Hayek and Central Planning
As I’ve posted about earlier, to understand why socialism must fail, you need to understand Hayek’s argument (which he drew from Ludwig von Mises and elaborated on) that the information that’s most valuable is information held in the hands of millions of individual actors. A central planner simply cannot have the information needed to plan an economy well.
I had thought this was part and parcel of what pretty much every economist knew. But I’ve been reading the back and forth between Bryan Caplan and Brad DeLong and I realize that that’s not true. DeLong wrote a brilliant review of James Scott’s Seeing Like a State, a Hayekian book, and credited Hayek for Scott’s insights in a way that Scott didn’t credit. (Incidentally, I think this is one of the best things DeLong has ever written.) Yet, in this latest debate, DeLong shows none of that understanding. He seems to think that the way to get growth is to have more technology or more capital, and doesn’t seem to think it matters whether that more technology and more capital exists in a free market or in a centrally planned economy. DeLong aggregates capital and labor in one function to yield output. Put aside the fact that capital and labor cannot be aggregated. The bigger problem is that central planners must think in aggregates, which doesn’t allow for local knowledge.
Here’s one of the key paragraphs in Hayek’s Use of Knowledge (paragraph H.16):
This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”
I think DeLong is right that this is the way the late Paul Samuelson was thinking in making his way-off predictions about economic growth in the Soviet Union. And that’s the problem.