Thursday, August 8, 2019

Four Laws: The Man in Washington Cannot Outperform Consumers and Producers

There are, I believe, Four Laws, scientific principles, if you like, that need to be understood in relation to all proposals for More Government.

The First Law is that Socialism cannot work because it cannot compute prices. This law was discovered in 1920 by Ludwig von Mises.

The Second Law is a corollary of the First Law. It argues that the Man in Washington, the Planner directing the economy, cannot outperform the consumers and the producers because he does not have enough informaiton. This law was enunciated by Friedrich von Hayek, a student of Ludwig von Mises. He first enunciated this Law in his The Road to Serfdom:

The Road to Serfdom was written during World War II when the Austrian Hayek was living in England. It was addressed "to socialists of all parties" and the argument was against the consensus among all educated people that "planning" was inevitable, a vital response to the increasing complexity of modern society. As Hayek writes, of that consensus,
[T]he complexity of our modern civilization creates new problems with which we cannot hope to deal effectively except by central planning.
It is true, for example, that certain activities in modern cities, such as public utilities, cannot be resolved purely by competition. This leads the planning advocates to the following:
What they generally suggest is that the increaing difficulty of getting a coherent picture of the complete economic process makes it indispensible that things should be coordinated by some central agency if social life is not to dissolve in chaos.
Hayek argues that the opposite is true.
This argument is based on a complete misapprehension of the working of competition. Far from being appropirate only to comparatively simple conditions, it is the complexity of the division of labor under modern conditions which makes competition the only method by which such coordination can be brought about. There would be no difficulty about efficient control or planning were conditions so simple that a single person or board could effectively survey all the relevant facts. It is only as the factors which have to be taken into account become so numerous that it is impossible to gain a synoptic view of them that decentralization becomes imperative. But once decentralization is necessary, the problem of coordination arises -- a coordination which leaves the separate agencies free to adjust their activities to the facts which only they can know and yet brings about a mutual adjustment of their respective plans...
This is precisely what the price system does under competition, and which no other system even promises to accomplish.
The above is the problem with Hayek. He writes long sentences in complicated prose that are unquotable!

But what Hayek is saying is that you guys that think that a complex economy requires coordination from the top -- from people like us -- in fact the opposite is true. The more complex the economy becomes the more it becomes impossible for the sainted planners to know enough about the various activities to make the right decision, or even have enough hours in the day to begin to make enough decisions to keep the economy from falling apart.

In modern parlance we would say that the economy is an emergent phenomenon, not a system, and so mechanical decisions, based on reading this dial or pulling that lever, cannot suffice. Or we could say that the planner-in-chief and his assistants just cannot have the bandwidth necessary to apprehend all the information necessary to understand the economy, let alone have the time left to adjust the economy to keep it on track.

In Britland, where Hayek was writing at the time, they started to talk about the planner the "Man in Whitehall." In Margaret Thatcher's era they would say that the Man in Whitehall cannot know enough to direct the economy. In the US we have our Man in Washington.

And here the situation is that the Man in Washington, the administrators and whatever, cannot know enough to direct their programs effectively. Because it is just too complex. That is why, for instance, we had the No Child Left Behind program and the Common Core education standards are all about. National standards! A gentle push to educators to make sure they do their jobs! But, you will notice, nothing has happened. That's because with a top-down planned system the problem is not just an inability to respond to individual events, but that the whole system is designed to prevent individual response.

I think though, that the "bandwidth" argument is the best, because you can make a comparision with the internet. Google Maps, for instance, is collecting traffic information every second from all over the world. And then distributes it out to each individual smartphone. How do they do it? Not with an administrator directing traffic, but by a decentralized system that runs by itself.

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