The social phenomena are not ‘stumbled upon’

The recent success-story of Bitcoin is a fascinating example showing that there is a big problem with any evolutionary accounts of social phenomena, like the Hayekian one. To quote Hayek from The Use of Knowledge in Society, 

“The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it.”

Although of course no one ever designed even a fraction of the interactions that have involved bitcoins, that doesn’t mean that people just ‘stumbled upon the Bitcoin scheme. Well, at least not the people who invented it and decided to give it a try. They realized from the start that they were trying to launch a new medium of exchange.

It may be countered here that Bitcoin might have emerged as a normal entrepreneurial innovation but when means of exchange initially emerged their emergence could not follow the same trajectory. However, this criticism is unpersuasive. The first persons who have deliberately exchanged something for what would become a means of exchange in the future, or decided to forgo its consumption in the hope to exchange it into something else in the future obviously realized what they were doing, even though they might not have had the praxeological term ‘means of exchange’ in their minds.

So no one just stumbled upon means of exchange and ultimately money, either. The same holds true of other social phenomena, such as the price system mentioned in Hayek’s quote above. At some point some of those who have been involved in exchanging their stuff into the future means of exchange noticed that other people are doing a similar thing. And they decided to regularize their exchanges, i.e. to quote prices for their stuff in terms of the relevant liquid good. They were followed by others, and the process snowballed. Thus, the price system was born.

However, another interesting question is what got Hayek confused. I think that it was the ambiguity of the word ‘understanding’. We rarely understand any phenomenon completely. Even modern economists have and probably can have only a very general understanding of how the price system works. But they understand about it somewhat more than, say, ancient Romans two thousand years ago. However, can we say that the latter had no understanding of the price system whatsoever? Of course not. Otherwise, entrepreneurship would have been impossible which actually existed in the Roman Empire, too. As Israel Kirzner showed in his works, entrepreneurship involves reallocating inputs for uses that produce more valuable things than are currently produced with them. But the only way this can systematically be done is by reliance on the prices of inputs and consumer goods. And in that reliance, entrepreneurs must understand what prices mean for their particular situations.

The intellectual work of an economist is actually not entirely different from that of an entrepreneur, it only is done at a significantly higher level of abstraction. Whereas an entrepreneur needs understanding of only some relative prices and some preferences and other facts that influence their formation, an economic theorist starts from preferences and other relevant facts in general. But the essence remains the same. The latter observation is especially evident when as an economist one has to study particular business models and try to explain why they work. The entrepreneurs, however, usually make poor economic theorists because, as the vast majority of people, they can only think abstractly in the context of their familiar activity.


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