Complex Systems Work Only Through Long Chains of Incentives

One of the many arguments in favor of free markets is the decentralization of knowledge. Perhaps the best illustration of this is Leonard E. Read's essay "I, Pencil".

In it, he basically shows how no one man can make a pencil. An object seemingly so simple actually requires the diverse knowledge and cooperation of millions of people, most of whom who have never even seen each other.

But it occurs to me that no less important than the knowledge of how to make a pencil is the motivation it requires. Incentives. Think about the fairly routine task of buying something in a shop. Odds are, it wasn't produced in the shop itself, but was delivered. Sometimes across half the world.

The only way this works is because everyone along the way, from the truck drivers and delivery people to the people who built their trucks and their roads, is self-interested. They don't care about your pencil, but they do care about eating, and sleeping under a shelter. And on a free market, those come only through the creation of value for others.

The labor of countless millions is embodied in a single, simple transaction of buying, say a pencil. Or soap. Or pretty much anything.

Think for a moment how difficult it would be to make something of value from scratch. From scratch! No tools, no materials that anyone else has made. Nothing. Most people would be utterly stumped. Perhaps only some survivalists would know how to make some basic things using their hands and whatever they can themselves fashion.

So when someone, say a petulant meddling bureaucrat, comes along and intervenes, disrupting this long chain of incentives, things go very, very wrong. Further laws are then passed to rectify the failures of the initial intervention, and this continues until the entire complex system is so disrupted and perverted that it no longer has any resemblance to what it would look like on a free market.

Then, opponents of free markets take this broken system, and present it as a failure of free markets. And that's pretty much the entire section on "market failure" in modern economics textbooks. Talk about straw man arguments.

The economic systems that provide us with all the wonderful things we are used to are so complex and inter-related that no amount of modelling or simulation is possible. The free market must either be left as is, or be disrupted and savaged by useless busybodies in government and their legions of fans outside it.

Markets are both fragile and not. Even the smallest intervention will disrupt them and cause unintended consequences, but even the most insanely tyrannical one will not stamp them out completely.

In the end, markets are only as bad as the government legal framework makes them.