CHAPTER 6-4 CONTROL AND FREEDOM IN SOCIETY - I Most ideas in this book are important for conducting your own life well. In contrast, the central idea of this chapter -- the role of spontaneously-evolved order in society, and its connection to social decisions about centralized economic control versus freedom and decentralization -- is not crucial for your daily affairs, unless you run a large organization. But understanding this idea is crucial for the leaders of a society - - and nowadays, especially crucial for the leaders of Communist and ex-Communist societies in transition. Furthermore, citizens of all countries must understand this idea if their countries are to flourish and be free. To dramatize the importance of this subject: during this century the freedom of billions has been abridged, untold wealth has been lost, and hundreds of millions of people have died -- 30 million in China alone during 1959-1961, and 16 million in the Soviet Union's Ukraine during the early 1930s -- just because this principle was not in operation. The lessons of Eastern Europe under communism would seem unblinkable. The people of Eastern Europe and China have absorbed hard lessons about the efficiency of socialism. But as Poles and others note in amazement, many people who have not experienced the effects of centralized control first-hand -- such as intellectuals in the U. S.-- still believe that we would be better off if we moved toward more socialism. The economics shelves in second-hand bookstores around Washington are still dominated by Marxist economics tomes. So perhaps this is a propitious time to try again to get the facts out, loud and clear. The next chapter will discuss the idea in its full-blown form as an economy and society. This chapter approaches the central principle through discussion of two related ideas -- first, spontaneously-evolved systems other than markets, and second, the role of decentralization as organizations grow. We're not talking of a dead doctrine when we discuss socialism. People will not stop asking for it just because socialist centralized control has been shown to be economically inefficient, or even that it is unfree and brutal, too. Greater economic efficiency and improved welfare for the public are not the only motives of those who want socialism. Nor is the desire to serve and aid the public the only motive of those who wish to serve in government. Rather, socialism is a desirable state of affairs for those who hope that their education and talents will give them a role in governing, a share in the power of the state to direct and control others. Some people want to wield power over other people for its own sake; this motive of wanting the pleasure of power has always been part of human life (Plato was the greatest exponent of it with his call for rule by philosopher-kings), and always will be with us. Others want a place in government because it is simply a way of enriching themselves. One way to gain wealth is to create it with a business enterprise. Another way is to enlist the power of government to divert to yourself part of the wealth that others create. (Of course there are still other ways of obtaining wealth, such as theft and fraud and marriage for riches, but we need not discuss them here.) Wealth-grabbing (in contrast to wealth-creating) with the aid of the government is called by economists "rent seeking". It includes not only those who enrich themselves by getting onto the government payroll but also those who use the powers of government to obtain for themselves a protected monopoly position (for example, a cable television franchise or a television channel allocation), or a government regulation that protects their private business from a particular form of competition (such as laws that allow stores only to be open during specified hours, or that prevent women from working in particular jobs or particular hours). But it is the desire to gain a place of power that makes the enlargement of government through socialism, and hence the doctrine of socialism, particularly attractive to so many who believe they have the credentials to obtain the positions that Socialism creates. Hence we should not expect the call for socialism to disappear simply because it has been discredited by experience. The idea of socialism is not just history, an episode and doctrine that may now be safely forgotten. SPONTANEOUSLY-EVOLVED NON-MARKET SYSTEMS6-4-1 The Idea of Spontaneous Order Who invented the word "word?" Which committee or government agency decided that that particular combination of letters, and the sound it leads you to utter, should serve the linguistic purpose that it serves? Clearly, no one invented it, as no one designed the English language. The language grew up by itself as a result of a multitude of human actions, not as a result of a human plan or design. Yet the language works very well, as do all natural languages. Indeed, research on artificial languages such as Esperanto that were rationally designed shows that an undesigned, evolved language like English has much greater flexibility and capabilities than does an artificial language. Hidden in the apparently-messy structure of English are many devices such as redundancy that help prevent errors and promote communication, tasks that are performed by other devices in other languages [cite Beckmann], but that were not included into artificial languages such as Esperanto because they seemed to be unnecessary complications. The English common law (found also in ex-British Colonies) is another system which grew up without any overall plan or centralized decision-making. Yet in such fields as tort law it functions better than any alternative which has ever been suggested. Indeed, when there is competition between a common- law system and a legislated system of law (such as the European system is to a considerable extent) the common law usually proves its greater value by pushing out the legislated system, because of its greater concreteness and specificity, Roscoe Pound tells us (1921). The body of common law is the result of many painstaking human actions -- decisions by individual judges over many centuries -- which have fitted together into a mosaic without any over-arching plan. Again, as David Hume put it, the common law is the result of human action but not human design. Science in the free world is organized mostly as a decentralized evolutionary decision-making process, wherein researchers build their studies piecemeal upon the work of others, rather than working according to an overall blueprint. Within some commercial and government laboratories, and to some extent in socialist countries, there is some top-down planning of research. But most decisions about what to work on are still made by individual scientists in a process not organizationally different than Newton's decision to work on mechanics, or Einstein's decision to work on optics. And the results suggest that this decentralized spontaneously-ordered system is more productive than is a centrally-planned scientific system. Highway traffic is another example. On the Beltway around Washington, for example, there are at any given moment tens of thousands of cars whizzing around at high speeds within a few feet of each other without any overall plan, yet safely. Each driver is influenced by his own objectives, mood, and digestion about where to enter the Beltway, which lane to drive in and at which speed and when to change lanes, and then where to exit.. When one driver changes lanes or speed, other drivers make adjustments in a cooperative process that gets most people where they want to go in pretty much the time they expect, without much dissatisfaction. No computer program -- not even in principle -- could do nearly so good a job. No computer could know when a driver suddenly feels an urge to stop for rest or refreshment, or changes her destination. No computer could allow for a given driver's frustration with the driver up ahead and in response move the car into a different lane. All this can only be done efficiently by a decentralized system in which individuals make their own decisions on the basis of their own needs, though allowing for the movements of other cars on the basis of the other drivers' needs. A remarkable outcome, with remarkably few casualties. Of course the society makes rules which help the system to function -- drive on the right, signal your lane changes, and so on. But even if the legislature and regulatory agencies had not created such rules, chances are that satisfactory rules would have evolved spontaneously, sooner or later, just like the common law in torts. (See Heyne, 1987, for more discussion of these matters.) Animals, and especially insects, exhibit the characteristics of an ordered society without central direction. Indeed, beeswere the example used by the first important writer about spontaneous order, Bernard Mandeville1, in his rhymed Fable of the bees, or Private vices, public virtues (1705/1962). His key idea was: ""Thus every part was full of vice [by which he means self-interest], Yet the whole mass a paradise" (p.31). He then goes on: "Thus vice nurs'd ingenuity, Which carry'd life's conveniences...To such a height, the very poor Liv'd bettr than the rich before" (p. 32). By "vice" he meant the seeking of one's self-interest, and he did not himself regard this as a vice, but he recognized that many other people do so regard it (except while practicing it). Evolved societies can contain many patterns of behavior which are not fully understood by their users yet are vital to the system's operations even some peculiar and un-understood social behavior such as circumcision of males.6-4-2 Lewis Thomas described the spontaneous organization of ants as follows: A solitary ant, afield, cannot be considered to have much of anything on his mind; indeed, with only a few neurons strung together by fibers; he can't be imagined to have a mind at all, much less a thought. He is more like a ganglion on legs. Four ants together, or ten, encircling a dead moth on a path, begin to look more like an idea. They fumble and shove, gradually moving the food toward the Hill, but as though by blind chance. It is only when you watch the dense mass of thousands of ants, crowded together around the Hill, blackening the ground, that you begin to see the whole beast, and now you observe it thinking, planning, calculating. It is an intelligence, a kind of live computer, with crawling bits for its wits. At a stage in the construction, twigs of a certain size are needed, and all the members forage obsessively for twigs of just this size. Later, when outer walls are to be finished, thatched, the size must change, and as though given new orders by telephone, all the workers shift the search to the new twigs. If you disturb the arrangement of a part of the Hill, hundreds of ants will set it vibrating, shifting, until it is put right again. Distant sources of food are somehow sensed, and long lines, like tentacles, reach out over the ground, up over walls, behind boulders, to fetch it in. (Lewis Thomas, The Lives of a Cell (Penguin Books, 1974), pp. 12-13.) The Market As a Spontaneous Order, and as the Basis for an Enterprise Economy The focal point and the final controlling mechanism of a free-enterprise economy is the market in which people buy and sell the goods that enter into and that emerge from the productive process. A market is a classic spontaneous order. Left to themselves in the absence of regulations, people create markets. Indeed, the forces that create markets are so powerful that they operate even when the law provides powerful sanctions against doing business, as black markets show. For example, In the Soviet Union in the 1980s, store employees were executed for selling food delicacies such as wild boar meant for the elite to customers who did not qualify, yet the employees took the chance anyway. Joke: How many free market economists does it take to change a light bulb? Answer: None, the market will do it. The joke is funny, but it perpetuates a grave misunderstanding of the nature of markets. A market is not an invisible, anonymous process. It consists of people, struggling with might and main, sometimes succeeding and sometimes failing. Each market is driven by individuals using their first-hand knowledge of what people want, and the goods that can be made available, as the basis of their initiatives. It is the opposite of initiatives from above. Here are a couple of lively examples from the newspaper to give the flavor of process: Soon after the airlines began their plan of giving bonus tickets to frequent flyers, there sprang up firms that bought the tickets from frequent flyers who did not need them, and resold them at low prices to others who wanted them. (Wall Street Journal, Nov 28, 1984, p 33). And when movie makers wanted to use scenes from old black-and-white movies in color movies, an enterprising firm figured out a way to color the old moves. (WSJ, Sep 11, 1984, p 37). When we look at a market from a distance, it seems mysterious how all the parts could get where they are, and be integrated and coordinated in an effective fashion without central direction. It seems as bewildering to us as looking at an army of ants engaged in a vast project of moving a dead moth, say, or bees building a hive. But when we get ourselves a little closer to the individual business units, it seems less mysterious. How does the price of lettuce get to be what it is? Go to an open-air vegetable market on Friday afternoon an hour before closing time. You'll probably see the price of lettuce written on a blackboard in front of a stand that sells only lettuce, or lettuce and another vegetable or two. There is still a considerable pile of unsold lettuce -- too much, it seems, to be sold by closing time. Will the seller take the lettuce back with her? That would be expensive, and the lettuce might spoil. But wait -- the proprietor erases the old price on the blackboard, "50 cents", and writes a lower price: "45" cents. That speeds sales a bit. But still there is a lot of lettuce. In a few minutes she erases "45" cents, and writes "35" cents. The pile goes down faster as last-minute buyers crowd around. But there is still some left, so -- "30" cents. And at that price the lettuce pile finally disappears, except for a few bad heads which she throws away. That process which happens so visibly here occurs less visibly in all the markets of the economy to equate the supplies and demands of each good, as long as the price is not controlled by the government. In markets where the goods do not spoil as readily as lettuce, the prices do not need to change so fast, but over the longer run the same process operates. If the government does attempt to fix the price -- either at a given level, or with a floor or a ceiling -- there will arise either a shortage of the good, with people lining up to buy the supplies that become available, or a surplus which the government must buy and either store or give away or destroy. A first key function of a market, then is that it matches the buyers who are willing to pay the highest price, and the sellers who will accept the lowest price, in a fashion that all of them settle at a price as good or better for them than they would be willing to accept. Others are priced out of the market. Prices can be used to match buyers and sellers more favorably for all than can arbitrary selection systems. Consider the case of the volunteer auction plan that resolves problems of airline overbooking and oversales (see Chapter 00) that I again brag that I invented. The heart of the scheme is allowing people to indicate their own desires - whether they are willing to wait for the next flight in exchange for a relatively low price, or whether they are extremely anxious not to be bumped and hence would not accept even a high price to get off and wait. The price system of an auction enables both classes of people to get what they want and at the same time the airline avoids hassle and high penalty payments. A second key function of a market is to serve as a signaling mechanism for indicating willingness to pay, and willingness to supply. Markets extend invisibly all over the world. Prices that emerge from the Chicago auction market (a market which is housed within a single building) determine whether people who own stocks of soybeans in Brazil will sell them now or hold them for future months. And these prices not only "clear" markets, but they also send signals to farmers in Argentina that affect their decisions about whether to plant soybeans or wheat next year. The prices that arise in markets affect longer-run investment decisions, too. The London prices for palm oil influence the decisions of Malaysian farmers whether to plant palm trees or coconut trees for harvests that will not occur for several years. And the existence of profitable businesses, or of potentially profitable niches in the market, lead to new businesses being started. Let's imagine how one of those businesses get started. How does it happen that there is a printer in Berry Park, Maryland, just outside of Washington, D. C., who does standard commercial printing jobs? Perhaps the story is that Arthur Flamencon, the person who started the Berry Park printing establishment, originally worked in a printing firm in the city and noticed a lot of orders going to Berry Park. He then figured that with his knowledge of the printing trade, and with this market, he could have a flourishing business. Based on that hope, he interested several other people in investing their capital in the firm, and he then ventured to start the business. Knowing this history makes the process seem less mysterious. Now we can understand how there happens to be a printer in Berry Park filling the local needs, rather than there being an absence of such services. If we imagine a great many people constantly scanning the economic horizon around them, being alert to opportunities and needs, it seems less surprising that when there is a big gap and a major opportunity, someone moves in to fill the niche -- not necessarily immediately, but eventually -- just the way squirrels move in to occupy pieces of turf in your neighborhood. Similarly, it is not surprising that the owner of the printing firm sought out equipment manufacturers and sellers to equip his shop. Nor is it surprising that sellers of printing equipment subscribe to services that notify them when new printing shops are being opened so that they can solicit their business. Both the buyer and the seller in that situation have an interest in developing communication with the other, and hence there is "spontaneous" coordination. Actually, the coordination is not really spontaneous in the sense that it comes from nothing. Rather, it comes from the efforts of individuals who will benefit from the coordination taking place immediately around them. And from these local activities there emerges a full network of communication from the bottom level of the industry to the top, from one geographic end to another, and between the industry and its customers and suppliers. Whether the behavior of the ants and bees would seem as understandable if we were able to decode all of the nervous-system signals of these insects, we do not know. But just because the process seems mysterious at a distance does not mean that it really is more complex or difficult to understand than the location of a printer in Berry Park. If we expand the concept of the market beyond the immediate function of matching buyers and sellers, we can include the function of discovery of new ways of doing things, which promotes new knowledge and the progress of civilization. The example of coloring black and white movies given earlier in the chapter illustrates this point. ENTERPRISE AND COMMAND ECONOMIES A free-enterprise economy is that slice of the society that comprises the individual markets and integrates them. The economy performs in an overall fashion the functions that individual markets perform -- matching buyers and sellers, signaling the presence or absence of opportunities for productive investment, discovering new products and new ways of producing goods, plus a few more functions to be discussed shortly. These functions can be performed in at least two ways -- by a free-enterprise system of markets consisting of independent enterprisers, or by a system of commands from a central planning apparatus. We can gain an insight into the advantages and disadvantages of these two systems, command and free-enterprise, by comparing organizations of different sizes. ORGANIZATIONS OF VARIOUS SIZES The purpose of organizing a group is to help achieve your objectives. Bad organization produces confusion, waste, frustration, disaffection, rigidity, and stagnation. Good organization brings out, and combines, the best talents and energies of the members of the group. The organization of a tiny operation can be informal, constantly shifting. The boss can know everything necessary about what is going on, and can communicate her wishes and instructions directly to each other member of the group. Even with only two employees, however, the boss may have to specify lines of authority to avoid disputes about who is responsible for what. When the organization gets larger, there arises the problem of how to arrange who reports to whom. There are a variety of organizational forms, but no matter which one is used, one of these phenomena must occur: Either the number of people who report to each boss must increase (an increasing "span of control"), or the number of levels of management must increase -- or both may happen. And as a result, there are increasing problems with centralized control as the organization gets larger: 1. Faulty Information flow in both directions. Everyone has observed the increased distortion in the flow of information in the game of telephone as the chain lengthens; errors and also purposeful distortions increase. Similarly, as organizations increase in size, managers more easily get out of touch. It becomes more difficult to practice MBWA -- management by walking around -- the crucial strolls the captain must take throughout his ship almost every day, for example. Hence delusions frequently develop after a long period of isolated power; Howard Hughes was a bizarre example in the 1970's. Rulers of governments are particularly subject to this problem because concern about personal security from assassination increases the isolation; Stalin was a classic case, as are various African leaders who are afraid to mingle with the public. This accounts for age-old stories told about many monarchs such as Peter the Great who are said to have gone amongst their peoples in disguise to find out what the populace was saying about them. In large organizations managers find themselves making decisions without being in first-hand touch with the local situation. This is one important reason why corporate farming on a large scale fails again and again. An Illinois farmer once pointed out to me how each of the fields on his 400 acre farm was quite unlike the others, and required special decisions about when and how to plow in the spring. It is necessary for the decision-maker to literally be on the ground to make such decisions appropriately. 2. Increasing numbers of people who must be consulted and "sign off" on decisions as the organization increases in size. This slows up the decision-making process. 3. Difficulty of knowing from the top what people are capable of, what they want, who is doing good work and who is doing poor work. The process of rewarding employees for successful performance is less closely tied to results than it is for the owner of a firm her/himself. 4. Feeling of lack of independence. Managers feel that they have to clear decisions with higher-ups, which slows down decision-making. This explains why big firms often are slower in introducing new methods and new products than are small firms. 5. Managers maximize their own "utility" rather than the welfare of the organization as a whole. That is, they look out for themselves and their own personal interests rather than interests of the firm. This is the problem of the separation of ownership and control. Many social theorists such as Max Weber assumed that public officials could be objective and selfless. But accumulated experience has made this idea less credible. A manager has incentive to expand the size of her staff and department beyond what is best for the organization, because enlargement brings with it more power and salary. University department heads often try to build "empires" for this reason, and hence a key quality in a department head is the ability to get more funds from the central administration. Related, too, is the problem of property rights and incentives. On your own farm, you'll get up at 5am to take care of a sick hog because it is yours, but you are less likely to do so if the hog belongs to the company. (Does your auto mechanic take care of your car as well as she takes care of her own?) Marxism assumed away this problem of property rights for many years. But socialist countries now recognize its gravity. (Actually, even Stalin recognized this problem, but his system was not capable of handling it.) Points 1-3 above refer to problems in coordinating the organization's activities. Points 4-5 refer to problems of managerial motivation. There are, of course, benefits from an organization being large. Some of these effects are not beneficial to society to society as a whole, in my view, such as a lower cost of capital, but this is a controversial point. But under some conditions larger firms are more efficient due to economies of size in production, which is beneficial for the society. The advantages of large organizations may looked better in theory than in practice, however. For example, even though it seems obvious that having two electrical utilities stringing wires on the same street and competing for customers must cause electricity to be more expensive than having just a single monopoly firm, it turns out not to be so; the pressure of competition offsets the cost of redundant wires, as shown in comparison of the roughly 50 small cities in the U. S. where such a situation exists, against cities with just a single utility. (cite Primeaux.) This lovely example illustrates that many propositions for which the accepted theory seems overpowering -- so much so that you will surely have difficulty believing that these sentences about electricity supply mean exactly what they seem to mean on the simplest reading -- turn out not to be so in practice. It is interesting that as technology improves, many developments point toward smaller rather than larger organizations. For example, the development of the motor truck has allowed industry to locate almost anywhere, and not just at the side of railroads. And the electrical motor made it possible for production to take place almost anywhere, in contrast to earlier times when machines were powered by belts running from a massive central steam engine or waterfall. Electronic communication and the computer seem to push toward smaller, more decentralized units of production, also. And for a long time it was thought that small steel producers could not compete, but now they are the ones who are successful in the U. S. (Why, then, do mergers take place? One reason is financial. Another is just ambition of managers for a larger and higher- salaried domain. Still another are the interests of the promoters who profit from the fees and stock in putting deals together.) Alfred Sloan, the famous head of General Motors, thought he could circumvent these control problems of the large firm by decentralizing -- breaking the huge firm into quasi-independent organizations that would compete even with each other. Decentralization may be much better than decentralization in many cases. The trouble is that "quasi" is not actually independent. As long as a unit is owned and supervised from above, it is not truly independent, and therefore suffers from some coordination and motivation problems. The only sure way to completely avoid the problems that inhere in large organizations is to make the smaller units totally independent, to "spin off" or "privatize" them. With respect to units that supply inputs to the organization, such as the outfit that supplies printing or bolts to General Motors, if an vendor is no good, you can go to another vendor. GM can afford to buy its own printing equipment, and could make own tail-lights. But it can shift coordination and discipline problems to market to others by buying outside. Competition usually produces services cheaper for you on the open market than you produce them for yourself.6-4-3 The situation is similar with respect to the kinds of government services that can be supplied by private firms. A town's garbage collection is done more cheaply by a private firm contracting with the town than by town employees, experience shows. Citizens are usually satisfied even more by being allowed to contract individually with private garbage-collection firms. (Why is it not done that way? The only reasonable explanation is that officials prefer the additional power that comes with government operation or discretional selection of contractors. This also explains why contractors are selected by official decision in many or most cases, rather than by strict auction; cable television is a universal example. And of course this explains a major barrier toward economic "reform" in Communist countries. Is there an "optimum" size for groups? High school football squads vary from 12 players to perhaps 40 or so, but never less and never much more than that range, so we can identify an optimum range fairly closely. Half a century ago one could have identified the optimum size of a restaurant operation as between one employee in one location and perhaps a few large restaurants in a chain. But nowadays there are international chains of thousands of restaurants and franchises, so the optimum is much harder to identify. We can be pretty sure that the optimum range for steel mills will not include mom-and-pop operations. The optimum varies from industry to industry, and from era to era. And there can be successful operations at all points in across a wide range, as with big and small homebuilders. There is constant experimentation with a variety of sizes as long as the government does not forbid certain sizes (as it has forbidden interstate banking). Sometimes it is possible to analyze a system's need for less or more centralization of control. As a case study, let us compare highway traffic with airplane traffic. The U. S. federal air-control system works entirely differently than does the Capital Beltway; it uses a high order of central control rather than spontaneous decentralized decisions. These are some of the differences between the two situations, focusing on why central control is more appropriate for the airline control system. 1. Destinations of airplanes are declared before taking off. This is not so with autos (though it is so with buses). It would be most difficult to require that destinations be stated in advance with cars -- for pleasure trips, for example. (Of course there is some pleasure-cruising with planes, also, but we can skip that.) 2. The number of airplanes in flight is much smaller than the number of cars on the road at any moment 3. Planes have the capacity to fly "blind" (using radar) whereas autos do not. 4. It may be harder to mark "lanes" in the air than on the road. 5. There are fewer, and therefore more constrictive, choke points for airplanes, the take-off and landing strips. Roads have many entrances and exits, and therefore there is less congestion at them than at airports. Now consider the choice of control system for lunchgoing of the employees of a large firm. Should everyone in a given department be required to go to the cafeteria at the same time, each department separately, or should employees be allowed to go at their discretion? Should everyone be required to eat the same food, or should there be a choice? There are advantages to the administration in doing things by the numbers, which is why the armies do it that way. But when the tastes (sic) of the employees as well as the convenience of the bosses are considered, the command system usually gives way to individual choice. References [Heyne, Paul, The Economic Way of Thinking (Chicago: SRA, 1987. Mandeville, Bernard The Fable of the Bees (New York: Capricorn, 1705/1962) Pound, Roscoe, The Spirit of the Common Law (Boston: Beacon Press, 1921). FOOTNOTES 1 Chances are that the spontaneous-cooperation behavior of bees had been discussed even before Mandeville. More than a century earlier, in King Henry V, Shakespeare wrote: "[F]or so work the honey bees;/ Creatures that, by a rule in nature, teach/ The act of order to a peopled kingdom." (Act I, Scene II). FOOTNOTES 6-4-1Any reader of Hayek will recognize my debt to him in this section and in the rest of the chapter. 6-4-2Recent reports, based largely on evidence from Africa, suggest that "Circumcision may protect against the AIDS virus", title of story in Science, 4 Aug, 1989, 470-471.) Given that science has not previously discovered any very large effects of circumcision, it is most interesting that this practice has evolved nevertheless, and until now it would not have been possible to "understand" the practice or to justify it on "rational" grounds. But abolishing the practice for lack of such justification would have had a negative effect on health, apparently. Food prohibitions against pork and shellfish also have links to trichinosis (sp) and to allergic reactions. 6-4-3There are sometimes offsetting benefits of control if you own a supplier, but we can skip that issue now. Page # thinking spont64@ 3-3-4d