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TGIF: Economy or Catallaxy?

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That the champions of the free market have always understood it, first and foremost, as the most basic form of social cooperation is evidenced by a dissatisfaction with the term economy itself. In volume 2 of Law, Legislation, and Liberty, F.A. Hayek claimed that we cannot properly comprehend the market order unless we

free ourselves of the misleading associations suggested by its usual description as an “economy”. An economy, in the strict sense of the word in which a household, a farm, or an enterprise can be called economies, consists of a complex of activities by which a given set of means is allocated in accordance with a unitary plan among the competing ends according to their relative importance. [Emphasis added.]

Of course, that’s not what a “national (or world) economy” is.

This may seem like semantic trivia, but an examination of Hayek’s point underscores an important and often overlooked aspect of the market order: its cooperative nature.

Unlike a household (or other economy), Hayek wrote,

the market order serves no such single order of ends. What is commonly called a social or national economy is in this sense not a single economy but a network of many interlaced economies.… The belief that the economic activities of the individual members of society are or ought to be part of one economy in the strict sense of the term, and that what is commonly described as the economy of a country or a society ought to be ordered and judged by the same criteria as an economy proper, is a chief source of error in this field. But, whenever we speak of the economy of a country, or of the world, we are employing a term which suggests that these systems ought to be run on socialist lines and directed according to a single plan so as to serve a unitary system of ends.

What Hayek is getting at is this: The market order consists of countless individuals each pursuing his or her own aspirations. While each person demonstrates his or her (changeable) ranking of ends through the choices made and actions taken, there is no social ranking of all the ends valued by all the individuals in the society. My desire, say, for a pizza dinner can’t be placed on a social value scale in order to see what it takes precedence over and what takes precedence over it. That simply makes no sense. Society is not an organism with a preference scale, and preferences cannot be compared interpersonally, because for each person preferences are subjective and ordinal.

We can see why Hayek stressed this point. As he suggested, if people think of the market order as a unified economy, they will be more susceptible to central planning, that is, a rational scheme for allocating scarce resources among competing ends. But if market advocates emphasize that there is no single economy — but many, with a diversity of goals — people may be less prone to the central planner’s mindset. “The cosmos of the market,” Hayek wrote, “neither is nor could be governed by such a single scale of ends; it serves the multiplicity of separate and incommensurable ends of all its separate members.”

If the market order is widely understood as consisting of many individuals pursuing through exchange a multiplicity of separate and incommensurable ends, its intrinsically cooperative nature would be harder to ignore and social engineering would be less attractive. After all, if individuals living in society wish to achieve their ends and if force is barred — that is, if these individuals are respected as ends in themselves and not merely means to others’ ends — then cooperation is the order of the day. Hence, the value of the division of labor, specialization, and free exchange, which together raise living standards and make possible the lofty pursuits that would not be possible in the abject poverty of isolated existence.

What goes on in the market order (to the extent it is free) is not the allocation of scarce resources aimed at maximizing social utility, but rather an unending series of exchanges. It is cooperation writ large.

Because of Hayek’s concern to avoid misunderstanding, he suggested that the word economy be restricted to the earlier sense noted above and that another word be used “to describe the system of numerous interrelated economies which constitute the market order.” He proposed that since the word catallactics was used as far back as 1855 by Richard Whately and more recently by Ludwig von Mises to mean the science of exchange, “it would seem appropriate to adopt a corresponding term for the market order itself.” This makes sense, for as Hayek pointed out, “the term ‘catallactics’ was derived from the Greek verb katallattein (or katallassein) which meant, significantly, not only ‘to exchange’ but also ‘to admit into the community’ and ‘to change from enemy into friend’.” Thus he proposed the Anglicized catallaxy “to describe the order brought about by the mutual adjustment of many individual economies in a market.”

This is especially appropriate because Mises contended that it was the prospect of gains from trade that made human beings social beings. Mises wrote in Human Action,

The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man’s reason is capable of recognizing this truth. But for these facts men would have forever remained deadly foes of one another, irreconcilable rivals in their endeavors to secure a portion of the scarce supply of means of sustenance provided by nature. Each man would have been forced to view all other men as his enemies; his craving for the satisfaction of his own appetites would have brought him into an implacable conflict with all his neighbors. No sympathy could possibly develop under such a state of affairs.

Mises and Hayek were not alone in seeking to revive terms related to catallactics. James M. Buchanan, a founder of the Public Choice school of political economy, was also attracted to that term over economics because of its emphasis on exchange. He also liked symbiotics: “The connotation of the term is that the association is mutually beneficial to all parties. This conveys, more or less precisely, the idea that should be central to our definition [of the discipline]. It draws attention to a unique sort of relationship, that which involves the cooperative association of individuals, one with another, even when individual interests are different.” Also, “I want them [economists] to concentrate on exchange rather than choice.”

Mises, Hayek, and Buchanan were onto something important. In the popular mind, economics is a cold, detached study of the Economy, almost as though it were a machine that acts on society. In contrast, the catallaxy is where people who disagree about the value of things peacefully exchange goods and services in a never-ending cooperative effort to improve their lives. It is indeed a community where enemies may be changed into friends.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.