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Hayek on Smith on complexity

July 28, 2009

Economics has from its origins been concerned with how an extended order of human interaction comes into existence through a process of variation, winnowing and sifting far surpassing our vision or our capacity to design. Adam Smith was the first to perceive that we have stumbled upon methods of ordering human economic cooperation that exceed the limits of our knowledge and perception. His ‘invisible hand’ had perhaps better have been described as an invisible or unsurveyable pattern. We are led — for example by the pricing system in market exchange — to do things by circumstances of which we are largely unaware and which produce results that we do not intend. In our economic activities we do not know the needs which we satisfy nor the sources of the things which we get. Almost all of us serve people whom we do not know, and even whose existence we are ignorant; and we in turn constantly live on the services of other people of whom we know nothing. All this is possible because we stand in a great framework of institutions and traditions — economic, legal, and moral — into which we fit ourselves by obeying certain rules of conduct that we never made, and which we have never understood in the sense in which we understand how the things that we manufacture function.

Modern economics explains how such an extended order can come into being, and how it itself constitutes an information-gathering process, able to call up, and to put to use, widely dispersed information that no central-planning agency, let alone any individual, could know as a whole, possess or control. Man’s knowledge, as Smith knew, is dispersed. As he wrote, “What is the species of domestic industry his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, in his local situation, judges much better than any statesman or lawgiver can do for him”.

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From → Hayek

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