The Complexity of Simple Economics

Michael Sykuta —  17 September 2010

That’s the title of Steve Horwitz’s blog post reflecting on a recent celebration honoring the lifetime contributions of 1986 economics Nobel Prize winner James Buchanan. (HT: Art Cardin for pointing it out on FB) Horwitz describes Bachanan’s comments about how “the most basic insight of economics is fairly simple: the spontaneous order of  the market.” He goes on:

At the core of the economic way of thinking is the idea that economic coordination requires no coordinator and that an order which serves the interests of all can emerge from the interaction of self-interested choices. Although simple, it is also highly counterintuitive when first encountered.

This fundamental insight underlies much of the spirit that unites the collection of bloggers called Truth On The Market (at least as I see it…Geoff and Josh can delete me if I’m wrong). Horwitz then goes on to describe Buchanan’s remarks on a subject that relates even more closely to TOTM. To wit:

Buchanan’s final point, however, was one that is perhaps the most important in our own time and place. He reminded the audience that not all spontaneous orders are equally good. The quality of the outcomes depends crucially on the rules that frame the economic processes and behavior which produce that order.

In short, the rules matter. Or, as one of my professors, 1993 economics Nobel Prize winner Douglass North might say, “institutions matter.”  Spontaneous order will emerge from the interaction of individual decision makers as they work to maximize (or satisfice) their own well-beings, regardless the nature of the rules. However, the rules themselves create incentives and constraints that shape the nature of the spontaneous order itself.  Often, the rules result in spontaneous orders which are neither intended nor desirable…largely because those responsible for creating the rules have such little grasp of and/or appreciation for that most basic insight of economics: the spontaneous order of the market.

When I was in grad school I had the pleasure of attending a talk by Buchanan and picked up an anecdote that I still use with my students. Buchanan told a story of a trip to Russia just shortly after the reforms of the early 90s. He learned that there had been (or was at the time) a thriving market for burned out light bulbs. It was a great tale of how spontaneous market order can emerge, even in a society that had been taught for generations to eschew the market.

So,while not so presumptuous as to write on behalf of all my colleagues, I will simply suggest that TOTM readers may better understand the philosophy behind much of what is posted here by coming to an understanding of the complexity of simple economics; remembering the spontaneous order of the market and the importance of the rules by which it is shaped.