Spontaneous Order in Adam Smith

by Steven Horwitz for AdamSmithWorks





Spontaneous Order


Of all the contributions that Adam Smith’s work in political economy offers us, perhaps the most important and enduring of those is the idea of the “invisible hand.” Although Smith only uses that term a few times in his written work, the idea was so original and profound, particularly in the way it defined a task for the social sciences, that it became deeply associated with Smith’s work. Subsequent scholars have introduced other terminology that they believe more precisely describes the underlying phenomenon. One of the most popular of those is “spontaneous order,” suggested by the philosopher-chemist Michael Polanyi, and popularized by F. A. Hayek during the years he and Polanyi worked together at the University of Chicago.

In this essay, I begin with a textual analysis of the two most recognized uses of spontaneous order in Smith’s works: the use of the phrase “invisible hand” in An Inquiry into the Nature and Causes of the Wealth of Nations (hereafter Wealth of Nations) and the famous “man of system” passage in The Theory of Moral Sentiments. Then I will discuss the ways in which the ideas in those passages were expanded on and clarified through the work of Carl Menger in the 19th century and F. A. Hayek in the 20th. Smith provided the starting point, but Menger and Hayek turned Smith’s insight into a full-fledged way of thinking about the social world.
 
The passage in Wealth of Nations in which Smith uses the invisible hand metaphor appears in the section of the book entitled “Restraints on Particular Imports,” so for Smith, the context is international trade. Smith writes:
 
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
 
The economic idea expressed through the invisible hand metaphor is that one can promote “an end which was no part of his intention,” promoting the interest of the society as a whole “more effectually than when he really intends to promote it.” Smith was observing that pursuing self-interest under the appropriate set of social institutions leads to socially beneficial unintended consequences. The idea that we could explain social outcomes as the unintended result of people behaving according to discoverable rules rather than the good or bad intentions of particular individuals was Smith’s key insight and the beginning of real social science.
 
One way to see this is to illustrate by using a 2x2 matrix. Ordinarily, we think of intentionally doing good, intentionally doing something bad, and unintentionally doing something bad. But what of unintentionally doing something good? It’s not “serendipity,” which is more like luck. It is only with the idea Smith alludes to when he writes of the invisible hand—the idea that was expanded into the concept of spontaneous order—that we get a systematic understanding of the upper right cell. In his 20th century exploration of this idea, Hayek identified the upper right cell as the domain of the social sciences, which attempt to explain how order can be produced without design.
 
Even before the explicit invocation of the invisible hand in Wealth of Nations, Smith grasped the basic idea of spontaneous order and the challenges of trying to design a social order from the top down. The Theory of Moral Sentiments (1759), written almost 20 years earlier, contains Smith’s famous discussion of “the man of system”:
 
The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government that he cannot suffer the smallest deviation from any part of it…He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon the chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. 
 
It’s worth noting that Smith again references a “hand,” but this time it is a visible one. Unlike the invisible hand, which is a metaphor for the principles of motion that lead to harmony when the legislature creates the right rules of the “game of human society,” the visible hand of the man of system is unable to accomplish its goals in the context of a complex society. 
 
The man of system passage appears in the section “Of the Character of Virtue,” which suggests that there are important links between The Theory of Moral Sentiments' analysis of individual human behavior and the more systematic treatment of social and economic interaction in Wealth of Nations, both of which are grounded in a broad understanding that social orders evolve without design. 


Early Exploration of Spontaneous Order
 
Smith was not alone among his contemporaries in developing this insight. He, along with David Hume, Adam Ferguson, and others, was part of the Scottish Enlightenment, in which similar ideas were being explored. Ferguson famously described the outcomes of invisible hand processes as “the products of human action but not human design.” This phrase nicely captures the idea of socially beneficial unintended consequences and was Hayek’s preferred pithy definition of “spontaneous order.” One can also read Bernard Mandeville’s Fable of the Bees as part of this broad tradition, though there are important differences with Smith and the others. 
 
The consequences of our choices and our intentions are always mediated by social institutions. Humans may be universally self-interested, but whether that works to our advantage or disadvantage depends on the quality of institutions. One of the common misunderstandings of Smith is that he defends the idea that greed is good. It’s important to remember that invisible hand processes only yield positive unintended consequences if the surrounding economic and social institutions are right. If the law allows people to plunder, then when I steal your wallet my greed does not lead to socially beneficial consequences. 
 
Good social institutions penalize what we might call “anti-social self-interest” and encourge the socially beneficial self-interested behavior that Smith is describing in the invisible hand metaphor. It’s interesting that Smith refers to society as a “game” in the “man of system” passage. One way to read the end of that passage is as a claim that if the rules of that game aren’t right, the principle of motion of the individual pieces on the chess-board will not generate the easy harmony that we wish. The essential Smithian claim is that those rules and institutions do the heavy lifting to produce peace, prosperity, and justice.


Expanding Spontaneous Order Theory
 
The move from “invisible hand” to “spontaneous order” took place over the 19th and 20th centuries in the work of Carl Menger and F. A. Hayek. In Menger’s Investigations into the Method of the Social Sciences with Special Reference to Economics (1985 [1883]), he developed the invisible hand approach from Smith into a way of understanding the social sciences in general. He posed what is often referred to as the “Mengerian” question: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” (1985: 146) This was a more precise statement of the idea behind Smith’s invisible hand and Ferguson’s “products of human action, but not human design.” 
 
Menger believed the task of the social sciences was answering this and related questions. He called answers that built up a story of how beneficial institutions could emerge without design “compositive” explanations and he contrasted them with what he called “pragmatic” explanations that showed how institutions were intentionally designed for specific purposes. Though that terminology did not stick, this core distinction remains central to the spontaneous order tradition. For example, in Hayek’s later work he was careful to distinguish “orders” from “organizations” on more or less the same principle. 
 
Menger’s main application of these ideas was crucial to the development of spontaneous order theory. In his Principles of Economics (1871) and a follow up article in 1892, Menger showed that the emergence of money is an example of the sort of compositive (or spontaneous order) explanation that he thought was at the heart of social science. 
 
Menger’s story of the origin of money begins in a world of barter. Individuals try to improve their circumstances by making exchanges, but the absence of the “double coincidence of wants” (or situations in which two people who want to trade each have what the other wants) makes betterment through trade difficult. Soon people recognize that they can make more exchanges if they hold stocks of goods that other people want to have, even if they don’t want those goods themselves. 
 
Different actors try using different goods for this indirect exchange process. Some turn out to work better than others. Those who use the goods that work better make more exchanges and become wealthier. Those who see the actors using in-demand exchangeable goods becoming rich imitate them. They use the same goods as exchange intermediaries, and as a result, the goods work even better in that role. Eventually, people will converge upon one or two goods as the media of exchange, and it is those that we call money.
 
None of the actors in Menger’s theory intend to create money. Like Smith’s chess-board pieces, they each have a principle of motion—the pursuit of their own ends. The evolution of money is an unintended consequence of that pursuit under the right rules and institutions, not the product of some intentional design or invention. In Human Action (p. 405), Ludwig von Mises said of Menger that he “recognized the import of his theory for the elucidation of fundamental principles of praxeology [the theory of human action] and its methods of research.” Mises agreed that Menger’s theory was a template for how to do social science properly.


Further Development by F.A. Hayek
 
An important aspect of spontaneous order is that there is no way to predict ahead of time what such a process will produce. This was articulated by James M. Buchanan when he said of spontaneous orders, the “order is defined in the process of its emergence.” And as Hayek noted about economic competition, it is a “discovery procedure.” We need spontaneous order processes because they enable us to learn what we did not know we did not know. Humans are simply not smart enough to design a social order. To generate such order we must rely on the systems of differentiation, competition, filtering for success, and imitation of what’s successful that define all evolutionary processes, whether biological or social. 
 
It is on these issues that Hayek’s work fully realizes the idea of spontaneous order. Hayek repeatedly referred to the way in which his work emphasized the “twin concepts of evolution and spontaneous order.” Hayek explained the ways in which social spontaneous order processes, especially the market economy, were primarily about making dispersed, contextual, and tacit knowledge available for use by others. This use of this knowledge advances social coordination and cooperation (compare this to Smith’s “easily and harmoniously” in the “man of system” passage). 
 
For Hayek, the fundamental social problem starts with the observations that we each know different things, that the things we know often only appear when we have to choose in certain contexts, and that knowledge often exists in a form we cannot articulate. Given these observations, how do we make this knowledge available in a form that others can use? The solution to this problem involves two pieces, Hayek argues. 
 
First, control over resources should be decentralized to more closely align with the decentralization of knowledge because those with the relevant knowledge are best able to make good decisions about the use of the relevant resources. This is what Hayek called the idea of “several property” (as opposed to the less precise “private property”) in the context of the market. But while decentralization and variation are necessary for progress, they are not sufficient. 
 
Although it allows for differentiation and competition in evolutionary processes, decentralization alone does not provide a filter to sort good variations from bad ones. Filtering identifies success so that it can be imitated, leading to coordination and progress. In the market, Hayek argued, sorting and identification require the price system and its associated institutions. Prices, profits, and losses in the market provide a way to judge whose “use of knowledge” in the form of resource allocation is better than others. For Hayek, such evolutionary mechanisms are what make order without design possible.
 
While filtering by profit and loss in the context of the market provides the clearest example, Hayek argued that the evolution of other social institutions was filtered by the long-term survival (or disappearance) of groups who adopted them. This theory of group selection as a form of spontaneous order is one of his most controversial claims. There is a real danger of concluding that the theory is an endorsement of whatever survives, which seems problematic. A weaker claim, that the economic success of a growing population with increasing levels of material comfort is an indicator that the institutions that produced that success are better than alternatives that do not, seems more plausible. Generalizations of spontaneous order processes from the market to all social processes should be done with caution.
 
Whatever the flaws in Hayek’s attempt to extend the ideas of evolution and spontaneous order to the whole of human social evolution, it embodies a vision that was implicit in Smith’s pioneering work. Charles Darwin read Smith and consciously patterned his evolutionary perspective of the natural world after Scottish and English social theorists. Writing after Darwin, Hayek saw the idea of spontaneous order as the social extension of the natural world’s evolution via variation and natural selection. Homo sapiens evolved as a biological entity without a designer, and through our social lives developed the institutions that promote progress and complexity, especially the price system—again without a designer. Smith’s insights about the flaws of the man of system and the role of the invisible hand have become, in their development into Hayek’s spontaneous order theory, a fully realized evolutionary account of the biological and social history of human progress that does not require conscious human design.