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This essay first appeared in the journal Literature of Liberty: A Review of Contemporary Liberal Thought, vol.
V, no. 2, Summer 1982, published by the Cato Institute (1978-1979) and the Institute
for Humane Studies (1980-1982) under the
editorial direction of Leonard P. Liggio.
Although the editorials were unsigned, they were probably written by
the Editor Leonard P. Liggio or the Managing Editor John V. Cody. It is
republished with thanks to the original copyright holders.
"Invisible Hand" Explanations of Society
"Wherever we see a well ordered arrangement of things or men we instinctively
assume that someone has intentionally placed them in that way." - Michael
Polanyi, The Logic of Liberty.
"The effectiveness with which knowledge is transmitted
and coordinated through social processes depends upon the actual characteristics
of those specific processes. ... Emphasis on the characteristics of social
processes implies a systemic analysis of social causation, in contrast to
individual or intentional analysis of why things happen as they do .... the
(systemic) outcome does not depend on the individual agent's subjectively
pursuing the end result of the system." - Thomas Sowell, Knowledge
"By pursuing his own interest he frequently promotes that of society
more effectually than when he really intends to promote it. I have never known
much good done by those who affected to trade for the public good." -
Adam Smith, The Wealth of Nations.
Since the dawn of history intellectuals, with varying degrees of success, have
been trying to explain the nature and meaning of society and suggesting ways
to improve the social order. For the most part until the Scottish Enlightenment
of the Eighteenth Century, the thrust of these investigations was intentionalist.
That is, social order was seen to be the result of some being's conscious design,
whether man's or God's. There were exceptions, but as Hayek points out, "Neither
the Greeks of the fifth century B.C. nor their successors for the next two thousand
years developed a systematic social theory which explicitly dealt with these
unintended consequences of human action or accounted for the manner in which
an order or regularity could form itself among those actions which none of the
acting persons had intended."
During the Age of Enlightenment, modern social theory was born. This non-intentionalist
or systemic theory flourished mainly among the Scottish intellectuals such as
Adam Ferguson, David Hume, Josiah Tucker, and, most famously, Adam Smith. For
the first time there was a thorough investigation of the unintended consequences
of human action. These consequences were seen to be not only often benign but
also absolutely necessary for mankind to attain any semblance of civilized social
Institutions and institutional processes were rendered intelligible not by
attributing them to human or divine purpose but by what were later to be called
by Robert Nozick "invisible hand" explanations.
Although not usually thought of as such, a price is such an "invisible
hand" institution. No one enters an exchange to produce a price, but nevertheless
an exchange ratio or a price emerges from the transaction. Not being the result
of anyone's intention a price can be rendered meaningful only by an invisible
hand explanation. Prices are both unintended and benign. They lead in turn to
the spontaneous evolution of money which encourages a further division of labor,
both of which, like prices, are unintended and undesigned social institutions.
These along with other undesigned institutions, such as the Common Law, mesh
together to produce a spontaneous social order or what Hayek has called a "catallaxy."
The rules that emerge from institutions such as markets and from the Common
Law can then be discovered, studied, and implemented by man to establish the
Rule of Law. But as can be seen, the rules are not imposed from without to create
order, but rather are immanent in the emergent social processes that, as if
led by an invisible hand, themselves lead to orderly social institutions which
in turn lead to an even wider social interdependence and coordination.
The emergence of money and (when left alone to do so) a free banking system,
such as existed in Scotland, constitute one of the clearest object lessons in
spontaneous order theory. The recent work of Lawrence H. White in rediscovering
and presenting the work of nineteenth-century British monetary theorists Samuel
Bailey, Lord King, Henry Parnell, and Thomas Hodgskin should serve as a model
to those wishing to learn how spontaneous orders both emerge and maintain themselves.
At first glance one might possibly get the idea that spontaneous order theorists
believe that no deliberate planning takes place in the course of achieving social
order. Clearly this is not the case. The best theoretical explanations of the
need for both constructed and unintended institutions is to be found in the
following: (1) Ronald Coase's classic article, "The Nature of the Firm,"
shows how pockets of planning (firms) permeate the price system. He quotes the
master of luminous prose and distinguished economist, Sir Dennis Robertson,
to underscore his own point about intentional planning at times superseding
yet also fitting together with the price system. Robertson likens firms to "islands
of conscious power in this ocean of unconscious cooperation like lumps of butter
coagulating in a pail of buttermilk." (2) Michael Polanyi's Logic of
Liberty demonstrates the tension yet at the same time the complementarity
between what he calls corporate or hierarchical orders and spontaneous orders.
(3) Israel M. Kirzner shows in his Competition and Entrepreneurship
that spontaneous is not the same thing as automatic if by automatic one means
instantaneous and mechanical adjustment. On the contrary, the entrepreneur must
perceive changes and adjust the use of resources not only to the new present
conditions but also to what he sees as likely conditions in the future. Here
again the conscious deliberate plans of entrepreneurs interact with the unintended
effects of others' expectations, plans, and actions. (4) Location theory tells
us that we can expect people to be led to arrange themselves in relation to
one another according to certain functions they will perform for others through
the division of labor. As Jane Jacobs demonstrates in her The Economy of
Cities, the unintended effects of such self-arrangements are the emergence
and development of what we know as cities. (5) The capital theory developed
by the Austrians from Carl Menger through Mises, Richard von Strigl, and Hayek
is yet another example of the interaction of deliberation and spontaneity. Just
as no one sets out to produce a price, neither does one attempt to create a
macroeconomic structure of production, yet in building his own plant he unwittingly
contributes a new element in what Ludwig Lachmann in his Capital and Its
Structure calls a lattice-work structure of heterogeneous yet interconnected
and complementary capital goods.
Adam Smith's explanation of the division of labor is by most accounts cited
as the first significant step in modern social theory. Perhaps Carl Menger's
evolutionary explanation of money deserves to be ranked beside Smith's, although
in many ways Menger was rediscovering and rearticulating for a new generation
a set of theoretical insights that for several decades had languished or had
been superseded and pushed aside by intentionalist social explanations of one
sort or another.
Surely it must follow that the second great step in modern social theory after
Smith's explanation of the division of labor was Hayek's contention that the
central problem in social and economic theory is that knowledge is fragmented
and dispersed unevenly among the members of society, i.e. the division of knowledge.
How, then, can this knowledge of time and circumstance - including their expectations
about the future - which by definition can be known only by the individual members
of society - how can this knowledge be utilized in such a way so as to lead
to a coherent and viable social order?
Hayek is not alone in addressing this question over the decades since he first
encountered the problem during the debate in the 1930s concerning the impossibility
of economic calculation under a regime of socialism, and when he succinctly
articulated the problem in his classic 1945 article "The Use of Knowledge
in Society." The same question has also captured the attention of some
of the leading contemporary economists and social theorists, such as Michael
Polanyi, Ronald Coase, Karl Popper, G. L. S. Shackle, James Buchanan, Alan Coddington,
George Stigler, Harold Demsetz, Axel Leijonhufvud, Armen Alchien, Robert Nozick,
Israel Kirzner, Ludwig Lachmann, Brian Loasby, and most recently Thomas Sowell
in his remarkable 1980 work, Knowledge and Decisions.
With the publication of Sowell's book, Hayek's trilogy Law, Legislation
and Liberty, Norman Barry's Hayek's Social and Economic Philosophy,
George Shackle's Epistemics and Economics, and Brian Loasby's Choice,
Complexity, and Ignorance, the reissuance of Michael Polanyi's The
Logic of Liberty, the spontaneous order tradition has again been thrust
into the midst of the academic debate. This time the economics and sociology
of knowledge are at the cutting edge of the tradition's return. There is much
work yet to be done in this field of research, but as the work of Hayek, Sowell,
and others demonstrates, there are many aspects of society (most of the interesting
aspects) that can be understood and explained only through the use of invisible
 See Lawrence H. White, Free
Banking in Britain: Theory, Experience, and Debate, 1800-1845 (Cambridge
University Press, 1984).
Norman Barry's Hayek's Social and Economic Philosophy (London: Macmillan,
Ronald Coase, "The Nature of the Firm," originally published in Economica
(November 1937) and reprinted in R.H. Coase, The Firm, the Market, and the
Law (University of Chicago Press, 1990), pp. 33-55.
Friedrich Hayek's trilogy Law, Legislation and Liberty (London: Routledge
& Kegan Pau, 1973-79), vol. I, Rules and Order, 1973; vol. II, The
Mirage of Social Justice, 1976; vol. III, The Political Order of a Free
Jane Jacobs, The Economy of Cities (New York: Random House, 1969).
Israel M. Kirzner, Competition and Entrepreneurship (University of
Chicago Press, 1973).
Ludwig Lachmann, Capital and Its Structure (1956) (Kansas City: Sheed,
Andrews and McMeel, 1978).
Brian Loasby, Choice, Complexity, and Ignorance: An Enquiry into Economic
Theory and Practice of Decision-making (New York: Cambridge University
Michael Polanyi, The Logic of Liberty: Reflections and Rejoinders
(1951) (Indianapolis: Liberty Fund, 1998). Available from
Liberty Fund's Online Book catalog.
Sir Dennis Robertson, The Control of Industry (London: Nisbet, 1928).
George Shackle, Epistemics and Economics ( Cambridge University
Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980).
Lawrence H. White, Free Banking in Britain: Theory, Experience, and Debate,
1800-1845 (Cambridge University Press, 1984).