The Bases of Economic Planning
MARCH 01, 1979 by DAVID KELLEY
Dr. Kelley Is Assistant Professor in the Department of Philosophy at Vassar College.
Liberals and socialists share a vision of a planned economy. It is a vision of order, extending to economic matters the rational foresight that is the glory of our nature: weighing and ranking our needs by intelligent deliberation, allocating resources with scientific efficiency to satisfy those needs. The concept of economic planning wears a public face of dedication to reason. Behind the face, however, lies a deep-seated philosophical hostility toward reason.
The concept originated with the socialists of the nineteenth century, principally Karl Marx. Marx complained that while man had achieved control over the forces of nature, and bent them to his ends, he was still the pawn of economic forces. The movements of supply and demand determine prices, wages, profits; they determine the investment of capital and the allocation of resources; yet they operate outside anyone’s control. No attempt is made, in a capitalist system, to direct these forces to our ends. To allow this, he said, is to abandon the methods we use in controlling nature—it is to abandon reason.
Since these forces arise from voluntary exchanges between individuals, each acting as an independent agent, Marx wanted to eliminate that system. There would be instead only one economic agent: the state, and it would act by consciously deciding the allocation of resources: that is, by economic planning.’ As his collaborator Engels put it: "In making itself the master of all the means of production to use them in
accordance with a social plan, society puts an end to the former subjection of men to their own means of production [i.e., to the marketplace]."2
A Century of Communism
In the hundred years since Marx and Engels wrote, society has "made itself the master of all the means of production"—in the Communist countries. The results have been disastrous. The Soviet Union has the most fertile agricultural resources in the world, yet it can barely feed its own people—and then only because as much as a third of its food comes from the tiny private sector the government allows. Communist East Germany continues to stagnate while its better half in the West, after rejecting economic planning, rose to an unprecedented prosperity. In Europe, the most troubled economies—England, France, Italy—are the most heavily planned.
In this country economic planning became a cause during the Depression, and its presiding spirit was the philosopher John Dewey. Dewey rejected the principle of individual rights that had previously stood in the way of government planning. Indeed, as a pragmatist, he rejected all fixed principles, claiming that we cannot judge a social policy until it is tried. Under this banner, New Deal pragmatists tried planning in various sectors of the economy, with results parallel to those in the totally planned economies.
The airline industry, for example, began as a deliberately planned venture in the 1930s, and remained so for forty years; when it was decontrolled recently, prices fell immediately while profits rose. At the same time, the government began using the power of its own budget to manipulate the money supply, hoping thereby to regulate levels of inflation, unemployment, and investment. The result today is accelerating inflation—with the dollar now worth half what it was ten years ago—combined with high unemployment and falling rates of investment.
Why Planning Fails
It is not difficult to understand why planning fails. A market economy is a system of individuals acting to achieve their purposes by producing and trading with each other; the result is a delicate integration of freedom and order. From countless exchanges between individuals, there emerges a single price for every good or service, reflecting the relative supply and demand for it. This system of prices tells the individual the terms on which he may expect to enjoy the products of others, and the terms they will offer for his, but leaves him free to act on that information.
The market tells a producer of shirts, for example, that the new polyester fabric will cost him less than cotton; and that consumers can be expected to pay less for shirts made of the first than those made of the second. But it leaves him free to integrate these facts with information he has about his particular context: the tastes of his customers, the reliability of his suppliers, the adaptability of his work-force. And it leaves him free to decide, on the basis of all this information, what he will do: what proportion of each type of shirt he will produce, what new machinery he needs, how many new workers, and so on through all the countless decisions it takes to run a business.
In short, the market tells the individual what he needs to know if he is going to rely on trade with others, but leaves him free to act on that information. His actions, in turn, have their impact on the market, helping to shape the information on which others act. In this way the market automatically integrates the actions of everyone, without sacrificing anyone’s freedom. It is indeed one of the wonders of civilization, allowing millions upon millions of individuals to live together peaceably, each one benefiting from the endeavors of countless others whom he in turn benefits, yet each free to pursue his own course.
But government planning, employing such tools as regulations, subsidies, price controls—or in the extreme case nationalization of industry–undercuts the system: it distorts the information the individual receives from his economic environment, and it restricts his freedom to act on the basis of it. On the first count, the clearest example is price controls. By preventing a rise in the price of a good, controls disguise its increasing scarcity, and thereby prevent people from taking the appropriate action: businesses do not invest in further production of the good, and consumers do not economize on their use of the good. Price controls on natural gas, for both reasons, led to the crisis of several years ago, when suddenly there was no gas to be had at any price.
Their Hands Are Tied
On the second count, planning ties the hands of actors in the marketplace, preventing them from acting on the information they do have. A number of biological insecticides, for example, are now both technically and economically feasible, but they may never be produced because potential producers cannot afford the lengthy and expensive process of getting them cleared by Federal regulators.3 Many of the decaying sections of our cities have the potential to flourish, but the individuals and businesses who could exploit that potential cannot get past the roadblocks placed in their way by city planners, through taxes, zoning, government housing projects, and the like.
In this respect, the dark side of planning is commanding. The essence of government planning is to replace the free interaction of the market with the judgment of the planners, backed by the government’s power of coercion. In a totally planned economy, no one may act as a producer except by permission of his superiors in the economic bureaucracy. And consumers cannot make their preferences known except through the vague and infrequent sanctions of the ballot box, or through violent demonstrations, as in Poland.
And for what? Is the loss of freedom on the part of the individual compensated by the greater wisdom of the planners? On the contrary, there is no way to perform by conscious planning the feat which the market performs automatically.
No Basis for Decisions
Consider the extreme case of socialism, in which the government owns all the factors of production. In this case, these factors are not traded freely, so that they do not have prices that reflect their relative value; and as Mises points out this would make it impossible to invest them rationally. If the government wished to build a railroad, for example, it would have no way to decide what materials to use, what proportion of labor and capital is most efficient—or indeed whether the railroad is worth building at all. "Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all."4
Why couldn’t these calculations be made without prices? Because prices contain an enormous amount of information, too much to be integrated in any other way. The price of each good indicates how valuable it is in relation to all other goods; and each of these valuations is determined by millions of individuals in the marketplace, each acting on detailed information about his own local situation. To replace the price system by conscious planning, the government would need a way to gather and integrate that same information.
In a free market, the information is integrated automatically, without any individual’s having to gather it together in one place: the housewife in Chicago may know nothing of the Florida frost, but she adjusts her actions to it when the price of oranges rises. But a planned economy would have to gather all that information together in one place, in order to allocate resources as wisely as the market does. Considering the millions of prices in a modern economy, with the trillions of relations between them, and the masses of information that determine those relations, it is an unthinkable feat.5
Thus a planned economy frustrates rational action at every turn. To the extent that an economy is planned, individuals are prevented from doing what they must, and planners are required to do what they cannot. Yet the drive for planning endures, appearing repeatedly in the media like a third-rate film on the late show. As recently as 1975 a new movement for planning was launched: a group of old liberals and new leftists organized an Initiative Committee for National Economic Planning, which enjoyed a brief run in the press; and largely through their efforts a bill for national planning was introduced in the Senate (It did not pass.) Why does the idea persist? It has taken a fearful beating over the years, from economists and from reality, yet it keeps on ticking. Why?
The answer lies in philosophy—specifically in philosophical premises about the nature of reason.
The Mind of the Individual
Reason is an attribute of the individual. Human knowledge is attained by a complex process of observing facts and relating them, making inferences and testing hypotheses. It is a process that occurs only in individual minds, and can be initiated and guided only by an individual’s own volition. Much of what we know, to be sure, is learned from other people. But every item of that knowledge was at one time the discovery of an individual mind; and we ourselves, in learning from him, must carry out the rational process of grasping his truth.
Ultimately, therefore, everyone is responsible for his own life, because he is responsible for the use of his tool of survival: his mind. He must form his beliefs and values, and apply them to the circumstances of his life, by his own thinking. He cannot be forced to think, nor can he force others to think for him. There is no knowledge to be had except through active use of his own mind, initiated by choice. There is no automatic source of guidance—not from his emotions, not from his friends, not from his favorite columnist.
This is the fundamental reason why the market system works: it allows individuals to cooperate and learn from each other, but leaves each free to act on his own judgment: to do what his nature requires. In particular, it leaves the innovator free to carry his new ideas into practice, without depending on permission from those who do not, or cannot, share his insight.
But capitalism also prevents anyone from passing off the responsibility for thought onto others. And as Ayn Rand has shown, it is resentment against this fact that lies behind all the attacks on capitalism. The anti-capitalist mentality is at root a "longing for the effortless, irresponsible, automatic consciousness of an animal. [They] dread the necessity, the risk and the responsibility of rational cognition."6 It is not the effort of working that is resented. Capitalism requires that, but so does every other system, and people work longer and harder in the others. It is the effort, and the responsibility, of thinking for oneself.
Complaints Against Capitalism
This resentment takes many forms, and fuels a myriad of complaints against capitalism. All of them, by attacking the market, help create a climate in which a collectivist system seems attractive. But one such form is especially relevant to the issue of economic planning. It is the idea that thought is a collective activity, in which the individual acts only as a cell in the social organism. Both Dewey and Marx, among other philosophers, espoused this idea, and it is an indispensable basis of their support for economic planning.
Marx was a rabid anti-individualist. His essay "On the
Jewish Question" was a bitter attack on the natural rights philosophy of the eighteenth-century political revolutions; the effect of these revolutions, he said, was to create "a world of atomistic, antagonistic individuals"; the individual in a free society is a "partial being," "acting in accordance with his private caprice."’ The individual, he felt, could find fulfillment only by living for the group, as an integral part of the collective.
What of the independent mind? There is no such thing. Marx claimed that the whole sphere of "consciousness"—ideas, values, principles—is a by-product of the material forces of production: the individual’s mind is shaped by the tools he uses and the organization of the workplace. Since these are social factors, "consciousness is, therefore, from the very beginning a social product." Marx and Engels were notoriously reticent about the organization of the socialist society they sought, and the reason is presumably their confidence that once the economy is fully socialized, it will produce individuals whose minds are fully socialized—who think as cells in the organism.
Dewey shared this view in every essential. Like Marx, he believed the individual is justified only by his relation to the group: "Within the flickering inconsequential acts of separate selves dwells a sense of the whole which claims and dignifies them."9 Like Marx, too, he claimed that thought is collective:
"It thinks" is a truer psychological statement than "I think." . . . The stuff of belief and proposition is not originated by us. It comes to us from others, by education, tradition, and the suggestion of the environment. Our intelligence is bound up, so far as its materials are concerned, with the community life of which we are a part. We know what it communicates to us, and know according to the habits it forms in us. Science is an affair of civilization, not of individual intellect.10
Thought, for Dewey, is not an activity of the individual; the latter need not bear, and cannot claim, any responsibility for his ideas; he is merely a conduit passing along the influence of the group. He says the same of the products of thought. "The stationary engine, the locomotive, the dynamo, the motor car, turbine, telegraph, radio and moving picture are not the products of either isolated individuals nor of the particular economic regime called capitalism."11 The standard of living these machines have made possible is not an achievement of individuals; the machines are "driven by electricity and steam under the direction of a collective technology."12
Taken as statements about reality, these views of Marx and Dewey are scarcely intelligible. How can Marx say that ideas result from the forces of production, when the latter are themselves the products of our ideas? How can Dewey say that "It thinks" is a truer psychological statement than "I think," when anyone who is honest is aware introspectively that he has control over what he thinks, and indeed whether he thinks? How can anyone say that technological advances are not the work of individual minds, when the Patent Office keeps records of who those individual minds are?
But these statements become intelligible once they are seen as the expression of a deep-seated hostility toward human reason, and the responsibility we bear for exercising this faculty by our own choice and effort. To those who would evade the responsibility, they hold out the promise of having one’s cake and eating it too: they imply that one can enjoy the products of thought without having to take any responsibility, as an individual, for the process of thinking. To those who are threatened by the sight of independence in others and want power over them, this doctrine offers a justification: it implies that the individual can be forced to play his part in the collective life of society, at the cost of his own autonomy.
In this way, the idea that thought is collective is a link between the ancient hostility toward reason, and the concept of economic planning. Few public advocates of planning today explicitly state that thought is collective, or offer it as the basis for planning. But they inherited the concept of planning from philosophers like Marx and Dewey who did say these things; and if we examine the idea of planning more closely, it is not hard to see in it the footprints of the philosophic premise.
Consider an editorial statement made by the New York Times at the height of the recent planning controversy. "Why is planning considered a good thing for individuals and business but a bad thing for the national economy?"" Taken at face value the question is absurd. Planning is a conscious action; individuals can therefore plan their activities, and businesses assign to specific executives the tasks of planning and decision-making; but the national economy is not the product of a single mind. There is no collective mind to do its planning. The argument is a classic example of what logicians call the fallacy of composition: assuming that what is true of the parts is true of the whole. But that is exactly the assumption which the philosophy of Marx and Dewey would allow. They believe there is a collective mind to do the economy’s planning.
This is why would-be planners ignore the argument that they could not calculate rationally. The argument assumes, rightly of course, that calculation is the activity of a single mind; and the argument is that no single mind could gather all the information necessary for rational calculation. If advocates of planning ignore the argument, it is because the collectivist view of thought allows them to dismiss the premise: no individual will have to do the planning: society will.
Says the Initiative Committee for National Economic Planning: "Above all, planning is a way of looking at economic problems as a whole, providing the information needed to set explicit priorities in the use of resources, and guiding all sectors of the economy toward the attainment of our chosen goals."14 Who will look at economic problems as a whole? To whom will the information be provided? Who will choose the goals?
The Goal Is Power
Some advocates of planning have a perfectly clear idea of who will do these things: they will. Nor does it matter to them whether they can calculate rationally as planners, since that is not their goal; their goal is power. Others simply do not want to confront the fact that planning is the act of the individual mind. In either case, the collectivist philosophical theory provides a rationalization. It implies that no individual need perform these cognitive tasks of grasping information and setting goals, since cognition is an activity of society as a whole, acting as a single collective mind. That is why advocates of planning ignore the questions we raise, as if they were irrelevant. They envision a network of planning boards, citizens’ groups, legislative committees, and so forth; and their philosophic faith permits them to assume, against all experience, that the network will deliberate as one and speak with a single voice.
The same premise is the source of another feature of the argument for planning. Liberals and Socialists typically assume that an economy not planned by the government would be totally unplanned: the choice is between collective planning and chaos. Says the Initiative Committee: "No reliable mechanism in the modern economy relates needs to available manpower, plant and materials. . . . [T]he most striking fact about the way we organize our economic life is that we leave so much to chance."15
Endorsed as it was by professional economists, this is an extraordinary statement. The free market exhibits a marked degree of order, as we have seen. Indeed, it is precisely a mechanism for relating needs to available manpower, plant, and materials; and it does this in a highly reliable way. As a result, individuals are enabled to plan their own activities intelligently, taking account of their economic environment as they pursue their individual goals. What could possibly be meant in referring to this system as "chance"?
What is meant is that the needs which the market takes cognizance of are the needs of individuals, as determined by each individual’s knowledge of his own context, and expressed in his choices among competing goods. Advocates of planning implicitly deny that this could allow for an orderly economy. Why? Here again the collectivist assumption is apparent. On that assumption, allowing individuals to decide their own needs, and to act freely to satisfy them, is like allowing every brain cell to act on its own, apart from the needs and guidance of the brain as a whole. The result must be chaos. The assumption is that without the collective to set his goals and direct him in the choice of the means, the individual is a rudderless ship, his actions the product of chance.
A Poor Choice
In reality, the choice is between government planning and planning by individuals. It is impossible to have both; a collectivist economy would suppress the individual mind, replacing it with the judgment of the state, enforced by coercion. For many would-be planners, this is not an objection; it is exactly what they want. But the premise that thought is collective allows them never to address the issue. It implies that individuals cannot think for themselves; it implies that there is no such thing as the autonomous mind; it implies, therefore, that there is nothing to suppress, hence no objection against economic planning.
Two Provinces of Control
PROPERTY RIGHTS have often been described by socialists as "reactionary barriers against the will of the people." Not so. They are barriers against the state, and they protect the people from the abuse of its power. But they are effective barriers only so long as the two masters of men, the free market on the one hand and the government on the other, are kept separate and distinct. These masters must be confined to their own provinces of control.
When there is no free price mechanism to co-ordinate the economy, then dislocation is bound to arise. Depressions—such as that which followed World War I when political considerations controlled a great part of the world’s economy—become unavoidable and lead to still further control and further economic dislocation. If this development is allowed to continue, the rule of the economy by the people through the price mechanism comes to an end; their place is taken by the planner under the instructions of the political group in power.
GEORGE WINDER, "Centralized or Multiple Economies"
Consider, finally the question of innovations—new products and methods of production. Will not these unpredictable events make planning impossible? The Initiative Committee proposed that national planners be given "A mandate to examine major economic trends and work out realistic alternative long term economic programs for periods of 15 to 25 years. . . ."16 But no planner, 15 to 25 years ahead of time, could have foreseen the automobile, or the assembly line, or the rise of consumer credit and installment buying. These were innovations created by individual minds, and they altered the face of the economy in ways no one could have predicted.
For the collectivist mind, however, this fact has no reality. Innovations are not the work of individual minds, said Dewey, but of "collective technology." Science "is an affair of civilization not of individual intellect." Thus they are confident that all novelty will emerge slowly and anonymously from the group as a whole, growing in minute, piecemeal fashion like a coral bush, in ways that society’s collective intelligence will have no trouble anticipating. This philosophical faith prevents the contrary evidence from penetrating.
A Philosophical Matter
The real basis for planning, then, is not economic but philosophical. It is an age-old antipathy toward reason—toward the responsibility it imposes on the individual—expressed through the myth of society’s collective mind. The public defenders of planning may not defend the premises of Marx, Dewey and other collectivist philosophers. They may never have heard of the issue. That does not matter. They have accepted the implications of the philosophers’ views; they rely on arguments whose implicit premises originated with the philosophers; and they exhibit an incapacity to grasp evidence incompatible with those premises.
The recent movement for planning arose when it did partly because of dislocations the economy experienced in 1974-5, most notably the energy crisis (itself a signal case of the effects of planning). These dislocations have disappeared, and so for the moment has the movement. But as long as its philosophical premises remain unchallenged, it is a safe bet that the next round of economic difficulties will spawn a new movement for planning.
1Cf. Karl Marx & Friedrich Engels, The German Ideology, Part I, pp. 154-55 in The Marx-Engels Reader (ed.) Robert C. Tucker (New York: W. W. Norton, 1972).
2Ibid., p. 323.
3Cf. William Tucker, "Of Mites and Men," Harper’s, August, 1978.
4Ludwig von Mises, "Economic Calculation in The Socialist Commonwealth," in Collectivist Economic Planning (ed.) Friedrich von Hayek (London: George Routledge & Sons, 1935), p. 108.
6Friedrich von Hayek, "The Use of Knowledge in Society," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948).
6Ayn Rand, For The New Intellectual (New York: New American Library, 1961), p. 15. ‘Marx, in Tucker, pp. 41, 50.
8lbid., p. 122.
6John J. McDermott (ed.), The Philosophy of John Dewey (New York: G. P. Putnam’s Sons, 1973), p. 723.
nIbid., p. 654.
12Ibid., p. 610.
23New York Times, Feb. 23, 1975.
"From an official statement by The Committee, New York Times, March 16, 1975.