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April 26, 2008

Hayek’s famous 1945 paper “The use of knowledge in society” is often referred to as the seminal source for the idea that the free-market is a bottom-up phenomenon where prices spontaneously emerge, that prices’ function as vectors of decentralized knowledge, and that this is vastly superior to the various wishful theorizations for planned economies.

In another important 1937 paper “The nature of the firm”, Coase addresses the conundrum that firms are (supposedly?) little islands of command-and-control, small versions of planned economies, in a sea of bottom-up emerging market forces.

Reading these two great economists (two Nobel prizes), one realizes once again that the words used in these discussions are highly misleading. What do we mean by command-and-control? Commanding heights? Planned economies? etc…The reality is quite different, in fact, from these high-sounding descriptions. It’s often said of workers in the Soviet Union that “they pretended to work and the government pretended to pay them”. So who’s commanding who?

Free-marketeers are often accused of being hopelessly idealistic, and they often concede that true free-markets have never existed. I always cringe when I read these concessions, because the inevitable follow-up is that “free-markets have never been tried for the good reason that they don’t work”. This obscures the fact that free-markets are all around us and constantly springing up, evolving and producing results. To the contrary, it’s the so-called “guided economies” that have the burden of proof to demonstrate that they have ever existed. Show me anyone in history who was ever able to smoothly guide an economy from A to B! Show me a law in any country at any time that had it’s intended effects and only those! Even in the context of firms or families, how much is actually obtained by pure authoritarianism? And how much are firms and families instead the result of free associations, in order to share gains and losses a little more widely?

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