Reprinted with the kind permission of the Ludwig von Mises Institute.
According to one slogan, we should think globally, but act locally.[1] Such thinking obviously has significant appeal, but it is highly misleading. Typically, this slogan pertains to environmental issues. However, it represents a particular worldview that is hostile to free markets and friendly towards governmental intervention.
The appeal of this slogan and the ideas it represents derives from legitimate issues. The persons who promote governmental control of the economy and environment do so because they see great potential for conflict in a free society based on the pursuit of self-interest. After all, how can individuals pursue their interests without coming into conflict with each other?
The simplest and most-obvious answer to this question is we cannot avoid conflict in a society of free individuals. It might therefore seem to be the case that the interests of individuals can only be reconciled through coercion. However this dismal conclusion is not true. Reconciliation of divergences of interests between individuals comes through social cooperation within the market system. To see this point we must understand how the pursuit of individual interests leads to conflict, and what markets do to harmonize individual interests.
The most obvious reasons for conflicts between individuals are the fact of scarcity and the idea of rational self-interest. If we each pursue our selfish use of scarce resources aggressively, conflict might seem inevitable. There are a few dreamers who speak of a postscarcity society. While the idea of abundance has a certain emotional appeal there are obvious reasons to reject such an idea, such as human mortality and the finite nature of natural resources. Others reject the idea of self-interest. After all, some people do undertake seemingly selfless actions, such as charity and occasionally martyrdom. And some believe that though there is no natural harmony of interest, we can instead harmonize social life by making human nature altruistic.
Altruism alone does not harmonize social interaction. On the contrary, a world of altruistic people could easily be more rancorous than the world we know. It is not enough for people to want to promote the interests of others. We must also comprehend the interests of others, and this is impossible. One of the great insights of 20th-century economics was the "knowledge problem" examined by F.A. Hayek. The modern global economy is shaped by the individual interests and local circumstances of billions of people, each of whom is unique. We each have our own scale of values concerning the end uses of scarce resources, and these values are personal and subjective. Moreover, we each develop our values through time, through experience. We also each have unique skills or talents in producing the things of value to ourselves or others.
Adam Smith illustrated the productivity advantages of specialized and divided labor. The ability to divide productive tasks among individuals enables groups to improve productivity and raise living standards far beyond what is possible under autarky. Finally, modern means of production use advanced technology arranged in complicated chains of production. Capital goods exist in enormous variety, and are arranged in very complicated ways. The unique nature of wants combines with the advantages of global division of labor and modern technology to pose a problem. How can anyone comprehend such complexity? How can we harmonize so many different actions in the pursuit of self-interest?
It should be fairly obvious that nobody can "think globally," but this is not the only problem with the aforementioned slogan. It might seem inevitable that we must "act locally," but this is not true either. Our inability to think globally poses a problem. How can a global economy work if nobody comprehends its working? The knowledge problem renders the idea of an altruistic solution impossible. Of course, self-interested people will want to achieve global order, if such an order delivers higher living standards for them.
In any case, seemingly selfless acts usually have a hidden payoff. People who perform volunteer work or donate to charities often speak of how much they enjoy these acts. Also, leaders and martyrs can secure prestige and a place in history for themselves when they commit seemingly selfless acts. Consequently, there is no reason to believe that altruism exists or will ever exist, and there is no need for it anyway. The real problem of attaining social cooperation lies not in the nature of human intentions, but in the limits of human cognition.
Since we can only think locally, global coordination of production requires some means by which we can "extend our span of the use of resources beyond the span of conscious control of any one mind" (Hayek 1948, p. 88). Markets solve the knowledge problem of mutual coordination of the use of scarce resources in the face of the knowledge problem. Prices in markets reach out across the world as signals to coordinate production.
Increased demand for oil in Asia has sent a signal to the West to conserve this resource. Americans recently cut their consumption of oil by 800,000 barrels a day, not because of any altruistic sentiments regarding Asians. We have economized on our use of oil because we are thinking locally, in terms of our own budgets, our own interests. Yet without intending to, we have acted globally to coordinate with others in the use of this and all other scarce resources. The price system enables us to "think locally and act globally" through markets. This is how we solve the knowledge problem, to arrive at some degree of global harmonization of many selfish interests.
The market system itself was not designed for the purpose of achieving social harmony. Markets emerged initially out of self-interested trade based on double coincidence of wants. When two people each have what the other wants and want what the other has, they can trade provided that they recognize this situation and have the means to carry out this trade (Menger 1871). Institutions like money and property emerge to facilitate commerce.[2] The whole system of capitalism can therefore be seen as Adam Smith put it: "a system of natural liberty". The formation of market prices in money makes the coordination of global production possible.[3]
There is a moral dimension to the idea of social coordination through trade in markets. As Henry Hazlitt has argued, there is no conflict between personal interests and ethical behavior. Ethical conduct derives from the subordination of immediate gains to longer-term gains. People achieve the most for themselves through social cooperation in markets rather than through coercive transfers. This reasoning of Hazlitt’s implies that markets harmonize ethical conduct and personal gain. Yet some still fail to see how a system of natural liberty enables us to achieve prosperity and justice. Some people still see planning or "global thinking" and coercion through government as the means of attaining a better and more just world.
The debate between those who see the benefits of a free society and those who insist that economic progress and social justice require deliberate planning and coercion is long standing. In 1767, Adam Ferguson described an evolutionary process where an unplanned social order emerges out of purposeful acts in the face of a complex and uncertain world. Since then, scholars like Adam Smith, Carl Menger, and F.A. Hayek have developed this evolutionary view of institutions. Yet some people claim that the market system could only have resulted from deliberate action to establish social order. Even though nobody could have designed the modern global economy in all its details, there must have been a more general plan for social order, especially where the protection and enforcement of individual rights are concerned.
Private institutional arrangements can emerge and develop mechanisms for the enforcement of rights that are, however, often less formal and coercive than is commonly thought. Individuals tend to coordinate activity between themselves by abiding by unwritten, unspoken, or implicit agreements. As Robert Axelrod has demonstrated, it is in the interests of individuals to cooperate with others so long as others cooperate with them. Of course, the need for self-defense exists in great variety, but the satisfaction of such needs does not require a central planner who can "think globally." On the contrary, protection industries require exchange and competition on a mass scale, if they are to function properly.[4]
We each achieve much more through social cooperation than we can alone. The past few centuries have proven Adam Smith right about the great benefits of a global division of labor. Furthermore, experience with the market system has proven its worth as a coordinating mechanism for global production. Yet many people not only deny the merits of global capitalism, they decry its results and call for greater governmental control. Politicians still win elections by promoting "economic plans."
While the debate in question is lengthy, and the sum of all the ideas within this debate is considerable, it can all be reduced to a simple form: The idea that we can think globally is absurd, not only when it comes to environmental issues, but perhaps even more so when it comes to economics. The idea that we should act locally is timid and small minded. The market system globalizes human action in a way that makes global thinking unnecessary, if not pernicious. The idea that we should think globally and act locally has superficial appeal, but careful examination of this proposition reveals that it derives from thinking that is both utopian and mediocre or unimaginative. The idea that we should think locally or selfishly and act globally might seem counterintuitive — in some sense small minded and greedy and in another sense absurd. However, competition in the market system does result in the unintended consequence of promoting general interests through individual actions, whether they appear greedy or altruistic.
To put it simply, those who truly want social progress should promote the idea that we should all think locally as individuals and act globally through the capitalist system. This is the creed of the true progressive.
D.W. MacKenzie teaches economics at the Coast Guard Academy. The views expressed in this paper do not represent the official views of the Coast Guard.
Notes
I thank Don Lavoie, Pete Boettke, Anila Xhunga, and Scot Kjar for commenting on drafts of this paper. The usual disclaimer applies.
[1] This slogan has been attributed to David Brower, Rene Dubos, and Jacques Ellul. In its original usage it applied to environmental issues. However, the idea behind this slogan underlies much of the thinking of socialists and social democrats.
[2] Menger has an excellent discussion of the emergence of money in his "Principles". Mises refined this concept in his regression theorem (1912, 1949).
[3] Von Mises argued this point forcefully in his "Socialism" (1922).
[4] Donald Wittman (1995) and Theodore Breton (1989) have shown that if government is to achieve economic efficiency, it can do so only by replicating the workings of the market system.
Sources
Axelrod, Robert An Evolutionary Approach to Norms
Breton, Theodore (1989) "The Growth of Competitive Governments." The Canadian Journal of Economics. 22, 717Ð750.
Ferguson, Adam. Essay on the History of Civil Society (1767)
Hayek, F.A. Individualism and Economic Order (1948)
—— "The ‘Non Sequitur’ of the Dependence Effect," (1962)
—— The Constitution of Liberty (1960)
Hazlitt, Henry. The Foundation of Morality (1964)
Menger, Carl. Principles of Economics (1871)
Mises, Ludwig von. Human Action (1949)
——The Theory of Money and Credit (1912)
—— Socialism (1922)
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Wittman, Donald. The Myth of Democratic Failure (1995)
