Innovation and Dumb Luck

"The real power of free markets: not efficiency, but innovation and dumb luck" is the title of the article published by Rory Sutherland on The Spectator almost a month ago, and it can be praised for being a true "Hayekian manifesto".

In his note, Sutherland dismisses neo-classical economics and embraces two of the most polemical statements that can be found in Friedrich Hayek's works. The first one: competition has little to do with efficiency. In fact, there are more efficient processes than competition to allocate resources. Competition must be regarded as a discovery process of new goods to meet our needs –which some of them remain unknown to us. Competition could be efficient but in an "artificial way" (as David Hume called "justice" an "artificial virtue"): since the discovery process of competition is guided by the tendency for equalisation of the marginal value of relative scarce resources, the innovations brought about by the entrepreneur, despite threatening the stability of the economic order in the short run, stabilise the system in the long run.

The second statement is about meritocracy: again, here the market contributes to assign results in accordance to merit only in an "artificial way". Since the payrolls are related to the marginal contribution of each agent to the productive process, it is highly probable that, in the short run, we see very lucky people reaping huge unexpected profits, whereas other activities, more important but less scarce, are poorly remunerated. Theses processes work as way to equalise relative scarcities in the long run.

“Innovation” and “dumb luck” are two devices of the market to stabilise itself. They provide the economic order with a negative feed back process that allows it to adapt to the changing environment: new habits and tastes, life expectancy, cultural shifts, etc., etc., and this stabilisation via adaptation to the changes in the environment is nothing more and nothing less than evolution.

The Causes of Decentralization

            In the chapter fourteen of “Law, Legislation and Liberty”, published in 1979, F. A. Hayek cited three causes of the progressive centralization of government powers: the main one was the danger of war; the second one was the necessity of dealing with the effects of natural disasters; and, finally, the third one was the assurance of a certain minimum income as a compensation for the dissolution of the personal ties of the small communities, which formerly cared of the persons who could not earn their living in the market, brought about by the extended society.

            Today, in 2015, it is interesting to question whether the inverse statement holds true: the dissipation of the danger of war, the international cooperation in case of natural disasters, and the financial aid to countries by supra-national entities contribute to decentralize the government powers. We are thinking of the referenda that are held among the members of the European Union concerning the independence of some of their regions: the United Kingdom and the Kingdom of Spain, for example.

            The avoidance of war is the main objective of every supranational union and the humanitarian aid is now a moral duty of every country despite its affiliation to any international organization. The novelty that could imply a turn of events is the legal duty from the interstate union to provide its members with financial assistance. Normally, the financial aid to a country is based on the interest in preventing the dramatic social consequences of an economic collapse, i.e.: the third cause mentioned by Hayek of the process of progressive centralization of government powers.

            If the financial help to its members becomes a legal duty of the interstate union, then it will be more alluring for a region to leave the country it belongs to and switch to the direct assistance of the interstate union. Moreover, it will be easier for the interstate union to help a small region than it would be for a single member. In the case of The European Union, that is why we consider that the decisions to be made on the economic struggles of Greece will boost or diminish the process of fragmentation experienced by some of its members.

Law and Politics

The theory of spontaneous orders is a byproduct of Hayek's attempt to lay the foundations for his proposal to separate law from politics. The political is related to conflicts that are open to escalation, while the conflicts of the law are meant to be solved by the verdict of the judiciary courts. The former works with the logic of positive feedback systems and the latter is the very example of a negative one. That is why Hayek imagined two different legislative chambers to deal with political issues and to enact general laws. Politics is about expediency and law is based on abstract principles.

Nevertheless, what had once been conceived by Hayek as a tool to justify his project of a constitutional reform, gained a life of its own. Nowadays we can find several works that concerns Hayek's notion of spontaneous orders, but which disregards his proposal on institutional reform. This is not bad at all. After all, the theory of spontaneous orders shows the necessity of keeping separated law from politics. So, the more we develop the spontaneous orders theory, the closer we will be to achieve Hayek's constitutional program.

Notwithstanding the importance of the study of the complex phenomena, all Hayek's enterprise would be lost if we neglected the mission of building a division between politics and law. This topic has generally been worked by authors that intended to erase norms from politics, like Carl Schmitt, but Hayek remains to this day to be the main author to seek to prevent law from being captured by the political logic of solving disputes on an expediency basis. Perhaps we need more papers on law and politics. Those works will be "Hayekian" as long as they state the independence of law from politics, regarding the former as a negative feedback system which provides solutions based on principles to conflicts related to the interaction of different spheres of individual autonomy. In fact, this is the core of the spontaneous order notion: a normative system which does not depend on any political will to work and evolve.