The Market Order or Catallaxy by F.A.Hayek

This chapter comes from the second volume of Hayek’s Law, Legislation and Liberty published in 1976. The chapter is a good summary of Hayek’s argument for markets as the way of organising economic production and distribution.

I’ll try to sketch out his argument alongside my thoughts on it here.

The starting point of his argument is that there is a common misconception in modern thought by classifying the “economic” activity of a society as an economy. Hayek argues that strictly speaking an economy is a closed unit in which there is a clear continuum of goals and aims that are to be satisfied. This is clearly not the case in society where there are multiple sets of goals and aims possessed by each individual and group which are not commensurable. So therefore cannot be converted into a single continuum of desires. Instead, he argues, we should think of market orders as a catallaxy where multiple agents come together in production and exchange under set rules in order to achieve their goals. This catallaxy does not attempt to create a single continuum or guarantee that each set of goals will be fulfilled but it does maximise the chances of each individual, given her material endowments, of achieving her goals.

This is set against a planned, or partially planned, society where through a political hierarchy a continuum is constructed based on the thoughts and ideas of officials, who cannot know the desires of the individuals, and then dictated to producers. This, Hayek appears to argue, is an economy in the strictest sense but it is based on a false continuum of desires representing not the goals and aims of the citizens but the goals and aims of the elite.

Hence Hayek argues that the freedom of the individual is inseparable from market relations as to intervene from above is to reduce the chances of some of achieving their goals in favour of increasing the chances of a select few.

The second strand of this chapter was the standard argument that markets result in production at the production possibility frontier. However due to the lack of knowledge and the non-commensurability of peoples goals (i.e. the lack of a continuum) the point that is chosen is not pareto optimal. But for the same reasons (non-commensurability and knowledge) the concept is redundant. Personally I don’t fault this statement and it is a much more mature understanding of the issues of knowledge and commensurability problems than that of modern neo-classical economics.

But the first argument that individual freedom is inseparable from market relations I do fault. The problem is the initial distribution of resources. Hayek openly accepts that both the initial resources available to an individual and the results of her actions are in part determined by chance. He also argues that if this were not the case we could not be seen as free as we would have perfect information about the future and the present and therefore would just be machines calculating best outcomes. However this ignores that although the fickle hand of chance may have a role in the outcomes of our decisions the options available to us to pursue are limited by our initial bundle of resources. It is both high conceivable and empirically the case that poverty traps exist and that those who by chance are born into wealth often maintain their position with no effort or work by simply employing somebody else to manage their estate; somebody who, if endowed initial with the same resources, could have made more of them.

A possible rejoinder to this is that the exact opposite may be the case where the ingenious accountant is deprived of resources to invest wisely in order to support the lifestyle of a delinquent.  This would be to slightly misunderstand my argument. What I am arguing is that if all started with the same resources some would succeed and some would fail dependent partly on chance and partly on skill. Therefor the delinquent would have to be incredibly lucky, ala Forest Gump, to achieve the standard of living afforded in the case above; whereas the ingenious accountant would have to be unlucky to not be able to achieve her goals.

However this assumes that in each generation we are able to have a “hard reset” of economic resources. This clearly isn’t possible. So any attempt to achieve this distribution would have to be done by redistribution. Hayek argues that this is not acceptable as it interferes with the working of the catallaxy. This is because redistribution is to interfere with the “rules of the game”. As the “rules of the game” are part of the institutional framework that actors depend on to make their predictions and thus their plans any changes brings chaos and disrupts the outcome of the catallaxy; causing actors to become wary of future action thereby reducing the ability of the catallaxy to function efficiently.

This however, I would posit, depends on the type of intervention. If for example there was a 100% inheritance tax implemented progressively over time and it was explicit that this was the case (say a 1% increase each year for however many years) the catallaxy would accept this as the case and individuals would be able to adjust their plans appropriately. Also if the equalisation of starting points was achieved by free education to all for as long as people achiever a set standard to progress (i.e. achieving a 2:1 to progress to masters) and a “starting fund” accessible at a given age to be spent or invested as the individual wishes would be beneficial to the catallaxy as not only will potential entrepreneurs be able to begin innovation with fewer barriers but the knowledge available in planning will be increased enabling better formulated plans and therefore potentially better results. In effect increasing the “chances of any chosen individual to achieve their goals”.

Therefore although the market order may result in the most efficient way (if considered in opposition to planning) of enabling as many people as possible the chance  of achieving their aims and goals this does not rule out entirely redistribution and in fact redistribution can have a role in improving the functioning of the catallaxy in certain circumstances.

Or at least that’s what I took from it.