It's the complexity, stupid

In 1944, amid the roaring of the guns and the Keynesians, an obscure economist named Friedrich Hayek published an obscure book called The Road to Serfdom. Widely ignored, occasionally ridiculed, it transformed public debate by demolishing the very concept of economic planning. People had long argued whether public control of economic activity would make society fairer, more friendly and maybe even richer or be unjust, create soul-destroying dependency and strangle the economy. Hayek said it didn't matter. Desirable or not, planning was simply impossible for the same reason that, if attempted, it would destroy liberty.

To liberals his argument, or his title, seemed absurd. They were convinced that freedom from want was indispensable to real liberty, and that increased state power in the hands of well-meaning people like themselves would never be used maliciously. Hayek's argument, however, was technical not moral, though it has moral implications.

Critics of planning usually focus, and before Hayek focused almost entirely, on what one might call "first order" unintended consequences. Introduce rent controls, and fewer people will build new apartments. Prop up the price of corn in a glutted market and farmers will grow even more. Raise welfare benefits and fewer people will seek low-paid work.

Economically literate supporters of planning could reply that precisely because such effects are predictable they are manageable. You can buy the surplus corn and burn it; subsidize rental housing construction; implement workfare (or be glad welfare prices degrading jobs right out of the market). With intelligence planning can survive, albeit in damaged form, the basic free market critique. But it cannot survive Hayek.

Hayek's main point is not the immediate unforeseen consequences. It is that the staggering complexity of the economy, the extraordinary number and range of decisions undertaken every day by every citizen, cannot be comprehended by any one mind.

In a market economy it doesn't have to be. The baker does not need to know how his competitors sell at the price they do, what difficulties farmers in Ukraine face or anything else of that sort. He only needs to know that if he charges too much for bread his customers will march out his door, and if he pays too much for flour the bailiff will march in.

The state of the planner is quite different. He must know where the baker's customers might go instead, and why, and what would happen next. To devise a master plan to coordinate everything, ensuring the flour he has assigned to every baker is produced in the right amount and delivered to the right places on time, he must understand how all these decisions feed back on one another (for instance, bakers' suppliers eat bread). And he can't. The spontaneous coordination produced by each independent actor acquiring and using the information he needs about his situation cannot be replicated by gathering all that information in one place. There's just too much of it.

As a result, any intervention looses a flood of second, third and fourth-order unintended consequences that spill back on one another. Planners must start rushing about engaging in ever-more desperately ad hoc intervention, wielding authority that cannot be resisted (or there is no plan) or foreseen or controlled by elected bodies because there is no time for orderly rules and procedures in the face of the growing chaos. And arbitrary power, no matter how well-intentioned, is incompatible with freedom. It reduces citizens to serfs.

Hayek's argument has been ridiculed, misrepresented and ignored, even after his 1974 Nobel Prize in economics. But it has never been answered. No socialist has ever accepted the challenge of showing how planners, with or without computers, could take into account not only the number of factors necessary to model the economy but their literally incomprehensibly complex interrelationships.

Plenty of people maintain an enthusiasm for planning simply by having no idea what Hayek said. And in fairness, the book went largely unread due not only to its unwelcome message but also to its Teutonically impenetrable prose style. It could have been put better, and was, in Leonard Read's little masterpiece I, Pencil. But at the intellectual pinnacle it demolished the argument for planning.

Economics has never been the same since.

[First published in the Ottawa Citizen]

ColumnsJohn Robson