Spontaneous Economy: The Invisible Hand at Work

by Kai Weiss

This article is part of the series Spontaneous Order: A Rich Tradition with Lessons for Today. Read the previous article here.

When social scientists, particularly economists, look at social phenomena, they tend to either accentuate the individual so much that society vanishes, or they accentuate society so much that the individual vanishes. An approach called Social Economics which has arisen out of the tradition of the Austrian School of Economics prevents falling into either one of these traps. It realizes that only individuals can make choices and act, but it also embeds the individual in a society, a social fabric of which an individual (usually, at least) wants to be a part.

Humans are social animals. And cooperation, particularly in the economic realm, can bear fruitful results. Rather than doing everything by oneself, it is more opportune to collaborate and work together with others. Free Trade 101 theories have stated this clearly for over two centuries. Autarky cannot go beyond very simple, rudimentary, and materially poor economies. Networks of men and women cooperating with one another will lead to economic progress and prosperity – I will abstain from bringing up Adam Smith’s (1723-1790) and David Ricardo’s (1772-1823) theories yet again.

When individuals cooperate, however, something else is happening. As individuals come together voluntarily, interact and collaborate, and networks and certain patterns will emerge as a result. Take language as an example: language is not a natural law, nor has it been decreed by some Commission of Language. Instead, language comes into being ‘just like that,’ by people trying to interact, using certain grumbling sounds to indicate something and those becoming words at some point when a sufficient number of people come to accept that this word has this specific meaning.

Or, put differently, language comes into being in a bottom-up way, not through a centralized authority. That is, language comes into being spontaneously, with no one in charge, but ‘merely’ through human interaction.

This is not only the case with language, but with many, if not most, of our social and economic institutions. One prominent example of such a spontaneous, organically emerging institution in the economic realm, as expounded by Carl Menger (1840-1921), is the institution of money. Take a barter economy, that is, an economy in which there is no money and market participants just trade goods with one another – for instance, a farmer and fisher trade bread and fish because the farmer wants fish and the fisher wants bread.

How difficult is it, though, asks Menger, to always find precisely that person and potential trading partner who actually has what you want – and who actually wants what you have? What if you are fisher and all you have is fish, but the farmer has no interest in fish? Or vice versa, what if he actually wants fish, but all he has is bread and you hate bread? No transaction would result.

Instead, people started trading goods indirectly. That is, they started using certain goods merely for trade – or exchange – to be able to buy what they actually wanted in the first place. Certain goods are more suitable for this purpose of an exchange good than others (for instance, gold, silver, or paper are easier to carry around in your pocket than cows). And so, sooner or later, many – if not most – people in an economy will start using the same exchange good, as it makes trade increasingly easy and efficient, lowering transaction costs. These exchange goods have come to be known as that institution called money.

What is of particular importance in this is that, once more, no one was in charge of creating this thing called money. It just developed spontaneously. But even more so, no one who was involved in the process actually knew that they participated in the creation of money. When the fisher started to trade indirectly to get what he wanted, he did not do it because he wanted to create the institution money. He had no clue what money even was. Or, in the words of Menger, money became one of these “institutions unintentionally created, vital for the welfare of society, which are not the result of reasoned planning.”

Indeed, these market institutions such as money – accompanied by the price system – make it possible to go beyond the simple barter economy. Instead, through these organic processes, our economy will become increasingly complex, with more opportunities to trade, collaborate, and even to create and innovate, as the economy is working more efficiently.

Looking at today’s world, we can see, indeed, an extended order having come into being over the last centuries, a world in which this spontaneity is taking place truly globally. Leonard Read (1898-1983), the founder of the Foundation for Economic Education, used the example of the pencil to demonstrate how complex our economy really has become. A pencil in today’s world could actually not be created by a single human being anymore. Instead, even one simple pencil is produced by millions of people who work on the production of all the small ingredients of it and who are involved in this production process. These millions of people are collaborating with one another day in, day out, without actually realizing the gigantic and vast processes they are a part of.

We all are part of this. Our entire global economy consists of billions of humans cooperating and interacting with each other every day and every minute with one another. One would think this would inevitably lead to chaos. But it does not. And the reason is that an invisible hand lets a spontaneous order come into being.

“Good order results spontaneously when things are let alone,” Zhuangzi (369-286 BC) already realized in third century BC China. But the view that the economy works best in a decentralized way by people simply collaborating and thus having an order emerge organically came to full fruition in the Scottish Enlightenment. As Adam Smith famously put it, “by directing that industry in such a manner as its produce may be of the greatest value, [an individual] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Similarly, Adam Ferguson (1723-1816) alluded to what Menger would point out one century later with money, when he spoke of how “every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design” (emphasis added).

The results of this spontaneous economic order have been nothing short of spectacular: materially, we are living in the greatest age in history with massive prosperity, ever-new innovations, soon the complete abolition of abject poverty, and manifold opportunities to travel and collaborate with others.

However, the spontaneous order can be observed in more orders than merely in the economy. Indeed, while in the economy, the thinkers that ascribed to this tradition have accentuated how following one’s own economic advantage will inevitably lead to better results for society at large, they have made clear – such as in the case of Adam Smith – that this does not translate into all areas of life, as some moral sentiments may prevail in other spheres.

The spontaneous order, indeed, extends beyond economics and equally holds important insights in the social and cultural realm. Turning to the occurrence and significance of organically emerging institutions in society will inevitably lead us to Edmund Burke.

Do you want to add something to Kai’s thoughts? Or do you disagree? Then feel free to respond to it by sending or pitching us an article.

Find all articles in German on the blog of the Friedrich A. v. Hayek Institute.

Kai Weiss is the Research and Outreach Coordinator of the Austrian Economics Center and a board member of the Friedrich A. v. Hayek Institute.