The Invisible Hand in the Self-Organization of the Market
I have previously discussed some instances of the deprivation of ordinary life, and the debate on the benefits of a planning economy in the 1930s. At the time, the views of Friedrich Hayek (1899-1992), who envisaged the limit of the planning economy and computability, were not well regarded, but 40 years later he was awarded a Nobel prize, and many socialist regimes have now broken down.
His philosophy has also provided a justification for financial globalization. It is important to appreciate that Hayek (1945) discovered an important function of the market, and revealed the potential exchangeability of supply and demand. This can be visualized as the creativity of the market (Mainzer 2007, VII, p. 230).According to Friedrich Hayek, markets themselves are centers of creativity, because they serve as procedures to discover the opportunities of goods. The coincidence stands thereby at the beginning. In this sense the market knows more than the individual producers, salesmen and customers who form the market.
Hayek depicted the effects of this function at an earlier stage of the market economy. As history shows, market expansion never creates harmony. In this sense, the invisible hand does not work at all in the later stages of market development. Hayek did not refer to changes in trading technology as a cause of changes to the meaning of the market. I will discuss this further in Chap. 5.
The over-expansion of the market cannot be checked by the market itself in an industrial society, but above all we have seen the over-expansion of the financial market. This can lead to chaos, which is easily discernible in modern financial markets. A series of new financial commodities results from co-mingling option dealings and computation, as Arthur (2009) stated. This accompanies a vertical integration of the market as well as a much higher density of financial circuit.
According to econophysics, the market economy is usually used to produce a power law distribution of price fluctuations, share holdings, capital size, and sales, which is characterized by a ‘heavy’ or ‘fat’ tail. This distribution implies that it holds scale-free property at all points. A kind of polarization evolves rapidly at every step. Consequently, we see strong vertical integration in all market networks. This kind of vertical integration leads to a monopolistic concentration, with just a few winners and many losers. The modern economy can therefore be considered as ‘winner-takes-almost-all’, borrowing from Frank and Cook’s (1995) term ‘winner- takes-all’.
Hayek’s self-organization, triggered by a creative coincidence of the market function, however, tends towards a special distribution with a heavier tail than that of a Gaussian distribution. Put another way, his self-organized market is often doomed to develop into a vertically integrated economy, heavily biased towards the financial elements. Paradoxically, the result does not have an affinity for market efficiency. A modern financial circuit cannot guarantee either market or system stability. Selforganization can happen automatically, and a self-organizing process produces more than the sum of its parts. Drawing on Klaus Mainzer (2007, p. 171), cancer is a kind of self-organization, whose full evolution implies the eventual death of the human body. By the same token, self-organization can also lead to the death of the market.
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