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starbucks4ever (99.51)

What central planning is and what it is not

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February 19, 2010 – Comments (18)

The idea of central planning is getting a very bad rap in this community. Of course there is an obvious selection bias involved. The people here are looking for ways to invest money that was earned under the (supposedly) free market, and most have a vested interest in the current system. Also when you have a vested interest it makes you think everybody who's praising the system is smart and everybody who is less sanguine must be stupid. This in only natural.

But I think there is also some genuine misunderstanding that results from propaganda exacerbated by lack of critical thinking skills. It is such a pity that we don't have critical thinking lessons in school. If we did, maybe it would be easier for us to see through the rhetorical tricks used by our free market fundamentalists. Or maybe not. (Let us all think critically. Repeat after me: we must always challenge the accepted viewpoint. Is that clear? Is there anyone in this room who does not want to challenge the accepted viewpoint? Get out of the room now!)

Central planning doesn't work, we are told, because the economy is such a complex system, it defies any attempt to plan it. Well, the complexity is part real but it's also part myth. A car is a very complex system if you look at its internals. Yet many people can drive it successfully without a Ph.D and even without a particularly high IQ. 

If Toyota designed its cars for professional scientists only, it would be bankrupt from the first minute of its existence. If central planning required bureaucrats to have a stellar IQ, it would be doomed from day 1. Luckily, it is not necessary in either case. A system can be tricky as hell, but running that system does not need have to be difficult.

What does it take to become a stock market genius? There are two answers. The complex answer is to remember the current and previous prices of all 10,000 stocks, know every chart, read every news article and follow all earning reports for all your stocks. The simple answer is not to buy companies with PE of 50 and negative free cash flows. And guess what? The simple answer will work well enough in most cases. It will very likely work better that complicated market-beating strategies employed by the pros.

A man of average intelligence could easily prevent the financial crisis simply by checking the ambitions of men of high intelligence at AIG and Lehman who "knew" they could leverage themselves 30 to 1 because they were so intelligent they couldn't possibly fail. By the same token, you don't have to be a genius to run a planned economy. Sticking to simple common sense and avoiding obvious blunders will be more than enough. 

 

18 Comments – Post Your Own

#1) On February 19, 2010 at 7:16 PM, whereaminow (77.51) wrote:

Thanks for bringing this up zloj.  Question: why, after all this time you have been debating with me, do you have to lower yourself to the "fundamentalist" jab?

You say that we must challenge the accepted viewpoint.  Correct.  And how do you think I came across Mises?  Was it taught to me in school?  Nope.  In the military? Nope.  By my family? Nope.  By my Church?  Nope.  By my friends? Nope.

And is my view supported by my peers?  Nope.  My friends?  I've convinced some, but not most.  My family?  Nope. 

So maybe you see my view as "accepted" here.  Well, this is a small stage in the battlefield of ideas.  A speck. If we're "accepted" here it is a combination of unusual circumstances and some diligent debating by a handful of "fundamentalists," as you so poorly describe them.

David in Qatar

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#2) On February 19, 2010 at 7:45 PM, whereaminow (77.51) wrote:

Anyway, since I love these discussions, I figured I'd look up some Mises to offer a counter argument.  What an excellent quote I just stumbled upon!  It addresses your post most perfectly,

"the cardinal fallacy implied in [market socialist] proposals is that they look at the economic problem from the perspective of the subaltern clerk whose intellectual horizon does not extend beyond subordinate tasks. They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions…. They fail to realize that the operations of the corporate officers consist merely in the loyal execution of the tasks entrusted to them by their bosses, the shareholders…. The operations of the managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs those operations which allocate the capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the shares and bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market. It is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of the consumers in the best possible way." -  Mises, Human Action, pp. 703–04

David in Qatar

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#3) On February 19, 2010 at 8:52 PM, chk999 (99.98) wrote:

This would be a more compelling argument if there was an example of a planned economy that worked even mediocrely. All the planned economies seem to get stuck in a permanent slow/no growth phase that never seems to shake loose. Look at the UK after WWII when they nationalized the major industries. They had food rationing for years after every one else was done with it. 

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#4) On February 19, 2010 at 9:02 PM, starbucks4ever (99.51) wrote:

Hi  whereaminow, 

#1,

You won't believe me but I didn't have Libertarians in mind. Skepticism towards central planning is spread much wider than across a narrow circle of "Misesians" (did I spell this correctly?).  

And this brings us to

#2,

What Mises does here is describing what is known to mathematicians as "optimization problem", or the problem of maximizing a functional. And you don't to convince me that mathematically speaking, this problem is intractable once you have more than a few variables (at this moment we have 307 million of "variables", do we?). But here Mises does a simple card trick. He replaces the proven impossibility of an EXACT solution with the claim about impossibility of an APPROXIMATE solution. Which is a different thing altogether. May I continue with the car analogy? When you drive from point A to point B you will naturally want to minimize expenditure of gas. If you try to consider all possible factors, you must consider several thousand cars on the road, several dozen lights, every turn of the road, and so on. Theoretically you can't handle that problem at all. Mises would "solve" this problem by giving up on the whole concept of intelligent driving and advising you to take your hands off the wheel and let the car find its best course on its own in the chaos of the highway. Yes, that would be a perfect solution! The invisible hand of the highway will get your car to its optimal destination; it may not be the destination point B that you had in mind, but who are you to decide what is best? Nature will sort things out; it is always so good at it. But irony aside, good driving is actually easy. Don't cross the double yellow, stop at red light, don't speed above the limit, and then a whole series of suboptimal decisions will result in a satisfactory outcome. Now, what is an acceptable degree of accuracy in economic planning can be debatable. I don't know the answer myself. Maybe central planning will give you an intolerably large error when you try to plan the latest 28 nm VLSI technology. Or maybe the errors can be brought under control. I have no opinion on that one. Removing garbage from streets is a low-tech, fault-tolerant procedure where central planning is much more likely to succeed. Generally, the lower the innovation component, the better central planning can handle it, and vice versa. So it is all very debatable. If Mises were a serious economist, he could make a dent in the socialist cause by looking at the high-tech sector, make a compromise with socialism when it comes to the boring traditional industries, and overall, put up a serious fight. But Mises is a pamphlet writer, not an economist. As a pamphlet writer, he is not interested in a difficult answer. He wants something glib and simple that will sell well with his target audience. So he just pushes that card under the deck and shows you his "complexity" card because he thinks this is the card he can play. 

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#5) On February 19, 2010 at 9:33 PM, angusthermopylae (43.30) wrote:

Mises would "solve" this problem by giving up on the whole concept of intelligent driving and advising you to take your hands off the wheel and let the car find its best course on its own in the chaos of the highway. Yes, that would be a perfect solution!

And some of us would argue that the drunks have been driving for too long--drunk on power, drunk on righteousness, drunk on purpose.

 

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#6) On February 19, 2010 at 9:45 PM, whereaminow (77.51) wrote:

zloj,

I gotta run for now, but I promise to pick this up tomorrow.  Are you familiar with the Lange rebuttal of Hayek's knowledge problem?  Your rebuttal is very close to his formulation.  I'll try to explain how Mises' position differs and his rebuttal of Lange tomorrow.

David in Qatar

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#7) On February 19, 2010 at 9:50 PM, starbucks4ever (99.51) wrote:

No, I never heard of Lange. Great minds think alike, right? :)

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#8) On February 19, 2010 at 10:00 PM, Harold71 (27.93) wrote:

But Mises is a pamphlet writer, not an economist. As a pamphlet writer, he is not interested in a difficult answer.

Homework for zloj:

Read Human Action

It's only around 900 pages

Let me know when you're done with that "pamphlet"

 

But I think there is also some genuine misunderstanding that results from propaganda 

Agreed!  That propaganda is called Keynesian economics.  It is preached as gospel in US universities. 

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#9) On February 19, 2010 at 10:03 PM, ChrisGraley (31.87) wrote:

Central planning = Central control = Central power = Central corruption = Central failure

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#10) On February 19, 2010 at 11:22 PM, starbucks4ever (99.51) wrote:

ChrisGraley,

Yes, this is the main difficulty with central planning. If the leaders don't know how to put honest people in charge of the planning agency (in other words, if they are personally corrupt, and also stupid to boot because otherwise they would still realize their rational egoism, put good people in charge and get themselves a small piece of a large and growing pie). Then the chain of events is exactly as you described. 

The country will not fare any better with such leaders even under the purest form of capitalism.

A crook in charge of a country will make any system fail. 

The recipe for a virtuous circle is this:

Central success -> Central honesty -> Central power -> Central control -> Central planning. 

 

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#11) On February 20, 2010 at 1:15 AM, ChrisGraley (31.87) wrote:

the equation derails at central power every time.

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#12) On February 20, 2010 at 10:41 AM, starbucks4ever (99.51) wrote:

 Harold71 

Quantity is not quality. It may be 900 pages long, but it's still a pamphlet.

ChrisGraley,

Of course central power is always a part of the equation. It would be naive to expect otherwise. 

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#13) On February 20, 2010 at 10:48 AM, whereaminow (77.51) wrote:

Ok I'll try to pick this up. This is going to be a very long reply to comment #4, so for those that don't like long comments or blogs I am just giving fair warning :)

zloj,

I'm sorry but you are totally confusing Mises' position.  He doesn't care if you have every variable and every perfect equation.  For Mises, it's not a knowledge problem, thus there is little difference whether there is exact or approximate variables or information.

Allow me to take a step back for a second.  There are two conceptions of the Economic Calculation Problem of the Socialist Commonwealth and they are very different.  The first is Mises' position that Socialism can not succeed because there is no private property in the land and capital markets in the means of production. This is a very different, and more extreme/radical, position than the later position espoused by Hayek/Robbins that Socialism faced a knowledge problem.  Mises and Hayek were not in agreement on this issue despite their teacher/pupil relationship.  In fact, both may be right after all.

Let's take a look at the Lange solution, based on the Pareto-Barone equations that supposedly solved Hayek's knowledge problem.

"Neither would the Central Planning Board have to solve hundreds of thousands … or millions … of equations. The only "equations" which would have to be "solved" would be those of the consumers and the managers of production plants. These are exactly the same "equations" which are solved in the present economic system and the persons who do the "solving" are the same also. Consumers … and managers … "solve" them by a method of trial and error… And only few of them have been graduated in higher mathematics. Professor Hayek and Professor Robbins themselves "solve" at least hundreds of equations daily, for instance, in buying a newspaper or in deciding to take a meal in a restaurant, and presumably they do not use determinants or Jacobians for that purpose." - Socialist Economist Oskar Lange, "On the Economic Theory of Socialism, Part One," p. 67.

And according to Socialists, that was that.  Hayek had been vanquished!  Well, let's aside the fact that Mises' position hasn't even been addressed.  It turns out that Lange had the perfect opportunity to vanquish Hayek, not in a class room, but in real life.  He went on to become the head of the Polish Economic Council under communist rule.

Rothbard points out Lange's failures in real life with his usual precision:

"It did not take long for Oskar Lange to adjust to the persistence of the Stalinist Model. Indeed, it turns out that Lange, in post-war Poland, argued strongly for the historical necessity of the persistence of the Stalinist model as opposed to his own market socialism. Arguing against his own quasi-decentralized market-socialist solution, Lange, in 1958, revealed that "in Poland, we had some discussions whether such a period of highly centralized planning and management was historical necessity or a great political mistake. Personally, I hold the view that it was a historical necessity." - Rothbard, ibid.

Late in his life, Lange's vision of Socialist planning became even more fanciful.  In 1965, he claimed that new computer technology would handle all of the equation "problems" that Hayek cited.  Never mind the fact that bad input creates bad output, this view directly contradicts his previous view that humans solve these equations every day without any computer assistance.  Yet, the Orthodox Line still holds sway in most universities.

So, nevermind Mises for now, the question that we can ask is has even Hayek's weaker and less radical position actually been vanquished.  I would say no.  On the other hand, it doesn't even matter to me since Mises' position is far more nuanced and ultimately, correct.  We can move to that position next if you'd like.

David in Qatar

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#14) On February 20, 2010 at 10:52 AM, kdakota630 (32.79) wrote:

the equation derails at central power every time.

ChrisGraley, I LOVE that line!

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#15) On February 20, 2010 at 11:09 AM, starbucks4ever (99.51) wrote:

So Lange was wrong in his article just because he would later sell out to the Stalinists and make a 180 degree turn?

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#16) On February 20, 2010 at 11:18 AM, whereaminow (77.51) wrote:

zloj,

I would say that Lange was wrong because he was being completely facetious from the beginning.  He completely contradicts himself in his later work by claiming that computer technology will handle all of those "equations" that he derided Hayek about in 1936. 

From another perspective, The Norwegian economist and defender of both Mises' and Hayek's positions, Trygve Hoff, noted that:

"Quite apart from the fact that the equations the central authority would have to solve are of quite a different nature to those of the private individual, the latter tend to solve themselves automatically, which Dr. Lange must admit the former do not." Hoff, Economic Calculation in the Socialist Society, pp. 221–22.

In short, Lange was never been fully serious in the first place, and that played out when we took over command of the Polish economy.  He signaled his own rebuttal when he penned his computer-driven utopia model. 

David in Qatar

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#17) On February 20, 2010 at 11:55 AM, Tacomatight (55.31) wrote:

"Central planning doesn't work, we are told, because the economy is such a complex system, it defies any attempt to plan it. Well, the complexity is part real but it's also part myth."

This was really interesting until I realized that you had nothing to say after this. You are attempting to make an argument with no argument. By reading the above sentences I guess that you disagree with the common held belief that a centrally planned economy is innefficient. I think you are wrong, but was willing to read your argument...but then you didn't write anything about your subject...just something about some guy driving a car but not understanding the engineering?W?T?F?

This has absolutely nothing to do with what you are talking about. I don't mean to be a dick( I will anyway 'cause I was excited at first to read what you had to say), but it's times like these that I think the internet really does dum people down.

As you speak in a condescending tone to everyone that thinks central planning is inefficient( I being one of them, having lived in China for 6 years), I'll return the favor:

Fooollllooowww meee...Theeesis...thessiis. Every argument needs a thesis. Writing has basic parts...just like numbers on blocks.

1) Intoduction- talk about what you are you going to talk about

2) Thesis- In one sentence sum up your argument

3) Body- Argue your thesis with facts and supported critical opinions.

4) Conclusion-Sum up everything you've argued previously.

David in Qatar is really too nice to you by responding with all his thoughtful and interesting stuff.

P.S. even people who write pamphlets know about a thesis.

 

 

 

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#18) On February 20, 2010 at 11:45 PM, starbucks4ever (99.51) wrote:

whereaminow ,

Applying computer technologies to the planning process is a terrible idea. Why? Because the moment you say, "I need a computer", you admit that you have lost sight of the problem. I believe that economic planning should be a simple process. If you can't keep things simple, it means you're doing something wrong. Either you are getting carried away with complex models much like the guys at AIG, or you're trying to regulate things that you have no business regulating in the first place. To paraphrase Buffett, you must design the planning process in such a way that it could be run by a fool because some day it will be run by one. The strength of central planning comes from its ability to avoid D's and F's, not from its ability to get A's. Anyone who hopes to write some ideal system of equations and get his computer to tell him how many rivets must be produced by Nashville Rivet Company in 2011, does not understand the nature of the good planning process. He's missed the boat entirely. This is NOT a job that bureaucrats should even attempt to do. This is precisely the field that must be left to private capital. Lehman and Bear Stearns have tried that already, hope it served them well. Planning officials will do will to stay within their circle of competence.

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