"How is that millions of people every day cooperate with millions of others to get the bagel to your corner coffee shop? There's no office or government agency or central hub where all the commerce originates. The web of connections holding the system together is unseen."
One of the great virtues of economics is how it illuminates the unseen and the hidden. Frederic Bastiat, in his classic essay, What Is Seen and What Is Not Seen, analyzed the economic consequences of a simple act of vandalism, the broken window. We see the broken window. We see or can imagine the consequences of the broken window—more money for the glazier. What is harder to see and imagine is what is not seen—the economic activity that will not take place because the window must be fixed.
This simple example is a fundamental reminder of the scarcity that constrains our choices at a point in time. Bastiat used the metaphor of the broken window to critique policy recommendations whose promises of success often ignored the inevitable scarcity that must always apply at a point in time—resources used for one purpose can no longer be used elsewhere.
But Bastiat had another insight about the seen and the unseen that is less appreciated than his classic metaphor of the broken window. In Chapter 18 of Economic Sophisms, Bastiat asks why is it than no one goes to sleep anxiously in Paris, worried about whether there will be bread and other items available for purchase in the morning:
On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect… What, then, is the resourceful and secret power that governs the amazing regularity of such complicated movements, a regularity in which everyone has such implicit faith, although his prosperity and his very life depend upon it? That power is an absolute principle, the principle of free exchange.
There are really two aspects of the unseen here. The first is to simply marvel that the massive coordination and cooperation problem gets solved every day without anyone being in charge. Does anyone at the bagel shop or newsstand or lunch counter in a major city every stop to savor this extraordinary achievement of civilization? The source for this lack of appreciation is the quality of the coordination. The system works so well, we never even notice that it is functioning at all. We never stop to marvel at it because we so rarely see the system fail. When was the last time you showed at your local coffee shop to find them out of scones or croissants or bagels? They are always there, always fresh, and eminently affordable.
The second aspect that is unseen is that if someone does happen to notice that this unmanaged system works beautifully, he or she would struggle to explain how this phenomenon is achieved. How is that millions of people every day cooperate with millions of others to get the bagel to your corner coffee shop? There's no office or government agency or central hub where all the commerce originates. The web of connections holding the system together is unseen.
In this essay, I want to highlight some of the attempts economists have made in the past to illuminate the often unnoticed and uncoordinated order that emerges, creating wealth the daily life we so often take for granted.
Bastiat was not the first to point the marvel of coordination. Ultimately, the cooperation that underlies the process is driven by specialization and the division of labor. So it is not surprising that Adam Smith, who began The Wealth of Nations with a discussion of the division of labor and its wealth-producing properties, asks his readers to marvel at the power of specialization, the division of labor and the unseen cooperation of thousands to produce a simple woolen coat:
Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country!
Henry George, who is known to modern readers—if he is known at all—for his advocacy of taxing land rather than other inputs, was a superb communicator of this concept of unseen cooperation. In Protection or Free Trade, he writes of a rural family preparing a meal of bread, fish and tea, all accompanied by a cheery fire:
The settler cut the wood. But it took more than that to produce the wood. Had it been merely cut, it would still be lying where it fell. The labor of hauling it was as much a part of its production as the labor of cutting it. So the journey to and from the mill was as necessary to the production of the flour as the planting and reaping of the wheat. To produce the fish the boy had to walk to the lake and trudge back again. And the production of the water in the kettle required not merely the exertion of the girl who brought it from the spring, but also the sinking of the barrel in which it collected, and the making of the bucket in which it was carried. [par. VII.2]
As for the tea, it was grown in China, was carried on a bamboo pole upon the shoulders of a man to some river village, and sold to a Chinese merchant, who shipped it by boat to a treaty port. There, having been packed for ocean transportation, it was sold to the agency of some American house, and sent by steamer to San Francisco. Thence it passed by railroad, with another transfer of ownership, into the hands of a Chicago jobber. The jobber, in turn, in pursuance of another sale, shipped it to the village store-keeper, who held it so that the settler might get it when and in such quantities as he pleased, just as the water from the spring is held in the sunken barrel so that it may be had when needed.
George's elaboration of the complexity underlying even the simplest of products was designed to defend free trade. Making something and swapping it for something from abroad is no different than making it directly. By showing the complexity of modern production, he is trying to counter the charge that such products are full of wasteful or parasitic contributors of transportation and distribution. See Chapter 7.
George's point is not so much the marvelousness of all this unseen cooperation but rather the importance of every step along the way that allows us to enjoy the goods we do. We may think of distributors and traders and transporters as less important than say, the baker who bakes the bagel, but the baker could not bake the bagel without the delivery of the flour, the manufacturing of the ovens and so on.
Perhaps the best known example to the modern reader of the marvelousness of unseen cooperation is Leonard Read's wonderful "I, Pencil." Read claims, speaking in first-person, in the voice of the pencil, that no one knows how to make one:
Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum.
Read emphasizes the uncoordinated aspect of this incredible coordination:
There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work.
Yes, it is marvelous that there are bagels waiting for me in the coffeeshop. Yes, it is marvelous that there are pencils at a dozen places where I might stop to shop for something else along the way. There are plenty of woolen coats, plenty of tea, and more impressively, plenty of cars and computers and televisions, products that are infinitely more complex. But what sustains that cooperation that allows those products to be assembled by millions of strangers who toil unknowing that the cooperation is taking place?
Hayek was invoking the marvelousness of uncoordinated knowledge as a counterpoint to the socialists of his day who argued for the superiority of centralized, state-run, top-down coordination. Bastiat, in the same discussion quoted above, contrasts the success of decentralized exchange in providing Paris with all of its citizens needs with how poorly a government bureau would perform the task.
One of the deepest attempts to illuminate that process is Hayek's 1945 article in the American Economic Review,"The Use of Knowledge in Society." Hayek is not content to simply marvel that there are pencils and bread and coats and televisions. He has something even more marvelous and unseen he wants his readers to see, and that is how the uncoordinated throng of cooperators who work to produce these products respond to a shortage or some other external change.
Hayek wanted to illuminate the incredible coordinating of vastly decentralized knowledge that must happen to cope with any adjustment such as a shortage. Hayek's answer, akin to Bastiat's referring to self-interest and exchange, and Read's invoking of the Invisible Hand, is the price system, which he expounds on in some detail.
It is tempting to say that Hayek was referring to what we today call supply and demand. Unfortunately, today's students are too frequently taught that supply and demand requires perfect competition or perfect knowledge. This leads students to view supply and demand as a theoretical construct that is unlikely to apply in the real world other than in the occasional arcane case such as wheat.
But Hayek took a very different view of the process. He viewed it as imperfect but effective:
Of course, these adjustments are probably never "perfect" in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or "normal" level.
I have deliberately used the word "marvel" to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do.
One of Hayek's favorite quotes was from Adam Ferguson on "the result of human action but not of human design":
Mankind, in following the present sense of their minds, in striving to remove inconveniences, or to gain apparent and contiguous advantages, arrive at ends which even their imagination could not anticipate, and pass on, like other animals, in the track of their nature, without perceiving its end...
Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.
[From An Essay on the History of Civil Society (1767): Part Third. Section II, p. 122 of the Duncan Forbes edition, Edinburgh University Press, 1966. An online edition is at McMaster's.]
One of the virtues of Hayek's exposition, though it is stylistically drab in comparison to the other examples I have given here, is its emphasis on how the unseen cooperation solves the central problem of modern economic order. How do you decide how many bagels or pencils or cars a society needs? How do the answers to those questions change as circumstances and knowledge changes? I want to use this as a jumping off point for an example of unseen cooperation that is taking place today.
Over the next five or ten years, hundreds of millions of Chinese are expected to leave the Chinese countryside and move to the city. This extraordinary migration will require millions of adjustments to take place to make sure that our lives here in America are not thrown totally out of whack. All those newly-arrived Chinese city dwellers will use more pencils, drink more coffee, buy more bicycles, buy more cars and so on. Will there be enough to go around for those of us outside of China? Surely this expected migration will cause immense disruption. Should we worry about it? What precautions should we take to make that transition a smooth one?
And yet, like Bastiat's Parisian, we rightly lose little or no sleep worrying about these changes. The transition will be managed not by a Congressional committee or Presidential board charged with averting a crisis. The transition will be handled by the price system and we'll hardly notice it. Part of my confidence comes from Hayek's insights into how markets work. But much of my confidence comes from the evidence of the past 20 years when a hundred million Chinese made the same trek we're talking about in the future. This is the greatest migration in human history and my guess is that you missed it. Very little changed in the world around us. The Chinese didn't buy up all the bicycles or cedar for the pencils or coffee grounds for more coffee. Somehow, our economic system took care of this transition so effectively, that most of us didn't even know it happened.
For an intellectual history of the idea that order can emerge without a conscious design or plan, see Norman Barry's "The Tradition of Spontaneous Order."
Such changes are happening all the time. The price system, along with the profit we allow producers to earn for responding effectively to prices, keeps our economic lives orderly in the face of those changes. Teachers of economics, this one included, should be looking for ways to illuminate the unseen workings of that incredible system. It is a system that is often described as competitive. Yet it is ultimately a system of cooperation. No one designed the system. It works without anyone being in charge. Marvel at it.
* Russell Roberts is professor of economics at George Mason University and the Features Editor at the Library of Economics and Liberty. He is working on a book on how the emergence of order and unplanned cooperation create wealth and our standard of living.
For more articles by Russell Roberts, see the Archive.