The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
Friedrich August von Hayek.
Conscious deliberate planning is a uniquely human activity. Non-human life forms don’t have the cognitive capacity to plan. But we do it all the time. It involves at a minimum some evaluation of the present conditions, a set of reasonably well-defined and reasonably stable preferences over present and future states of being, and an understanding of the various available means to achieve some selected or desired future state.
It takes brains
All this is cognitively demanding even for seemingly trivial tasks. It involves lots of brain power. I evaluate my present state: I am hungry and there’s no food at home. My well-defined stable preference: I prefer to eat and satisfy my hunger. My preferred future state: To not be hungry. The means available to me: I have money and there are restaurants in the vicinity. Plan: Go to a restaurant and eat.
We humans routinely, universally and incessantly engage in planning, individually and in groups. Nothing of any value can be accomplished without some planning. But all of us has learned from experience the truth of the poet Robert Burns’ claim that even “the best laid schemes of mice and men” often fail. The future is uncertain because there are factors beyond our control that we cannot forsee and therefore prepare to meet. We are boundedly rational. We are capable of reasoning but our capacity to reason is limited.
We are finite beings and therefore our capacity to hold and process information is limited. There are severe constraints on what any individual can know. This has serious implications and is consequential for our well-being. We are capable of planning relatively simple tasks but the grand big tasks are beyond our grasp. This fact is not as widely appreciated as we would want and leads to much unnecessary misery all around.
The examples of what we may call planning for simple tasks range from the trivial (planning on what to have for dinner) to the design, fabrication and selling of a smartphone, or even a commercial jetliner like the Airbus A380 costing hundreds of millions of dollars. The grandest of grand big planning is that of an entire large economy. Grand big tasks that involve centralized planning invariably fail, and fail spectacularly. This is what I plan to explore in this piece. (See, planning in action.)
Why the grand plans fail in their attempt to construct what Hayek called “the rational economic order” is fascinating. His answered that question in his 1945 seminal paper The Use of Knowledge in Society. True to his style of answering complex questions with pure logical reasoning, his argument is accessible to the average thoughtful person who is motivated enough to take the time to understand some basic principles of how the world works. We will refer to Hayek’s insights in the following although maybe not directly.
Families are centrally planned.
Whether we appreciate it or not, all of us are familiar with “centralized planning” and a closely related term, “command and control.” Command and control systems involve centralized planning. The family consisting of a set of parents and their children is the prototypical command and control unit which uses centralized planning as a means to achieve its various objectives. That’s our first experience of a command and control system. It works within the family setting and therefore we are naturally inclined to be in favor of it.
Not just in our familial settings, even at our workplace we find that centralized command and control planning works. Firms, corporations, offices, etc, are command and control. The top management decides on some goal, makes specific plans, and then gives out commands for the grunts lower down the chain to execute the plan. The success of firms — from the smallest family run firm to mega-corporations such as Apple, Boeing, Costco (my favorite store), Disney, eBay, Facebook, Google &c. — attest to the fact that centralized planning with command and control obviously works. We get more evidence to support our intuition that command and control should therefore work at the level of an economy.
That intuition that centralized planning can work at the level of the economy is wrong. Actually it is worse than wrong: it’s evil because it causes untold human misery. Centralized planning has killed more humans than all other causes of avoidable deaths, I think. If we are to be deathly afraid of anything, we must be afraid of central planning of economies. Certainly none of us is immune to the common human frailties but when some so-called leaders promote centralized planning of economies, it is usually due to an explosive combination of insatiable greed, acute ignorance, intense lust for power and extreme stupidity. The result is not pretty, and is usually heartbreaking.
Did you know that in India alone, every day, about 5,000 children die of malnutrition and preventable diseases? Not every week, or month or year. Every day. That’s heartbreaking and it is all due to that deadly (literally) combination of greed, ignorance, lust for power and stupidity among the leaders.
With that brief rant out of the way, let me look ahead to the questions we need to explore. First, why is it that central planning appears to work in familial situations and in firms but not in economies? Second, does planning really work for firms and corporations? Finally, if it is indeed true that centralized planning does not work at the economy level, why do petty despots (like Nehru) go for it despite the ruin it causes?
Please feel free to ask questions, provide push back and comment. Thanks.
[Part 2 of this series: Planning Works but not Always.]