The Rational Optimist (P.S.)

by Matt Ridley

It was a description of an entirely fictional world. The concept of a steady final state, applied to a dynamic system like the economy, is as wrong as any philosophical abstraction can be. It is Pareto piffle. As the economist Eamonn Butler puts it, the ‘perfect market is not just an abstraction; it’s plain daft ... Whenever you see the word equilibrium in a textbook, blot it out.’ It is wrong because it assumes perfect competition, perfect knowledge and perfect rationality, none of which do or can exist. It is the planned economy, not the market, that requires perfect knowledge. The possibility of new knowledge makes the steady state impossible. Somewhere somebody will have a new idea and that idea will enable him to invent a new combination of atoms both to create and to exploit imperfections in the market. As Friedrich Hayek argued, knowledge is dispersed throughout society, because each person has a special perspective. Knowledge can never be gathered together in one place. It is collective, not individual. Yet the failure of any particular market to match the perfect market no more constitutes ‘market failure’ than the failure of a particular marriage to match the perfect marriage constitutes ‘marriage failure’. In an exactly analogous way, the science of ecology has an enduring fallacy that in the natural world there is some perfect state of balance to which an ecosystem will return after disturbance. This obsession with ‘the balance of nature’ runs right through Wes...