The second fallacy is the belief that economies require someone or some group to design and/​or control them. Often this belief is linked to an argument from complexity: only a simple economy could be left to its own devices. Complex, advanced economies like those across most of the globe require human monitoring and regulation to function properly.

The flaw at the heart of this fallacy is that it ignores the idea of spontaneous or undesigned order. The mainline of economic thinking over the last 250 years has been focused on understanding the ways in which good social institutions can lead self‐​regarding individuals to cooperate and coordinate in ways that none of them intended. This idea was at the heart of Adam Smith’s metaphor of an “invisible hand” guiding humans to create benefits that none of them intended, and Carl Menger’s work a century later, which asked how it was possible for institutions to emerge that no one had willed into existence. In the 20th century, F. A. Hayek took this line of thought one step further by explaining how markets created coordination and order by making better use of dispersed and tacit knowledge than any other system could.

All of these are articulations of the concept of spontaneous order, which is the claim that many of our most useful norms, practices, and institutions are the products of human action but not human design. Think of the way a path gets trodden through the fresh snow on an open quad on a college campus. People have to take the first steps through the snow. Others see the footprints and walk there, where it’s a bit easier. As the snow slowly gets tamped down, a path begins to emerge. Several such paths will likely cross the quad, all reflecting the directions in which students and faculty need to walk. No one designed that system of paths, and no one put up signs directing people to walk in particular places. Rather those paths emerged as the products of human action but not human design.

We recognize these sorts of spontaneous ordering processes in nature through Darwinian evolution. The whole theory of evolution through natural selection is one of emergent order. There is no designer in nature, rather variations that improve the chances of survival and reproduction are passed on, leading to changes that make living things better adapted to their environments. Order is produced without design. It is also worth noting that Darwin borrowed many of his ideas about competition and evolution from social thinkers like Smith and David Ricardo.

The trouble is that so many who accept that idea for nature cannot see how social systems work in the same way. In fact, the very arguments that are used to support spontaneous order in nature work in society too. The objection that nature could not produce something as complex as the human eye can be rebutted by pointing out that its very complexity could only be produced by a process that operated over a long time span and that had the ability to sift out beneficial marginal changes from harmful ones. That’s precisely how evolution works. And market economies work the same way, though at much more rapid speed thanks to humans’ ability to pass on acquired cultural adaptations.

The prices and profit signals of the market provide the feedback that informs producers whether or not they have created value for others. In a genuinely competitive market, profits indicate that consumers valued the good more than they valued the individual inputs that went into its production. If your ready‐​to‐​eat pizza is profitable, that means it is worth more to consumers than the sum of the value of flour, yeast, cheese, sauce, and pepperoni, and labor that went into making it. Firms that create value this way, as indicated by their profits, survive, and firms that destroy value, as indicated by losses, will eventually die off.

This process, and the more general process that create economic order, cannot work unless the institutional rules of the game are right. Unlike biological evolution, where the environment for competition is given by nature, the environment in social competition is the set of rules and institutions that any society adopts. When those rules clearly define and protect private property, enforce contracts, respect the rule of law, and assure sound money, then the competition that takes place within them will produce economic coordination and social progress. By contrast, when the rules are wrong, for example when we penalize profits or subsidize losses, the competitive behavior of individuals and firms will not lead to the unintentional creation of order and social cooperation. Under poor rules and institutions, the signals do not reward value‐​creating behavior, breaking down the mechanism by which self‐​regarding behavior is channeled into undesigned social order.

What prices and profits enable us to do under the right institutions is to communicate our own bits of knowledge–some of which we might not even be able to put into words or numbers–to the rest of society through our acts of buying and selling. Those prices and profits form a complex system of communication that shifts and changes as we make decisions to buy or sell. Those changing prices and profits provide both knowledge and incentives to sellers to adjust their behavior accordingly. Those who do so, succeed, and those who do not, find themselves failing.

When governments attempt to design market outcomes, they will find it impossible to obtain all of the knowledge needed to know how best to act, as political action cannot capture all of the knowledge that can be processed by the decentralized communication network of the market. The ability of markets to make use of knowledge in this way, and enable us to communicate across our individually limited fields of vision, enables us to generate a level of economic complexity that designers could never match. Complex modern economies do not require designers. In fact, those who presume to design make matters worse as they stumble their way around, deprived of the illumination of market signals generated by the choices of consumers and producers.



