1974 Nobel Laureate in Economics F.A. Hayek is probably the first person to have properly explained how evolution created not just the biological world but the socioeconomic one as well. For brevity’s sake, Hayek explained how the entire world works, thus it seems inevitable that today’s leading intellectuals simply end up quoting him more and more, and the wisest of them, like bestselling popular science author Matt Ridley, simply admit the fact that “Many of the insights that I thought I had discovered in my own readings and writings…it turns out Hayek had long before me.”
Hayek summarizes:
“We understand now that all enduring structures above the level of the simplest atoms, and up to the brain and society, are the results of, and can be explained only in terms of, processes of selective evolution…”
Natural Selection can be said to have evolved two mechanisms for creating biological and social order. The biological order is created via the well-known mechanism of biological evolution with genes being like the sentences which store the information necessary to create/coordinate life/order. If we remember from biology class, mutations cause new genes and thus new information to arise which lead to a different life-form which is then ‘naturally selected’ as it inadvertently competes with others, with the winner reproducing more and thus passing on more copies of the better-adapted/“fitter” genes/information on to latter generations while the less-adapted genes/information disappear or play an increasingly less significant role (see “junk” DNA). At its core we have competing information which survives by leading to the “fittest” “enduring structure” or order. This mechanism of biological evolution and genetics is well understood and there is little doubt that even though a person is the result of the actions of its trillions of cells, it is definitely NOT the result of any conscious planning or design on their part. We clearly know that natural selection has been the sort of inadvertent “designer” of the biological order and the numerous “systems” like the respiratory and nervous ones which help sustain and coordinate the entire cellular enterprise.
Let us next discuss the “system” or “process” which coordinates the global socioeconomic order/economy, or what 19th century British philosopher Herbert Spencer so cleverly referred to as the “Social Organism”. The global socioeconomic order is coordinated by what economists refer to as “The Market Process” and its various “parts” like trade, money, economic competition, the banking/finance industry, interest rates, governments and more. In the social order new knowledge arises in the minds of people/entrepreneurs/companies/orders and spreads via economic competition. Automotive air conditioning, power windows, and rear view cameras, were all good ideas/information/knowledge that originally emerged in the minds of a few individuals/companies/orders. THE FREEDOM of the public to choose among competing auto-manufacturers motivated, and inevitably forced, other auto-manufacturers (competitors) to copy the new ideas/knowledge, and it is for this reason, thanks to economic competition, that all auto-manufacturers provide them and use the latest and greatest production techniques. As cost-cutting ideas emerge leading prices to continuously fall, new profitable ideas arise and once again spread via competition in an endless cycle of knowledge generation/innovation. For example, computers were once very expensive, but once the price of making them came down enough, people easily realized that every home could have them, which gave birth to our computerized world and the Internet and all the great things that flow from it.
Economic freedom and decentralization is vital for competition to work and thus generate the information which helps create/coordinate/expand the social order. Why do BMW, Ford, Toyota and other auto-manufacturers “compete” and thus constantly innovate and copy each other’s innovations thus spreading superior knowledge and subsequent social order? Because social orders (individuals/companies) are FREE TO CHOOSE. It is our freedom as consumers to trade our life/order-sustaining wealth for what we calculate to be best, which motivates and forces all of us in our role as producers to do our best. And we can only do our best by innovating and/or copying existing innovations, in other words, competing.
The more wealth is created, the more wealth will be offered in exchange for labor as businesses/orders compete with each other for the labor they need so the economic pie grows for everyone. Since the government/‘public sector’ is a tax-funded monopoly, it means that by law, government bureaucracies/monopolies are immune to the market process’ social-order-shaping-knowledge-sharing mechanisms like competition, causing government created social orders/bureaucracies to be inefficiently ordered/backward and produce little wealth compared to how much they consume from the economic pie, eventually leading to chaos, famine and death as the public sector gets too large as happens in all Communist/Socialist countries who attempt to outlaw/abolish “competitive orders”/businesses and the institution of PRIVATE PROPERTY which underpins it all.
The picture below provides a now-classic comparison of a Communist/Socialist/monopolistic order (North Korea) and a Capitalist/competitive/‘market process coordinated’ order (South Korea). Both orders have the same people in terms of intelligence/genetics yet the market-process-coordinated South Korea has a far more complex/innovative/productive social order.
Hayek’s focus on knowledge and the order it creates provides us with a simple yet profound way to understand it all. We can see how economic competition turns billions of brains into a sort of global supercomputer which is constantly innovating and restructuring itself into increasingly more productive and technologically advanced states.
A government regulation is essentially a “way” of doing things, it is knowledge. But unlike knowledge that arises in the private/competitive/free sector and is constantly improving due to economic competition, a government regulation is knowledge that arises out of a few brains in government and is then forced upon the entire social order via the law and can only be changed via a painfully slow monopolistic/bureaucratic apparatus made up of economically ignorant politicians, lawyers, lobbyists and special interest groups who always lack the necessary knowledge and incentives to discover what is the best way to do something. The more the government regulates, the more it paralyzes competitive knowledge discovery. As government regulations have increased in the health care sector, turning it into a sort of island of paralyzed top-down competition-less socialist central planning, so have costs. These increased costs have led the sector to grow from consuming just 1.6% of the American economic pie in 1960 to 4.2% in 1980 to a whopping 16% in 2006 and about 18% by 2017. The image below is yet another powerful “meme” that helps explain the regulatory paralysis and thus growth of the entire medical sector.
In image below one can see how the less regulated a sector is the better it functions.
