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V. IS "FREE COMPETITION" REALLY HAYEK’S MESSAGE?

It might be said that the Hayekian prescription is not very robust. In a case like urban transit where coordination, in the Schelling sense, is fragile and complex, free competition may be highly imperfect and perhaps undesirable. A Hayekian faith would tend to make one believe that wherever there is discoordination there is an opportunity for an entrepreneur to step in and make a profit by resolving the discoordination, improving metacoordination in the process. In urban transit, where information problems and network effects complicate every action, and where interlopers lies waiting to skim the cream, this logic simply may not hold.

The pitfalls of free-market transportation are accentuated by Joseph DeSalvo in an article entitled, "The Economic Rationale for Tranportation Planning:"

This faith in the free market has existed at least since the time of Adam Smith who used the term ‘invisible hand’ to describe its workings. It is only recently, however, that the ‘invisible hand’ theorem has been rigorously proved and the conditions under which the theorem holds spelled out carefully [i.e., general competitive equilibrium] . To the extent those conditions are not fulfilled in practice, the case against planning is much weakened, for decentralized decisionmaking cannot achieve desired economic goals when the conditions are violated. Some other method is then required. (DeSalvo 1973, 22-23)

I have posited a "free competition" policy and some of its likely results, but is such a regime necessarily what Hayek would favor? Is Hayek instructing us to choose policy to mimic the conditions referred to by DeSalvo? One of Hayek's chief missions as an economist was in fact to wean economists away from equilibrium models and technical categories as ways of describing economic affairs. Those who would drape the ideas of Hayek and Adam Smith in a rarified notion of pure competition make a mistake much like that of Lange when he sought to mimic a free economy by mimicking the rarified models of perfect competition.

Economists are trained to think in terms of neatly characterized settings which they call "markets." Numerous traders buy and sell at equilibrium prices. They transact speechlessly. The canon comes from Walrasian general equilibrium and perfect competition. A rich variety of models of market imperfection also are instilled in the budding economist, but they too lead him to think of the economy as atomized action within a set of neatly characterized procedures. Because the procedures are fixed, there is no role for private actors to engage in conscious planning for Schelling coordination.

But in real life, deals are embedded in particularistic human contexts, and the money price may be only one part of the terms imposed on the "buyer." Commerce and industry in real life are a skein of negotiated and particularistic contracts, as well as informal and implicit relationships. This view is what Hayek has in mind when he writes of the free competitive economy:

It involves competition between organized and unorganized groups no less than competition between individuals. ... The endeavor to achieve certain results by co-operation and organization is as much a part of competition as individual effort. Successful group relations also prove their effectiveness in competition among groups organized in different ways (Hayek 1960, 37; see also 1988, 37; 1944, 42).

The emphasis that Mises and Hayek place on local knowledge is not merely a recognition of the free market's function to distill dispersed knowledge into a price vector, in a manner like the "Big Board" (the New York Stock Exchange). They also recognize the importance of flexibility in private contract, to sculpt private arrangements to fit the particulars, to cope with change, and to coordinate with others. Although Hayek coordination is distinct from Schelling coordination, its process is not apart from Schelling coordination. The process includes the practice of voluntary planning, by consent and contract, to achieve Schelling coordination. Hayek (1973, 46) says, "[t]he family, the farm, the firm, the corporation and the various associations, and all the public institutions including government, are organizations which in turn are integrated into a more comprehensive spontaneous order [or metacoordination]." (2)

This latter theme is prominent in the work of Ronald Coase (1937) and the law-and-economics tradition (to which Hayek 1988 pays tribute). In caricature, the firm is an island of planning and the market is like the Big Board. Yet Coasian researchers have done much to dissolve the distinction between "firm" and "market." All capitalist activities are contractual relations, and involve elements of both jealous conflict and mutual planning. Armen Alchian (1969) and Harold Demsetz (1972) write of the competitive labor market within the firm. Other Coasians like Steven Cheung (1983) and Paul Rubin (1978) write of contractual relations making up an abstract and invisible firm within the market. It is the process of "truck, barter, and exchange," not just speechless purchase, which was said by Adam Smith (1776, 13-16) to be guided by an invisible hand.

The cooperative and malleable nature of private agreement eluded Karl Marx. He said: "Division of labor in the interior of society, and that in the interior of a workshop, differ not only in degree, but also in kind" (1867, 354). The Coasians tell us rightly that it is only a difference in degree. Marx saw a need to "regulate production" and looked for a solution in "united cooperative societies." But he would reject the nexus of private agreement, or voluntary planning, as a basis for such cooperative societies, because he was unable (or unwilling) to view "commodity" exchange as a process of cooperation between trading partners, and as a process of sportsmanship among competitors. As Mises (1949, 335) puts it, the market process is consummated by all members of society "[c]ompeting in cooperation and cooperating in competition."

Hayek's real message, which found rich elaboration in his later works, was the advancement of a legal order of private property and freedom of contract -- not of "competition." With this understanding of Hayek's prescription, we might take a different view of the transit scenario we have presented. The coordination problems due to information problems, poor passenger facilities, network effects, destructive competition and interloping may be described, not as the failures of free competition, but as failures arising from that part of the system that remains socialistic. The problem is that the Hayekian prescription has not really been adopted.

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