Why Government Can't Manage Society
By Richard Ebeling
This year marks the seventieth anniversary of the end of the
Second World War. On May 8th, Nazi Germany surrendered to the Allied Powers in
Europe. On September 2nd, Imperial Japan surrendered to the Allies on the deck
of the U.S.S. Missouri in Tokyo Bay, thus ending a global
conflict that is estimated to have cost the lives of upwards of 50 million
people.
In autumn of 1945, everyone was looking forward, finally, to
a world at peace that could recover from the destruction of a catastrophic war
and move towards a bright new future. But what kind of world was it to be?
Nazism and fascism had been militarily and ideologically pulverized in
the conflict. No one wanted to goose-step to Hitler and Mussolini's grandiose
dreams of a world-ruling master race or a war-worshipping aggressive
nationalism to which innocent human beings were to be sacrificed.
The Postwar Hope for a Better World Through Soviet Socialism
Instead, many looked East to the Soviet Union that stood as
the new colossus that had bore the brunt of the Nazi war machine; Soviet
socialism seemed to offer a vision of a "better world" free from
economic exploitation or class distinction.
Before the war, under Comrade Stalin's bigger-than-life
leadership, socialist central planning and a spirit of serving the "common
good" of humanity seemed to be creating a colossal industrial society in
what had been the backwards agricultural nation of Russia a mere handful of years
before. This was all being done, Soviet propaganda assured, for the benefit of
the mass of the workers, and not a handful of greedy plundering capitalists.
A
people's utopia was in the making.
The German invasion had destroyed many of the industrial
centers in European Soviet Russia. But beyond the Ural Mountains, Stalin had
directed the reconstruction of new industrial centers that had ground out vast
amounts of military hardware and equipment that stopped the Nazi onslaught, and
had brought the Soviet Army to the central of Europe, with the red flag raised
over Warsaw, Budapest, Vienna, Berlin and Prague.
Marxian ideology (and prophecy) asserted the inevitability of the
coming socialist society. Communist parties both within the orbit of Stalin's
new empire in Eastern Europe and in the Western democracies outside
of Stalin's grasp were all at work to bring the totalitarian collectivist future
to pass.
Western Socialists Wanted Socialism with a Democratic Face
Of course, not all socialists in the West were slavish
servants to the Soviet Master in Moscow the way the communist parties
were so bound. Many Social Democrats believed that democracy was both compatible with
and an essential complement to a humane socialism, a socialism that did not
reduce humanity to obedient cogs in a giant collectivist wheel directed by a
"dictatorship of the proletariat." They wanted socialism with
traditional civil liberties, personal freedom and democratic politics.
It is important to remember, however, that at a fundamental
level the conflict between Western European democratic socialists and
Moscow-managed single-party communists on opposite sides of the European divide
was a
dispute over means and
not desired ends.
Soviet Communists and Social Democrats All Wanted Central
Planning
In the years before, during, and immediately after the war, the dispute
and debate between "communists" and "socialists" was over
two things: How shall the collectivist society come about: through ballots or
bullets – through democratic elections or violent revolution? And once
in power, would collectivist rule and control be maintained through multi-party
democratic choice or on the basis of one-party dictatorship with
the suppression of civil liberties and political freedom?
But both Western socialists and Soviet-style communists, nonetheless,
still agreed about the end or goal to be attained: near or full abolition of private
ownership of the means of production and the implementation of government
central planning of production and distribution in the place of decentralized
and competitive private enterprise.
Capitalism was the
enemy for both Soviet-oriented communists and those desiring a hoped for
"democratic" socialism. Private enterprise was considered the root
of "exploitation" of the workers, "social injustice," and
economic inequality of income and wealth. Both communists and
socialists believed in government central planning of a society's economic
activity over virtually all facets of life.
Most American Leftists Pushed for Interventionist-Welfare
Statism
The United States, of course, was noticeably different. The
socialist ideal of nationalization of the means of production and central
planning had never caught the imagination or the political traction the way
they did in Europe. In spite of America's flirtation with economic fascism during
FDR's early New Deal days and the wartime planning under which virtually the
entire U.S. economy was put into the straightjacket of government control, the
postwar direction was for the freeing of the market from direct and total
government planning.
In America, outside of the more consistent and vocal voices
on "the left," the debates focused on the degree to which U.S.
industry needed to be regulated by the government to tame tendencies toward
supposed monopolistic and oligopolistic inefficiencies and distortions in the
market; the extent to which New Deal-introduced welfare state programs should
be enlarged and extended; and, of course, the requirements for
"activist" fiscal and monetary policies to assure and maintain
"full employment" inspired by the virtual monopoly dominance of Keynesian ideas
over the thinking of economists and government policy-makers in all matters of
macroeconomic theory and policy.
F. A. Hayek was Critic of Keynes and Author of The
Road to Serfdom
But in that same September of 1945, now seventy years ago,
there appeared a lead article in the American Economic Review, the
leading journal of the American economics profession, on "The Use of
Knowledge in Society," by an "Austrian" economist named
Friedrich A. Hayek who had been teaching at the London School of
Economics for almost a decade and a half.
Born in Austria and having graduated from the University of
Vienna, in the 1930s Hayek was recognized as the leading opponent and contender
against the ideas of the Cambridge University economist John Maynard Keynes and
his emerging "Keynesian" economics. Hayek was also acquiring an
international name recognition from a book he had published a year earlier in
1944, The Road to Serfdom.
The theme of The Road to Serfdom is that
while socialism had been promised as a "new world" of freedom and
prosperity for all with an abolition of capitalist exploitation, in
reality the inescapable concentration of power and control in the hands of a
socialist government so to centrally plan the economic affairs of the society
would lead to the threatened loss of not just economic freedom with the end of
private property, but the loss of personal and civil liberties as well.
In spite of the dreams and promises of the
"democratic" socialists, when the government owns all the means of
production, then the only books and magazines published, including their
content, is what the government wants printed. When the government owns all the
resources, factors and machines, the only things produced and made available
are those consumer goods the central planners considered "good" and
desirable for "the people." When the government is the monopoly
manufacturer, then the only employment opportunities are those the political
authorities make available and assign you to fulfill.
You, as an individual, are at the
mercy of an all-powerful, single provider of all things from which you have no
escape because there is nothing outside of what the government owns, controls
and plans. There is virtually no "private space," to live in and
freedom over outside of the centrally planning hands of the State.
Running through his damning indictment of the political and
personal consequences from imposing full socialist planning on society is a
defense of the dignity and sanctity of the individual as a human being.
The importance of private property is argued to be essential to secure and
protect any and all freedom for the grasping hand of political power.
Hayek also pointed to the crucial role of the existence,
practice and respect for an impartial rule of law for any protection from
arbitrary government control. Without a delineation and enforcement of the
rights of the individual and constitutional limits on the size and scope of
government, political tyranny always threatens a society.
Hayek's "Use of Knowledge in Society" and the Un-workability
of Planning
There are several concise and suggestive passages in The Road to Serfdom in which
Hayek points out fundamental weaknesses in the practical ability of a central
planning system to effectively replace a functioning competitive market order
for solving the "economic problems" of society. But it is
only in his 1945 article on "The Use of Knowledge in Society" that
Hayek details what he considers to be the essential difficulty with any
comprehensive system of economic planning.
If central planning were to work,
it would be necessary for the central planners to possess complete and comprehensive
knowledge of all the relevant "data" to decide how best to use and
allocate all the diverse physical resources, human labor skills and technical
possibilities so to produce those goods best serving the wants of the members
of society, and in the most efficient manner to get the most out of the scarce
means available to satisfy people's ends.
Hayek's starting point was to emphasize that all of that
meaningfully relevant "data" exists in no one place and in no one
mind or group of minds. The "knowledge of the world" is
dispersed and divided up in the minds of all the members of society, with each
knowing and understanding only a small part relative to all the knowledge that
exists in everybody's minds, combined.
Furthermore, while people often think of knowledge in the
textbook or "scientific" sense, there are other types of knowledge no less
relevant or important that must be utilized and brought to bear if production
is to proceed effectively and efficiently and if what is supplied tends to
match what members of society want to demand.
Decentralized Knowledge and Need to Coordinate All that
People Know
Hayek called this other type of knowledge the
"local knowledge of time and place." This is the knowledge
that is only acquired working and interacting within a particular corner of the
social system of division of labor. This knowledge comes from working in a
particular trade, in a specific firm or enterprise, working with a distinct
group of other people, in which particular machines and tools are used as the
means to satisfy specific consumers and demanders in the attempt to gain and
keep their business in a competitive market.
But if knowledge is decentralized
in a complex system of division of labor in which people are invariably
separated from each other by both time and space, how shall information be
communicated among people so their choices and actions on the production side
of the economy can be tending to match and coordinated with the consumption
side of the market?
Hayek forcefully argued that it is not necessary for all the
multitudes of millions (now billions) of participants in the division of labor
to directly know each other and each other's planned actions and desires to
interpersonally coordinate all that they do. And it is certainly impossible
for a handful of central planners to know enough of all that there is to know
to successfully perform such an intricate and ever-changing task.
The Role of
Market-Based Prices to Solve Society's Knowledge Problem
The market solves the "economic problem," which Hayek
emphasized was really the problem of how to utilize all the knowledge in the
world when all that knowledge can never be coordinated for effective use other
than through the competitive price system.
Through the prices they offer to pay, demanders from one
corner of the globe to another register their interest and their degree of
willingness to pay others to supply them with the various goods, services and
resources they are interested in obtaining from those willing and able to
supply.
At the same time, every producer anywhere in the world is
saved the necessity of needing to know all the other competing producers and
enterprisers who also may have investment goals in mind involving the
acquisition and use of various types of labor, capital equipment and raw
materials.
It is sufficient that those rival
demanders for the means of production on the producer-side of the market
indicate and register their interest, willingness and ability to demand those
factors of production through the prices they offer to purchase, hire or employ
them.
These input prices inform producers anywhere in the world what
the relative costs shall be to use those factors of production in their own
line of activity, and therefore which combination of them would incur the least
monetary expense to employ relative to the anticipated price they think
consumers might be willing to pay for the finished product they could assist in
producing.
These prices on the demand side of the market enable everyone in their
own corner of the society to decide how best to allocate their limited income
among alternative consumer goods they might purchase; and those prices on the
supply side of the market assist each and every producer in deciding whether
production of some product might earn a profit or suffer a loss, and if
possibly profitable, with what combination of inputs to minimize expenses
given
other desired uses for them in other parts of the market.
Markets Enable Both Freedom and Use of Knowledge
The advantage of using a market-generated network of
competitively established prices is that they not only inform everyone about
the demand and supply potentials of others in society. It also means that every
individual may be left free to make his own decisions about how best to use
that knowledge of his local time and place in the most effective manner, so
all may benefit from what each knows and can do what no central planner could
ever know or do better than the decentralized decision-makers themselves.
Thus, individual liberty and
social coordination through prices – personal freedom and market order – become
not only possible, but can be shown to be indispensible if the "knowledge
of the world" is to be brought into play for the mutual benefit and
advantage of all.
If personal freedom is considered to be a desirable human
condition and if human cooperation for mutual improvement is considered of
value for the material and cultural betterment of mankind, then it can be
shown, Hayek concluded, that only free markets – competitive
capitalism – can solve the "economic problem" of the use of knowledge
in society.
Socialist central planning, therefore, with its concentration
of control over the means of human existence in the hands of the political
authority, is not only a threat to human freedom and dignity – a "road to serfdom"
– but also could be shown to be an economic dead end offering neither
productive efficiency nor the practical utilization of the division of knowledge
that accompanies a system of division of labor.
Abolition of private property in the means of production not
only results in the personal loss of the means for existence and betterment
outside of the power of government, with its danger of tyranny. It limits
mankind's opportunities and progress to what a small number of finite
minds can master and know, who are assigned the task of centrally planning and
commanding the productive activities of the society.
Hayek's argument on the essential
limits of the human mind to know enough to reconstruct and plan society
according to a crafted central design was and is a powerful critique against
the socialist ideal of the last one hundred years.
Which one of us, if we spoke with all honesty and truthfulness, can
assert that they know enough to plan the economic and related social
activities of the over 320 million distinct individuals living in the United
States, or the more than 7.2 billion people who live on our planet?
But it might be said that "socialism" in his older and
original form is now dead. It died with the fall of the Berlin Wall in
1989 and the collapse of the Soviet Union in 1991. Except, maybe, in North
Korea, the case for and the practice of central planning has become something
of the past, a tragic historical curiosity that historians will analyze and try
to understand for a long time.
Today around the world practically every country operates
with forms of a market economy. Some may be more free and competitive while
others less so, but "the market" as the broad institutional framework in
which economic affairs go on in daily life is now virtually universal.
Therefore, is Hayek's message in both The Road to Serfdom and
his article on "The Use of Knowledge in Society" still meaningful and
relevant in our world today?
(The text is based on a talk given on a panel session
devoted to "Friedrich Hayek as Defender of Liberty" at the Tenth
Annual Moral Foundations of Capitalism Conference sponsored by the Clemson
Institute for the Study of Capitalism at Clemson University in South Carolina,
May 29, 2015)
Dr. Richard Ebeling is the BB&T
Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel
in Charleston, South Carolina. He was professor of economics at Northwood
University in Midland, Michigan (2009-2014). He served as president of the
Foundation for Economic Education (2003-2008) and held the Ludwig von
Mises Chair in Economics at Hillsdale College in Hillsdale, Michigan
(1988-2003).
