Liberalism begins from the fact that people pursue different, and revisable, conceptions of the good life. Rather than directing people toward some collectively chosen end, the liberal state governs through general rules. Economic success, on that premise, is a matter of capacity. I previously defended GDP as the best scalar proxy for a society’s ability to solve problems: an economy with more output can devote more resources to almost anything its members decide they care about. GDP is, in this sense, a liberal measure. It measures the means available for pursuing different ends, but leaves people to decide which ends to pursue.
This capacity, which comes from a combination of labor, knowledge, and resources, furthers particular human ends that emerge through cooperation. People combine what they have in order to serve one another’s interests; in return, they earn the means to act on ends of their own.
At the scale of an economy, that cooperation stretches across millions of strangers whose aims, knowledge, and opportunities to act are constantly shifting. This creates an informational problem because the knowledge it would take to make existing plans effective and compatible is scattered across many people. But the goods people value change as new possibilities come into view.
Market institutions form the default economic expression of liberal commitments because they allow open-ended cooperation to proceed at scale without relying on serving different purposes through a collective, and often coercive, plan. Instead, prices enable the plans of many parties to adjust to circumstances unknown to their authors, while rival experiments create knowledge about what people will come to value, and of how their ends can be served.
Cooperation Without Agreement
People’s differing purposes generate two related conflicts. First, ineradicable scarcity makes other people’s plans obstacles to one’s own. This creates an incentive to use violence to settle conflicts. Since people have to pursue their ends alongside one another, some political order is required to mediate between competing priorities. Second, concentrating force in the state means that whoever controls it can force others to serve their own goals. Hence the need for a liberal political order that confines collective power within general rules under which rival plans can coexist.
These conflicts are most acute in economic life, where every act of production commits scarce resources to one purpose at the expense of others. Giving an authority the power to rank these ends would reproduce in economic life the political problem liberalism exists to contain.
The liberal answer to the problem of coordination is to extend the distinction between general rules and particular ends into economic cooperation. Law establishes general and knowable rules (for example, around contract enforcement and taxation) within which people can cooperate, but doesn’t specify what they must cooperate to achieve. So if others have chosen to pursue some project of which you disapprove, you can refuse to participate, or criticize it and organize an alternative. But if they are acting within those rules, you are not entitled to prevent others from cooperating.
Exchange narrows the scope within which agreement is required. If someone wants to open a restaurant, they do not need a collective answer to the question, “Should this restaurant exist?” Instead, assent is fragmented; they need only strike a series of narrow bargains on terms the other parties are willing to accept. Will a landlord rent a building at a price they can afford? Will employees accept the wages and hours on offer? Will someone supply the ingredients at a price that makes sense for the restaurant? Will customers pay for the meals? Nobody has to share the owner’s enthusiasm for the cuisine, still less agree that this particular restaurant advances a collective good. The landlord may just care about the rent; the cook, his wage or the satisfaction he derives from his work; the supplier, a reliable customer; the diner, dinner. Their purposes meet during this exchange while remaining different everywhere else.
This dynamic also limits what any participant may demand of others. People are free to pursue their plans, but they are not entitled to other people’s cooperation. A worker’s desire for a job does not require any particular employer to create one, nor does an employer’s desire for labor require any worker to provide it. This reciprocal constraint applies to every exchange, not only labor. If my project requires something another person controls, that thing does not become mine simply because of the importance I attach to my end, any more than their need for what I can offer obliges me to provide it. Other people are therefore not encountered as resources I can just appropriate; they enter my plan as independent conditions of its success, whose cooperation I must earn. A market gives me the freedom to propose a plan, but not the authority to realize it. I must make its pursuit responsive to the will of others.
The narrowness of these agreements is what allows bounded cooperation to extend across an entire economy without turning everyone who takes part into members of a single enterprise with a shared purpose. People may of course choose to enter purposive and hierarchical organizations, including firms where they agree that someone else will decide what they do over a specified domain. But outside that domain, the employee remains free to spend their wages however they like, use their time for other purposes, and support causes not shared by the firm.
A liberal economic order must therefore both leave people free to form plans without collective agreement on their ends, and somehow reconcile the competing demands those plans place on scarce resources. But across billions of participants pursuing complex and changing designs, no individual or authority can survey all the relevant claims and circumstances, or decide which ends should yield to which. How, then, do conditions elsewhere in the economy register within each person’s plan, without common knowledge or purpose?
Known Unknowns
Such coordination is possible when these local agreements take place within a market: an institutional setting in which many buyers and sellers transact and their competing offers give rise to prices. Hayek’s example is tin. If tin becomes scarcer, or more urgently wanted elsewhere, its price increases. Each user must decide whether to pay more, use less, find a substitute, or stop; those decisions alter demand for other inputs, whose prices may change in turn. No one needs to understand the whole chain of consequences. Knowledge can therefore remain dispersed while people adjust separately, and the plans become more compatible.
The tin example isolates only one part of the problem. It shows how prices help people adjust plans and possibilities that are already in view. However, we cannot assume that consumers know what they want, producers know what can be made, uses for tin have already been imagined, and the plans in which it figures are already specified. Much of that knowledge does not exist yet, for economic life also involves discovering uses, products, and purposes that nobody has yet conceived. Economic coordination therefore involves two unknowns that cannot be settled in advance. These are what can be done with scarce resources, and what people will come to want as the range of possibilities expands. The possibilities themselves have yet to be worked out; means and ends emerge together through the process of market discovery.
Hayek later extended the argument in his account of competition as a discovery procedure. Here, the price system doesn’t only coordinate among known possibilities; it directs search effort toward areas where demand is strongest. If tin becomes more expensive, a method that uses less of it becomes more valuable. The higher price doesn’t communicate those solutions, but it creates a signal that it is worth searching for them.
Because the possibilities concern what can be done with scarce means, this search often has to take the form of an experiment. A new method can be theorized, modeled, or simulated beforehand to some extent, but eventually resources have to be committed: the restaurant has to open, the machine has to run. Putting the method into use can reveal costs that differ from projections, and customers may use the product unexpectedly or not at all. These experiments therefore reveal possibilities that could not have been specified beforehand. The textbook picture has markets choosing from a complete menu of possible plans. But part of what competition discovers is what the options are; there is no menu.
Were human ends fixed independently of this process, the story could stop here. Market competition would amount to an expanding search to discover new ways of satisfying settled wants. But new possibilities also create choices that did not previously exist. Just as producers do not know all the ways consumers’ ends might be served, a person cannot have a settled view about every good or form of life before it becomes available to them.
Experiments in Wanting
The second unknown concerns what people will come to want. Sometimes experience tells us whether something suits a preference we already have. But experience can also develop new interests and standards by which we judge what is worth doing. In those cases, learning about a possibility helps form the preference we later express.
This is the same epistemological structure underlying Millian “experiments in living.” If people are agents capable of forming, revising, and pursuing their own ends, then the knowledge of what kind of life suits a person is not available in advance, not even to that person. In trying a way of life, one can develop the interests and abilities through which it becomes valuable to one. People are therefore both learning about themselves and changing through the experience.
The knowledge is not separable from the practice: we may often have a good idea whether a way of life would suit us, but some judgments can only be tested through experience – by taking up an occupation or joining a community and finding out how it goes. Individual freedom is therefore not merely a political accommodation for people who already know what they want. It is a condition under which that knowledge can come into existence. Economic freedom belongs within that broader liberty because production and exchange are among the ways people encounter new possibilities and learn what place, if any, to give them in their lives.
Imagine asking someone living in 1900 how much they would pay for a smartphone. They might already value communicating with friends, staying up to date on news, and being entertained. But that does not mean they had some pre-existing willingness-to-pay for a device they had never encountered. Someone who bought one simply to stay in touch might start taking photographs, learn to notice light and composition, and come to care about making good pictures. What began as a convenient way to communicate could develop into an interest that changes how they spend their time. To say that consumers later revealed a preference for smartphones is true, but that only reveals a choice among the possibilities confronting someone at that moment, not a ranking they carried before the possibility existed.
The story doesn’t end after a purchase is made. The buyer may be pleased with it, or discover a use they had not expected. But the experiment may also disappoint: someone can discover that they dislike what that purchase brings into their life. Each outcome supplies information, both to the producer about demand and to the consumer about their wants. Liberalism doesn’t depend on the assumption that people’s choices are good for them – regret and revision are part of the discovery process. What matters is that neither an individual nor an external authority can reliably know the result before the relevant experience occurs. Leaving the choice with the individual preserves the freedom to try, withdraw, and try differently – to notice errors and correct them, rather than substituting an equally fallible but less corrigible judgment, backed by authority, for the individual’s own.
Markets therefore do not match a fixed list of means to a fixed list of wants; they allow both to be worked out through exchange. Moreover, once such a match is found, the knowledge need not disappear with the transaction that revealed it. It can be embodied, and thus become part of the productive capacity from which later experiments begin.
From Discovery to Growth
Exchange separates the ends people serve from the ends they pursue. Someone who wants a Porsche doesn’t need to build one; instead, they can become a surgeon or an engineer, supply something others value, and use the income to command the labor and materials a Porsche requires. It is through this separation, between the end served and the end sought, that we get division of labor and specialization. People can spend whole careers solving problems for strangers, building up knowledge and abilities they would have no use for if not for someone else’s ends. The price signals that direct production in the present also inform which productive knowledge is worth acquiring for the future.
These gains can accumulate when knowledge is preserved and passed on. In a market, the gains from finding a better way of doing something give people reason to preserve and extend it. Techniques can be built into machines, encoded in software, absorbed into routines, embodied in standards. What once had to be worked out becomes part of the organization of production itself – something the next person can simply begin from.
As productive knowledge accumulates in skills and capital, higher productivity increases real incomes, creating a larger market that can sustain further specialization. A producer may find it worthwhile to concentrate on a narrower task, or to develop a method whose cost could not have been recovered from a smaller volume of sales. Since these gains are retained, subsequent experiments can build on these new capabilities – and the new possibilities they open up keep reshaping what people find worth pursuing. Where that feedback loop is sustained, gains compound upon gains, contributing to the extraordinary, sustained growth in real GDP per capita since the Industrial Revolution.
But if markets also shape the ends they satisfy, then growth may look less like the discovery of human ends than a self-amplifying process that manufactures the demand it satisfies. And if productive experiments can impose costs on people outside the exchange, what registers as success may fail to fully reflect these consequences. Both possibilities turn the argument toward institutions: what rules preserve the autonomy and decentralized experimentation on which the case for markets has rested?
The Constitution of a Market
Galbraith made the first of these objections, in a form he called the dependence effect: through advertising and salesmanship, producers influence what people want in order to sell to them, rather than satisfying wants they already had.
The fact that markets influence preferences does not, by itself, tell us whether that influence supports or impairs people’s ability to choose. Nobody invents their ends ex nihilo: friends, schools, technologies, communities – and yes, the market – all shape what people come to want. No preference arises independently of outside influences. Indeed, I argued before that a new possibility could hardly become part of someone’s conception of a good life without first affecting it. Hence Hayek’s reply to Galbraith: that advertising is only one such influence among many.
The relevant distinction is not whether preferences are influenced – they always are – but whether that influence impairs people’s autonomy: their ability to assess their wants, revise them, and act on their own judgments. Deception can undermine autonomy by distorting someone’s understanding of what they are choosing; coercion can undermine it by preventing them from refusing or changing course. Practices can impair this ability without deception or coercion. A service might repeatedly prompt users to override limits they have set, while burying the controls for reinstating them. Continued use would not by itself show that users had reconsidered those limits. What matters is that people remain free to encounter alternatives, test their wants against experience, and revise them in light of what they learn. A market can therefore succeed at selling something while failing to preserve the freedom on which this defense of markets rests.
The same requirement applies to production. If a method only appears cheap because some of its costs are shifted onto people outside the exchange, the price carries misleading information – it no longer conveys the full cost of the experiment. Rules assigning liability, defining force and fraud, governing externalities, and so on, can be compatible with a market order – indeed, a market order is constituted by such rules, established and enforced by the state. What matters is that they sustain the conditions under which productive experiments can be run and corrected, rather than determining their ends in advance1.
Selecting Experiments
Under general rules, people can try things, cooperate where it suits them, and find out what works by how others respond. But coordination is only part of what markets achieve. New possibilities and ends are discovered, generating the knowledge from which later choices proceed and the productive capacity from which later experiments begin. The result is sustained economic growth that leaves people increasingly able to pursue the ends they come to value.
But discovery alone cannot tell us which possibilities to prioritize. Experimentation does not abolish resource constraints. Scarce labor and capital cannot sustain every conjecture at once. Some experiments must attract more resources, while others adapt and come to an end. Rival experiments must therefore be selected as well as attempted. A sale tells us that somebody valued what was produced; it does not by itself tell us whether the labor, capital, and materials consumed in producing it could have served other purposes better. For that we need a way to compare what an experiment creates with the opportunity cost of the scarce means it uses2.
The liberal case for markets is that a plan does not need collective agreement on its end; through exchange, it can instead obtain the particular cooperation it requires from people acting for reasons of their own. Rightly constituted, markets connect Hayekian discovery to Millian experiments in living: people can draw on growing productive capabilities as they figure out how they want to live. To serve that purpose, markets must also preserve people’s ability to reconsider the wants they help form.
This essay is by Aashish Reddy, a Researcher at Cosmos Institute. It is the third piece in a series on liberalism, hosted on his Substack. The first gave his account of liberalism; the second defended GDP as its measure of economic success. Later essays will examine profit, capitalism, NGDP targeting, and inequality.
Cosmos Institute is the Academy for Philosopher-Builders, technologists building AI for human flourishing. We run fellowships, fund fast prototypes, and host seminars with institutions like Oxford, Aspen Institute, and Liberty Fund.
Again, one cannot specify ex ante exactly what set of rules are compatible with a liberal order. It is for this reason that, despite the title of this section, I do not favour actual constitutions laying down the law, saying what kind of intervention is and isn’t legitimate (I will discuss this further in later pieces). Still, we can give rough criteria for what kind of rules are more or less adaptive given this criterion: rules are on the “sustaining” side to the extent they (a) are general and don’t target particular firms or products (b) operate on the conditions of exchange — liability, disclosure, enforcement — rather than fixing a quantity or price directly, and (c) preserve the possibility of rival plans continuing to compete rather than foreclosing certain experiments outright.
That is coming next: A Liberal Defense of Profit