I’m reading through Hayek’s Individualism and Economic Order with a group of students. Other constraints have prevented me from blogging about as I promised to do earlier, but we had an especially fruitful discussion on Thursday afternoon. We got to Hayek’s classic essay “The Use of Knowledge in Society,” and we zeroed in on what Hayek writes about knowledge, data, and planning.
In particular, we divided the kinds of knowledge that are relevant to social orders as those kinds of knowledge that can confront a central planner as data–things given–prior to the planning, and those kinds of knowledge that cannot. A planner can have a great deal of scientific knowledge, and the various propositions of the natural sciences and social sciences can be known to a central planner before a plan is formulated and executed.
There are other kinds of knowledge–what Hayek calls “the particular circumstances of time and place”–which cannot confront planners as data outside of the prices, profits, and losses that are generated by the exchange process. As I read Hayek, I think this strengthens the case originally made by Mises that there is no way for socialism to function as an economic system; to paraphrase Mises specifically, without prices, profits, and losses, there is no way to determine how factors of production should be allocated so as to ensure that we do not satisfy less-urgent wants at the expense of more-urgent wants.
On one hand, this seems blindingly obvious. On the other hand, I can see how this is easy to dismiss because a critic might say that “consumers don’t have the right preferences and need to be re-educated.” Another critic might say that we can, in fact, solve complex optimization problems and arrive at a solution given tastes, technology, and an inventory of natural resources. This, I think, ignores two fundamental problems. The first is that tastes, technology, and resources aren’t “given.” The second is that optimization might be a very useful metaphor for what is actually happening, but it is only that: a metaphor.
We will discuss this in greater detail in my Mises Academy Course on Capitalism and Socialism.
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I believe that “Rediscovering Fire: Basic Economic Lessons from the Soviet Experiment” by Guinevere Liberty Nell makes the case that the Soviets were actually trying to change human nature. They recognized the problem of people making the “wrong” choice and the socialists thought they could reprogram human nature to make the appropriate choices. Of course that still doesn’t change the calculation problem.
Mises makes clear that the socialist central planner cannot plan a complex economic system, taking his own value scales as given, in the absence of market prices. And so the first challenge cannot even be raised since Mises never formulated his thesis in such a way that it was open to such a challenge. And Mises refutes the second challenge in Human Action, pages 710-715 of the fourth revised edition published by FEE.
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