I have been updating myself on political philosophy, theory and history of thought for most of last year and I came across an interesting insight from Immanuel Kant.

Taken from an essay titled An Answer to the Question: ‘What is Enlightenment?, it is revealing as to the necessary conditions for a free market to function and, I believe complementary to Hayek’s and Kirzner’s view of the market process.

Kirzner, in his very clever Competition & Entrepreneurship takes position against the traditional neo-classical equilibrium view of markets. He argues that viewing microeconomic relationships under an equilibrium lens prevents us from understanding the underlying very dynamic and critical entrepreneurial process at play. He explains that entrepreneurs, far from being price takers mechanically adapting their structure of production to exogenous price changes, permanently thrive to find new ways to attract customers by differentiating products in ways that the market currently does not (seem to) exploit.

Kirzner’s story of entrepreneurship is a story of perceiving. As by nature humans are partly ignorant, it is an entrepreneur’s superior perception of opportunities that provide him with (often temporary) supernormal profits and perhaps lead him to a (also often temporary but deserved, and in customers’ short-run interest) monopoly position. Hence structures of production are constantly changing, driven (rightly or wrongly) by those perceived opportunities. Those opportunities exist because information is imperfect and constantly evolves: customers’ tastes, technological boundaries change. As no market actor is omniscient, opportunities arise. Moreover, entrepreneurs themselves can alter the market (and hence prices) by coming up with a new type of product (think about Apple and its iPhone).

Importantly, the market process takes time. There is no instantaneous entrepreneurial change. The market process works by trial and error. This means that, not only will there be some losers, but what is viewed as an ‘imperfect’ situation by some people can last for some time. Monopolies can be undone by more creative competitors (if barriers to entry aren’t artificially raised), but this process requires patience. And Kirzner emphasises the importance of letting entrepreneurs and the market experiment and search for the right solution, that is, the importance of freedom.

Kant defines ‘enlightenment’ as “man’s emergence from self-incurred immaturity”. In turn, this ‘immaturity’ emanates, “not from lack of understanding, but of lack and resolution and courage to use it without the guidance of another”, perhaps due to “laziness and cowardice”. He says:

It is so convenient to be immature! If I have a book to have understanding in place of me, a spiritual adviser to have a conscience for me, a doctor to judge my diet for me, and so on, I need not make any effort at all. I need not think, so long as I can pay; others will soon enough take the tiresome job over for me. The guardians who have kindly taken upon themselves the work of supervision will soon see to it that by far the largest part of mankind (including the entire fair sex) should consider the step forward to maturity not only as difficult but also as highly dangerous. Having first infatuated their domesticated animals, and carefully prevented the docile creatures from daring to take a single step without the leading-strings to which they are tied, they next show them the danger which threatens them if they tried to walk unaided. Now this danger is not in fact so very great, for they would certainly learn to walk eventually after a few falls. But an example of this kind is intimidating, and usually frightens them off from further attempts.

As a result, Kant believes that it is hard for each separate individual to become ‘mature’. However,

There is more chance of an entire public enlightening itself. This is indeed almost inevitable, if only the public concerned is left in freedom. (my emphasis)

According to Kant, freedom is key in enabling ‘maturity’ of the masses and hence ‘enlightenment’. Without freedom, society effectively remains in a state of underdeveloped slavery. However, here again the ‘enlightenment’ process isn’t instantaneous. Even once granted freedom to think freely, “the public can only achieve enlightenment slowly.”

While the remaining of Kant’s essay mostly focuses on religious matters, his reasoning is absolutely key to understanding the very essence of a free market. The parallel with Kirzner’s understanding of the market process is striking.

Both writers, in their own way, focus on freedom as the key enabler to prosperity. Freedom allows market actors to become more ‘mature’ by forcing them out of their ‘guided laziness’ to provide for themselves by slowly experimenting and discovering what the needs and tastes of potential customers are. This experimentation process takes time and is bound to lead to some mistakes and failures. But ultimately, through the experimentation of a multitude of entrepreneurs that have limited local knowledge and fragmented pieces of information, market order emerges. Markets, and society, become ‘enlightened’.

K&K also warn about the negative effects of the intervention of ‘guardians’ (for Kant) and government (for Kirzner). Enlightenment cannot be achieved if guardians intervene to attempt to ‘protect’ their ‘docile creatures’. And the market process cannot play its capital and goods allocative role if government intervenes to regulate monopolies or distort the capital allocation mechanism based on flawed welfare maximisation considerations.

In short, governments should get out of the way and certainly not attempt to protect consumers through paternalistic policies. Government’s only role is to ensure the continuity of the Rule of Law. Unfortunately, and as I have pointed out in a number of posts, our modern democratic process, along with the increased speed at which information circulates, has transformed society into an impatient one. When what is considered as a problem by some arises (whether it is a monopoly or a market ‘inefficiency’), governments are pushed to act, the sooner the better. Consequently, the crucial learning process that is inherent to Kant’s philosophy and Kirzner’s market process is prevented from functioning. The ‘docile creatures’ never learn, the ‘guardians’ gain ever more power, and the market process never achieves its full allocative effectiveness. In the long-run, we all end up poorer.

Unfortunately, there has been an almost continuous and disastrous trend in ‘protection’ in the post-WW2 era. In the finance industry protection has translated into thousands of pages of regulation (protection acting on the supply side), as well as regulators preventing customers from making their own choices and mistakes (protection on the demand side). A latest example was published by The Economist last week in an article titled Anti-choice: Regulators are keen to stop people making mistakes. Worryingly, the supposedly classical liberal newspaper doesn’t even question this paternalistic regulatory trend.

Preventing people from making mistakes is wrongheaded. Kant pointed it out in the 16th century and Kirzner and numerous others reformulated this view since the early 19th. Those views indirectly unleashed the industrial revolution. Regrettably, we have forgotten those teachings and this trend has now moved into reverse for a number of decades. The mechanism is simple: freedom and time forces society out of its laziness, leading to enlightenment, which leads to an effective, self-correcting and anti-fragile market process. By not respecting this sequence, we have forced our society to live through constantly recurring crises and, to require ever more ‘protection from ourselves’. Sadly, the solution to our woes has now become politically controversial: freedom and patience.

PS: I wrote a post about the importance of failure in free markets more than two years ago here. I also added that financial crashes following a liberalisation period were ‘normal’. That is, that they were part of the learning process that Kant describes. When the financial sector was tightly under control, market actors and consumers’ learning was effectively suppressed. Liberalisation restarts the process, hence the unsurprising crashes…