On the relevance of Hayek: centralized economic planning is dead

Many blog posts cite F.A Hayek’s essay Use of Knowledge in Society and, well, it’s a pretty impressive and important part of the intellectual foundation for free enterprise. Hayek wrote the essay when large-scale, centralized economic planning was becoming the norm and touted as the way of the future. It was central planning vs. capitalism and Hayek’s essay in the American Economic Review put the nail in the coffin of the intellectual (not political) debate.

            As most readers know, Hayek argues that central planning cannot work because not only lack the tacit and local knowledge needed to allocate resources, but also the knowledge needed to allocate resources isn’t available to them; that knowledge is communicated in a market via prices- knowledge, which the process itself creates.

            Those on the ‘far’ left almost universally admit that markets can outperform central planning, and, in fact, large scale, nationalized, economic planning is dead both as a public policy and academic debate. However, Hayek’s most cited, and perhaps most influential contribution (The Use of Knowledge in Society) remains as important as ever- even though central planning doesn’t exist as it did in 1940.

            Today, governments are increasingly engaging in a new form of central planning; it’s central planning that isn’t quite like the 1940’s but nonetheless very similar. High-level bureaucrats, which we politely call ‘enlightened experts’, are attempt to socially engineer a better society via public policy. Though they aren’t making five-year plans for the entire economy, these enlightened experts are still subject to tall of the problems that Hayek points out.

            The statisticians, economists, and super computers at The Federal Reserve are trying to engineer an Economic recovery. Similarly ‘trained’ experts over at USAID are trying to engineer economic development abroad.  Legislatures want to engineer a more ‘fair society’ by redistributing wealth, while other legislatures want to engineer a virtuous society by redistributing their moral values- nearly without regard to the consequences of their moral preference. Other lawmakers are busy subsidizing ‘good’ habits, like homeownership (that turned out swell), and taxing the ‘bad’ ones, like cigarettes.         

            Unfortunately, all of the government workers described above lack the knowledge to be able to execute their plans, and their constant failures place costs on the rest of us. Large scale economic planning may be dead, but understanding the Use of Knowledge in Society is increasingly relevant.

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