In a recent article in Jacobin Magazine titled “Yes, a Planned Economy Can Actually Work” by authors Leigh Philips and Michal Rozworski, the authors argue that central planning in the economy can actually work since vertically integrated corporations such as Amazon and Walmart, with the assistance of modern technology, are already making use of “large-scale central planning.”
Supporters fail to grasp why large vertically integrated firms are efficient and why it’s an error to conflate such firms with a centrally planned economy.
The authors hold up Jack Ma, the founder of Chinese technology titan Alibaba, as someone who holds similar views. He has argued that with the availability of big data in almost real time, the “knowledge problem,” which made centrally planned economies once impossible, will become a thing of the past and allow more central planning in the future.
The authors fail to grasp the nature of why central planning does not work, which is evident in their conflation of Friedrich Hayek’s position with Ludwig von Mises’s on why central planning in the economy is impossible. Furthermore, the authors also fail to grasp why large vertically integrated firms such as Walmart are very efficient and why it’s an error to conflate such firms with a centrally planned economy.
Since the word “socialist” is used often without terminological precision by both its proponents and opponents and many times is used in place of the word “interventionism,” for the purposes of this article, the orthodox Marxian definition of socialism will be used. According to Merriam Webster Dictionary, it is:
A system of society or group living in which there is no private property…a system or condition of society in which the means of production are owned and controlled by the state
Socialism may also be used synonymously with central planning.
The Limits of Knowledge
Until recently, I fell for the trap of conflating the positions of Friedrich Hayek and Ludwig Von Mises on why a centrally planned economy is impossible. I simply viewed their arguments synonymously as part of the “knowledge problem.” But upon more careful reading and analysis, I have come to conclude that even though they both lay out a case against central planning, their arguments are different and must be dehomogenized.
Furthermore, the authors of this Jacobin Magazine article and those who claim centrally planning in the economy will now work in light of technological advancements also fall into this trap. They see the case against a centrally planned economy as one revolving around knowledge and thus base their new arguments around knowledge.
Friedrich Hayek, whose critique—known as the “knowledge problem”—as to why economic planning under socialism is impossible, posited in The Use of Knowledge in Society that in a centrally planned economy:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data."
It can be inferred that to Hayek, the problem with central planning is the prohibitive cost in gathering all the “dispersed bits of incomplete and frequently contradictory knowledge” that would be needed for central planning, thus the solution to this problem is the decentralization of knowledge and decision-making.
On the other hand, Ludwig Von Mises, whose critique—known as “the calculation problem”—as to why central planning under socialism cannot work, posited in Economic Calculation in the Socialist Commonwealth:
[A] soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.
In essence, Mises argued that in the absence of private property and a market in the factors and means of production—along with capital markets and a relatively stable unit of money, which acts as the common denominator of accounting—the absence of prices for such factors would make economic calculation (i.e. cost and capital accounting) of projects being embarked upon impossible.
In an example of the knowledge/calculation dichotomy at play, in the past few years, the practice of customer development has been popularized by entrepreneur Steve Blank in his best sellers such as The Startup Owner’s Manual. The idea is to reduce risk and uncertainty around new ventures by first finding and interviewing a handful of potential customers in order to gauge market potential for new products or services (as opposed to first expanding resources on a product or service before gauging customer interest).
Even if feedback is positive and the entrepreneur(s) gains all the market insights and knowledge that can possibly be gained, it still will not be sufficient to begin serving customer desires. Economic calculation (i.e. revenue projections) is needed in order to gauge the feasibility of such ideas in light of available resources.
With recent technological advancements, it has been suggested in some quarters that the confluence of technologies such as cloud computing, big data, and artificial intelligence (AI) could finally make centrally planned economies feasible and thus make the “knowledge problem” moot.
But even with an ocean of data being streamed to a central planning board in almost real time, such data will have little utility in predicting future events. Unlike automatons, humans have free will, and our actions are not bound by constants that can be described using equations. As Ludwig Von Mises stated in The Epistemological Problems of Economics:
Mathematics has a significance in the natural sciences all together different from what it has in sociology or economics. This is because physics is able to discover empirically constant relationships, which it describes in its equations.
Even if some trends hold at some point in the immediate past, it is not guaranteed that they will hold in the future. The error in thinking that a near constant stream of almost real-time data will be of any use is a mentality that sees the world a static and unchanging. As Mises also pointed out in the same book:
It is a mistake to think that from statistical investigations concerning the relationship of the supply and demand for definite commodities, quantitative conclusions can be drawn that would be applicable to the future configuration of this relationship. Whatever was established in this way has only historical significance, whereas the specific gravity of different substances, for example, have universal validity.
Further, this view of things leaves no room for innovations or any changes in the course of human affairs. Innovation by its very nature does not come from looking backward or trying to discern patterns in data sets. Rather, innovation comes from looking forward, bucking trends, and coming up with ways to make the state of human affairs better in unforeseen ways.
Conflating a Firm with a Centrally Planned Economy
Contrary to the claim in the Jacobin Magazine article that “Walmart engages in large-scale planning without the direct intermediation of markets at scales to make Hayek bristle,” Walmart does use markets for intermediation. It would never be as efficient or as big as it is if not for a market in the factors of production and capital goods, which it can use as a reference for its cost and capital accounting.
Walmart, like many large corporations, has independent divisions that make extensive use of cost and capital accounting and are able to assess their profitability. One of these divisions—referred to in the Jacobin Magazine article—is its massive distribution and logistics division made up of tens of thousands of tractor trailers, warehouses, and other distribution and logistics equipment.
The arguments as to why central planning in the economy is impossible as posited by Hayek and Mises are not homogenous.
But as massive as this division is, similar firms of different sizes also have distribution and logistics divisions. Together they form a distribution and logistics market where free exchange takes place and prices of such factors are established. But in a centrally planned economy, the abolition of markets for such factors prevents the formation of the prices needed for economic calculation.
Let’s assume that Walmart goes on a buying spree and attempts to vertically integrate all distribution and logistics businesses, along with all the complementary businesses that support these firms (e.g. semi-truck manufacturers) in the world. There is an upper limit beyond which efficiency would be compromised. In a situation where Walmart totally absorbs the distribution and logistics market, the same economic calculation problem as under socialism will be encountered. As Murray N. Rothbard said in Man, Economy, and State:
For every capital good, there must be a definite market in which firms can buy and sell that good. It is obvious that this economic law sets a definite maximum to the relative size of any firm on the free market.
But the difference between a worldwide vertically integrated firm and a centrally planned economy was summed up by Rothbard in Man, Economy, and State when he said:
The difference between the State and the private case is that our economic law debars people from ever establishing such a system in a free-market society. Far lesser evils prevent entrepreneurs from establishing even islands of incalculability, let alone infinitely compounding such errors by eliminating calculability altogether. But the State does not and cannot follow such guides of profit and loss; its officials are not held back by fear of losses from setting up all-embracing cartels for one or more vertically integrated products. The State is free to embark upon socialism without considering such matters.
Central Planning Would Set Us Back
The arguments as to why central planning in the economy is impossible as posited by Friedrich Hayek and Ludwig Von Mises are not homogenous. Even though it is not totally wrong and is still valid, the thesis put forth by Friedrich Hayek has its limitations and has opened up a gap that is allowing certain elements of the reinvigorated socialist movement to relitigate its case for a centrally planned economy. It behooves those of us who understand what a free society is—and the potential it has to unleash human energy and creativity—to know these arguments in all their nuances if we are to rise to the occasion in this new and emerging battle of ideas. As Frédéric Bastiat said:
The worst thing that can happen to a good cause is not to the skillfully attacked, but to be ineptly defended.
Ineptitude is simply not an option!