Hayek’s mature arguments for his ideal system revolve around the notion of a “spontaneous order” in the free market, which in turn echoes Smith’s “invisible hand.” Supposedly, the market results in a “spontaneous” emergence of order that is opposed to conscious planning or deliberate design.
Hayek also invoked a type of evolutionary process in his belief that “spontaneous order” is at the heart of a market process (for a critique of this aspect of Hayek’s thought, see Hodgson 1991).
As I have shown in the previous post, Hayek’s “spontaneous order” concept is really an example of an “emergent property,” but Hayek missed an important aspect of emergent properties: that they can be the result of conscious direction and design, not just spontaneity (Lewis 2012: 374).
Hayek’s understanding of emergence and self-organisation was also flawed by a failure to understand destabilising feedback, as described by Witt:
“... the theory of self-organizing systems distinguishes two types of processes implied by non-linear dynamics … : self regulating processes (negative feedback) and temporarily self-amplifying processes (positive feedback). The former stabilizes given states of order. The latter can destabilize an existent state of order beyond a critical threshold and induce a transition to a new state of order. (In the transition between the old and the new state of order, an instability is passed, a phenomenon called phase transition in physics.)” (Witt 2012: 126).Witt regards the processes induced by “innovation competition” as destabilising, and part of Schumpeter’s vision of the “creative destruction” side of capitalism.
Witt sees another aspect of Hayek’s defence of the market order as involving an “epistemic argumentation in support of market liberalism.” This is the familiar idea of the market coordinating dispersed knowledge, above all, by the price system.
Witt argues that Hayek’s emphasis on competition as a “discovery procedure” via the price system merely focussed on one type of competition: price and cost competition (Witt 2012: 125). There is another profoundly important type of competition Hayek neglects, which is “innovation competition.”
This relates to “economically relevant technological knowledge” such as new production techniques, new goods, and new resources (Witt 2012: 125–126). The process by which innovation affects an economy can result in serious destabilising forces.
A further problem from “innovation competition” could be “negative externalities” resulting from new technologies in terms of health or environmental side effects.
Witt considers the case of chlorofluorocarbons (CFCs), which were a chemical innovation and one which had a severe negative externality in form of stratospheric ozone layer depletion (Witt 2012: 132). Interventions to deal with this were necessary, and the whole general problem suggests that government interventions can and should deal with negative externalities.
In short, Hayek has failed to consider negative and destabilising aspects of emergent market processes.
Hodgson, G. M. 1991. “Hayek’s Theory of Cultural Evolution: An Evaluation in the Light of Vanberg’s Critique,” Economics and Philosophy 7: 67–82.
Lewis, Paul. 2012. “Emergent Properties in the Work of Friedrich Hayek,” Journal of Economic Behavior and Organization 82.2–3: 368–378.
Witt, U. 2013. “Competition as an Ambiguous Discovery Procedure: A Reappraisal of Hayek’s Epistemic Market Liberalism,” Economics and Philosophy 29: 121–138.