[First published on Free Life]
One of the aspects of capitalism and the free market that the typical lay person finds difficult to comprehend is the fact that the complex structure of work, production, distribution, and trade could possibly take place without some kind of centralised, directing authority in order to co-ordinate everybody’s efforts. Wouldn’t there just be chaos and mal-coordination with everyone trying to make their own, independent plans if there is nobody at the tiller to steer the giant ship?
This fallacy stems from the belief – accentuated by holistic concepts such as aggregate, pseudo-statistics like “GDP” or “the national income” – that what we refer to as “the economy” is some kind of enormous machine that has “input”, with a single operator “processing” these “inputs” into “outputs”.
In fact, rather than being one giant, amorphous blob “the economy” is made up of millions and millions of independent, unilateral acts of production and two-way trades, many of which will never have anything to do with each other. I may sell an apple to my neighbour for 10p in London; another person may sell an orange for 20p to his neighbour in Manchester. Neither of the two pairs of people has ever met, nor need any of them have any involvement with the exchange of the other pair; and yet both exchanges would be regarded as part of “the British economy” in mainstream discourse.
Rather than being a top-down operated machine, “the economy” is a bottom up network of independent transactions – motivated by the ends desired by each and every one of us rather than by some bureaucrat – joined together only through the communication of the price system. All of the trades together, stimulated by varying and changing desires and ends that people seek, will have a constant and unceasing influence on the prices that regulate the supply of goods relative to their demand. Ironically, it is precisely because of such complexity – the so-called “knowledge problem” – that the attempts of any central authority to control and direct it are nothing short of futile. Even worse, however, is the fact that without market prices generating profit and loss such an authority would have no rational guide to apportion resources to where they are most needed. This is what Ludwig von Mises established in his Economic Calculation in the Socialist Commonwealth, a work that was published at the birth of the world’s greatest collectivist experiment – the Soviet Union – and foresaw its ultimate failure.