When Central Planning Is Harder

In her column in the Washington Post Julia R. Cartwright makes a fairly standard libertarian criticism of James Galbraith’s book:

He is probably too optimistic about Russia’s economy, but the larger point stands: Sanctions are a case study in unintended consequences. The irony is hard to miss. Galbraith treats the failure to anticipate Russia’s adaptation as evidence against conventional economic policymaking without asking whether the same problem applies to the domestic planning he favors.

and

But the real case for markets rests on a problem he never confronts: local knowledge. Galbraith writes that when profit becomes “the accepted criterion of success,” the result is “pathological.” But prices — and profits — coordinate information about scarcities, technologies and wants, information that no central authority could assemble.

That’s a fairly convention von Mises/Hayek argument. But there are others.

Namely, businesses and consumers can modify their behaviors faster than planners can adapt their plans. However good the knowledge of the planners was at the time they made their plans, by the time they’ve issued their plans the environment has changed to the degree it no longer applies to the plan that was made.

That issue is particularly acute in the U. S. where the “long tail” phenomenon dominates many sectors. A few very big businesses control much of the sector, a smaller number of medium size companies also operate in the sector, and, potentially, thousands of small companies continue to operate in the same sector. And that phenomenon applies across the entire economy, in many sectors.

Said another way, China can coordinate certain sectors more readily.

There’s another challenge as well. Over time the “experts” who rise to positions of authority in the civil bureaucracy are increasingly those who follow the prevailing orthodoxy. The Soviet Union’s problem wasn’t that they didn’t pay enough attention to their experts; it was that over time their experts were increasingly telling them what they wanted to hear.

The difficulty is not merely that planners lack information. They must make decisions before that information changes in an economy whose participants can alter their behavior faster than a central plan can be revised. And the people authorized to interpret the information will, over time, tend to be those whose judgments fit the governing orthodoxy. A planning system can therefore fail while listening attentively to its experts: it may be hearing the experts its own politics selected.