Don Lavoie on the Continuing Relevance of the Knowledge Problem

Lavoie reformulated and clarified the knowledge problem as developed by Ludwig von Mises and Friedrich Hayek, took to task the various proposals of the day calling for more state control, and articulated a radically liberal alternative.

You might think we know all there is to know about the knowledge problem by now, but as it turns out, the proposals of the 2020s don’t differ all that much from the proposals of the 1980s, and Lavoie’s knowledge problem remains just as relevant as ever.

What do you know about the knowledge problem?

Now, everyone knows what the knowledge problem is: central planners lack access to all the knowledge necessary to comprehensively plan an economy. And most everyone accepts the knowledge problem on this reading (everyone except for market abolitionists). Here’s how Lavoie puts it:

• Comprehensive planning, the classic doctrine of planning advocates, seeks to achieve economic coordination without relying on the contention of separate decision makers with one another; it thereby deprives itself of access to one of the most important sources of knowledge exhibited by these kinds of orders. Just as in biological competition, there is the ‘information bearer’ function of DNA, so in the society of Tradition, this function is further served by such developments as language and culturally acquired techniques and habits. In the society of Market, profit and loss signals are added to this array. In the society of Planning, there is no new information bearer and those of the Market are discarded. It is this lack that gives the knowledge problem argument its force. (86)

But a major point of Lavoie’s “National Economic Planning: What Is Left?” was that the knowledge problem rules out not only comprehensive economic planning (nationalizing entire industries and total state ownership over all the means of production), but also non-comprehensive economic planning (targeted state ownership, subsidies, price and wage controls, tariffs, quotas, monopoly privileges, and other policies distorting price signals). This is the sort of economic planning most people support today (even those self-avowed “state socialists” who nevertheless imagine more welfare state than communist state), and it’s probably even more commonplace than in the 1980s because the fall of the Soviet Union dealt a significant blow to the case for comprehensive planning, turning its less radical cousin into the moderate, reasonable-sounding alternative.

Lavoie showed not only the knowledge problem’s continuing relevance, but also its more expansive, even radical, implications. The knowledge problem is not unique to certain groups, ideologies, or even institutions. The knowledge problem afflicts all human action. Our reason can lift us to unbelievable heights, but we’re still inescapably bounded, limited, and ignorant. The question is the extent to which certain practices, procedures, and feedback mechanisms help alleviate or exacerbate the knowledge problem. Our goal is, well, to accomplish our goals. But neither the best means to our goals nor the full ramifications of our goals are automatically known (or necessarily knowable!). There is a chasm between our intentions and our consequences–not always an unbridgeable chasm, but a chasm that can often be widened or narrowed depending on what tools we use. And since our goals all simultaneously draw upon the same shared reservoir of scarce means (the time, materials, and ingenuity which may always serve alternative ends), it becomes more and more difficult to even see how wide or narrow the many overlapping chasms are, let alone “measure” them or compare them against the chasms implicit in other potential goals. Selecting from our infinite array of means and ends the most efficacious among them, or, more accurately, merely figuring out which arrays’ chasms between intention and consequence are wider or narrower, is a problem for which we need knowledge. This is the knowledge problem: achieving efficacy in the face of uncertainty, or more accurately, continually telling the efficacious from the inefficacious and trying to adjust accordingly.

This is why the knowledge problem wasn’t made irrelevant with the collapse of comprehensive planning. The knowledge problem is part of the human condition, points to a general feature of human decision-making, and will remain an everlasting consideration in comparative institutional analysis. Our lack of omniscience is omnipresent; hence our reliance on various social devices to help guide our means/ends selections, from the more explicit signs of speaking, writing, voting, and/or polling to the more implicit signs of associating, giving, and/or trading (including the resulting prices). This list is far from exhaustive and the listed devices are far from mutually exclusive. It’s hard to even imagine a society relying on any single one of them, rather than a varied mix of them at different levels, in different contexts, and on different margins. Of course, those concerned about the knowledge problem tend to place special emphasis on a device that is uniquely useful, but also uniquely misunderstood and threatened, a device which many states tried to violently abolish in the 20th century and continue to coercively interfere with today: the price system.

Prices have a number of useful features such as 1) bundling material incentives with its signals (and thereby turning the signals into scarcity indicators and lowering the transaction costs of cooperation outside one’s preexisting circle of social trust), 2) compressing relatively large amounts of knowledge into relatively simple signals (and thereby lowering the transaction costs of knowledge conveyance and facilitating relatively faster adjustments in the face of change), 3) capturing dispersed, local, tacit, and/or inarticulable knowledge (and thereby facilitating more accurate comparisons between various means/ends selections), and 4) conveying people’s judgments about their opportunity costs (and thereby turning that formerly incommunicable knowledge into public, tractable, comparable, and actionable signs for others to, however unwittingly, incorporate into their means/ends selections). Of course, speaking, writing, voting, polling, associating, giving, and all other devices involve opportunity costs (all actions do), but none of them convey opportunity costs, instead keeping knowledge of opportunity costs hermetically sealed within each of us and thereby private, intractable, incomparable, and inactionable. What those devices convey are preferences, which, while incredibly useful in their own right, are nevertheless abstracted and untethered from the concrete resource tradeoffs implied by actual means/ends selections and, by extension, the potential tradeoffs implicit in the means/ends selections available for everyone simultaneously. By contrast, prices emerge from trades and therefore reflect the tradeoffs people actually make in their means/ends selections, lending the price signal an epistemically unique place along the many signals we rely on in our decision-making.

The problem (efficacious decision-making) is not a mere technical one (a single planner autarkically allocating resources within a single plan) but a language one (many planners mutually coordinating resources across many plans), and price is the language of opportunity cost, the only means by which we can “economize” in the sense of comparing the opportunity costs of rival plans. Planners literally lack the medium necessary to economize:

• No advocate of planning has yet indicated a workable medium, analogous to the insects’ pheromones or the scientists’ journals or the market’s money prices, through which the interdepartmental rivalry [between a planned economy’s different departments] could generate a level of social intelligence that exceeds the individual intelligence of its participants. (85)

• The function that prices play in a market is a cognitive one. It is to reduce for each decisionmaker the otherwise overwhelming number of technologically feasible ways of producing things to the relatively much smaller number that appear economic—that is, appear to more than repay their costs. Without the guidance provided by price signals, each producer is likely to engage in a project which, were it the only goal of society, could probably be carried out (technological feasibility) but which, since it is not the only goal, finds itself running out of scarce resources used up by other producers (economic infeasibility). Price movements convey the more or less accurate knowledge of the relative scarcities, the values, of all the factors of production to those who calculate potential and actual profits with them. Yet the only force that tends to pack this scarcity information into prices is the degree of the tug exerted on prices from various directions by multitudes of competitive bidders. Each is committing himself, and either his own wealth or that which it is his responsibility to manage, to his own assessment about where future profits are to be found. (54)

Seeing prices as unique cognitive devices shows why they shouldn’t be destroyed (comprehensive planning) but also why they shouldn’t be distorted (noncomprehensive planning). While comprehensive planning is like trying to communicate by abolishing language, noncomprehensive planning is like trying to communicate by speaking different languages, and instead of trade, central planners (comprehensive or otherwise) speak only coercion. As Lavoie wrote:

• … the profit motive cannot be viewed as merely a wind or current, a driving force that keeps the economy moving or flowing. Inextricably bound up with its operation is its function as the economy’s rudder, or as its dikes and locks, as well.

• When the government tries to steer a market system, it is not simply providing direction to an otherwise drifting economy; it is necessarily pulling against the directions already indicated by the principle of profitability under some agreed-upon rules of social cooperation. It is not providing guidance to a rudderless ship of state. It is instead struggling to gain control of a rudder that would in its absence steer the economy toward a relatively well-coordinated outcome, even though the government has no scientific grounds for its pretense that it knows how to steer the economy toward some alternative, equally coordinated, outcome. By blindly interfering with its rudder, the government will misdirect the ship and possibly damage or destroy its rudder. But it lacks the knowledge to replace the rudder already supplied by the profit motive.” (119-120)

• Essentially, the problem with noncomprehensive planning is a direct corollary of the critique of comprehensive planning. The latter is impossible, because no single agency could attain a level of individual intelligence that could rival the social intelligence that emerges from the competitive process. While noncomprehensive planning is not an impossibility (indeed the world has seen little else this century) it does represent an attempt to interfere with the competitive process in order to steer it onto desired paths of development. But the same lack of knowledge on the part of any single person or organization which makes it impossible for comprehensive planning to replace the market also makes it irrational for a noncomprehensive planning agency to try merely to ‘guide’ the market. If the guiding agency is less knowledgeable than the system it is trying to guide—and even worse, if its actions necessarily result in further undesired consequences in the working of that system—then what is going on is not planning at all but, rather, blind interference by some agents with the plans of others.

• A comprehensive planning agency, if it could exist in a modern economy, would be distinguished from planning of the more mundane and partial variety (as it is done, for example, by businessmen) in that it would be able to plot all the consequences of its own actions. In that case unintended consequences could be dispensed with and humanity could truly become master of its own future development. But if this ambitious goal proves unattainable, as most advocates of planning now admit it is, then what can be said in this regard of noncomprehensive planning? How does it differ from the partial planning of the individual firm? Surely neither can pretend to be able to anticipate the remote consequences (both in time and place) of the limited variables it controls. In each case the attempt by any one decisionmaker to solve one problem may unintentionally lead to the creation of new problems for other decisionmakers.

• The primary characteristic that distinguishes the noncomprehensive planning done by a government from the familiar planning the rest of us engage in during our daily lives would seem to be that the former has the advantage of being able to employ coercion to help achieve its purposes. The rest of us have to persuade others, for example by offering them something valuable in exchange, in order to get them to cooperate with us so that we can achieve our goals. This coercive advantage does not guarantee, however, that the goals promoted by the government planners will be accomplished. By definition, noncomprehensive planning seeks to control only part of the economic system and hence those parts which it does not control are free to react in their own ways and at their own initiative to government policies. These reactions and the consequences they engender cannot be fully anticipated by noncomprehensive planners, and thus may cause undesirable and unplanned results to follow in the wake of their policies.

• All proponents of noncomprehensive planning ought to address themselves to this issue. They ought to explain why any one agency in society should have this coercive advantage over others in the economy. In particular, in light of the knowledge problem, why should we expect noncomprehensive planners to be any better informed about the remote consequences of their coercion-backed plans than the rest of us are about the consequences of our persuasion-backed plans? (95-6)

Comprehensive planning’s more moderate, reasonable-sounding cousin in noncomprehensive planning continues to dominate prevailing policy proposals in the form of calls to increase state control over everything from education to healthcare to housing to immigration to trade to transportation to energy and beyond. Whether left, right, or center, empowering the state to blindly interfere with something is an enduringly popular idea. But all of these schemes amount to little more than planners trying to substitute their own individual intelligence for everyone’s social intelligence by meddling in something larger than themselves, something too complex and dynamic to be captured by a static model or comprehended by a single mind, let alone controlled or “guided” by the relevant authorities. Policies which merely restrict this or regulate that may be more moderate than full-on central planning, but they are no less unreasonable.

Neither will the increasingly fashionable idea of an AI-planned economy help us “transcend” markets. AI’s staunchest advocates seem to conflate the knowledge problem for a technical or computing problem and envision a world where the emergent, ongoing signals of the market’s rivalrous trial-and-error processes somehow already exist as a continuous stream of ready-made inputs for computers to manipulate and optimize. Artificial intelligence is no more a substitute for social intelligence than individual intelligence is. Lavoie, who had a degree in computer science, was well aware of both the potential and the limitations of computing power:

• While I confess to being as romantic as anyone about the untold benefits that computers promise for future generations, it does not strike me as even a remote possibility that these machines could replace market institutions. Rather, we can expect them to facilitate market transactions increasingly and thereby improve the coordination of plans.

• The reason is not only that computers are a long way from being intelligent enough to replace an individual human mind in the making of the sorts of skillful judgments that economic decision making requires. More to the point, even if some supercomputers were invented that surpassed human mental powers in every respect, their “intellect” would be put to a far more effective use if organized competitively than if organized by a single plan. Minds, whether human or not, achieve a greater social intelligence when they are coordinated through the Market than is possible if all economic activity had to confine itself to what a single supercomputer could hierarchically organize. (54-5)

Whether AI technocracy, Stalinist centralization, Wilsonian militarization, RFC cartelization, populist restrictionism, democratic socialism, some mix of them all, or some new scheme drawn up tomorrow, Lavoie would suggest we close the door on economic planning and get to work on alternative, more viable, more inspiring solutions to the world’s problems.

If knowledge is the problem, freedom is the answer

Lavoie considered himself a “radical” in the sense that he thought “our society is in serious trouble and demands a sharp departure from current policies” (1) and affirmed the need to “transcend—through principled and concerted social action—war and militarism, political oppression, and special privilege, and to set in motion progressive forces that will begin to solve such difficult human problems as poverty, disease, and environmental decay” (1-2). But Lavoie parted ways with many radicals when it came to planning, and instead argued that “the ultimate ends of the radical movement will almost certainly be frustrated if national economic planning is chosen as the means for their realization” (2):

• Comprehensive and noncomprehensive planning emerge from this account as successive and ultimately reactionary diversions of what began as a genuinely progressive movement, diversions which have not only wreaked havoc on the millions of human lives who have had to live under planned economies but which have also caused immense harm to the whole notion of popular ideological movements for radical change. (9)

• Today the radical ideology of planning is intellectually bankrupt. All that remains are meek suggestions to try yet one more variation on the century’s dominant theme of noncomprehensive planning. But this policy does not resolve the knowledge problem; it merely substitutes a form of destructive parasitism on the market process in place of its earlier unachievable goal of dispensing with market processes altogether. The knowledge problem shows that the freely competitive market order makes more effective use of the information that lies dispersed throughout society than can any of its participants. This means that noncomprehensive planning is blind interference into a complex order, interference which can succeed in protecting and enhancing monopoly power and privilege, but which cannot improve the productive capacity of a modern technologically advanced economy. (241)

• In short, noncomprehensive planning is not a basis for a radical movement at all. It is politics as usual. It is another plea by messianic political leaders that we should trust them to set things right. The goal of a genuine radicalism must be to transcend this whole level of politics. (237)

Lavoie actually agreed with Karl Marx that markets involved an “anarchy of production” but argued it was precisely this anarchy (the “ongoing rivalrous struggle” amongst producers) upon which the production crucially depends! Absent anarchy, all producers would be confined to a single plan and therefore blind to the opportunity costs of rival plans, lethally hampering their collective social intelligence. The “anarchic” process of ongoing mutual adjustment through the market forms an intricate, delicate tapestry, and the iron-fist of the state is not a very precise instrument. Attempting to direct, control, command, circumscribe, regiment, regulate, restrict, or otherwise interfere with this anarchy is doomed to exacerbate, not lessen, chaos. Iron-fists are also blind-fists.

Lavoie identified a critical link between planning and power, which he saw as going hand-in-hand in practice:

• Their [“the real fathers of planning”] aspirations were not to achieve any Utopian vision but to secure for the major corporations effective isolation from the rigors and uncertainties of competition. Planning in practice was born as a mutual protection society for a corporate elite. (221)

• The origins of planning in practice constituted nothing more nor less than governmentally sanctioned moves by leaders of the major industries to insulate themselves from risk and the vicissitudes of market competition. It was not a failure to achieve democratic purposes; it was the ultimate fulfillment of the monopolistic purposes of certain members of the corporate elite. They had been trying for decades to find a way to use government power to protect their profits from the threat of rivals and were able to finally succeed in the war economy. (225-6)

• The citadels of power are in fact, whether they know it or not, more threatened by the spontaneous forces of the openly competitive market than by any other factor. Power thrives on coercive obstructions to market competition. Ideologies that seek increased governmental intervention into the economy have been only helping the powerful secure better control throughout the world. But an ideology that embraces the spontaneous forces of the market process can yet succeed where all these planning ideologies have failed. The more fully these principles are applied, the more the productive elements of the economy are released; the more opportunities for improvement that the competitive discovery process is permitted to uncover, the more the economy grows. (240)

In Lavoie’s hands, the knowledge problem goes far beyond a mere negative critique of comprehensive and noncomprehensive economic planning. It also guides us in creating positive remedies for social ills. Lavoie’s “persuasion-backed planning” (or McCloskey’s “trade-tested betterment”) is an illuminating description of market processes. Testing new plans, ideas, technologies, resource combinations, organizational strategies, etc. by persuasion or trade is far superior than testing them by coercion (superior both epistemically, in terms of knowledge, and morally, in terms of freedom). Lavoie showed the intimate, perhaps necessary, connection between knowledge and freedom. It turns out epistemic progress and economic progress are not all that different, and they are both linked by freedom:

• Coercion obstructs the flow of knowledge in the market process for the same reason it obstructs it in the scientific community. The spontaneous transmittal of scattered information that is continually being accomplished by the various tugs of market rivals is distorted when some of the participants gain the coercive advantage. (84-5)

• But if knowledge—whether scientific or economic—is based on tacit skills, if it is inextricably personal, and, most important, if it depends upon the free play of open debate and contention, then the intelligentsia’s justification for special powers evaporates. For the very freedom of inquiry on which the success of science rests is in this case inconsistent with the bestowal of special powers to anyone, including the scientists themselves. (264)

• For the same reason that science requires freedom and intellectual competition to progress, a modern economy requires economic freedom and market competition. We rely on interpersonal rivalry to give us knowledge about alternative production methods without which most of the present world population would be doomed to starvation. (237)

Lavoie closed National Economic Planning: What Is Left? with a quote about the connection between knowledge and freedom by nineteenth-century radical natural-rights theorist Lysander Spooner and it seems fitting to include that same quote here:

• We all come into the world in ignorance of ourselves, and of everything around us. By a fundamental law of our natures we are all constantly impelled by the desire of happiness and the fear of pain. But we have everything to learn, as to what will give us happiness, and save us from pain. No two of us are wholly alike, either physically, mentally, or emotionally; or, consequently, in our physical, mental, or emotional requirements for the acquisition of happiness, and the avoidance of unhappiness. No one of us, therefore, can learn this indispensable lesson of happiness and unhappiness, of virtue and vice, for another. Each must learn it for himself. To learn it, he must be at liberty to try all experiments that commend themselves to his judgment… And unless he can be permitted to try these experiments to his own satisfaction, he is restrained from the acquisition of knowledge, and, consequently, from pursuing the great purpose and duty of his life.2

For Lavoie, the knowledge problem informed not just a radical critique but a radical vision, a lively, humanistic, cosmopolitan, and emancipatory vision of cultural, scientific, and economic progress through peaceful social cooperation, dynamic experimentation, and mutual exchange. As the knowledge problem continues to be misunderstood, underrated, or downright ignored, and as human freedom continues to be trampled on, it’s vital we keep the legacy and, more importantly, the ideas of Don Lavoie alive and well.

Footnotes

[1] Don Lavoie, National Economic Planning: What Is Left? Cambridge, Massachusetts: Ballinger Publishing Company, 1985.

[2] Lysander Spooner, Vices Are Not Crimes, Cupertino, California: TANSTAAFL, 1977 [1875].