If an economical system manages to diversify and increase its complexity above a certain critical level, it undergoes an explosive increase in growth and creativity. This is called economic take off and is a kind of spontaneous self-organization. In market economies, this self-organization creates equilibrium between supply, demand, and prices. Diminishing returns ensure that no company or product can grow big enough to totally dominate the market. The reason is that the more you do of anything, the less useful, less profitable or less enjoyable the last quantity becomes. This happens with nobody in charge or some kind of conscious planning. People satisfies their needs by unconsciously organizing themselves into an economy through buying and selling. They will respond to every situation by optimizing their economical utility, just as a physical particle will respond to any given set of forces. Although each individual is striving only for his own profit the market works as if the participants were collectively acting to maximize the sum of consumer and producer surplus. Theoretically, man is a being whose reasoning always is considered to include and promote his predictable self-interest. By this behaviour, man in a market economy often is called “The Economic Man”.
Large interacting ensembles of people exhibit collective behaviour quite different from what is expected from simply scaling up the behaviour of private individual. But the micromotives of the individuals sometimes leads to macropatterns that are not desired by any of the individuals.
Social and environmental side effects of the competition in a free market are inequality. Losers pay a high price and winners achieve huge privileges. The alternative, centrally planned production and distribution, has, however, proven to be completely disastrous with its lack of feedback and unhealthy bureaucracy.
Attempts to handle side effects of a free market are achieved by implementing legislative regulation, tax redistribution, subsidies and public service. But all this also take on a life of their own and undergoes self-organization. High taxes inhibit economic growth, generates unemployment, lower tax revenues and create hugh costs for welfare. All industrialized economies today seems to run deficit. Meanwhile, a majority of voters demand for lower taxes and more welfare.
Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.