I participated in a symposium on Friedrich Hayek last week, hosted by the Legatum Institute in London, where some fifteen young scholars spent a day discussing the practical implications of Hayek’s political and economic thought for contemporary policy debates—the financial crisis, health and education, or child care. One contribution that stood out, in my opinion, was by a young writer and activist based at the University Francisco Marroquín in Guatemala, Zach Caceres.
In his short paper, Zach provided a clever metaphor for thinking about the practical role of markets in human societies, based on the short story by Jorge Luis Borges, “The Library of Babel.” Borges there outlines the idea of a library of all possible 500-page books. These would include a 500-page book with all pages blank, a book with only the letters “a” written in it, and so on and so forth, but also various great works of literature, past, present, and future. As Zach puts it,


 [t]he vast majority of the Library of Babel is, well, babble. The library contains acomplete list of all possible combinations, and as you might expect, most of those are nonsense.
[…]
We have a big problem in the library: it’s hard to find the books that make any sense in the mass. The readable novel gets lost in the sea of babble.
The library can be seen as a metaphor for the complexity of the order of social organization. There is a vast number of potential business models, institutions, ways of addressing coordination problems or individual needs. Most of them will fail but some may lead to great improvements in human welfare. How do we navigate such complexity? As in Borges’ Library,
any “book” chosen at random will almost certainly be noise rather than signal. It will be non-adaptive and fail. The challenge for agents, and for the system as a whole, becomes: how can we search these libraries of possibility for the signal in the noise, as quickly as possible?
Drawing on Hayek’s idea of competition as a discovery process, Zach makes the case that market competition is a way of navigating the “library” and thus addressing what he calls “the Problem of Possibility.” Quite independently of questions of economic efficiency—or even of the use of local knowledge—competition and creative destruction of markets are tools that let us sift through the enormous numbers of possible ways of organizing human activity. Competition enables to progressively discard volumes that are just babble and keep those that contain valuable information.
This is not to say that competition is the only tool. In their everyday lives, most humans—including entrepreneurs—do not need to envisage all the possible ways of solving social problems. We quite consciously limit ourselves to what we know, what has been tried, and what is permissible under the existing systems of formal and informal rules. In other words, we close ourselves off to many of the existing parts of the “library.”
Economic regulation, for example, can close off whole wings of the “library,” for better or for worse, as can injunctions against certain forms of conduct based in tradition. It may well be that there are very good reasons for discarding those parts of the “library” but one suspects that the abundant statutory regulation existing in advanced industrial economies is keeping us from some potentially valuable finds.
In the end, the point of Zach’s essay (and of Hayek’s lifetime work) is not to argue for market competition unrestrained by any rules. Rather, it is to call for rules that enable individuals to harness the power of markets—using trial and error, competition, and creative destruction—to search through alternative models of social cooperation:
In short, Hayek’s classical liberalism is not just a commitment to private property liberalism per se. It’s a commitment to a higher-level rule about building systems that allow humanity to cope with uncertainty, ignorance, and “the Problem [of Possibility].”