No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Two: Fundamentals of Economic Behavior 49 And with the millions of differing products within the market, you necessarily must aggregate the information provided to the central planner. This is the central point of Hayek’s critique of central planning. This order occurs when individuals are the source of equilibrating behavior, thereby creating and maintaining the order. Let’s see how this works with a common irritant: a hike in gasoline prices. As drivers, an increase in gasoline prices causes us to conserve; we drive less often, try to combine trips out, maybe even carpool to work. If we expect the price rise to be longer-lasting, we may switch to a more fuel-efficient car. No one tells us to do it—it is in our own self-interest— so we do it. Likewise, when producers see higher prices for their products they will respond by increasing production. They may work plants and personnel longer hours and/or start up marginal wells (marginal wells are those that might not, for example, have made money at $25 per barrel, but are very profitable at $75 per barrel; they are profitable only “on the margin” as prices increase). If producers expect the increase to last, they will spend more on longer term supply improvements such as oil exploration and possibly alternative energy supplies. Once again, no one tells them to do this. They do this because it is in their self-interest to pursue higher profits. Yet their actions will benefit consumers and serve the social interest. Whatever the source of the price hike, both consumers and producers react to equilibrate the situation. The source could be a war in the Middle East, or perhaps a boom in Asia; the important point is that it doesn’t matter. The combined actions of producers and consumers lead to the emergence of a new order, without any central authority telling them what to do. One could say that a government bureaucrat could do the same thing, and could order people to consume less and could direct producers to expand production. Of course those orders could be given, and there would be a change in behavior. We saw this when consumers were given ration cards for many items during World War II. The key distinction is that a government planner does not have and cannot have all the information necessary to ensure the social goal of reducing oil consumption is met at the lowest cost. For example, does the government planner have the knowledge of what the most highly valued use of oil is for everyone? Obviously not. Some families may want to stop driving the SUV, but still drive the same distances. Others might want to carpool and combine trips in the SUV. Still others may need to drive the same vehicle the same distance (maybe the vehicle is used for work, such as a truck driver) and they’ll give up something else to handle the price increase. With the decentralized free market system, individuals will make decisions that ultimately lead to the desired social result of reduced consumption while optimizing their own situation. Notice that this socially desirable outcome of an emergent order is highly dependent upon institutions: we need an oil market for prices to emerge, and the prices create incentives for individuals to adjust their behavior in socially beneficial ways. What if Congress passed a law limiting “price gouging” by Big Oil? Hold your answer here, because we’ll look at this further in chapter 5. The point to appreciate is that the