Lawrence Reed, of the Foundation for Economic Education, explains [spontaneous order] this way:

“Spontaneous order is what happens when you leave people alone — when entrepreneurs … see the desires of people … and then provide for them.

“They respond to market signals, to prices. Prices tell them what’s needed and how urgently and where. And it’s infinitely better and more productive than relying on a handful of elites in some distant bureaucracy.”

The column continues with a discussion of FEE founder Leonard E. Read’s “I, Pencil.”

Another way to understand spontaneous order is to think about the simple pencil. Leonard Read, who established the Foundation for Economic Education, wrote an essay titled, “I, Pencil,” which began, “[N]o single person on the face of this earth knows how to make [a pencil].

Read the column here.

To watch the video segment with Mr. Reed on Stossel’s Show click here.

This clearly seems like a complicated issue but in many ways its actually quite simple. F.A. “Baldy” Harper, an economist from Cornell University who worked for FEE in its first years and then founded the Institute for Humane Studies, wrote this 1951 pamphlet on inflation. For him, “inflation can be prevented. Failure to do so is purely and simply a matter of negligence.” And the way to prevent it is clear, “Inflation means too much money. The way to prevent inflation, then, is to close down the money factory. It is that simple.”

The issue is not how much money the government should print but is an institutional one. Economists define institutions as rules that constrain human behavior. Our current monetary system fails to constrain the government from the over printing of money. Currently the government has a monopoly over the monetary system; as Harper points out, if you don’t believe this just try and make your own money. The government wishes to hold this monopoly in order to cover what it spends in excess of its income, i.e. tax revenue. In essence, inflation is simply a hidden tax on every dollar we hold. The government thus has the incentive to print as much money that will maximize its revenue. It is similar to the government basically having an incentive to consistently water down a bowl of punch.

A monopoly in money essentially boils down to a planned monetary system. As Carl Menger, the founder of the Austrian school of economics, showed money did not emerge from the state but through a spontaneous order brought about by the complex interaction of many individuals. In the past, money, usually gold, was produced through a competitive process. Anyone could produce it. By allowing our monetary system to instead be “planned” by the government we have created what economist Gordon Tullock called a social dilemma. Society would be better off if the government did not inflate the money supply but the government gains from doing it, thus, just like a prisoner’s dilemma, we end up with a non-socially optimal outcome.

Maybe the situation is not as simple as Harper suggests. It is after all no simple task to remove the government monopoly on money. But as Harper points out, we are left with only two options, “the only escape from the consequences of these laws would seem to be for the citizens to ignore them. This means lawlessness, technically, in the form of black market operations and all the other forms of evasion. This places the honest citizen who favors human liberty in a strange dilemma. He must choose between practicing lawlessness in the technical sense, or supporting a socialist-communist regime.” What is simple is that the government has forced planning in our monetary system upon us. This makes Harper’s pamphlet extremely relevant even today.

Download F.A. “Baldy” Harper’s pamphlet on Inflation here.

This is a link to the Power Point presentation for this lecture – Menger & the Early Austrians 2010.

For the video file of this lecture click here.

For the video file of this lecture click here.

In this letter dated September 1974, Leonard Read thanks Hayek for inspiring him to write his Freeman article “Those Things Called Money.” In the article Read comes to the conclusion that “if money is to be useful to traders as a medium of exchange then the decisions as to what shall serve as money must be worked out by traders in the market, voluntarily, rather than by governmental edict.” What he is doing is applying Hayek’s idea of spontaneous order to money. As Read says, “When millions of people are free to act creatively as they choose, an unimaginable wisdom is the consequence. To assert that it is a billion times greater than exists in any discrete individual would be a gross understatement.” The same principle operates in Read’s famous essay, I, Pencil: Essentially the market is much better at coordinating the dispersed knowledge then any single planner.  That, in turn, comes straight out of Hayek’s 1945 paper (reprinted in the Freeman in June 1961), “The Use of Knowledge in Society.”

Hayek eventually came to the same conclusion as Read, as illustrated by his 1976 monograph The Denationalization of Money. Still, one can find instances of Hayek arguing the exact opposite. For example, in The Constitution of Liberty, published in 1960, Hayek argues that leaving money to spontaneous forces is not only impracticable but also undesirable. Hayek in 1960 was unable to see what Read saw until later.

It’s useful to point this out, not to impugn Hayek in any way, but to show how important Hayekian ideas are for freedom. Read’s article would have seemed very radical and maybe impractical to Hayek in 1960. Indeed the article probably seems radical and impractical to many people today. This doesn’t, however, make it any less correct. Without Hayekian ideas there would be a much weaker case for market-created money. And with government control of money comes a great chance of runaway inflation and disruptions in the market. So, what we should learn from this is that taking Hayekian ideas to their logical conclusion might just make the world more free and prosperous.

Download the Read To Hayek September 1974 letter here.

Her colleagues at Indiana University describe her as “humble and hardworking,” and another Nobel Prize winner, Vernon Smith, calls her a “remarkable scholar” with a passionate drive to understand human societies in all their variety. A former president of the Public Choice Society and the American Association of Political Science, Ostrom is also one of the most beloved teachers in academia. The Workshop in Political Theory and Policy Analysis at Indiana University that she co-directed with her husband, Vincent, is perhaps the ideal model for a research and graduate education center.

But what do we learn from her studies? I would argue that we learn at least three major points of style and substance. First, much of the last century of political and economic discourse has been dominated by a debate between advocates of perfect markets and perfect central planners. For one side, the demonstration of market failure was accompanied by an insistence that government would provide the necessary corrective. Ostrom was one of the core thinkers in the social sciences to say, “Hold on. Markets may fail, but government solutions also might not work.” One must always remember that Elinor and Vincent Ostrom are foundational contributors to the theory of Public Choice. But the Ostroms went further than simply demonstrating the possibility of government failure.

Smith versus Hobbes

This leads to the second point. In the history of political and economic thought the source of social order has been attributed either to the invisible hand of market coordination (Smith) or the heavy hand of state control (Hobbes). Perhaps one of the best ways to understand Elinor Ostrom’s work is to see it as working out a Hobbesian problem by way of a Smithian solution. That is perhaps a bit of a stretch but not by much. Her work on local public economies and common-pool resources focuses on actual “rules in use” (as opposed to the “rules in form”) that decentralized individuals and groups rely on to make decisions and to coordinate their behavior in order to overcome social dilemmas. Hers is an optimistic message about the power of self-governance to succeed even in difficult situations. As my colleague Alex Tabarrok put it, she sees how, through various voluntary associations, groups transform the common-pool resource situation from a “tragedy of the commons” to an “opportunity of the commons.”

Traditional economic theory argues that public goods cannot be provided through the market. Traditional Public Choice theory argues that government often fails to provide solutions. Ostrom shows that decentralized groups can develop various rule systems that enable social cooperation to emerge through voluntary association. A point that sometimes trips up readers is that Ostrom often focuses on situations where the technology of parceling property into private plots does not exist. In these situations she studies collective, but non-State decision-making over common-pool resources. While private-property solutions are not employed in such cases, the “rules in use” that do operate accomplish what private property would have accomplished. We find rules that limit access and that make individuals in the group accountable for their misuse of the resource. We also find enforcement of those rules. In short, the analyst must be willing to look at both the form and function of rules in a variety of social situations. There is a diversity of institutions at work in different societies that promote voluntary cooperation. As social scientists, we have to be able to understand them. There are rules that are in use, rules that are stated but not in use, rules that go by one name but that in practice do something else, and rules that tightly fit use, form, and function. Ostrom has insisted that social scientists must understand the rules that govern human behavior–both the way we interact with one another and the way we interact with nature. Some rules systems promote human betterment through the promotion of peaceful social cooperation and wealth creation; others thwart human progress by ensuring violence and poverty. It is actually that simple, and that profound.

The foundation of the social order of a free people is self-governance, not governmental authority and centralized power. Decentralized decision making that drills deep into the local social dilemmas real people face, that mobilizes incentives within a local rule structure, and that utilizes local knowledge is how the process of institutional development assures that self-governance is effective governance, enabling fallible human beings to reasonably manage scarce resources and the relationships among themselves.

Understanding Diverse Societies

The final point I want to stress concerning Ostrom’s research comes as a methodological message. Elinor’s work is humanistic and scientific. She is trying to understand human societies in all their variety. To do so she had to get up close and personal: from local government in California to irrigation systems in Nepal–and everything in between. Her field work in economics and political economy is guided by the logic of human choice. She describes her research program as “a behavioral approach to the rational choice theory of collective action.” If you take away the academic language, it translates into a research program that begins with human beings and their purposes and plans, and ends with their stumbling and groping to find voluntary solutions to difficult social dilemmas through norms, conventions, and rules.

Let me conclude by bringing this back to my title: Why should people who care about liberty rejoice in this choice for the prize? There is an ideological importance to the work of Elinor Ostrom. She has not stressed it in her work, but Vincent has ventured into the field of social philosophy. My favorite book of his is The Meaning of Democracy and the Vulnerabilities of Democracies (1997). In that work Vincent asks what are the preconditions for a self-governing citizenry. He answers that a self-governing society must be composed of citizens fully capable of embracing the “cares of thinking and the troubles of living.” Unfortunately, the machinations of democratic politics—with interest-group manipulation, logrolling, rent-seeking, and the vote motive—tend to undermine the capacity for self-governance among a people.

Nothing in this should be interpreted as deterministically pessimistic. The message is that hope is to be found not in the State but in the people. A society of free and responsible individuals who are able to form voluntary associations will solve the social dilemmas they confront through various means of self-governance.

Nobody has done more than Elinor Ostrom, both in her research and in her teaching/mentor capacity at the Workshop in Political Philosophy and Policy Analysis, to help us understand the self-governing rules and institutions that work to elicit cooperation in a wide variety of societies. And nobody has done more to alert us to the damage governments can do when they attempt to impose alien rules on local peoples from afar—especially when their own systems are already addressing social dilemmas in their own way. Elinor demands that we understand and respect institutional diversity in our world, to see the ingenuity and wisdom in local solutions and in the entrepreneurial creativity and resourcefulness of individuals throughout the developed and less-developed world. Transcending the older debates in social science and public policy, Elinor Ostrom’s work emphasizes the richness of the institutional environment and the creative solutions that arise when individuals are free to form associations and work within a network of informal rules that promote individual responsibility and collective accountability.

Supporters of FEE and readers of The Freeman are attracted to the vision of a society of free and responsible individuals. Elinor Ostrom’s research gives us a window into the diverse world of associations that do not fit neatly into the categories of “market” or “State” but nevertheless are essential to peaceful and prosperous social cooperation.

In his op-ed column Monday, Brooks imagines how Bentham and Hume would each approach global warming and health care. Bentham, he says, would display a policy wonk’s command of the nuts and bolts and come up with detailed government programs for imposing solutions to the problems.

“Mr. Hume, I’m afraid, wouldn’t be so impressive,” Brooks writes. He imagines that Hume — whining, head in hands, or weeping while in the fetal position — would confess his ignorance about solving the problems and then would propose just enough government intervention, such as a carbon tax and health-insurance exchanges, to “set off a decentralized cascade of reform, instead of putting all the responsibility on us here.”

Brooks then gets to his point:

This country is about to have a big debate on the role of government. The polarizers on cable TV think it’s going to be a debate between socialism and free-market purism. But it’s really going to be a debate about how to promote innovation.

The people on Mr. Bentham’s side believe that government can get actively involved in organizing innovation….

The people on Mr. Hume’s side believe government should actively tilt the playing field to promote social goods and set off decentralized networks of reform, but they don’t think government knows enough to intimately organize dynamic innovation.

Brooks predicts that Bentham will win because he serves the lobbyists interests.

Leaving aside Brooks’s defamation of Hume as a pathetic, sniveling character — David Hume? — we can take issue with his picture of Hume on a couple of other counts. I am no Hume expert (and I disagree with him on many issues), but I know enough to point out some important things Brooks missed in his effort to be cute.

Note that Brooks presents the debate over the role of government in fairly narrow terms. It’s between a government that actively organizes innovation and a government that actively sets social goals then arranges the carrots and sticks in order to induce people to achieve those goals.

In either case, government is the active party. Hume would not be comfortable with either team.

Stability of Possession

For one thing, Hume thought that society depends on, more than anything else, secure property. But how secure can property be if politicians of limited knowledge and perspective (not the impliedly lofty government) have the power to set goals for the rest of us and to impose incentives and penalties in the service of those goals?

Let there be no mistake about where Hume stood on the matter of property. In A Treatise of Human Nature (Book III, 1740) he writes of “the three fundamental laws of nature, that of the stability of possession, of its transference by consent, and of the performance of promises” and adds:

’Tis on the strict observance of those three laws, that the peace and security of human society entirely depend; nor is there any possibility of establishing a good correspondence among men, where these are neglected. Society is absolutely necessary for the well-being of men; and these are as necessary to the support of society.

“Stability of possession” is a favorite phase of Hume’s. Indeed, he emphasized that property should be respected even when in particular cases we do not like the outcome:

Property must be stable, and must be fix’d by general rules. Tho’ in one instance the public be a sufferer, this momentary ill is amply compensated by the steady prosecution of the rule, and by the peace and order, which it establishes in society. And even every individual person must find himself a gainer, on ballancing the account; since, without justice, society must immediately dissolve, and every one must fall into that savage and solitary condition, which is infinitely worse than the worse situation that can possibly be suppos’d in society.

These “three fundamental laws of nature” were not the conscious inventions of some Benthamite social engineer, but rather elements of an undesigned social order that produces benefits for the general population. Indeed, Hume along with Adam Smith, was a leading philosopher of the Scottish Enlightenment.  Its defining characteristic was the historic liberal appreciation that society was not constructed consciously but rather emerged spontaneously from the peaceful pursuit of self-interest and the social cooperation it generates. “[T]he rule concerning the stability of possession,” he wrote, “… arises gradually, and acquires force by a slow progression, and by our repeated experience of the inconveniences of transgressing it.”

He goes on to draw a parallel that will be familiar to students of Menger, Mises, and Hayek: “In like manner are languages gradually established by human conventions without any promise. In like manner do gold and silver become the common measures of exchange….”

Thus law, language, and money are institutions that are, in the words of Hume’s friend Adam Ferguson, “the result of human action, but not the execution of any human design.“

Public Good as Byproduct

Hume emphasized that, as spontaneously emergent institutions, the laws of justice and property were not intended to promote the good of the public, having grown out of “self-love,” but they nevertheless do so. This process is what Adam Smith would liken to an “invisible hand.” In fact, Hume wrote, the public good wouldn’t have been achieved had it been aimed at directly and consciously. He writes,

[I]f men had been endow’d with such a strong regard for public good, they wou’d never have restrain’d themselves by these rules; so that the laws of justice arise from natural principles in a manner still more oblique and artificial. ’Tis self-love which is their real origin; and as the self-love of one person is naturally contrary to that of another, these several interested passions are oblig’d to adjust themselves after such a manner as to concur in some system of conduct and behaviour. This system, therefore, comprehending the interest of each individual, is of course advantageous to the public; tho’ it be not intended for that purpose by the inventors.

Is belief in spontaneous social order and stable property consistent with the two forms of rationalistic discretionary government Brooks gives us? I think not.

One final word from Hume in light of today’s fiscal affairs: “The source of degeneracy, which may be remarked in free governments, consists in the practice of contracting debt, and mortgaging the public revenues, by which taxes may, in time, become altogether intolerable…” (Of Civil Liberty).