Competition and Individual Knowledge

“The market produces a spontaneous order in which the different, shifting ends of individuals are satisfied.”

F. A. Hayek

F. A. Hayek, the 1974 Nobel Memorial Prize winner in Economic Sciences, was an economist and philosopher best known for his defense of classical liberalism and free-​market capitalism against socialist and collectivist thought.

If the assumptions behind certain models of competition were true of the real world, then competition would, indeed, be a wasteful way of allocating resources. Economists assume all the relevant data are known. Were this the case, competition should be eliminated in favor of central planning. The world assumed into existence by standard competitive models is one far more consonant with central economic direction and socialism than with decentralized planning and capitalism. These models, however, do not fit the real world.

“Competition as a Discovery Process.” In New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press, 1978, pp. 179–190.

Real life competition, by contrast, endeavors to discover facts that are wrongly presumed as costlessly available (data) in economic models: “Wherever the use of competition can be rationally justified, it is on the grounds that we do not know in advance the facts that determine the actions of competitors.” Competition is thus valuable because its results are unpredictable, which implies that these generally beneficial effects include disappointing certain expectations. A competitive order is one in which some individuals are necessarily disappointed. This dynamic view is in sharp contrast to the economists’ “competitive” world in which all expectations are met and all plans executed. In mainstream economics, “competition” is a static state which excludes the activity of real world competition. “Competitive” theory has little to tell us about the real world of change, disappointed expectations, and plan revision.

The prevailing view of competition stems from treating the order produced in a market as an “economy.” Strictly speaking, of course, an economy involves a given hierarchy of ends and the application of means so as to maximize the value of these attained ends. This conception is irrelevant, however, to a situation of many individuals with different goals independently pursuing their ends. The market produces a spontaneous order in which the different, shifting ends of individuals are satisfied. A market order does not have any preordained, static ends, nor can one express the value of the results as the sum of its individual products. A spontaneous order is one conducive to individuals achieving whatever their respective ends happen to be. No single a priori value is being maximized.

Socialists demand “social justice” to replace the market’s unequal distributions of wealth. In the name of protecting some from the market, the logic of a policy of social justice would impede adjustment to unforeseen change, and thus, the operation of the market itself.