Hayek - Individualism and Collectivism - Part 2

Monrovians - Unite!

We saw in Part 1 that the mechanism of socialism is primarily central control of all economic activity (and what activity may not be described in economic terms?).  It is the mechanism of socialism, not the desire for social justice, that those who believe in the inherent freedom of the individual object.  The central planner may plan well, plan poorly, or plan corruptly.

But what type of planning is meant by socialism?  The planning necessary to accomplish the distributive ideal, of course.  That is, whatever planning is necessary to distribute goods and services in a way that those in power believe is "just." 

Hayek isolates another reason that Socialism and Central Planning have an initial appeal.

Planning owes its popularity largely to the fact that everybody desires, of course, that we should handle our common problems as rationally as possible and that, in so doing, we should use as much foresight as we can command.  In this sense, everybody who is not a complete fatalist is a planner, every political act is (or ought to be) an act of planning.

So, Hayek notes, virtually everyone is in favor of planning.  What is the difference then, between those who believe in the general economic freedom of the individual and the socialist?

The question is whether for this purpose it is better that the holder of coercive power [government] should confine himself in general to creating conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether a rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed blueprint.

Hayek also notes that it is unnecessary to argue that all decisions should be left to the individual.  Those in favor of economic freedom contend that effective competition is a better way of guiding individual efforts than any other, where it can be created.  In order for competition to work beneficially, a carefully thought-out legal framework is required and . . . neither the past nor present legal rules are free from serious defects.  Where this is not possible, then resort may be had to other more coercive methods.

Economic liberalism is opposed, however, to competition being supplanted by inferior methods of coordinating individual efforts.  And it regards competition as superior not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority.  Indeed, one of the main arguments in favor of competition is that it dispenses with the need for "conscious social control" and that it gives individuals a chance to decide whether the prospects of a particular occupation are sufficient to compensate for the disadvantages and risks associated with it.

Hayek next hints at the reason economic competition works - the price mechanism.  All other things being equal, the price of goods and services reflects a vast multitude of considerations in one easy number - the price.  Just contemplate the price of a complex machine, with parts created all over the world, from raw materials throughout the world, each of which faces competitors for those same raw materials, finished products, and the labor and capital that went into their production.

Imagine that one of the parts may be made from either copper or steel.  If copper is desperately needed in one part of the world, for a highly sought-after device which requires copper, the people who want the copper are going to bid for the copper, and not for steel.  This would cause the relative price of the copper to rise, and make it more likely that those who don't require copper will choose steel instead.  That becomes a small factor in the price of the machine made with the part.  Multiply this same type of mechanism by the number of parts in the machine, to see that the one number (price) of the machine has very efficiently incorporated the results of thousands, and even millions, of decisions around the globe.

Give a central planner control over only one small part of the puzzle, and it is obvious that no central planner can as efficiently account for the millions of preferences the same way that the price mechanism can.  Even more important, controlling only a small part of the puzzle will not achieve the goal of the central planner - tell people they can't use copper, they will switch to steel.  No steel, and they will switch to plastic, or some other material.  This throws the whole plan out of whack, since the could not anticipate in advance how many will choose steel, how many plastic, etc.  This occurs not because people are evil or obstinate, but because their own needs and wants are different from those of the central planners.

How do I know this?  Because if everyone shared the same needs and wants of the central planners, in the same quantity and with the same intensity, the result would occur automatically in a free society without the need for a central planning mechanism.  Central control of all economic activity (i.e., what we are calling planning) is necessary only to the extent that people do NOT want the same thing as the central planners.