David Glasner attempts to defend central bankers from the accusation of being central planners. He does so from a distinctively Misesian perspective — or, at least, that is his intention. But, he mistakes Mises’ definition of socialism as a definition of central planning, where the former suggests the collectivization of the means of production and their rationing by means of a planning board (or something similar). Yes, socialism requires central planning, and yes socialism is untenable, but this does not mean that central planning can only occur in a socialist economy.
Mises, fortunately, defines ‘planning’ for us in “Small and Big Business”, in Economic Freedom and Interventionism (pp. 234–252). Contrary to Glasner’s claims, Mises’ definition presupposes the existence of a capitalist economy. Writes Mises,
The characteristic feature of this system of social control or planning is to be seen in the fact that it preserves to some extent a sphere in which the initiative of the entrepreneurial spirit can benefit the consumers. (p. 244)
It is best to approach the topic of central planning by first exploring the organization of society free from intervention. It is this form of organization that Hayek dubs “spontaneous order”, and it basis itself on human action — the fact that individuals act purposefully, economizing between means and ends. As George Reisman, in Capitalism, carefully puts it, there is planning in the free market, but it is a planning by part of the individual market agents for themselves. It is a plan to accomplish a chosen end and allotting means towards the achievement of that end.
Central planning refers to planning as a means of social engineering. In other words, the central planner intervenes in the economy to manipulate the outcome. Why does the government fund healthcare? Because it is believed that if they do not then the market will inadequately supply health services. Why do Keynesians support fiscal stimulus? Because there is insufficient aggregate demand. These are all forms of interventionism, and as such they are also all forms of central planning. They represent the intent to manipulate an outcome away from what it would have otherwise been had it been left to “spontaneous order”.
Of course, interventionism is not the same thing as socialism — socialism is a very specific economic system, where the means of production are collectively owned. But, central planning is not the same thing as socialism; it is merely a facet of socialism. Planning boards can exist in a capitalist economy (government) and a socialist economy.
Is central banking a form of central planning? Absolutely. The role of central banks is to help avoid certain outcomes which are expected to produce themselves in a free market. This includes price stabilization, unemployment targeting, and the guarantee of financial stability. Central bankers look at the data and decide whether or not an intervention is necessary. By the very definition of their actions they are centrally planning.
So, in the interest of “clear thinking” (as Glasner puts it), let us all admit that if we are in favor of certain forms of interventionism then we are in favor of central planning in those cases.
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I think this is a really interesting and clear post. Are there situations in which Austrians support intervention?
Or maybe it’s better to put the question in parts:
1. Do Austrians believe that “spontaneous order” always produces optimal outcomes?
2. If not, then do Austrians believe there is any intervention strategy capable of improving outcomes for the cases where “spontaneous order” is sub-optimal?
3. If yes to 2, do Austrians believe that those interventions should be pursued, or are there moral considerations (tyranny of the state &c) that demand we avoid those actions even though they produce better outcomes?
Regarding question #1, I point you to my article “The Implications of an Imperfect World“. Do Austrians believe in market optimality? No. However, Austrians do believe that on the whole interventionist policies will lead to outcomes which are relatively less “optimal”; see my “Government Spending is Bad Economics“. Optimality itself is difficult to define; who decides what is optimal?
Some Austrians do support certain interventions, although mostly in lieu of the preferred solution (the free market). For example, many free bankers support some form of monetary interventionism, in lieu of a free banking system.
Jonathan,
I think you are downplaying the “central” in “central planning,” not to mention downplaying the fact that Mises said “central planning” is “impossible.” There’s no doubt that the Fed is trying to override the forces of spontaneous order that would rule in the monetary realm absent what it’s doing, but to call it “central planning” is to, ironically, give the Fed too much credit. The first thing one learns in studying central banks is that they cannot and do not “control” the money supply because the choices made by both banks and the public with respect to their reserve and cash holdings will determine the ultimate effect on the money supply of the Fed’s changes in the monetary base.
The Fed gets this too. Yes, they are intervening in the monetary order, but they know as well as anyone that they cannot “centrally plan” it precisely because they operate in a broader market in which banks and the public can still make choices.
The phrase “central planning” was historically associated with Marxian attempts to abolish the market and choice and commodity production and replace it with ex ante coordination through one unified plan. This is not what the Fed does.
Finally, consider that your quote from Mises appears to talk about “planning” not “central planning.” And also consider this from Mises (HA: 287):
“The substitution of economic planning for the market economy removes all freedom and leaves to the individual merely the right to obey. The authority directing all economic matters controls all aspects of a man’s life and activities. It is the only employer. All labor becomes compulsory labor because the employee must accept what the chief deigns to offer him. The economic tsar determines what an dhow much of each the consumer may consume. There is no sector of human life in which a decision is left to the individual’s value judgments.”
This does NOT describe the world we in habit, even the sub-world of monetary policy. I would abolish the Fed in an instant if I could, but that doesn’t mean it’s engaging in central planning. It’s not. It’s part of the interventionist state, which is a whole other beast.
But isn’t price fixing a form of planning? And isn’t that what the Fed does with (short-term) interest rates?
Actually no Jeff. The Fed Funds rate is a target. The Fed adjusts the monetary base with the hope that its additions or subtractions of reserves will lead to banks making changes in their bank-to-bank lending that will cause the rate to change. It doesn’t SET the Fed Funds rate – that’s determined in the bank-to-bank market. It can AFFECT it by additions and subtractions, but it does not set it.
The Fed does set the “discount rate,” which is the rate IT charges banks that wish to borrow reserves from it. But even here, it is often more concerned with the spread between the DR and the various market rates as that’s what will determine whether banks will try to borrow from the Fed or elsewhere. The Fed is more like a very large firm trying to price compared to where the competition prices. Banks can borrow from the Fed, but they can also borrow from each other or other sources.
Interest rates are set in the market. The Fed can only totally control ONE thing: the monetary base, which is the supply of currency plus the supply of bank reserves.
Isn’t the very fact that the Fed often misses its own targets evidence that the Fed is not centrally planning the money supply?
And don’t get me wrong folks: I think like all acts of intervention, the Fed is subject to the same criticisms one can make of central planning (knowledge and incentives stuff), but that’s also true of other forms of intervention, like all the regulatory stuff Jeff’s been writing about recently.
To clarify:
If the Fed dramatically expands reserves, interest rates will indeed fall, but that’s not because the Fed “sets” them like fixing a price, but because they’ve dramatically expanded the supply of loanable funds (without a corresponding increase in saving, c.p.). So yes, expanding the monetary base will (assuming banks don’t just sit on it) lead to lower interest rates, as in the ATBC, but not because the Fed is setting rates/prices.
To me, this seems like a semantic technicality. So the Federal Reserve can’t force banks to adopt a certain rate of interest. But, it can manipulate the monetary base in an attempt to change price and profit signals which may induce banks to reduce the rate of interest on their own. In as wide a sense as possible, I don’t see a difference.
There’s a huge difference. The Fed cannot *control* interest rates or the money supply. Central planning was *premised* on the belief that the planner could control the outcome – that is, there would be no unintended consequences. See my reply to your other reply for more.
yes, all these things I know. It still seems like price control.
Aye, the Fed is merely dumping its shoddy product wholesale onto the markets. Like it has diarrhea or something.
Central planners are notorious for missing targets. That does not mean that they were not engaging in central planning. It simply means that they could not shape reality to their will, which is exactly why central planning does not work. One could have made the same comment about the Soviet Union. “Because the Soviet economy was in the throes, that was evidence that there was no central planning. Look, the market didn’t respond as they liked. Therefore, there was no central planning.” It seems to me a fallacious argument, even if the FED does not engage in central planning.
Perhaps it’s true that the FED’s activities are merely intervention, but this argument does not lead to that conclusion.
I am not sure that Mises ever writes that central planning is impossible, although I may be wrong. He writes that socialism is impossible, but I don’t think we can equate central planning with socialism. I’m not so sure that your quote from Human Action supports this equivocation (and, for what it’s worth, this quote refers to “planning”, as well — not “central planning”. I’m not sure Mises recognizes a difference in the broader sense). Mises is referring to the complete substitution of planning for the market, but the quote does not suggest that partial substitute is impossible.
It is true that Mises writes that a mixed economy is impossible. There is either capitalism or socialism. Even an economy beset by interventionism is subject to the market process. This supports that you write in regards to central banking and the inability to absolutely control every variable (including the money supply).
But, I don’t think that complete control over every economic variable is required for central planning. If we adopt this definition of central planning then the term almost loses its meaning. There are two forms of planning: economization and planning by part of another party. If someone is trying to manipulate certain variables that affect how others economize then, in my opinion, this constitutes a form of central planning — that person is planning (or manipulating) how others economize.
So, OK the Federal Reserve is limited in its ability to plan. That doesn’t mean that it isn’t practicing central planning. Central bank policy is still a form of social engineering.
I’m only using central planning the way Marx and the Marxians do, which IS the substitution of ex ante coordination for any choice by actors. It IS “complete control over every economic variable.” That’s precisely what Marx wanted and what people like Otto Neurath thought would be possible.
Read Marx. What he objected to about capitalism is precisely the idea of unintended consequences because that meant humans didn’t control their social world in the same way they were learning to control the natural world. Marx really wanted to abolish unintended consequences in the economic realm by “the people” collectively taking control of their economic destinies and generating exactly the pattern of resource use they thought was optimal. No social coordination and mutual adjustment, just an ex ante decision about what should be produce and how and by whom.
When I read “central planning,” I take it like Marx meant it.
I’m not well read on Marx (I thought Marx believed that his system would lead to an anarchic post-scarcity society?), but again, that socialism includes a central planning board that directly controls all economic variables doesn’t mean that central planning boards can’t exist in a capitalist society, where their ability to control is more limited. Marx referred to his system as the communist system, not the central planning system. To me that suggests some degree of differentiation, and that the definition of central planning is not necessarily the same thing as the definition of socialism/communism.
What do we call planning outside of economization? Interventionist planning? Planning by part of an individual who is looking to partially control the economization of others? The difference seems semantic at best.
I think you’re just wrong here to claim that “central planning” is not the same thing as socialism/communism. Writers on both sides of the issue in the history of ideas have believed otherwise. There’s a reason Lavoie titled his book on the calculation debate *Rivalry and Central Planning.*
There’s also a reason that Marx wrote, in Capital: “the life-process of society, which is based on the process of material production, does not strip off its mystical veil until it is treated as production by freely associated men and is consciously regulated in accordance with a settled plan.” (p. 84) Marx wanted people to collectively control their future, hence “planning.” And the “central” in central planning is necessitated by the fact that their must be a “settled” plan that unifies everyone. Piecemeal or decentralized planning would replicate the problems of capitalism.
Marx wanted to transcend commodity production with production for direct use. Marx wanted to end the alienation and exploitation of capitalism, and that meant production for direct use as directed collectively and centrally. Of course, none of this is/was possible, but Marxian socialism IS central planning.
This is a matter of degree more than one of definition… how are the Fed’s interventions not driven by a central planning ideal? Sure, they may not put a gun to our heads and tell us where to put our money (yet), but they do put a gun to our heads and tell us to accept their “money”. That one power they use, to the best of their ability, to influence us into putting our money where they think we should. The fact that the central plan is ineffectual (it always is) and doesn’t involve direct, violent repression (again, not yet) doesn’t make it less of a central plan.
The “pushing on a string” thesis that the Keynesians had shortly after the 2008 debacle illustrates this point perfectly well: the Fed does want to “push” the economy this way and that, they just don’t always have the power to do so.
‘ I think you are downplaying the “central” in “central planning,” not to mention downplaying the fact that Mises said “central planning” is “impossible.” ‘
Hmm. They call it “central” banking don’t they?
If central planning is impossible, as per your characterization of Mises, then even what they do in communist or socialist states cannot be considered to be central planning.
Finally, as long as there is a monetary economy, some private decision-making will remain so government planning must always be incomplete. Even in the USSR and China, if I recall correctly, there were times when private incentives or property, and thus private decision-making, were reintroduced (perhaps temporarily?) in various sectors.
“If central planning is impossible, as per your characterization of Mises, then even what they do in communist or socialist states cannot be considered to be central planning.”
That’s exactly correct. The USSR was NOT centrally planned, or at least not since the end of War Communism in 1921. It was a highly distorted/intervened in commodity producing economy. Marx would have recognized it for what it was: heavily state-driven capitalism.
Numerous scholars have made this point, and I find it amusing that people who would normally say that Mises had all this right are willing to concede that these countries were, in fact, examples of central planning, when Mises said it couldn’t be done, at least not without quickly leading to utter destruction.
OK, so “the thing that is commonly known as central planning” and that has been practiced or attempted by the most centrally planned states (USSR, etc.) is not really central planning as defined by Mises (since that’s impossible). Fair enough, I’ll go along with that. What I believe Jonathan to be saying in substance is that central banking, and indeed all forms of intervention, are forms of “the thing that is commonly known as central planning” or if you prefer, “non-Misesian central planning of the type practiced by the USSR”. I agree with him. See my comment below.
Somehow, though, I don’t think that defenders of central banking are trying to make the point that while it may “non-Misesian central planning of the type practiced by the USSR”, it’s not “the (impossible) form of central planning defined by Mises”.
Horwitz and Boettke are probably the last people in the world you want to rely upon for an understanding of Mises’ argument.
Steve Horwitz: “The phrase “central planning” was historically associated with Marxian attempts to abolish the market and choice and commodity production and replace it with ex ante coordination through one unified plan.”
That isn’t the historical association that Mises saw: quite the opposite. He characterized the move toward planning as a turn AWAY from “Marxian dogmatism”.
From the Small and Big Business essay Jonathan cites:
“The attitude that the German “majority socialists” adopted in 1918 and 1919 marks a turning point in the socialist movement in the countries of Western industrial civilization. The nationalization issue receded more and more into the background. Only some adamant visionaries, entirely blinded by Marxian dogmatism and unfit to face reality, still cling in Germany, England and the United States to the outworn nationalization slogan. With all other foes of the market economy the party cry is now “planning.”"
In that essay, Mises characterizes the “planning” movement as an interventionist movement which, by subtly crippling the market and replacing it incrementally with a network of government diktats, ultimately would lead a Zwangswirtschaft, or socialism of the German pattern, characterized by a sham market.
This is contrast to the Marxian-inspired nationalization movement which, by forthrightly gobbling up the market bite by bite, leads to the more overt socialism of the Russian pattern, in which there is no sham market.
So your (A) yoking of Marxianism and planning and (B) distinction between planning and intervention don’t hold water, at least with regard to the Misesian use of those terms.
Good article. But it makes me wonder if there really is a distinction between central planning (ie. government intervention) and socialism.
To the extent that intervention supersedes individual freedom, it means that the individuals don’t have complete ownership of the means of production, since ownership means control.
If government takes some control, as it does for central planning of monetary system, then is it not fair to call it partial socialism/fascism?
Julien and Steven,
Socialism and capitalism refers to how the means of production are distributed and owned amongst the division of labor. In socialism, the means of production are collectively owned. In capitalism, the means of production are privately owned.
Central planning refers to a type of planning. Of course central planning is necessary in a socialist economy, because the other type of planning — economization — is impossible (no private ownership of the means of production). But, that doesn’t mean that central planning and socialism are one in the same; it just means that central planning and socialism go together. But, that these two go together doesn’t mean that central planning and interventionism don’t go together, either.
They are part and parcel of the same thing. Central planning describes the action, socialism describes the thing. Whether or not all central planners are inherently socialist depends on whose definitions you care to use and how formal you want to get with the discussion.
Remember that Socialists cheered the Fascists of Italy, Nazis of Germany, Stalinist-Marxists, and all forms of Communism as applied forms of socialism until these forms of government turned out to be the mechanism which destroyed wealth and systematically murdered millions of their own citizens. Modern Socialists now try to draw a distinction and change their own definitions to exclude their previous allies. Their are ‘right wing’ socialists and ‘left wing’ socialists just like there is ancaps and socialist anarchists.
What we face now in the USA is a sort of clumsy Italian-style fascism lite. It’s a corporatist state with huge amounts of deficit spending, special privileged major corporations working with the government to manage the economy. A government that is so tightly wound into business interests that Wall Street and the Federal government are becoming inseparable.
We even have the war mongering (We are involved in no less then 3 shooting wars right now, have bombed several others in the past year or two, and have military stationed virtually all major countries in the world) that was a distinct feature of Italian Fascism and the propensity to use the police and secret agencies to monitor and control our citizenry.
Like I said it’s ‘lite’. It’s going to require a bit of restructuring of the government to go full-corporatist state. We are going to need to have serving members of committees in governments that are active employees/representatives of major corporations that control and share fairly distinct slices of the USA economy to get to the same level of ‘corporatism’ that Italy got to before WW2.
If one favours government intervention in markets, one is favouring the replacement of private decision-making and planning with decision-making and planning by government. Whether you want to call the latter planning “centralized” or not is a question of semantics. But clearly, “central” banking involves the “central” concentration in a very few hands of planning and decision-making that would otherwise have been highly dispersed. It also involves attempts to target and plan key attributes of the economy like price levels, inflation, NGDP and interest rates.
I am aware that the phrase “central planning” usually refers to a certain high threshold of intervention but that is matter of degree not of kind.
It strikes me that what devotees of central banking really don’t like about the reference to central planning are a) the implied point that central planning is what you automatically get more of when you reduce opportunities for private planning, b) what they consider to be the inconvenient implication of a) for perceptions of governance in modern democratic states (i.e., there is a lot of central planning going on), and c) the fact that the public is generally aware that “central planning” failed in the USSR. In other words, central planning’s got a seriously bad name so we better not call “central” banking a form of central planning.
Jonathan,
I don’t see how you can reconcile “central planning” being an element of “interventionism” with Mises’s own typologies. And, fwiw, in MES, Rothbard (p. 830ff) has a section titled “socialism and central planning” where he both treats them as essentially synonymous (correctly) and uses quotes around “central planning” to make the point that one can’t actually engage in it. That section is separate from the ones dealing with other sorts of “violent interventions into the market,” namely those we’d call “interventionism” of various sorts.
Steve,
It seems that you are being unnecessarily narrow in your definitions. Nobody here is arguing that full central planning is possible, only that the central bank engages in a limited form of central planning. In the same way full socialism is not possible but socialized health care is. The government is certainly capable of planning certain aspects of the economy, as long as enough of the economy take place in the market to allow prices to develop.
Unless you are saying that agents of the government can exert NO control over any aspect of the economy I don’t think there is any real disagreement here.
On a macro perspective (that of the whole economy) a non-socialist state (by your definition) does not centrally plan but intervenes in , for example, the monetary system. Yet, in a “micro” perspective this non-socialist state centrally plans one sector of the whole economy – the monetary system.
Regarding the matter whether it is proper to call what a socialistic state does a central planning: the individuals in this state can not act toward production in the means-ends framework, that is they can not plan for themselves what to produce and etc. But the state as the sole owner of the means of production actually DO make plans for how scarce resources to be allocated, but here the word “plan”does not have it’s economic meaning which it has when we refer to the (economic) planning of the individual factor owners. When we are talking about the allocation of resources through the different lines of production the word “to plan” is meaningful in the economic sense, that in which resources are utilized according to consumers most urgent wants, only when the “to plan”is done by individual factor owners.
Central banking = central planning = sicialism.
Just have a look at Huerta de Soto’s book on Money which has a chapter THE “THEOREM OF THE IMPOSSIBILITY OF SOCIALISM” AND ITS APPLICATION TO THE CENTRAL BANK which includes the following paragraph:
The system made up of a central bank and private banking
with a fractional reserve is the most disruptive example of
“central planning” in the financial sphere. Indeed this system
is founded upon a privilege which private bankers enjoy
(the use of a fractional-reserve ratio) and which naturally
causes distortions in the form of credit expansion, malinvestment
and recurrent cycles of boom and recession. Moreover
the entire system is orchestrated, managed, and supported by
a central bank which acts as lender of last resort and exercises
systematic, institutional coercion in the field of banking,
finance and money.
Huerta de Soto writes that any interference with entepreneurial activity inhibits economic calculation and should therefore be called socialism.
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