Hungarian Conservative

The Knowledge Problem in Central Planning

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Central planning is not viable because it can never collect enough information about the market to optimally coordinate economic interactions. It is also a path that may lead to a totalitarian state.

Somewhat counterintuitively, Marx liked how production is arranged in a factory. He was amazed by how different departments in the same factory work harmoniously to produce the final product. He liked that everyone has a place, and everything flows as planned as opposed to capitalist economy which he described as ‘anarchic’. The Marxist term, ‘anarchy of capitalist production’ describes the spontaneity and volatile nature of commodity production based on private property. Since free markets are not pre-planned (in contrast to command economies), no single agent knows how and when a product is going to be put to its final use—if at all. This chaos and uncertainty of capitalism may lead to overproduction (due to the uncertainties outlined above), which in Marxist thought is usually interpreted as a sign of the crisis of capitalism. As opposed to a chaotic and anarchic capitalism that is prone to crisis, Marx advocated for the scientific planning of all interactions in an economy—much like the way the stages of production are pre-planned in a factory.

Marx argued that the long circulation time is a feature of capitalism which is both inefficient and leads to alienation

To overcome the chaotic anarchy of capitalist production, Marx advocated for a systematised, centralised, comprehensive planning where everything that happens in an economy is arranged in advance. Marx argued that economies should be ‘scientifically planned’ instead of letting them function on their own. Scientific planning would put an end both to the inefficiencies of markets (e.g., overproduction) and alienation. Alienation springs from the producers’ inability to see the product of their labour being put into good use. In a capitalist market, commodities are produced relatively fast but then the same good is circulated for a long time before being sold to the final consumer. As an example, to illustrate the difference between production and circulation time, think about the masses of books in bookstores which stay on the shelves sometimes for years before being purchased. Marx argued that the long circulation time is a feature of capitalism which is both inefficient (i.e., consumers pay for storing books in bookstores for years instead of just for the book) and leads to alienation. To overcome the alienation that comes for not seeing the final use of produced goods due to the long circulation time, Marx proposed to scrap circulation entirely. According to the utopian idea of scientific planning, everything can be pre-planned, thus everything can reach the final consumer exactly when the consumer needs the product.  

While on paper such ‘scientific planning’ sounds like something that would enhance the efficiency of markets, in reality it seems certain that no one can gather enough knowledge to coordinate an economy so precisely. In the Austrian School of economic though this is known as the ‘knowledge problem’. The knowledge problem refers to central planners’ inability to access sufficient and accurate information to rationally plan and coordinate a national economy. According to prominent Austrian School economists, like Friedrich Hayek and Don Lavoie, the central planning agency is unable to gather enough information about the state of the economy to plan. The ‘knowledge on the spot’, the localised knowledge about demand and supply of individuals on the ground cannot be replaced with the knowledge of a single central agent who is unable to collect sufficient information to control an ever-changing dynamic market.

With the aim of controlling and coordinating all aspects of a complex market, they infringe on the freedom of individual economic agents

Beyond the knowledge problem, the Austrian School also criticised central planning for its ‘power problem’. The power problem stems from the knowledge problem, and it means that as the planners try to accumulate sufficient information about the whole of the economy, with the aim of controlling and coordinating all aspects of a complex market, they infringe on the freedom of individual economic agents, depriving them of their freedom to make economic decisions. As the central planning board tries to design the whole economy, that is, the interaction of millions of actors, the planner inevitably turns into a tyrant, coercing every individual to keep to the plan even if it is unreasonable. According to the ‘Austrians’, this ‘power problem’ explains why all planned economies were dictatorships.

Overall, the ‘knowledge problem’ demonstrates why central planning is contrary to the central tenets of conservatism. Conservatism holds that society is a ‘partnership not only between those who are living, but between those who are living, those who are dead, and those who are yet to be born‘. The wisdom of any single generation is very limited—but the combined knowledge of present and past generations that inform the decisions of the generations to come make up the wisdom needed to form societies. The stock of wisdom each one of us possesses is small—therefore, no single individual can craft any abstract theoretical design that can replace institutions that are founded on the knowledge of multiple generations. Just as any one generation is unable to have on its own enough wisdom to devise a functioning society, central planners are also unable to accumulate enough knowledge on their own to control markets which are naturally shaped by the collective knowledge of millions of economic agents. Free markets built on the collective knowledge of many minds is the economic ‘mode of production’ that is instinctively supported social conservatives.

Central planning is not viable because it can never collect enough information about the market to optimally coordinate economic interactions. It is also a path that may lead to a totalitarian state.

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