Hayek's Theory of Spontaneous Order and the Normative Development of the Free Market and Common Law.

• Author: Herron, Daniel J.

1. INTRODUCTION:

   The debate over the development and proper management of the free market underlies virtually every discussion on the political landscape. It is such a hot debate that productive discussion is deeply challenging. What if a reasoned discussion of common law--a less fiery field of inquiry--would enable progress in the more burning questions of political economy?

   Common law evolved out of 12th and 13th century reforms in the English legal system initiated by edicts or assizes of Plantagenet King Henry II. The questions presented with any historical development include "how?" and "why?" these developments occurred. Was there an evolutionary process at play or was it intentional design? Friedrich von Hayek (4) advances the hypothesis that the common law is the result of spontaneous order. (5) He advances this theory along with the twin theory that the evolution of the laissez faire market also evolved out of "spontaneous order."

   Hayek, of course, is better known for his work on spontaneous order in the markets than for his work on common law, so the appeal to Hayek connects common law with the debates over political economy that shape civic dialogue and behavior across the world at this very moment. For analysts of either law or political economy, one of the primary questions is how much the systems should be shaped positively and how much they should be allowed to develop organically. It often seems that proponents of one view of the other not only disagree with, but indeed find it impossible to conceive of, the other side of the argument. Perhaps the law, which has been developing longer than the free markets, can be an important context: the balance of powers in the common law may contribute to a fuller understanding of one of the primary questions of political economy.

   Hayek's theory of spontaneous order is the connective tissue, and this paper explores Hayek's theory. One hypothesis disputing Hayek's theory would claim that left to workings of "spontaneous order," and only "spontaneous order," both the common law and laissez faire markets would evolve into unworkable or undesirable processes. If, according to Hayek, the common law process evolved out of "spontaneous order," how does Hayek address, for example, that without the application of reason, logic, and analogical deduction, stare decisis would not have evolved and continue to evolve today as the foundation of judicial decision-making? Or, might reason, logic, and analogical deduction not be a conscious activity of human design and subsequent human intervention, but instead be imbedded in the nature of spontaneous order?

   There is one aspect of Hayek's theory that does permit the interjection of human intervention.

   ... Hayek is asking us consciously to design the general rules of the economic system so that spontaneous order induced by these rules can be expected to promote the general welfare ... he is asking us to adopt a policy of using the spontaneous ordering forces of human behavior to bring about desirable (but, in detail, unpredictable) results. All this is very different from appealing to group selection to justify long-established rules. (6) The hypothesis of this paper is that Hayek is correct in identifying spontaneous order as an origin of various societal "institutions" such as the common law or the free market. But, to claim that rational "interference" in such spontaneous ordered institutions is a corrupting and damaging exercise is the significant question on the table.

   Hayek may have fallen into the trap of attempting to construct one theory to explain everything. Coincidentally, it is similar to a judge adopting one legal precedent to apply to all similar situations without permitting variance by rationally cognitive human intervention. We need to explore not just the theory itself but the context of both the times and applications.

2. Competing Twentieth Century Theories

   We begin with the primary system to which Hayek was responding: a socialist-inclined managed economy. (7) Almost from its inception, socialism proved to be a failed system. Ideologically pristine, socialism, as an economic system, has not been effective except in limited use in highly homogenous societies such as the Scandinavian countries. Even there, the economic system is a blend or hybrid of capitalistic and socialistic principles. (8) However, on a broader scale and with a far more heterogenous national demography, the Soviet Union was one failed socialistic attempt after another. (9) These continued failures awarded the default economic position of the twentieth century to capitalism--but which "flavor" of capitalism?

   1. Hayek versus Keynes, both ccpitalists but different flavors or opponents?

      Hayek and John Maynard Keynes (10) were the combatants in the quintessential free market economic battle of the twentieth century. Both were capitalists but disagreed vehemently on the government's role in the economy. Hayek took the "classical liberal" view of Adam Smith that the invisible hand served as the exclusive guiding force behind laissez faire economics. Keynes took the view that governmental intervention in the dual form of regulator and participant to guide the economy when it deviated from normative behavior. In the Keynesian universe, government could enter into the market with stimulus programs, such as a jobs bill or infrastructure bill, to influence economic growth. Likewise, government could regulate the economy with regulatory schemes, such as taxation, market regulation, international sanctions, or the like. Hayek opposed such schemes as a deviance from his view of normative market activities.

      The intriguing aspect of Hayek's thinking is the foundation of what he believes to be normative results. This foundation is his theory of "spontaneous order." Succinctly, this theory postulates that, "what is, is right" in Alexander Pope's words. (11) If society is left unfettered by governmental, positive, or constructivist intervention, it will "spontaneously" evolve those practices, policies, and institutions which should evolve.

      The doctrine of spontaneous order achieved a central place in economic and legal science when Adam Smith described the interaction of market forces coordinating processes of production, distribution, and consumption as the working of an invisible hand. Carl Menger extended the application of spontaneous order to the emergence of commodity money in a primitive barter economy and Ludwig von Mises contributed a highly sophisticated theory explaining how fiat money can evolve from commodity money. Mises' regression theorem filled an important gap in prevailing macro monetary economics, which was unable to understand how fiat money could circulate at all. Hayek developed a theory of the evolution of democratic political and legal institutions responding to historical influences without the intelligent design of an authoritative legislator. (12) As Mulligan connects Hayek's spontaneous order with 19th century laissez-faire markets, it is worth considering the failings of those markets alongside their broad successes. Wealth disparity, market manipulation, and employee oppression were, at best, side effects of 19th century laissez-faire economics. (13) With the advent of governmental regulations of market monopolies in 1890 with Sherman Act anti-trust laws (14) and then regulation of consumer protection with the Federal Trade Commission Act (15) in 1914, the federal government, and subsequently state governments, limited the laissez faire "spontaneous order" evolution of the market which then became affected by positive governmental influences. The paradox of the Sherman Act was that regulation was needed to protect the freedom of a laissez faire market. But does this kind of governmental intervention really contradict Hayek's spontaneous order theory?

   2. What is Hayek's identification of "rational constructivism"?

      Hayek contrasts his spontaneous order model of social organization with "rational constructivism," which assumes that human institutions are capable of serving human purposes by intentional design. (16) For Hayek, rational constructivism is deeply fallacious despite its infusion in Western thought since Descartes. (17) In describing the difficulties of a centrally-managed world, Hayek describes the unavailability of adequate information to manage a society, calling it a "fiction that all the relevant facts are known to some one mind, and that it is possible to construct from this knowledge of the particulars a desirable social order." (18) To this end, Hayek argues that the spontaneous order process is indeed normative. However, does the evidence show the contrary in both market and legal evolution?

3. Spontaneous Order as a Descriptive Process in Market Evolution

   Robert Sugden notes that, "[h]aving recognized that such institutions as language, law, markets, and money are the product of evolution and not of reason, [Hayek argues that] we must take the final step of accepting that morality is just another institution of the same kind: "Ethics is the last fortress in which human pride must bow in recognition of its origins." (19) Let's test this axiom with the fundamental market concept of the West: capitalism.

   Hayek argues that capitalism arose as a result of spontaneous order, or an order among persons that emerges from self-motivated individual actions that combine into a larger sequence of coordinated activity, without any central direction. A spontaneous order is one that is the product of human...