Competition as a Discovery Procedure: Smith, Hayek and Leoni

Garret Edwards for AdamSmithWorks

May 19, 2021
SMITH - HAYEK – LEONI – COMPETITION – JUSTICE - FREEDOM – LAW
You cannot invent what is already there. Even though Merriam-Webster’s Dictionary1 lists discovery as one of the possible definitions of invention, the fact is that you can only invent what does not exist before you actually create it. And the things that are already in our world, you discover. Competition is also another big word--one of those difficult enough that to be able to define them you need outside help. The magnificent economist Friedrich A. Hayek attempted to paint a helpful picture of it throughout his oeuvre. He said on one occasion: ‘Competition is a procedure of discovery, a procedure involved in all evolution, that led man unwittingly to respond to novel situations; and through further competition, not through agreement, we gradually increase our efficiency.’2
That was not the only time that Hayek wrote about competition, which turned out to be one of his most studied subjects. He would also explain the following: ‘Competition is thus, like experimentation in science, first and foremost a discovery procedure. [...] Competition as a discovery procedure must rely on the self-interest of the producers, that is it must allow them to use their knowledge for their purposes, because nobody else possesses the information on which they must base their decision.’3
But what does that really tell us about competition? How is competition relevant in discovering new ways to improve our everyday lives? Is it possible that competition ends up being useful for entrepreneurs to innovate even when government regulations get in the way? And was Hayek alone in his articulation and defense of competition as a discovery procedure? Those are all intriguing questions that make us ponder an issue that remains as important today as it was in the days Hayek was writing his scientific papers. Oddly enough, given the intervening history, those papers might matter even more now.
Hayek was not alone in his defense of fundamental market processes, of course. Adam Smith and Bruno Leoni were there to join him: one coming before him, and the other writing at the same time. Smith scholars have long argued about what was originally known as Das Adam Smith Problem, the contention that there were fundamental inconsistencies between Smith’s two major texts: The Theory of Moral Sentiments (1759)4 and The Wealth of Nations (1776)5. That discussion has now been, fortunately, left behind due to the well-documented realization that these texts are part of the same man’s ideas and work. They are both faces of Adam Smith, which together form his very own vision of the many affairs that interested him.
Throughout these two texts, Smith varies the references that he makes to the words ‘competition’ and ‘Justice’. Here I briefly showcase a few statistics that will be useful when approaching these varied usages:
  1. The Theory of Moral Sentiments and on the Origins of Languages (Stewart ed.) [1759].
  • Competition: 5 mentions.
  • Verb ‘To compete’: 0 mentions.
  • Justice: 170 mentions.

  1. An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 1 [1776].
  • Competition: 79 mentions.
  • Verb ‘To compete’: 1 mentions.
  • Justice: 43 mentions.

  1. An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2 [1776].
  • Competition: 58 mentions.
  • Verb ‘To compete’: 1 mentions.
  • Justice: 85 mentions.

The shift of focus between TMS and WN is notorious, and it will come to no surprise to anyone well versed on Smith. Nevertheless, it is quite enlightening visualizing the fact that Smith centered his attention on the notion of Justice in TMS, and that he decided to focus on Competition in WN. This again makes evident what were the main ideas that Smith wanted to work on in each of his texts. TMS focused on the principle of sympathy, and WN focused on the principle of self-interest.
All of this is shed a new light as soon as we attempt to use Justice as the bridge that connects the two faces of Adam Smith. While TMS’ Smith worries about being good, WN’s Smith worries about being fair. One sentences that you ought to love your neighbor as you love thyself, while the other exposes that you should love yourself as much as you love others. Subtle but different ideas that are linked together by the Justice bridge. Smith spells this out in his account of humanity passing through feudalism to modernity, from clans to the big society.
And that is where spontaneous order makes its main appearance, together with the famous image of an “invisible hand.” These two concepts can be defined by the following Smithian characteristics:
  • Respect for life, property and the value of one’s own words.
  • Fair play and rules of competition.
  • An order of greater cooperation.
  • Minimum government intervention.
  • Discovery through experience.
  • Social harmony and shared-sentiment-based agreement.
  • The generating of wealth.
Smith was of Scottish origin, which means that he must have had a particular relationship with the Law of his time, given the fact that while Scotland was -and still is- part of the British Common Law, at that moment in time Scotland’s Common Law was actually England’s Common Law being installed by the English ruling power. Nonetheless, his legal tradition and knowledge relies on making the assumption that he understood and comprehended Common Law as closely as we think his English colleagues might have. Having made that assumption, and letting aside the fact that Scotsmen from that time may have had their own prejudices against the Law that was being passed by the English, it is safe to assume that Smith studied Common Law as that set of legal notions that are passed from generation to generation, mostly relying on jurisprudence, mores, and traditions. This highlights an important difference between Common Law and continental Civil Law, which mostly relies on written legal norms.
On that front, Smith must have known pretty well that the Law was something to be discovered as problems arise, and not something that can be decided beforehand well ahead of time. This connects to his definition of Justice as a feeling, which notes the difficulty of actually defining it in an arid and pristine way. Justice is felt in response to particular situations, real or imagined. Everyone can tell whether something is just or unjust to them, even if they cannot put it into words. And individuals learn that by trial and error, by practice, through their experience. That is why, according to Smith, Justice is the portion of vengeance that is socially acceptable. And that is not something that can be resolved arithmetically, just as Aristotle’s golden mean is not the same for everybody.
Following on that, and flash-forwarding in time, Jesús Huerta de Soto6 relates how in the 1950s Prof. Hayek met with the grandiose and unfortunately short-lived Italian jurist Bruno Leoni, and how the latter convinced the former that he should go and find the origins of classical liberalism in Mediterranean Europe and not in Scotland. It appears that Hayek was ultimately convinced by Leoni, if you take into account the differences between The Constitution of Liberty (1960) and Law, Legislation and Liberty (1973). The first leans more towards Scottish Enlightenment ideas as being foundational to the classical liberal project, while the second one clearly aims toward the Mediterranean.
Friedrich Hayek and Bruno Leoni. Two authors that deserve to be studied together more often, although tragically that does not seem to happen as frequently as it should. Both of them share the same idea of the Law as an example of a discovery procedure. Leoni is painstakingly clear on that front and leaves not a single shadow of a doubt. He quotes Cicero’s anecdote on Cato the Censor in Freedom and the Law, which reads in its entirety:
‘[T]he reason why our political system was superior to those of all other countries was this: the political systems of other countries had been created by introducing laws and institutions according to the personal advice of particular individuals like Minos in Crete and Lycurgus in Sparta, while at Athens, where the political system had been changed several times, there were many such persons, like Theseus, Draco, Solon, Cleisthenes, and several others [...] Our state, on the contrary, is not due to the personal creation of one man, but of very many; it has not been founded during the lifetime of any particular individual, but through a series of centuries and generations. For he said that there never was in the world a man so clever as to foresee everything and that even if we could concentrate all brains into the head of one man, it would be impossible for him to provide for everything at one time without having the experience that comes from practice through a long period of history.’7
This quotation goes to show that to Cato Roman Law is the most perfect law of all, and even more in comparison to Greek Law. Roman Law has not been created by one single mind. It has not been built like a fortress. It is the result of many people thinking together. Following this line of thinking, jurists do not create law; they only discover it and make it better through trial and error.
To both Hayek and Leoni, the Law is a process of discovery, and we should not neglect their mutual influence on one another. Hayek himself went on to define justice as something lacking a definition, except for its negative.8 According to this view, we cannot know what is just. However, we are able to realize, one step at a time, what is unjust. Exactly the same thing we do as we try to approach ourselves to the knowledge of truth. The same way that Smith posed it should be done. What is that if not a discovery procedure?
The relationship between these two authors is an enticing one, more so given the fact that Hayek seems to follow many ideas expressed by Leoni but does not seem to cite him as much. Law, Legislation and Liberty goes hand in hand with Freedom and the Law. And they stand together against Hans Kelsen’s statist positivism, outlined in his prominent book Pure Theory of Law (1934).
Leoni, in his Introduction to Freedom and the Law, focuses on the strong connection between market economy and the lawyers’ law as a decentralized legal decision-making system. He states that ‘there is more than an analogy between the market economy and a judiciary or lawyers’ law, just as there is much more than an analogy between a planned economy and legislation.’9 This relates directly to the idea that ‘law, language and morals’ (Hayek, 1978, p. 37-38), together with money, are part of a spontaneous order. Tying with Hayek’s notion of complex order10 –one which far exceeds the absolute comprehension by only a single human mind– and civilization11 –all the advantages that one can get that one would not have been able to get by oneself.
Individuals can fail and they can make wrong decisions. Our very own points of view get in the way of how we perceive things. That is why we talk about perceptions: we are not sure that what we sense is what is really there. Thus, we are prone to making mistakes and we are unable to know with certainty the reality of things. Competition enters the stage to try to help solve this problem. It is not, alas, a perfect solution: ‘Although we employ competition to find out who performs best, the result will only show who did best on the particular occasion, but not that the victor will generally do best.’12
It comes as no surprise that Hayek was also fond of Friedrich Karl von Savigny’s magnum opus: The Vocation of Our Age for Legislation and Jurisprudence (1831). Savigny explains there that the creation of a historical view of legal science ‘[...] consists in the uniform recognition of the value and the independence of each age, and it merely ascribes the greatest weight to the recognition of the living connection which knits the present to the past, and without the recognition of which we recognize merely the external appearance, but do not grasp the inner nature, of the legal condition of the present.’13 Savigny joins Hayek and Leoni to form a potent trident that serves as a bridge between the Law in its spontaneous generation phase and its parallel with language, market economy and evolution. Competition is the key that lets travelers go from one side to the other and vice versa.
No wonder Hayek expresses that ‘[w]e cannot consider here that development in linguistics, although for a long time it was the only field outside of economics where a coherent theory was achieved, and the extent to which since Roman times the theory of law has been fertilized by conceptions borrowed from the grammarians deserves to be better understood than it is.’14 And the English language is a great example of how languages evolve without the central planning of one single wise mind. There is no centralized office in charge of deciding what we can or cannot say, and how to say it. And if it existed--like it does for the Spanish language, for example--people would be able to just nod their heads and continue with their lives without wasting another second reflecting on what “rules” this office proposes.
What was stated before does not imply that where we use the process of competition things will turn out perfectly every single time. Hayek is not scared to say otherwise and to warn that competition is not a tool to use for centralized planning or utopian ideals: ‘This, however, does not mean that where we have to use the process of competition to find out what the different people want and are able to do, we are also in a position to bring about the ideal state, or that the results even of ‘imperfect’ competition will not be preferable to any condition we can bring about by any other known method such as direction by government.’15 Even so, competition, as imperfect as it might happen to be, will always be better than a pretentious wise old man trying to tell us how to live our lives.
The fact that Hayek was not just an economist but also a jurist marks an outstanding difference with his colleagues. That is why his notion of competition differs from the one that other economists usually utilize. Competition is vital because it makes us arrive at outcomes that we could not have predicted beforehand and that we would not have been able to arrive at on our own. It is a door ajar behind which we do not know what we might find on the other side. And in that sense, local knowledge –the kind of knowledge only people in the field can acquire– stands out. We cannot know (at a given moment) what we do not already know. And competition helps us solve just that issue. ‘[C]ompetition is the more important the more complex or ‘imperfect’ the objective conditions are in which it has to operate.’ (Hayek [1948], 1958a, p. 103). Without competition we would be deaf amidst the total darkness.
Another issue that Hayek and Leoni tackle congruently is the importance of Common Law. George Mason University Professor of Law Todd Zywicki says that ‘[f]or Leoni, as for Hayek later, to understand why they believe the common law to be more certain and predictable –despite its unwritten characteristics– derives from recognizing that the common law is a conceptual system, as opposed to legislation, which is a verbal system of commands.’16 Predictability and legal certainty are the tenets that allow people to make decisions in a world of imperfect and asymmetric information. Kelsen would argue that a sign that said ‘No bears allowed’ means that you can bring, for example, a hippopotamus with you. While Hayek and Leoni would interpret it that you cannot bring any big animals such as bears with you. Zywicki goes on to explain that:
‘Thus, the common law is a conceptual system for which the articulation of judicial decisions (and making rules as a by-product) are verbal attempts to articulate the underlying concepts. But it’s the concepts –the concepts– of the common law that are the law, not the precise linguistic formulation of judges in particular cases. And it is from this that Leone says that the common law –although lacking precise verbal formulations– is more predictable.’17
We have already mentioned the similarities between Hayek and Leoni regarding the way in which they perceive the Law. To Hayek, Common Law is the prime example of a spontaneous order process. The two authors are able to signal the bridge between classical Roman Law and English Common Law, shedding light on the fact that English Common Law is closer to classical Roman Law than Civil Law actually is. With the vital distinction that judges in Common Law are to participate only when asked to do so by the interested parties. In Leoni’s words: ‘[J]udges or lawyers or others in a similar position are to intervene only when they are asked to do so by the people concerned [...] the decision of judges is to be effective mainly in regard to the parties to the dispute, only occasionally in regard to third persons, and practically never in regard to people who have no connection to people who have no connection with the parties involved.’18
You can do whatever you want and the state should not get in your way unless you want them to intervene and solve the matter at hand. In legal systems that do not adhere to competition as a discovery procedure, Law becomes legislation, and legislation turn into barriers and obstacles that prevent people from leading the kind of lives that they want to lead. Regulation destroys competition.
And Law is something that should be discovered. Not invented. Not created. It is not something that can be made up by a single mind sitting at the top of an ivory tower. Who really believes that they can legislate on every aspect of a human life? Only a lunatic could honestly think so. Rules are to be discovered, as both Hayek and Leoni pointed out. Change comes out as a result of those discoveries. However, one should not try to force change by modifying the current underlying rules. Chaos may ensue should one attempt to do so. You just cannot predict the unimagined and involuntary consequences of one’s actions.
As the Scottish Enlightenment pointed out, following Adam Ferguson’s sage phrase, things happen due to the result of human action, and not the result of human intent. And Law is a discovery, not an invention. I believe that Smith, Hayek and Leoni would agree with that. Do you not?


References
- HAYEK, Friedrich A. von. The Fatal Conceit. The Errors of Socialism. Edited by W. W. Bartley, III. Chapter 1, ‘Between Instinct and Reason’: Natural Man Unsuited to the Extended Order. U.K.: T.J. Press.
- HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge.
- HUERTA DE SOTO, Jesús (2009). The Theory of Dynamic Efficiency. USA: Taylor & Francis. 359 pages.
- LEONI, Bruno (1991). Freedom and the Law. Indianapolis, IN: Liberty Fund.
- Merriam-Webster’s Dictionary and Thesaurus (2009). USA: Merriam-Webster. 940 pages.
- SAVIGNY, Friedrich Karl von (1831). The Vocation of Our Age for Legislation and Jurisprudence. USA: The Lawbook Exchange Ltd.
- SMITH, Adam (1759). The Theory of Moral Sentiments and on the Origins of Languages (Stewart ed.). Available online at: 
- SMITH, Adam (1776). An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 1
- SMITH, Adam (1776). An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2.
- ZYWICKI, Todd J. (2014). When Friedrich Hayek Met Bruno Leoni. Available online at http://www.libertylawsite.org/2014/07/17/when-friedrich-hayek-met-bruno-leoni/. Last time checked on 12/20/19.
  1. Merriam-Webster’s Dictionary and Thesaurus (2009). USA: Merriam-Webster. 940 pages.
  2. HAYEK, Friedrich A. von. The Fatal Conceit. The Errors of Socialism. Edited by W. W. Bartley, III. Chapter 1, ‘Between Instinct and Reason’: Natural Man Unsuited to the Extended Order. U.K.: T.J. Press. Page 19.
  3. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. Volume 3. “The Political Order of a Free People”, Government Policy and the Market. U.K.: Routledge. Pages 68, 70.
  4. SMITH, Adam (1759). The Theory of Moral Sentiments and on the Origins of Languages (Stewart ed.). Available online at:
  5. SMITH, Adam (1776). An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 1
  6. SMITH, Adam (1776). An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2
  7. HUERTA DE SOTO, Jesús (2009). The Theory of Dynamic Efficiency. USA: Taylor & Francis. 359 pages.
  8. LEONI, Bruno (1991). Freedom and the Law. Indianapolis, IN: Liberty Fund. p. 88.
  9. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge.
  10. LEONI, Bruno (1991). Freedom and the Law. Indianapolis, IN: Liberty Fund.
  11. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge.
  12. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge.
  13. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge. P. 127.
  14. SAVIGNY, Friedrich Karl von (1831). The Vocation of Our Age for Legislation and Jurisprudence. USA: The Lawbook Exchange Ltd.
  15. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge. P. 2.
  16. HAYEK, Friedrich A. von (1998). Law, Legislation and Liberty. U.K.: Routledge. P. 66.
  17. ZYWICKI, Todd J. (2014). When Friedrich Hayek Met Bruno Leoni. Available online at http://www.libertylawsite.org/2014/07/17/when-friedrich-hayek-met-bruno-leoni/. Last time checked on 05/31/18.
  18. ZYWICKI, Todd J. (2014). When Friedrich Hayek Met Bruno Leoni. Available online at http://www.libertylawsite.org/2014/07/17/when-friedrich-hayek-met-bruno-leoni/. Last time checked on 05/31/18.
  19. LEONI, Bruno (1991). Freedom and the Law. Indianapolis, IN: Liberty Fund.