rules, and institutions into which we are socialized from an early age.  We learn to form expectations of others’ behavior based on those regularized practices.  As the modern literature on institutions argues, by limiting our range of both thought and action, institutions actually liberate us by making it easier for us to expect correctly the actions of others.  The fact that we all have to drive on the right (in the US) limits our freedom in some sense of the term, but it also makes us more free, in another sense, by removing the problem of having to figure out where people are going to drive on a case-by-case basis.

            Broader institutions such as language and money have similar effects.  Being “born into” a language makes us see the world through the words of that language.  We can’t “get outside” the language to see some non-linguistic “reality.”  Of course this very same apparent constraint is actually quite liberating in that the regularity of language facilitates communication.  The same is true of money, and the institutions of the market more broadly.  Monetary exchange is akin to a language in this way as it constrains the ways in which we can think about “value” and other economic concepts.  This connection between exchange and language and communication is a running theme of work in the this tradition of liberalism.

 

Scottish Enlightenment Man

            Critics of Enlightenment Liberalism often point to Veblen’s (1919: 73) famous account of how he believed the emerging models of turn-of-the-century neoclassical economics viewed humans:

The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.  He has neither antecedent nor consequent.  He is an isolated, definitive human datum…

 

Veblen attempted to portray critically the newly emerging economics as a Newtonian and mechanistic approach to the study of society that should be abandoned for a more evolutionary and institutionally rich approach. 

            It remains true that Veblen’s description of humanity is one that is often approximated by models in modern-day neoclassical economics and is rightfully scorned by its critics.  However, the leap that is often made from correctly pointing out the problems with neoclassical economics’ view of human actors to then concluding that somehow this is the view held by all people who work in the tradition of Enlightenment Liberalism, is demonstrably false.  The spontaneous order tradition offers a different picture of human actors, and one that is much more consistent with the kind of people that really inhabit the world. 

            As Richard Langois (1986c: 4) observes, the irony of Veblen’s attack was that one of his targets, Menger, “was laying the groundwork for a very fruitful approach to the evolutionary and the institutional.”  Veblen homogenized the marginal revolutionaries in much the same way as Enlightenment Liberalism more broadly is homogenized by its critics.  As a result, Veblen never saw that the view of human nature he was attacking “fit Jevons’s or Walsras’s theory much better than [it does] Menger’s” (Jaffe 1976: 521).

This argument can be made clear by examining the picture of human beings that emerges from our discussion of institutions.  Given this view of institutions, human beings are hardly atomistic, hyper-rational, utility maximizers.  Actors are, instead, products of the institutional environment in which they operate.  But rather than merely lament the limitations so imposed, and long for a world free of influences over ourselves that we cannot control, the liberalism emerging from the Scottish Enlightenment explores how, from another vantage point, those same limitations are in fact liberating.  In a world where knowledge is always dispersed, fragmentary, and tacit, institutions are a necessity for the emergence of any sort of social order.  Humans will always be social products, and we simply have to live with the fact that we will never be products of our own conscious construction.

In the view of all three thinkers at hand, humans are not repositories of hyper-rationality.  They are error-prone, often times short-sighted, and in frequent need of guidance from the knowledge possessed by others.  The knowledge they possess themselves is contextual, fragmentary, uncertain and often tacit.  As Hayek argued in his later work, even their capacity for reason itself is a product of cultural institutions (Hayek 1988).  Jaffe’s (1976: 521) description of Mengerian man fits this whole tradition: 

Man, as Menger saw him, far from being a “lightning calculator,” is a bumbling, erring, ill-informed creature, plagued with uncertainty, forever hovering between alluring hopes and haunting fears…

 

In all three thinkers’ work, human beings are also hardly atomistic and narrowly self-interested.  In fact, it is not clear what the word “atomistic” means in the hands of critics.  If it means something like “human actors have no attachments to other humans or human institutions,” then surely it is wrong as a description of the vision of humanity held by this tradition of liberalism.  In The Theory of Moral Sentiments (1976 [1759]), the foundation of Smith’s picture of human morality is the faculty of sympathy.  Mengerian man is understood to be molded by the institutional environment in which he operates.  And clearly for Hayek, humans are not the unconnected, narrowly self-interested folks that the Veblenian critique suggests. 

            Hayek (1946: 13) argues, speaking of how the Scottish thinkers used the term “self-interested”:

These terms [self-love or selfish interests], however, did not mean egotism in the narrow sense of concern with only the immediate needs of one’s proper person. The “self” for which alone people were supposed to care, did as a matter of course include their family and friends; and it would have made no difference to the argument if it had included anything for which people did in fact care.

 

Hayek (1946: 14) followed that point with an explanation for why it still made sense to assume that humans are in some broad sense self-interested:

Far more important than this moral attitude...is an indisputable intellectual fact which nobody can hope to alter and which by itself is a sufficient basis for the conclusions which the individualist philosophers drew. This is the constitutional limitation of man’s knowledge and interests, the fact that he cannot know more than a tiny part of the whole society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere he knows.

 

The phrase “sphere he knows” is understood to include family, friends, and the like, and not just the “self” narrowly construed.  Once again, this insight of the “sphere he knows” harkens back to Smith and the continuum he laid out between how one acts toward those who one knows well, and how one acts toward anonymous others.  In our interactions with friends and family known well to us, we can more easily invoke fellow-feeling and the other dispositions relevant to those close to us.  These are less reliable as we move to more anonymous interactions.

            Unlike neoclassical economics, and the traditions of liberalism that make use of it, the case for liberalism in the spontaneous order tradition is also not pinned to any belief about the rationality of human actors.  In fact, the case for liberalism is predicated on our very ignorance.  It is because our knowledge is so tentative, fragmentary, and tacit that we require the use of spontaneously evolved social institutions to generate social order.  Spontaneous ordering processes are communication procedures that enable us to overcome our very narrow and partial views of the world and to make use of the differently partial and narrow knowledge possessed by others.  In this tradition, it is not the individual actors that are best described as “rational,” but rather the processes in which they operate.

 

Liberalism as a Political Position

            The liberalism of the Enlightenment, sometimes called “classical” liberalism and today best captured by the term “libertarianism,” argued that it was not necessary for “the wealth of nations” nor the betterment of individuals along other dimensions, that the state do anything more than protect rights to life, liberty, property and the pursuit of happiness.[8]  State intervention beyond those limits would be counter-productive and in violating those rights, it would make actors less able to achieve those ends that they set out to attain.  In other words, state intervention would simply make people worse off. 

            What is interesting about the Scottish tradition, in contrast to other versions of classical liberalism/libertarianism, is that relatively fewer writers in this tradition argued from some sort of a priori natural rights perspective.  Modern day libertarianism, which remains largely rooted in the Lockean and Hobbesian, more English, variant of the Enlightenment, is dominated by that sort of rights-talk:  state intervention is bad because it violates one’s right to X.  For many of those liberals, once one has made some sort of case for individual rights of a libertarian sort, then state intervention is ipso facto bad, because it immorally violates those rights. 

However, for the Scottish writers, the issue was not primarily one of rights but of consequences.  Smith argued for free trade because it was the way to increase the wealth of nations, and in doing so, make people better off.  Smith does talk of rights and the system of “natural liberty,” but those are to be desired because they produce good consequences, and they not inviolable under all circumstances.  There are numerous examples in The Wealth of Nations where Smith is willing to deviate from the system of natural liberty because he believes the consequences of natural liberty are problematic.  Moving forward in this tradition, there is almost no talk of rights, certainly not natural rights, in Menger.  Like Smith, he was interested in issues of economic development and how markets would promote it and the larger betterment of humanity.  Hayek’s mentor in economics, Ludwig von Mises, who was an even more ardent opponent of state intervention than Hayek, concurred with Bentham’s characterization of natural rights as “nonsense on stilts.”  And Hayek himself, while constantly struggling between his Scottish heritage in the form of a Humean love of the empirical and his Germanic debts to Kant, in the form of a real concern with freedom and generalizable rules, still rarely, if ever, talks of rights.[9]  In this tradition, the arguments for free markets, freedom of expression and association, and international peace are consequentialist:  allowing spontaneous ordering processes to do their job is desirable because such processes work – they make for a more prosperous, happy world than do the alternatives.

            The key guiding political principle for this branch of liberalism is a recognition of the limits of human rationality and our ability to design top-down solutions to social problems, real or perceived.  It might seem somewhat ironic that a branch of Enlightenment Liberalism would take the limits to reason and rationality as foundational, but this view traces back to Hume’s claim that he wished to “use reason to whittle down the claims of reason.”[10]  There is nothing in the ideal of the Enlightenment that commits one to applying inappropriately the methods of science, which are so powerful and productive in their own arena, to the social world.  The mindset of the scientist or the engineer is inappropriate for solving human problems.  The social world is constituted by the subjective evaluations of human actors, often based on their inarticulatable knowledge of time and place, and informed by their often conflicting values.  To believe that human beings equally conditioned by context and history could design a top-down, one-size-fits-all solution for millions of other humans, stretches the imagination beyond its limits.

            Instead, human solutions emerge in multiple forms as the result of the “bottom-up” activities of humans with the sort of detailed, contextual knowledge that enables them to serve the needs of those around them in more precise, fine-tuned ways.  More important, the spontaneous order tradition argues that when we allow the competitive forces of markets and culture to generate solutions, we are able to rely on the feedback mechanisms of those spontaneous ordering processes to weed out the erroneous and weed in that which is successful at meeting people’s needs. 

            One of the major differences between the liberalism of Smith and Menger and the liberalism of Hayek, is that Hayek had access to, and was a participant in, one of the great intellectual debates that brought together the research program and political concerns of the liberal tradition - the debate over the possibility of economic calculation under socialism that took place in the interwar years.

            In response to the arguments of earlier socialist such as Marx, and 20th century writers such as Otto Neurath, Ludwig von Mises (1920) launched the debate with his article on economic calculation in the socialist commonweath.  Mises argued that without private property in the means of production, socialist planners, whether a small group or a more democratically organized polity, would have no way to determine how effectively they were using resources.  Mises’s argument was that in the absence of private property in capital, there would be no market for capital goods, thus there would be no prices for capital, depriving planners of an irreplaceable guide in determining what to produce and how to produce it.  Faced with having to choose how to apply a particular capital good to produce which consumer goods, or how to produce a given consumer good from which capital goods, planners would be groping in the dark without genuine market prices determined by exchanges of private property.  Mises’s argument cut to the heart of socialist claims of the productive superiority of planning.  Whereas socialists had long saw the market as irrational and anarchic, Mises’s argument showed how the anarchy of production was capable of creating order when actors could make use of market prices to guide their decisions.

            Later refinements of this argument by Hayek and contemporary economists working in the spontaneous order tradition have stressed the same sorts of epistemological issues that have been raised in the discussion of liberalism as a research program.  The claim is that when the political process attempts to intervene in the market it does so largely blind to the intricate details and contextual and tacit knowledge that comprise the market.  Again, as Smith (1976 [1776]: 448) saw it, in the paragraph after his reference to the invisible hand:[11]

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.  The statesman [would] assume an authority…which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

 

The focus on the contextuality of knowledge and the difficulties in communicating it “to the top” dates back to the earliest contributions to the Scottish Enlightenment.

            In this tradition, markets are a communication process that enables us to extend human communicative action beyond language and mathematics to the realm of the tacit.  Market prices perform a semiotic function in communicating the kinds of knowledge we often have difficulty articulating.  Interfering with, or eliminating, market processes deprive participants of the full benefits of the market “conversation.”  Markets are, in modern terms, “communicatively rational.”[12]  As the philosopher Gary Madison (1998: 135, 137) has noted:

The market economy can be said to be irrational only to the extent that one entertains an overly rationalistic conception of rationality, one which in fact reduces reason to mere instrumental, means-end (utility maximizing) rationality…Monetary transactions are of a communicatively rational nature;  they are not…purely utilitarian and instrumentalist.  Monetary transactions are on extremely important way in which citizens of a civil society carry on their society-constituting interactions with one another.

 

The argument that planners would not be able to engage in economic calculation in the absence of money prices suggests that what market processes do is to generate orderly outcomes without design by the use of coordinating institutions such as those prices. 

            The Misesian critique of planning implies a vision of the market radically different from that associated with both mainstream economics and the other strands of Enlightenment Liberalism.  The market is not the arena where atomistic maximizers blindly collide, hoping against hope to produce some sort of optimal static equilibrium outcome.  Rather it is part of the human conversation - a way in which we overcome the limits of our minds and engage in cooperative behavior to create, produce, and exchange. By providing each other with indirect knowledge via market prices, we allow others to make use of that knowledge and construct their plans accordingly.  This allows for the fine degrees of the division of labor and knowledge we see accompany economic growth.  Those of divisions of labor and knowledge mean that increased amounts of cooperation must take place to produce consumer goods.  As such, the Mises-Hayek argument against planning can be seen also as an extension of Smithian insights about the progressive division of labor, refined by both the epistemological issues raised by the subjective theory of value, and the importance of monetary calculation as stressed in the calculation debate.[13]

           

Conclusion

            The liberalism that finds its roots the Scottish Enlightenment points toward a different conception of both the task of the social sciences and the most desirable economic and political order.  Unlike the more rationalistic conceptions of humans and the social world associated with other strands of liberalism, the Scottish variant recognizes human fallibility and the subjective, tacit and contextual nature of the knowledge we do have.  It further recognizes the inherently social nature of human beings:  in order to survive we must cooperate with others.  However, the spontaneous order tradition argues that such cooperation need not, and to a large degree cannot, be intentional, planned cooperation.  Instead, it points to how much of the social world that we know has emerged as unintended consequences of human action.  The social world is “of human action but not human design.”  And the market is the foremost example of that kind of phenomenon. The Scottish tradition understands the market as a set of institutions that facilitates our (often erroneous) attempts at social coordination.  It is, in those ways, an outgrowth of those faculties of reason and speech that Adam Smith identified over 200 years ago.  The market allows us to communicate with millions of anonymous others in ways that extend our human propensity to persuade beyond language and direct face-to-face contact.

REFERENCES

Hayek, F. A.. 1945.  “The Use of Knowledge in Society,” in Hayek (1948).

__________. 1946. “Individualism:  True and False,” in Hayek (1948).

__________. 1948.  Individualism and Economic Order, Chicago:  The University of Chicago Press.

__________. 1952.  The Sensory Order, Chicago:  University of Chicago Press.

__________. 1973.  Law, Legislation, and Liberty, v. 1, Chicago:  University of Chicago Press.

__________. 1988.  The Fatal Conceit:  The Errors of Socialism, W. W. Bartley III, ed., Chicago:  University of Chicago Press.

Hodgson, Geoff.  1993.  Economics and Evolution:  Bringing Life Back into Economics, Ann Arbor:  University of Michigan Press.

Horwitz, Steven. 1992.  “Monetary Exchange as an Extra-Linguistic Social Communication Process,” Review of Social Economy 50, 2,  Summer.

_____________. 1998.  “Monetary Calculation and Mises's Critique of Planning,” History of Political Economy 30, 3, Fall: 427-50.

_____________. 2000. “From The Sensory Order to the Liberal Order:  Hayek’s Non-rationalist Liberalism,” Review of Austrian Economics 13, 1: 23-40.

Jaffe, William. 1976.  “Menger, Jevons and Walras De-homogenized,” Economic Inquiry 14, December.

Kukathas, Chandran.  1990.  Hayek and Modern Liberalism, Oxford:  Clarendon.

Lachmann, Ludwig M..  1971.  The Legacy of Max Weber, Berkeley:  The Glendessary Press.

Langlois, Richard. 1986a.  “Rationality, Institutions, and Explanation,” in Richard Langlois, ed.,  Economics as a Process:  Essays in the New Institutionalist Economics, Cambridge:  Cambridge University Press.

________________. 1986b. “Coherence and Flexibility:  Social Institutions in a World of Radical Uncertainty,” in Subjectivism, Intelligibility, and Economic Understanding, Israel M. Kirzner, ed., New York:  New York University Press.

________________. 1986c. “The New Institutional Economics:  An Introductory Essay,” in Richard Langlois, ed.,  Economics as a Process:  Essays in the New Institutionalist Economics, Cambridge:  Cambridge University Press.

Madison, Gary. 1998.  The Political Economy of Civil Society and Human Rights, New York:  Routledge.

Mayer, Hans. 1994 [1932].  “The Cognitive Value of Functional Theories of Price,” reprinted in Classics in Austrian Economics Vol. II, Israel M. Kirzner, ed., London: Pickering and Chatto.

Menger, Carl. 1981 [1871].  Principles of Economics, New York:  New York University Press.

___________. 1985 [1883].  Investigations into the Method of the Social Sciences with Special Reference to Economics, New York:  New York University Press.

Mises, Ludwig von. 1935 [1920].  “Economic Calculation in the Socialist Commonwealth,” in Collectivist Economic Planning, F. A. Hayek, ed., Clifton, N.J.:  Augustus M. Kelley, 1935.

Searle, John. 1992.  The Rediscovery of the Mind, Cambridge:  MIT Press.

Smith, Adam. 1976 [1776].  An Inquiry into the Nature and Causes of the Wealth of Nations, ed. by Edwin Cannan (1904 edn.), Chicago:  The University of Chicago Press.

___________. 1976  [1759].  The Theory of Moral Sentiments, Indianapolis:  Liberty Press.

Vaughn, Karen. 1994.  Austrian Economics in America, New York:  Cambridge University Press.

Veblen, Thorstein. 1919 [1898].  “Why is Economics Not an Evolutionary Science?” Quarterly Journal of Economics 12, reprinted in The Place of Science in Modern Civilization, New York:  W. B. Huebsch, 1919.

Young, Jeffrey T.. 2000.  “Adam Smith’s Two Views of the Market,” in Knowledge, Division of Labour, and Social Institutions, Pier Luigi Porta, Roberto Scazzieri and Andrew Skinner, eds., Cheltenham, UK:  Edward Elgar.


[1]  My task in this paper is not to explore and contrast all the various strands of the Enlightenment, although that would be a very valuable project.  Instead, I simply wish to explore the continuity among the thinkers associated with the Scottish tradition and offer a defense of it against some of the criticisms noted above.

[2]  Smith is speaking here of what both he and Hayek (1973) called “The Great Society.”

[3] See the discussion in Vaughn (1994: 26, fn 21) and the sources cited there.

[4] Menger also links back to the Scottish tradition, as the Scottish political economists of the early 20th century continued Smith’s work with a deep interest in the Austrian tradition spawned by Menger, including translations of Bohm-Bawerk.  I thank Alastair Dow for bringing this point to my attention.

[5] The idea of monetary exchange as an extension of language has been explored in more depth by Horwitz (1992).

[6] There is an interesting parallel between the price system’s role as a background of crystallized tacit knowledge that facilitates the more articulate and intentional choices of the entrepreneur, and the contrast between the Background and the idea of Intentionality in John Searle’s very Hayekian theory of mind.  See, for example, Searle (1992), where he argues that intentional behavior requires background capacities that are non-intentional.

[7] This learning-through-experience process reflects the broadly empiricist view of knowledge held by all three thinkers.  This point is most clear in Hayek (1952), where mental categories are the product of human interaction with the external world.  Both Hayek and Smith were quite “Humean” in their epistemologies.  The links between Hayek’s view of the mind and his work in political economy are explored in Horwitz (2000).

[8] Not all evolutionary approaches to the study of society that have roots in the Scottish tradition end up with classical liberal political positions.  The work of Geoff Hodgson (1993) is an excellent example of a non-libertarian evolutionary approach that finds its roots in places similar to that of Hayek.

[9] See Kukathas (1990) for more on Hayek’s attempts to reconcile Hume and Kant.

[10] As Hayek (1988: 8) wrote:  “By ‘reason properly used’ I mean reason that recognises its own limitations and, itself taught by reason, faces the implications of the astonishing fact, revealed by economics and biology, that order generated without design can far outstrip plans men consciously contrive.”

[11] One might also consult the famous “chess-board” passage in The Theory of Moral Sentiments (Smith 1976 [1759]: 233-4).

[12] Again, the importance of communication and its relationship to rationality is seen to be central to the Scottish tradition.

[13] For an interpretation of the calculation debate stressing the role of money, see Horwitz (1998).