Central Planners Cannot Know Enough

Socialism and the knowledge problem

In his 1920 paper Economic Calculation in the Socialist Commonwealth, the economist Ludwig von Mises dealt what should have been an intellectual death blow to socialism, showing, as he put it, that rational economic activity is impossible in a socialist commonwealth. Mises expanded on the argument in his Socialism, and F. A. Hayek took up what came to be known as the knowledge problem. Socialism, which purported to be scientific before it purported to be humanitarian (both claims have proved false), assumes that all relevant knowledge is essentially scientific in character and that economic problems may be solved in more or less the same way as engineering problems.

But there are other kinds of knowledge  local, temporary, transitory, dependent, subjective, situated in complex nests of subordinate and superordinate relationships. In Hayeks view, it is this knowledge that guides the constant small changes which make up the whole economic picture.

There is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebodys skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

The socialists of Hayeks and Misess time believed that a properly empowered bureaucracy overseen by a committee of disinterested experts could comprehend the entirety of an economy  within an industry, within a country, or around the whole globe  given sufficient resources and scope of action. This was rooted in what was contemporary scientific thinking. In 1814, around the same time that Charles Fourier was writing his utopian socialist blueprint The Social Destiny of Man, Pierre-Simon Laplace published A Philosophical Essay on Probabilities, in which he posited what came to be known as Laplaces Demon, which he described as an intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed. In Laplaces thought experiment, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes. This is the idea of scientific determinism, which holds that if one could know the exact location and momentum of every atom in the universe (Werner Heisenberg had not yet thrown in the monkey wrench of uncertainty), then the future of the universe and everything in it could, in theory, be calculated according to the laws of physics.

The socialists themselves were quite taken with the idea, hence the strange history of Soviet cybernetics, by means of which the central planners in Moscow imagined that they might develop a computer system so powerful that it could consider every variable in society at once and spit out scientific maxims about how many acres of potatoes to plant, and when and where to plant them. The prestige of science in the middle of the 20th century was enormous, and such dramatic scientific advances were being made so regularly  in the Soviet Union as elsewhere  that this did not seem entirely implausible.

It is precisely this view that Hayek is responding to:

If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions.

Mises and Hayek intuited (and showed) that complete knowledge was not attainable in social, economic, or political questions. Later, scientific studies of chaos and complexity worked out that in many cases of complex adaptive systems  such as markets and evolution  knowledge of the sort Laplace imagined is not available even in principle. In Complexity: A Guided Tour, computer scientist Melanie Mitchell of the Santa Fe Institute writes that two major discoveries of the twentieth century showed that Laplaces dream of complete prediction is not possible, even in principle. The first was Heisenbergs uncertainty principle, but that applies only at the quantum level, an interesting curiosity, but not one that would have much implication for prediction at a larger scale  predicting the weather, say. It was the understanding of chaos that eventually laid to rest the hope of perfect prediction of all complex systems, quantum or otherwise. In chaotic systems  Mitchell lists cardiac disorders, turbulence in fluids, electronic circuits, dripping faucets as examples  seemingly trivial uncertainties in measurement can produce staggering errors in predictive models. Chaos is the reason we cannot accurately predict the formation and behavior of hurricanes, even though we know a great deal about them and have a great deal of data to work with. Economies are even more difficult to predict and to manage, because market participants will react in unpredictable ways to intervention.

It is a little ironic that Hayek spent so much of his career warning against the scientific pretenses of economics and his professions mathematical manias only to see his work incorporated into a broad scientific theory expressed in recondite equations.

Some of the intellectual socialists of the 20th century took this criticism seriously and responded seriously if unsatisfactorily, inventing such ultimately incoherent ideas as market socialism. And they have largely abandoned their plans for unitary central planning of entire national economies, turning instead to trial-and-error approaches to managing markets (e.g., the Affordable Care Act) and to limited, industry-specific management schemes  as though central planning on the installment plan were any more rational than the whole-enchilada version.

If this sounds a little esoteric, there are some well-understood, down-to-earth applications. Compare the U.S. food-stamp program with socialist management of agriculture, whether through collective farming or by other means. The food-stamp program has its defects, to be sure: There is fraud, and abuse, and malingering, and food stamps create some poor economic incentives. But, generally, the program does what we want it to do: It helps some very poor people to get more and better food. Food stamps are welfare, not socialism. Socialism  central planning  would be something more like the governments trying to direct not only the farms but also the food-distribution networks, the grocery stores, and, inevitably, household diets and food economies. Even in their least ambitious forms (e.g., in Venezuela), those kinds of socialist undertakings have proved catastrophic. For all the gulags, purges, and massacres, the major socialist powers of the 20th century killed far more people through starvation than with bullets, sometimes intentionally (the Holodomor in Ukraine), sometimes through pure mismanagement, and sometimes a bit of both. For American conservatives, the conclusions are obvious when it comes to things such as K12 education, which is one of the few truly socialized enterprises in the United States and, not coincidentally, one of the most defective. The conservative preference for the voucherization of social services is the Rights intelligent response to the problems of central planning, but it is by no means an intrinsically right-wing position. It is simply an acceptance of the fact that having taxpayers pay for welfare services is a different and more manageable thing than having government act as a direct provider of welfare services. No modern state outside of libertarian fantasy restricts itself to the provision of public goods (goods such that your consumption does not prevent my consumption and neither of us can be forced to pay for our consumption  e.g., the light of a lighthouse). But the more intelligent governments have largely given up on central planning, even at the single-industry level. The Nordic social democracies so dear to the self-styled socialists of the United States mostly have been divesting themselves of state enterprises; indeed, the most common kind of socialism remaining in the world today is the one least loved by Bernie Sanders et al.: the oil company, many of which remain state-run. Even many reasonably successful state-run enterprises, such as the Swiss railroads, have been converted into stock corporations or reformed in other market-oriented ways.

For a too-brief period at the turn of the century, most mainstream progressives and conservatives were in broad agreement about some substantial part of the mechanics of welfare, including the desirability of letting markets work where possible. There was disagreement about how much to spend, about eligibility, about work requirements for welfare, and the like, but the central-planning impulse seemed to have crumbled with the Berlin Wall. But the fatal conceit, as Hayek called it, is immortal.

The anti-capitalist Right flirts with it from time to time, too  for instance, in Republican presidents desultory forays into the steel industry or the question of where the components of catalytic converters for automobiles are assembled, not normally matters about which one would consult a hotelier. The Wilsonian instinct for war socialism occasionally affects Republicans, usually abetted by pork-barrel politics. That is why we have a national strategic helium reserve, and many other silly things.

The subtitle of Hayeks Fatal Conceit is The Errors of Socialism. Of course Senator Sanders and Representative Ocasio-Cortez have failed to learn from those errors, in the same way that they have failed to learn from anything. You cannot call yourself the party of science and the party of socialism, too. You have to choose one or the other.