Does self-interest foster civility among people—even strangers? It can, when each person has something to gain from a little cooperation. And a lot of little bits of cooperation can also add up to quite a bit more than the individual parts—through markets.
One of the great advantages of markets is also one of its greatest mysteries. By means that no one of us can know in its entirety, people are able to accomplish their plans over distances great and small, as well as through time (a topic for another discussion). How this is accomplished is the tale of a complex network of interactions that arise spontaneously as people become aware of opportunities to make themselves happier.
Far be it from me to propose that the ‘dismal’ science is all about happiness, but at heart, that’s exactly what it is (we’re allowing that economists have a ‘heart’). And his being the season of hearts, let’s talk about the ways in which markets tend to make every participant happy, and why happiness-creation is important to the mystery of both economic and social coordination.
A classic example of the complex process of social cooperation through market activity was described by Leonard Reed, founder of the Foundation for Economic Education. Using a simple pencil as an example, Reed demonstrated that even the simple pencil requires the cooperation of virtually millions of individuals, each a specialist in some skill or bit of information, all of which are absolutely essential for the creation of the simple pencil. The mystery is how this happens, since no one individual has mastered or even knows about all of the required steps in pencil production, and most participants in the process never meet each other. How these individuals, living in different cultures and places around the globe could manage to pool their skills and knowledge to create even a single pencil is indeed remarkable.
The answer is both simple and complex. Most capital—meaning man-made means of production, like the pencil—requires the participation of many widely-dispersed individuals, and much pre-existing capital equipment, before it can come into being. This includes, for example, the road-building and forestry equipment, mining operations, paints and rubber, and myriad other skills and items Reed’s pencil essay details.
This unplanned network of relationships is known as a spontaneous order. Loggers do not need to know nor desire to help the individuals who will use the pencils their logs create. They do know that they need to eat, and while they are out pursuing their specialized line of work, they aren’t growing or catching their own sustenance. Even if they despised the likely users of pencils they still have an incentive to exchange in a civil manner to further their own well-being—really, happiness. In truth, they will likely never know exactly what happens to the trees they log. The certainty that they are better off cooperating and trading trumps the unknowable possibility that the logs, milled wood, or pencil may someday be used to harm them.
All knowable incentives favor the market and the social cooperation it weaves. Is a pencil too trivial to accomplish all that? The more steps and equipment needed to create a final product, the greater the social cooperation, the more widespread the individual benefits, and the greater the mutual incentives to maintain a cooperative stance.
As Nobel laureate and economist Vernon Smith stated: “When goods cross borders, soldiers don’t.” What does this suggest for global cooperation? That markets give people an incentive to find ways to cooperate. If they are not controlled for narrow political ends, market relationships also enhance people’s opportunities, bind people together in a way that benefits both sides of the exchange process, and through a competitive process allow individuals access to the goods that best promote their own goals.
It is impossible for planners to design the complex market and social orders that arise naturally as the result of exchange, but it’s no mystery that the incentives facing individuals in markets to achieve a happier state of being will create these orders nonetheless.