Technology may be an enabler for central planning

By | Tech

(Excerpt from Modern Monopolies by Alex Moazed and Nicholas L. Johnson)

The core argument in favor of markets was always that they were more efficient than central planning. In the United States, we take that as gospel, but is it actually true? Under the right conditions, markets can be perfectly efficient in organizing economic activity. However, economists also had to make a number of major assumptions for the argument to work. Chief among these assumptions was the idea of “perfect information.” This notion assumed that every participant had complete knowledge of all relevant factors in the market at all times. Producers understood all of the same production techniques as other producers, and both buyers and sellers knew all the prices being charged by other sellers. There could be no “information asymmetries” wherein one individual possessed market information that others did not.

… in 1975, Soviet professor Leonid Kantorovich was awarded the Nobel Prize in Economic Sciences in part because his work, The Best Use of Resources, proved the functional equivalency of perfect markets and perfect planning. In an economy with perfect information, a central planner can allocate resources just as efficiently as a market can. Intuitively, this makes sense: If you know everything about an economy, you can figure out how to allocate resources efficiently.

The problem, as Hayek identified it, was precisely that we don’t live in a world of perfect information. An individual couldn’t collect all the information necessary to effectively coordinate an economy. Hayek explained, “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” Rather than operating under perfect information, we live in a world of highly fragmented and decentralized information. This concept is called “local knowledge,” or, as Hayek puts it, “the knowledge of the particular circumstances of time and place.”

Additionally, even if one person could know all of the necessary information to coordinate an economy, he wouldn’t be able to process all of it to direct an economy because circumstances constantly change. In essence, what was needed was some form of decentralization so that local knowledge could be “promptly used” in economic activity.

… In 1965, the little-known Polish economist Oskar Lange penned a rejoinder to Hayek’s essay. Titled “The Computer and the Market,” Lange’s essay suggested that while Hayek’s problem may have held true in 1945, times had changed. The advent of computers meant that there now were devices that could quickly solve complex, simultaneous equations.

… Hayek lived in a world of siloed information. The cost of communication and processing power limited the amount of information that could be collected and distributed over long distances. It simply wasn’t possible to collect enough information to coordinate a large economy effectively, certainly not with any useful speed. In Hayek’s world, his “man on the ground” was an information island unto himself, separated from and unable to relay his local knowledge to any central planner. Besides, even if he could transmit such knowledge, there wasn’t enough processing power available to make sense of it all. But today you can easily collect and distribute an almost limitless amount and variety of information all over the world.

… All of this economic activity is being centrally planned and orchestrated by computers running algorithms.

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