Norm-based behavior and corporate malpractice

Journal of Economic Issues, March, 2007 by Miguel A. Duran

This spontaneous mechanism of trial and error was mainly used by Hayek to explain the emergence of the norms protecting individual freedom. (1) However, if the historical process that Hayek referred to ever actually happened; it seems to have been lost in the mists of time (Steele 1987, 173-5). If this atemporality pervading Hayek's work is left aside, it could be asserted that spontaneous selection of norms continues to take place in contemporary market societies. Indeed, Hayek's theoretical conception is grounded in the understanding of the market as a spontaneous process. In the context of that process, norm selection and competition are so closely related to each other that they can be thought of as mechanisms forming part of the same selection process.

The driving force of the market process is the interrelation between the actions that the large number of participants in the market undertake autonomously in an attempt to achieve their aims (Hayek [1948] 1980; [1973] 1983, 36-8; 1978, 7197). The role of competition in the market process is to discover the type of knowledge that fits the changing circumstances of the marketplace. Individuals who use knowledge in new ways and pass the test of competition have found pioneering ways to better satisfy their aims. Consequently, these innovative patterns of using knowledge spread spontaneously throughout the marketplace and thus become regular behavior. That is, individuals adhering to successful patterns of using knowledge make new norms emerge spontaneously:

   It is difficult to conceive all the combinations of knowledge and
   skills ... from which arises the discovery of appropriate practices
   ... that, once found, can be accepted generally.... Who will prove
   to possess the right combination of aptitudes and opportunities to
   find the better way is ... little predictable ... The successful
   combination of knowledge and aptitude is not selected by common
   deliberation ... it is the product of individuals imitating those
   who have been more successful. (Hayek 1960, 28)

Therefore, competition is responsible for discovering good quality knowledge, and spontaneous norms are a repository of that knowledge (Fleetwood 1996, 741-6; Vaughn 1999). In this sense, the fact that a way of acting has passed the competition test and has become a regular behavior implies that a new way of using good quality knowledge has been disseminated throughout the market. As a result, since resources and needs exist for practical purposes only, if they and their use are known (Hayek [1952] 1979, 176), wealth increases. That is, "Hayek's faith in the efficacy of social evolution" (Butos and Koppl 1997, 337) entails that spontaneously-arising norms generate material progress. Indeed, innovation in patterns of behavior is one of the reasons why the spontaneous process of the market is "a wealth-creating game" (Hayek 1976, 115).

Wealth creation is therefore explained in terms of an invisible-hand process: desirable collective outcomes are brought about by the interrelation between the independent actions of many individuals who did not intend to produce such outcomes (Ullman-Margalit 1978, 267); that is, far from being in conflict, individuals' aims are the means for social improvement. Nevertheless, not every single outcome resulting from this type of process is desirable (Nozick 1994, 314). As the fallacy of composition shows, there might be an unavoidable gap between the social whole and its constituent parts, so that social and individual welfare do not necessarily have to be aligned. Indeed, the spontaneous market process might sometimes give rise to undesirable outcomes which raise doubts about how much trust should be placed on "the anonymous and seemingly irrational forces" of the market (Hayek [1948] 1980, 24). Recent corporate malpractices can be taken as a paradigmatic illustration of this possibility.