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The Austrian School -

The story of the Austrian School begins in the fifteenth century, when the followers of St. Thomas Aquinas, writing and teaching at the University of Salamanca in Spain, sought to explain the full range of human action and social organization.

These Late Scholastics observed the existence of economic law, inexorable forces of cause and effect that operate very much as other natural laws. Over the course of several generations, they discovered and explained the laws of supply and demand, the cause of inflation, the operation of foreign exchange rates, and the subjective nature of economic value--all reasons Joseph Schumpeter celebrated them as the first real economists.

Nobel Laureate Economist F. A. Hayek (1899-1992) is one of the leaders of the Austrian School in the modern era, suggesting knowledge, prices, and competition as a discovery process. The following comes from the Hayek [biography] at [] and describes Hayek's views on moving from "planned order" to "spontaneous order":

Hayek was the central pioneering figure in changing the course of thought in the twentieth century. --Thomas Sowell

It is hardly an exaggeration to refer to the twentieth century as the Hayek century. --The New Yorker

A claim for equality of material position can be met only by a government with totalitarian powers. --FA Hayek

Knowledge, prices, and competition as a discovery procedure

Hayek's writings on dispersed knowledge and spontaneous order are also widely known, but more controversial. In "Economics and Knowledge" (1937) and "The Use of Knowledge in Society" (1945) Hayek argued that the central economic problem facing society is not, as is commonly expressed in textbooks, the allocation of given resources among competing ends. "It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality" (Hayek, 1945, p. 78).

Much of the knowledge necessary for running the economic system, Hayek contended, is in the form not of "scientific" or technical knowledge--the conscious awareness of the rules governing natural and social phenomena--but of "" knowledge, the idiosyncratic, dispersed bits of understanding of "circumstances of time and place." This tacit knowledge is often not consciously known even to those who possess it and can never be communicated to a central authority. The market tends to use this tacit knowledge through a type of "discovery procedure" (Hayek, 1968a), by which this information is unknowingly transmitted throughout the economy as an unintended consequence of individuals' pursuing their own ends.(17) Indeed, Hayek's (1948b) distinction between the neoclassical notion of "competition," identified as a set of equilibrium conditions (number of market participants, characteristics of the product, and so on), and the older notion of competition as a rivalrous process, has been widely influential in Austrian economics (Kirzner, 1973; Machovec, 1995).

For Hayek, market competition generates a particular kind of order--an order that is the product "of human action but not human design" (a phrase Hayek borrowed from Adam Smith's mentor Adam Ferguson). This "spontaneous order" is a system that comes about through the independent actions of many individuals, and produces overall benefits unintended and mostly unforeseen by those whose actions bring it about. To distinguish between this kind of order and that of a deliberate, planned system, Hayek (1968b, pp. 72-76) used the Greek terms cosmos for a spontaneous order and taxis for a consciously planned one.(18) Examples of a cosmos include the market system as a whole, money, the common law, and even language. A taxis, by contrast, is a designed or constructed organization, like a firm or bureau; these are the "islands of conscious power in [the] ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk" (D. H. Robertson, quoted in Coase, 1937, p. 35).(19)

Most commentators view Hayek's work on knowledge, discovery, and competition as an outgrowth of his participation in the socialist calculation debate of the 1920s and 1930s. The socialists erred, in Hayek's view, in failing to see that the economy as a whole is necessarily a spontaneous order and can never be deliberately made over in the way that the operators of a planned order can exercise control over their organization. This is because planned orders can handle only problems of strictly limited complexity. Spontaneous orders, by contrast, tend to evolve through a process of natural selection, and therefore do not need to be designed or even understood by a single mind.

Emphasis in this last paragraph is mine. This is the case for OpenSpaceTechnology. The planned orders of our organizations simply can not handle the levels of complexity and adaptation that most organizations are facing. The only compassionate thing to do is look carefully at the knowns and unknowns... and then to use planned orders for what we know and use OpenSpaceTechnology to discover and invite spontaneous orders to address all of the real and uncertain complexities, diversities, urgencies and conflicts we face.

The compassion (and the vision, wisdom and real power) comes in seeing the distinctions between the knowns and unknowns, plan-able and un-plan-able, without separating, discounting or attempting to dominate either one with the tools and temperment that work with the other. Give to Ceasar what is Ceasar's...


The parable of the broken window

...was created by Frederic Bastiat in his essay "What is Seen and What is Not Seen", to illuminate the notion of hidden costs (aka opportunity costs).

Bastiat uses this story to introduce a concept he calls "the broken window fallacy", which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian school of economics frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc.. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.


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Last edited May 12, 2004 2:16 pm CentralTimeUSA by MichaelHerman
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