Interesting post on CrookedTimber : http://www.crookedtimber.org/archives/001430.html
free markets may be flawed from a Hayekian point of view ... its quite clear that Scott [an author being discussed] sees the process of state-building as going hand-in-hand with the creation of national and transnational markets. In particular, both states and markets need commonly agreed formal standards (of quality, measurement etc), which allow non-local exchange between people who dont know each other. The historical evidence is emphatic - creating universal standards is an important part of the state-building process, not only in autocratic regimes, but also in more market-oriented societies ...
But heres the rub. Scott very clearly shows that national, written standards are going to be thin. By their very nature, theyre unavoidably going to leave out many of the important forms of tacit knowledge that local, consensual, unwritten standards and rules can incorporate. The Hayekian case for free markets, as I understand it, is based less on the ideal of competition, than the ideal of information exchange; i.e. that markets allow the transmission of tacit knowledge more effectively than formal organizations. But Scotts argument suggests that Hayek on tacit knowledge contradicts Hayek on free markets.1 If you want to have non-local exchange (i.e. properly competitive impersonal markets), you have to do so on the basis of universal standards. But these standards fail to live up to the Hayekian ideal. Ergo, you can construct a Hayekian case against the creation of competitive impersonal markets, insofar as these markets involve the destruction of the kinds of tacit knowledge that are embedded in informal local standards.
For me again the crucial problem here is the proper granularisation of markets. With the right granularity we can have global and local standards, and promotion of the local ones to some more global level when they are effective enough. I think I'll add this to my OnGranularity page. -Zby