2. Reason. An economic system must organize practical details in a reasonable manner. “It promotes invention and fresh ideas. It strives constantly for better forms of organization, more efficient production, and greater satisfaction. It plans for the long run as well as the short. It orders materials, machines, producers, salesmen, and consumers. It organizes means and ends. It constantly studies itself for improvement.”
3. Continuity. It is continuously calculating profit and loss, starting new enterprises, abandoning others, changing and growing. It is a system in flux. It exists in time. It is not an immobilized structure.
4. Impersonality. Market exchanges are impersonal. A business executive does not need to know the life history of another executive in order to transact business—only the things necessary to promote a successful deal. Likewise, money is totally impersonal. It acts as a medium of exchange, a store of value, a coding mechanism for the innumerable financial transactions which make up a nation’s information processing system—its economy. All coding systems for information transmissions must be, by their very nature, cold and impersonal, otherwise they would be too cumbersome to use.
5. Stable Networks of Law. These are the rules by which a system operates. They include rules for making rules. Without them there is chaos. With them a system has time to anticipate and account for necessary changes within itself. For example, corporate law permits more complex economic associations of individuals to exist over a longer period of time. It allows for the development of “small economies” within the larger economy, encouraging the growth of those associations that multiply the economic effectiveness of each participant.
6. Cities and Towns. By providing physical proximity, these permit the development of dense networks of cooperation by thousands, and then millions of people. Cities and towns assist economic systems in their efforts to revitalize themselves. Students are further educated, technologies are invented and developed, markets are creates, corporations are restructured, and management styles are updated. A system that is able to monitor subsystems, absorb the results, and then act accordingly, must change itself in ways that would shatter more traditional social systems.
Jane Jacobs examines the economic power of cities in “Cities and the Wealth of Nations.” Economic expansion needs an absolute minimum of widely diverse people who trade goods and services, exchange information and ideas, and stimulate one another’s creativity in a core area. In cities, networks of exchange grow in size and become thick with tangled interconnections. As a result, individuals and small firms develop their productive capabilities and link together to form economies of great wealth and power.
“Cities that replace imports significantly replace not only finished goods but, concurrently, many, many items of producers’ goods and services. They do it in swiftly emerging, logical chains. For example, first comes the local processing of fruit preserves that were formerly imported for which there was no local market of producers until the first step had been taken. Or first comes the assembly of formerly imported pumps for which, once the assembly step has been taken, parts of imported; then the making of parts for which metal is imported; then possibly even the smelting of metal for these and other import replacements. The process pays for itself as it goes along.”
Once the core group is established, the number of people, businesses, and jobs explodes. The city rapidly expands the production and export of its own manufactured goods while importing new goods from the region and elsewhere.
Why explosive growth? “In real life, whenever import-replacing occurs significantly at all, it occurs in explosive episodes because it works as a chain reaction. The process feeds itself, and once well under way, does not die down in a given city until all the imports that are economically feasible to replace at that time and in that place have been replaced.”
City imports must be earned because the earning process itself teaches suppliers what they need to know in order to create new wealth. “Development cannot be given. It has to be DONE. It is a process, not a collection of capital goods.” As suppliers respond to cues from the economy, feedback loops of extraordinary power form.
Feedback, in economics or biology, always governs a specific responding mechanism. There is nothing discretionary or flexible about it. If one thing happens, another very specific thing must then happen. Feedback systems can be found at work in respiration, thermostats, prices, and traffic patterns. Where feedback is blocked or distorted, the responding mechanism will fail. A whole chain reaction of inappropriate changes will result.
Lima, Peru is an important real-world experiment in the destructive power of ill-conceived government regulations versus the creative power of self-organization. Could people, neglected or deliberately excluded from a legal economic system, arrange their own affairs unguided and unorganized by government, labor unions, large corporations, or any other central authority? Hernando de Soto discovered that the answer is an unqualified yes, and explains why in his book, “The Other Path.”
Discriminatory and arbitrary government rules and regulations destroy wealth-building processes precisely because they are enforced so capriciously and unequally. The would-be economic actor has no idea where he stands, gets no feedback and is sabotaged in his efforts time and time again. It’s as if the government took a growing sugar crystal, smashed it, then complained because it stopped growing.
In 1983, de Soto tried to get official permission to open a clothing factory, the kind that Americans would set up in an unused room in the basement. It took his group 289 days of full-time work to complete the forms, lobby the bureaucrats, and cough up the bribes (24 solicited, two paid). They incurred $1,231 in expenses (the Peruvian equivalent of 32 minimum monthly wages back then).
He also discovered that if a private group wished to build low-income housing legally, they would have to work their way through six years and eleven months of bureaucratic mazes and spend $2,156 per person—if no bribes were paid.
Barred from legally taking residence and setting up shop in Lima, the people from the countryside created their own legal, economic, and social system—the informal society. The informals began typically with a few farmers’ huts. New people—friends or relatives of the original settlers—built next to the old huts. Finally, the new settlement took over the whole area.