Spontaneous Order

Somewhere in British Columbia – “Do Not Hump” says the sign on the side of the boxcar. We had no idea why the Canadian Pacific Railway is putting its nose into our private lives. But the authorities are always trying to tell us what to do.

As you know, we’re making our way from Toronto to Vancouver by train. A quick summary of Canadian geography: The vast Eastern Forest gives way to the vast Western Prairie. And then you’re in the vast mountains.


do not humpDon’t ye hump on this train, pilgrims!

Photo credit: Tod Polson


The train chuffs along… hour after hour… day after day. Night after night. The scenery is majestic. It is fascinating. It is endless. We’ll return to our travel update in just a moment…

But first, let us check in with the markets… and continue telling you what we learned from George Gilder’s latest book.

The Dow lost 68 points on Wednesday. Gold gained $11 – to settle at $1,102 an ounce – after sliding for 10 straight sessions. It is up from its five-year low… but not by much. We remind ourselves that we hold gold as a financial reserve, not an investment. Still, it doesn’t make us feel very good when it falls hard.


Gold, spotSpot gold: still going down. However, recently the entire futures curve out to December was in backwardation vs. spot (h/t Keith Weiner). That is rare, and shows that physical demand is actually quite robust at these levels, via BarCharts – click to enlarge.


Gilder doesn’t make us feel very good either. First, he makes us work. He stretches from one dot to another. It can be hard to keep up with him. And he sometimes reaches too far.

The key insight in his latest book, Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World, is that an economy is fundamentally a learning system, not a way for distributing wealth.

So far, so good. But Gilder has a sour side. He attacks our friends Nassim Taleb and David Stockman for reasons that seem trivial. He believes that neither fully appreciates his point. Friedrich Hayek and Murray Rothbard – two leading Austrian School economists – also get a beating.

Rothbard was sure that any government control over the economy would be a bad thing. Hayek was willing to imagine that a minimal state might help hold things together. Both counted on a “spontaneous order” – without government – to create a free, prosperous society.

They’re wrong, says Gilder. But his dots don’t connect. A paradoxical “spontaneous order” troubles him. You can’t have both, he says – order and spontaneity. Then he makes the extravagant claim that “order requires political guidance.”


HayekFriedrich August Hayek: Beginning with his seminal essay “The Use of Knowledge in Society” (1945), Hayek developed his ideas on the spontaneous order. At the root of these ideas were very likely the debates over the socialist calculation problem that had raged between Austrian and Marxist economists between the 1920s up to the mid 1940s. Michael Polanyi also developed closely associated theories on knowledge and the spontaneous order of the market economy – in fact, Hayek and Polanyi appear to have influenced each other, especially with regard to the nature of knowledge itself, much of which is “tacit” and not articulated explicitly by those who possess it. Incidentally, similar to the Austrian economists, Polanyi was strongly opposed to positivism, not only in economic science, but science in general. The notion of the spontaneous order stands in stark contrast to the Marxist and Keynesian belief that the “anarchy of production” in capitalism is somehow bad and needs to be replaced by the “scientific” plans of wise central planners, to be enforced by the government’s police and hangmen for “our own good”.

Photo via Corbis


That is, of course, the point of Hayek’s paradox: Order doesn’t need guidance. And especially not from politicians. When politics guides an economy, the results are always bad. Gilder says so himself. Economies are built on information, not money, he says.

Money – even gold – has no real value except what the economy gives it. Imagine you are alone at the North Pole. You have no food. And no shelter. But you have an ounce of gold. What is that gold worth? Zilch.

This explains why adding to the money supply does nothing for the economy. It’s the economy that gives money value, not the other way around.


Stifling Growth

This explains why zombies and cronies stifle the process of growth and wealth creation. To add wealth, you have to add knowledge. That is, you have to learn to do things better. The trouble with zombies is that they don’t want to learn. Learning is hard. And costly. Zombies just want to take the fruits of someone else’s learning.

Likewise, cronies try to freeze the process of accumulating knowledge. New knowledge – accumulated by others – is threatening. It is what causes disruption. And what economist Joseph Schumpeter called “creative destruction.”

Cronies fear this new knowledge and try to block it from ever happening – with subsidies, licensing requirements, and other regulatory impediments. Gilder believes that this obstructionism is a bigger threat to prosperity than debt.


orderHayek in his younger years, reminding us that central direction simply cannot establish a functioning order, because the required knowledge is widely dispersed among individuals.


When Capitalism Fails

Information, says Gilder, is always surprising. It tells us things we didn’t know. In an economy, the person who is the source of most important new information is the entrepreneur. He is the fellow who takes risks, builds a new business, and then – surprise, surprise – it works!

The cronies want to stop him, before he undermines the value of their old assets and old business models with new information. The zombies want to drag him down, leeching on him so greedily that he runs out of energy.

But without the entrepreneur, capitalism fails. Capitalism also fails when the information the entrepreneur relies upon is distorted. When the feds fiddle with interest rates, for example, they turn the most important signal in capitalism into misleading noise. Gilder:


“[I]nterest rates are noise, rather than signal. Interest rates near zero cause finance to hypertrophy, as privileged borrowers reinvest government funds in government securities. Only a small portion of these funds goes to useful “infrastructure,” while the rest is burned off in consumption beyond our means.”


Gilder believes the signals must move through channels – secured, but not corrupted – by government! Yes, government exists. It is going to provide “channels” – laws, property protection, speed limits, and so forth – whether we like it or not. And it will be better for us all if it just keeps the channels open and free from twists and tolls.

But that is very different from providing “guidance.” Politicians don’t have the information or experience to provide guidance. They are zombies. They don’t want to learn the nitty-gritty details of real wealth building. They should just make sure basic laws – against murder, theft, and fraud – are enforced. And otherwise butt out.


makes no senseHow not to solve the problem of cronyism.


Winding Through the Heartland

Meanwhile, back on the Trans-Canada…

The cities here are rich. An influx of immigrants, mostly from Asia, has boosted the energy and wealth of Toronto, Vancouver, and other large metropolises. Property prices – especially in Vancouver – are among the highest in the world. The restaurants are among the best too. But outside the cities, you might just as well be in West Virginia or Alabama. There is little evidence of wealth or style.

Along the tracks of the Trans-Canada, which is our only reference, houses are modest – or even shabby. Neither agriculture nor forestry appear to be especially rich industries. Particularly disappointing is the domestic architecture. Whether you are in the outer suburbs of Toronto… or out on the plains of Alberta… the style is the same: boxy, boring, and cheap.

In Ontario, stone and wood are abundant and almost free. But people still put up their houses with two-by-fours and vinyl siding – just like they do in West Virginia. These places must be as cold in the winter as they are charmless in the summer. No attempt has been made to create a vernacular architecture appropriate to either the climate or the scenery.

We expected the landscape to be barren, with stunted pines growing on windswept tundra. But most of the land we see is almost lush – either with fields planted in wheat or rye… or thick timber. Some places – especially the open country of Alberta – are particularly pretty. This time of year it looks like summertime in central France, with large fields of yellow or blue, depending on whether they were planted in canola or flax.

Everywhere you look is a stunning vista – either mountains, plains, or woods. But the local builders don’t seem to notice. The house goes up, wherever it is, as if it were in a New Jersey suburb.

“We have a friend whose brother moved to Saskatchewan to farm,” Elizabeth reminded us. “Do you remember?” We did not.

“Yes you do. He was Dutch. He and his wife left the Netherlands. They lived in Winnipeg. And he farmed some large fields outside the city.

“But we heard that they gave up. It was just too isolated and boring.”

Like the heartland of the U.S., there is little to do in these small prairie towns. Few restaurants. Few good liquor stores. No theater. No cultural attractions. They wouldn’t appeal to everyone.

We are now winding our way through the mountains of British Columbia. As usual, the scenery is superb. We sit in the dining car and our mouths drop open. The Thompson River… the Rainbow Canyon – Canada has some of the most spectacular natural beauty we have ever seen.


The mountains of British Columbia – spectacular natural beauty…

Photo via pixgood.com


Image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.


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2 Responses to “What’s Really Killing Capitalism”

  • Kafka:

    On your trip across Canada you passed by my business. Now completely shut down and abandoned. 50 full time employees in a small town with no work. After 2008 Canadian governments quickly circled the wagons to save their friends. First they saved the banks, by buying up dubious mortgages, to put cash into the pockets of power in Toronto. Then they saved their other connected friends. One of my competitors got a $12 million “loan” secured by nothing. In the forest industry fees for cutting (stumpage) was reduced to zero for large companies while small businesses were left to choke on overpriced wood.
    Canada is entirely government driven. You need quota to sell or buy almost everything- timber, milk, chicken, etc. Your business is worth what the quota is worth. You cannot have a cow and sell the milk- they will put you in jail.
    And look it up. Canadian government debt, when you include the provinces, especially Ontario and Quebec, (because Canada is a federation), is more than double, approaching triple, what is stated to the public.
    That keen eye of yours noted the exceptional scenery but missed the underlying reason why the homes were so plain. Private sector, non-government, non-crony businesses and people, are staggering under the weight of a corrupt system. Canada is a mirage and that is all you saw.

  • therooster:

    What’s Really Killing Capitalism ?

    I typically turn to a somewhat academic answer that says “debt”, but I must give credit and applaud the notion of limited knowledge and the limited awareness of debt as the major contributing factor. The problem here is that this is an observation in hindsight and we must really contend with this moment and then proceed forward.

    Any professional in marketing can tell you that a habit is a difficult thing to change. Much like dealing with a donkey that may be reluctant to take “the carrot” (knowledge), sometimes “the stick” has to be applied.

    People can move toward bullion as a sense of wealth and wealth preservation, based on pain or pleasure. Does it matter why ?

    It is in God’s great judgement that He has incorporated the influences of the the carrot and the stick in his great plan for economic salvation (and more). Unfortunately, the “way of the stick”, which , IMO, is a “plan B” could be a “necessary evil”.

    Gold and silver are now real-time floating currencies, debt free and with fully expandable liquidity, thanks to the age of information.

    The age of information is like a new wineskin and we should now know that we cannot pour new wine into old wineskins.

    Give thanks and act.

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