Much of modern policy debate revolves around the idea of government planning the economy. How should the healthcare industry be set up? How much testing should a product go through? At what wage should a business hire an employee? All of these issues involve some degree of control by the various levels of government. But do government officials really know the answers to these questions?
For a better understanding of these issues, we can look to Friedrich August von Hayek, the great twentieth-century Austrian economist. In 1945 Hayek published his essay, “The Use of Knowledge in Society,” in which he challenged the idea of central planning.
First, Hayek pointed out that the issue is not whether there should be a plan or no plan. The issue is whether there should be one plan by a single central authority, or millions of plans by the millions of people coordinating in the open market.
But having millions of plans by millions of different people seems chaotic. In order for all those plans to be effective, they would have to take into consideration all the relevant knowledge about the availability and possible uses of different resources. In a decentralized system, how is the relevant knowledge being coordinated? The answer, according to Hayek, is the price system.
Prices convey important information. Higher prices tell us that a good is relatively scarce; lower prices tell us it’s relatively abundant. This information then shapes the way people plan for the future and how they allocate their own resources. For example, say steel suddenly becomes scarcer. This will cause the price of steel to rise, telling everyone else in the economy that their use of steel needs to be economized.
Some businesses that use steel might reduce production or find cheaper alternative methods of production. Consumers of products that use steel might reduce their consumption. Other producers of steel, seeing higher revenue potential, might try to find ways to expand output and bring more steel to the market. The actions of all of these different people and companies are coordinated because of the information they gained from prices.
There’s no need for a central authority to gather all the relevant information to create a single plan. In fact, much of the relevant knowledge cannot be conveyed to a central authority at all.
Characteristics such as quality and an employee’s ability to learn cannot be precisely measured. Therefore, any datasheet given to the central authority will not give a full picture of the economy. Furthermore, all of this information is constantly changing, so that even the information that is quantifiable becomes obsolete by the time it reaches the central planner. Prices solve both of these problems. People’s implicit, unquantifiable knowledge can be reflected in constantly changing prices.
Hayek’s insight is significant when we think about modern policy issues. The government cannot know how best to set up a healthcare system, how to regulate production, or what wage employees should be paid.
Missourians should keep this in mind when the government pretends to have these answers. While it may be reasonable for the government to make adjustments when the market can’t provide—such as public goods and addressing negative externalities like pollution—more often than not, the best policy is to leave it to the market.
