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Hayek on Planning an Economy

Stephen is an online writer and former English teacher who is interested in sociology, economics, and literature.

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I know I shouldn't, but I have a packet of tobacco on my desk. This addictive product has had quite a journey to reach my desk in Spain. It was packaged in Germany but, before that, it had to be grown, processed, shipped, processed again, packaged, marketed, priced, and shipped once more to a distributor in Spain who... Well, you get the general idea. My packet of tobacco serves, as many things around us do, to illustrate the complexity of the world around us.

We take for granted that, when we go to the supermarket, the products that we want will be on the shelves. We give little thought to the myriad of transactions that lie behind each purchase.

In this article, I will talk about what Friedrich Hayek thought about how economic activity should be run - a misleading promise, as you will see.

Friedrich Hayek

Friedrich Hayek

The World According to Hayek

Let's begin our exploration with a quotation. Much of Hayek's work sought to illustrate the point that he was making when he said:

"To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm."

An ancient group of hunter-gatherers lived in a restricted world. Their group would have been small, linked by kinship, and probably they did possess the knowledge they needed to survive and the power to shape those processes that were within their control. If game were scarce, or the rains failed, they could move to better lands. However, the connections within the group and the relationship of the group to the environment were relatively simple. Simple, that is, in economic terms.

But most of us live in a different world. Over time, people formed larger groups, cities developed, and specializations. Groups flourished through joining together and sharing experiences and ideas. But, as groups got larger, coordinating and processing information became ever more difficult. Still possible, to an extent, in a feudal society, but, with the post-Enlightenment growth of capitalist societies, it became impossible.

Simpler times

Simpler times

Sharing information and processing this information rationally works well in those sciences in which people agree on the basics and can judge progress by accepted measures and results. It can't work in economics, Hayek claims.

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Complex Adaptive Systems

Let's have a look at three features of a Complex Adaptive System (CAS). Keep the example of my packet of tobacco in mind:

  1. The system has a number of agents. Each of these agents acts independently. An agent decides how to act and, as time goes on, these decisions evolve. Market conditions change, the agents change with them.
  2. These agents interact with one another. The manufacturer talks to the shipper, for example.
  3. The whole system becomes greater than the sum of its individual parts.

Notice that there is no one running a CAS. No single person is responsible for ensuring that my tobacco gets to me. Notice too that each agent in this chain of processes is influenced by other factors - the grower's yield depends on the weather, the shipper's ability to deliver depends on the availability of trucks, and so forth.

Tinkering with one agent may well affect the whole chain. And no one can foresee the result.

Planning - The Enemy of Freedom

The modern economic system is a perfect example of a CAS. It is an intricate network with many factors in play. No one person or institution can possibly have all the knowledge necessary to manage its course. If we go back, once again, to my packet of tobacco; the farmer knows his crop, the best time to plant and harvest, he knows how to maximize production. The same goes for every other agent in the process, each agent knows his business - the ones who don't, go broke. Even I, as the humble end-consumer, have an important role to play because I can choose whether or not to buy the final product.

Anyone or any government that tries to centrally plan an economy is taking on an impossible task simply because no one authority can know everything that they need to know. Freedom becomes restricted because choice is restricted.

Perhaps the most egregious example in the twentieth century was Stalin's Soviet Union. We don't need to wonder at Stalin's psychology. Indeed, we can allow ourselves to say that he had the best of intentions (dubious, I know). Regardless of Stalin the man, his drive towards collectivization and the subsequent, and closely connected, rapid industrialization was designed to drive the Soviet Union into a position of parity with the capitalist world. The ordinary citizen certainly did not benefit from an increase in personal freedom. Quite the opposite and, for many, the results were tragic.


We can build bridges but...

We can build bridges but...

Building a society is not the same as building a bridge. With a bridge, experts can team together, pool their knowledge and design then build the structure. It is complicated, not everyone can do it and mistakes are made. But it is feasible. Society, and the economics that drive it, is a completely different kettle of fish.

Yet, despite Hayek's warnings, after the Second World War, economies in the West became subject to central planning. Influenced by John Maynard Keynes, governments took an ever greater role in planning.

Hayek believed that Keynes was terribly mistaken, governments had no business interfering in economics. Yet, despite their unbridgeable (!) differences, the two men liked and respected each other. In fact, Hayek was unfailingly polite to his opponents and always maintained that they were acting with the best of intentions. They just happened to be wrong.

His thoughts on government intervention in economic planning were clear - Never, never, never should they interfere. But this didn't mean that he saw no role for government. Quite the opposite, wealthy societies had a duty to look after the disadvantaged and ensure that they were looked after. When Margaret Thatcher said that there was no such thing as society, Hayek would have disagreed.

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