Why Central Planning Fails

Politicians should learn from the mistakes of the past.


In F.A. Hayek's 1988 book, The Fatal Conceit, the economist explained, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Unfortunately, politicians of both parties today imagine they can design quite a lot by successfully managing the nation's health care, trade, and energy production, among other herculean tasks.

The recent push to centralize more of the economy—think about "Medicare-for-all" or "Buy American" requirements for infrastructure projects—comes even though we are still discovering all the ways in which prior efforts to direct economic activity have backfired. Consider the case of the Public Utility Regulatory Policies Act of 1978, or PURPA. This program within the Federal Energy Regulatory Commission, or FERC, is still causing headaches today.

Among the goals of PURPA was expanding the use of renewable energy sources. To do that, it required utilities to purchase energy produced by "qualified facilities" (QFs) if it was an equal or lesser cost to what could be purchased from a traditional power plant or generated itself. In PURPA lingo, that's an "avoided cost." This was considered a way to introduce competition into energy markets. In practice, however, the unintended consequences of the mandate coupled with other government interventions have resulted in less competition.

Utilities have had no choice but to buy from these QFs. In recent decades, the lower costs of solar and wind hardware, combined with the introduction of lucrative solar and wind tax credits, artificially high rates, and PURPA's guaranteed purchase requirement, have made QFs moneymaking investments regardless of market need. In other words, tax credits distort the energy markets, and the PURPA mandate distorts them further.

These avoided costs are rates set by bureaucrats, of course—bureaucrats who use poor models and false assumptions about future economic conditions that can result in fixed rates well above what would actually be found in the markets. This spawns ongoing legal battles throughout a number of states as utilities struggle to revise avoided-cost rates and prevent a flood of lengthy contracts at above-market rates, significant portions of which will be passed on to consumers. Given the goal of PURPA, this complexity has sometimes ironically resulted in less expensive wind generation being used less in favor of more expensive QF energy.

Another problem occurs when determining which facilities qualify under the law. QFs include small power production facilities—plants that generate between 100 kilowatts and 80 megawatts primarily using renewables, such as wind, solar, and hydropower—and cogeneration facilities that use waste heat from industrial processes to generate electricity. But larger renewable generators are finding ways to game the rules and qualify despite exceeding the statutory capacity limits.

The fight over PURPA reveals at least one of the many reasons why central planning fails. Even if prices are initially and miraculously established at rates that reasonably approximate market behaviors, they will inevitably grow further disconnected from the market because either the bureaucracy will be too slow to react to changing conditions or politicians will simply lack the time, expertise, and interest necessary to update the law. Making things worse, these PURPA contracts are historically long-term, so even if the avoided-cost rate made sense at signing, it can grow out become a burden over time.

In the 40 years since PURPA was passed, the ways in which energy is produced and used has changed—and continues to change. The law has not kept up. And yet there are many today who would impose even more complex price controls on things like prescription drugs, threatening to bring the same perverted incentives into health care as are plaguing the energy markets.

Central planning is all the rage in Washington, D.C., at the moment. But politicians should learn from the mistakes of the past and incorporate some Hayekian humility into policymaking.


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  1. Yup, central planning fails, despite the good intentions. Another example was when the public kept getting burned with unrated, low quality bonds in the 50’s, despite subscription services like Morningstar which rated them. So the feds decided to charter 3 bond ratings agencies (Standard & Poors, Moody’s, and Fitch) to rate the bonds, and then make it illegal to sell unrated bonds to the public. Well after a few decades it became pay-to-play, and basically the issuer could just buy their desired rating. The result was AAA+ rated junk that resulted in the housing bust. (Yes of course Morningstar could have been corrupted as well, but that was less likely because they were accountable to their subscribers.)

  2. What politicians tell people they can accomplish by managing the economy is quixotic than herculean. Herculean implies ir can be done by someone of great competence. Quixotic is more for something that cannot be done and should not be attempted, because you are incapable of comprehending the reality of the situation.

  3. They have learned from their past mistakes, and they will not repeat the same mistakes now. They swear. You just need to trust their omnipotence.

    1. This time will be different, baby. I’ve changed. Just give me another chance. I promise I’ll never hit you again.

  4. Central planning is all the rage in Washington, D.C., at the moment.

    Socialism, and Trumpista Juche. Both sides are equally culpable.

    1. Both sides want to control everything you do. They just want to build up to that from different starting points.

  5. But politicians should learn from the mistakes of the past and incorporate some Hayekian humility into policymaking.

    If they had the humility to understand how little they know and how little they’re capable of accomplishing they wouldn’t be politicians. You don’t get elected by promising to do nothing based on the assumption that everybody knows better than you what’s for their own good and are capable of taking care of themselves if left to their own devices. Or that as bad as some problems seem to be, government attempting to solve them is almost guaranteed to make things worse overall due to the direct costs, the unintended consequences and the unnoticed opportunity costs.

    1. This. Libertarian candidates have quickly learned that running as Mr. No, Rollback government, or end unConstitutional programs will always net about 1% of the voters.

  6. Why Central Planning Fails

    The last time we should have needed an article like this was in the 1980’s. I know it’s just human nature for some people to want to control others, but it’s still disappointing that people still think they can make central planning work.

    All forms of collectivism are evil.

  7. The new central planning program: Politicians Over Other People. You can do the acronym.

  8. Why Central Planning Fails

    Because people hate being told what to do.

  9. There’s an important book to be written about why elitists are so susceptible to hubris when it comes to planning the economy.

    I once read a report by a law enforcement official who dealt with investment fraud cases exclusively, and he noticed that a disproportionate number of the victims of these frauds invariably were doctors, engineers, scientists, and other highly educated professionals. How could such smart people fall for these schemes? He observed that scientific professionals tend to believe that investment works much the same way as medical, engineering, and other scientific professions. Cardiologists get better results than average people in dealing with heart conditions because they’re more knowledgeable and better trained than average people. This may be what makes them more susceptible to appeals to authority in investment fraud. The more highly educated you are, the better you are at getting superior investment results, right?


    1. victims of these frauds invariably were doctors, engineers, scientists, and other highly educated professionals. How could such smart people fall for these schemes?

      Education and intelligence aren’t the same thing. It’s blind, dumb arrogance that leads people to believe that because they know everything about something that they must know everything about everything. Take the people around here who brag about being engineers as if that gives them some special insight into human behavior.

      1. The point here is that because these people know so much about something, they imagine that other people who are knowledgeable will do better–but it’s in a situation in which that rule doesn’t apply. The smartest guys in investing are the people who know what they don’t know.

        A cardiologist really can tell a patient with a heart condition what’s likely to happen to his or her heart in five years because he’s knowledgeable and smart, and that makes them more susceptible to to the claim that because I’m knowledgeable and smart, I know where Tesla’s stock will be five years from now.

        Anyone who claims that because they’re smart and knowledgeable, they know where Tesla’s stock will be in five years is either a buffoon or a liar, but that’s not the way the elitist mind works. Markets can’t be any smarter, in the elitist mind, than the stupid people who participate in them, but that’s wrong. Markets make people behave as if they’re smarter than they are and as if they posses knowledge that they don’t posses.

        1. but that’s not the way the elitist mind works

          I’ll take your word for it. I don’t know any elitists so I can’t make an informed claim about their behavior or the way they think.

          I don’t totally disagree with you, but I think you may be making some assumptions that might not be valid.

          1. The elitist mind I’m talking about is the one that assumes they can outperform markets because they’re knowledgeable and smart.

            Why would you need to take my word that the socialists who are advocating central planning imagine that they can outperform the market?

    2. a disproportionate number of the victims of these frauds invariably were doctors, engineers, scientists, and other highly educated professionals.

      Because they were better educated with better jobs and more money to invest?

      1. Investors may be disproportionately wealthy, but doctors, engineers, and scientists represent a small proportion of the wealthy. “A disproportionate number of the victims . . .

        You seem to be having a problem with the word “disproportionate”.…..portionate

    3. A little anecdotal, but some of the worst investors I’ve known were corporate financial executives where I worked. They came up with gems such as “the stock has gone down 70%, it can’t go down any more” and “it’s doubled, it can’t go up any more” with no underlying analysis (actual examples). These people very good at their jobs. I don’t have a theory for why someone can be good at financial management and bad at investing.

  10. Truly educated people should be able to derive this from foundational principles.

    Newton was into alchemy.

    Marx was wrong about so many things.

    Darwin didn’t know about genes, so how could he have known about genetic drift–one of the two main forces driving evolution?

    Freud seems to have been wrong about everything.

    Uncertainty was always a persistent problem, even in science, and the central conceit of intellectuals who disregard or fail to account for the fundamental problem of uncertainty continues to be revealed by elitists today. It’s been 260 years since Smith published “Theory of Moral Sentiments”, and he’s been knocking on the doors of the western elite trying to find a wise man that knows what he doesn’t know ever since.

    1. One thing I’d add, given your Freud comment, is that there is an important difference between wrong and incomplete. Newton was technically wrong about gravity, but really just incomplete. I’m sure the same goes for many of Freud’s theories. They were wrong, but led to a better understanding of the field.

      Central planning attempts have been wrong and have certainly led to a better understanding of human nature and economics. The real problem is that they are trampling human rights and individual liberty in the process.

      1. “The real problem is that they are trampling human rights and individual liberty in the process.”

        There’s no legitimate difference between property rights and other rights. Rights are the obligation to respect people’s choices, and property rights are the obligation to respect people’s choices, too. After all, ownership of property is about who gets to choose how something is used, who uses it, when it’s used, when ownership is transferred, etc. Central planning by definition ignores our obligation to respect the right of others to make choices about their own property. So, it’s impossible to separate individual rights and property rights or to talk about how trampling on one is the problem–when they’re the same thing.

        I also disagree that the biggest problem is moral. The problem is that central planners cannot not possibly get better results than individuals each pursuing their own best interests by way of a market, and that fact is proven over and over again, both throughout history and, as I mentioned below, on Wall Street today. If we’ve learned anything from central planning, it is only that it’s a complete failure vis a vis markets, and that was demonstrated by Adam Smith as early as 1759 and 1776, long before the extreme experiments in central planning really began.

        1. So, it’s impossible to separate individual rights and property rights or to talk about how trampling on one is the problem–when they’re the same thing.

          I wasn’t doing that. The human rights I’m referring to include property rights. For example, people could have learned that central planning doesn’t work in a voluntary way. All the communists could have formed a commune and elected a central planner and then watched what happened. But they opted for a more coercive rout.

          Also, I think the moral problem is the only problem. If a bunch of people want to get together and voluntarily do something in an inefficient, way they should be free to do so. They cross the line when they force others to go along.

          1. The problem with stealing people’s money to buy flying unicorns is not only that stealing people’s money is immoral.

            What they’re trying to do with our stolen money is not possible, and if they came to terms with the fact that their goal is unattainable, maybe they wouldn’t be so immoral.

            Central planning cannot win the argument in utilitarian terms. There is no trade off between moral respect for agency via markets and the moral argument for utilitarianism via central planning if central planning can not ever serve the greatest good for the most people. And I’ve got some interesting news: markets serve the greatest good for the most people–not central planning.

            The morality of stealing property from individuals isn’t the only consideration. The people of Venezuela are suffering from malnutrition. Set the moral considerations aside, and socialism is still losing the argument on objective statistics.

            1. Now you’re also assuming that the would-be central planners actually think their ideas will work and aren’t just proposing them in a cynical power grab. It’s probably a mixed bag. AOC might not know better. Sanders and Warren almost certainly do. They aren’t interested in what’s best for the country. They want to wield power to punish people they don’t like.

              1. I want to strip them of every last fig leaf.

                I’m willing to give Marx credit for ideas like creative destruction.

                I’m willing to concede various observations to Keynes–he was nowhere near as foolish as his uneducated fans make him out to be.

                The socialists, on the other hand, resist intellectual honesty because intellectual honesty cannot abide socialism. I’d see them stripped of every last fig leaf.

      2. “there is an important difference between wrong and incomplete.”

        But incomplete knowledge is the fundamental problem of investing. Yeah, everything we know from science is tentative, predicated on the understanding that we can only use the data we have now.

        Investing works the same way. We’ll get more data tomorrow, and it will either help us confirm that our hypothesis is good or our hypothesis is bad. Markets do a better job in this environment than bureaucrats.

        Look at the yield curve and watch it move when new data becomes available. Doesn’t the idea of trading in a yield curve for some educated buearacrat’s opinion seem ridiculous? That’s what central planning does. Well, that and a whole lot more.

        1. You’re preaching to the choir.

          1. Maybe. Maybe not.

            Even if I am, I’m not sure the choir around here couldn’t use a brush up. We’re talking young Turks. They didn’t come to this stuff like prior generations.

    2. “Newton was into alchemy.”

      Ehrlich predicted population trends.

  11. Exhibit 1:

    Funds tied to he S&P 500 index continue to outperform all but a handful of investment managers over long periods of time, and there is still no reliable way to predict which investment managers will outperform the S&P 500 index in the future. These investment managers are among the smartest, most highly motivated people our society produces (they participate in the wealth they generate). If they do manage to outperform the index, the financial rewards for them personally are practically unlimited–and they still can’t outperform the market index!

    And, yet, there are still highly “educated” people out there who imagine that government bureaucrats know how best to price and distribute goods to get their preferred outcomes.

    500 different companies in a market index, all pursuing their own best interests–many of which conflict with each other–still outperform some of the smartest and most highly motivated managers the world has to offer, despite the fact that they can pick whatever companies they want and ignore the rest!

    Feel this fact in your heart.

    1. Anyone who can’t explain why money managers almost universally fail to outperform the index over long periods of time has no business claiming that government bureaucrats can outperform markets. It’s more rational to believe in a creator god with supernatural powers that controls everything than it is to believe that government bureaucrats have the supernatural ability to direct and finance the 500 largest industries in America better than the market–when the world’s largest investment funds are mimicking the holdings of the market index for fear of underperforming it.

      1. Maybe central planning really would work in a rational world, but God keeps undermining the attempts with divine intervention.

        1. I’ve read that when Darwin was on the Beagle, he was trying to reconcile Adam Smith’s invisible hand with Malthus–how can they both be true? If Smith’s markets triumph over Malthusian limitations, how?

          Then he observed two species of birds, one red-footed and one blue-footed that had differentiated themselves by specializing and taking advantage of different niches. It’s hard to talk about how things evolve and why without making it sound as if these birds had intelligence and planing of their own. They don’t. They were simply reacting to market forces. A shortage of resources here, and abundance of resources there, some creative destruction, etc.

          All this is to say that it’s remarkable that elitists will cling to Darwin, perhaps because the common people still believe in God, and Darwin seems to dispute that. Meanwhile, the elitists shun Adam Smith–perhaps because he makes it clear that the intelligence of elitists is really not fundamentally different from those of blue footed birds. In fact, the elitists aren’t as smart as the idiot masses when the latter are functioning in markets.

        2. Maybe in a world where government officials know everything about everyone’s economic desires and in which those officials are able to precisely manage centralized assets to produce results consistent with those desires, but that is light years more impossible than rationality.

          1. Yeah, it’s funny how what a person says they are willing to pay for something is often different from what they are actually willing to pay for it given the opportunity. The only way to discern a person’s values is to actually watch them act freely.

            1. Run-of-mill people don’t know what’s best for themselves!

  12. Was going to share this with my 30-something kids. They are not
    “socialists” but they also don’t understand why free markets are so
    much better. But, in order for this to convince anyone or at least
    make them think, it needs better explanations with more real world
    effects and actual numbers. This is only convincing to those who
    are already convinced.

  13. “Why Central Planning Fails: New at Reason”

    That’s an easy one. It fails because it’s never been done correctly before. But next time, it will work perfectly. Trust me.

  14. Now now, Ms. de Rugy. Central planning only fails when it comes to things like energy markets. Central planning however is totally awesome when it comes to labor markets. I know this because my ‘libertarian’ colleagues here at Reason keep telling me so.

    1. Who is advocating central planning of labor markets here at Reason? What is this referring to?

    2. Central planning only fails when it comes to things like energy markets.


      I recall during the whole Enron spiel how absurd it was as California Edison did min/max projections of energy needs for the entire state (I think forecasted up to 20 years in advance. It takes a long time to build energy plants) at least prior to deregulation. They had a pretty good grasp of where the energy market was heading (at least enough to where prices shouldn’t surge 3,000% over a year). So the rolling blackouts when Enron entered the picture seem peculiar at least. Wasn’t deregulation suppose to be a good thing? Isn’t this an example (as well as the boom/bust cycle) of the failure of markets?

      And while Hayek’s ideas on price signals are as near to “truth” as you are likely going to get in economics, it is less clear how well they work in situations like the various types of auctions. It seems price signals are more a function of how a market is organized.

      AND while libertarians champion Hayek in near mythic terms, they fall curiously silent regarding Hayek’s other ideas (*cough* UBI *cough*)

      Funny that.

      1. You’ll see people talk about that here. Hayek also had some things to say about pollution and environmental stuff that some knee jerk commenters are reluctant to talk about. Suffice it to say, when Hayek was talking about UBI, he didn’t mean when AOC is talking about if and when she talks about the same thing. Hayek wants there to be a market for social services, and you can’t have that without consumers rather than government. When libertarian economists are talking about creative destruction, they aren’t predicting how capitalism will destroy itself like Marx did either. Surely, libertarian thinkers aren’t wrong because they’re open-minded enough to advocate maximizing liberty through whatever means free people will embrace. After all, the purpose of libertarianism is not to seize the levers of power and inflict libertarian policy on the American people using the coercive power of the state. We’re here to persuade with reason. Our faith isn’t in libertarian saints but reason itself–somehow reality and reason always seem to support libertarian policies. All of God’s creation seems to thrive in liberty.

        So don’t get confused about the diversions. Once we agree that we should all be free to make choices for ourselves, we don’t necessarily need to agree on much else.

        1. P.S. Sometimes my fellow libertarians get mixed up when talking about privatization, too. Somehow their concern to avoid crony capitalism is such that they feel like they need to oppose privatizing things. The suggestion that nationalized industries (say bus service or parks) shouldn’t be privatized because those assets might go to some politically connected people at a discount is infuriating. It takes a libertarian to oppose privatization in the name of capitalism.

        2. Fair.

          However, unless there is a libertarian critique of something like UBI (or pollution taxes) beyond “socialism is bad, m’kay”, it removes libertarian insights from the discussion and reduces even the concept of markets into little more than a shell. AOC essentially gets to define something like the UBI because she is the only person bringing it up, even though notions of it go back as far as Thomas Paine.

          Even for the notion of regulations, it is far easier to decry them en masse as creeping socialism than to do the hard work of determining what minimum is required for markets to thrive.

          And that’s just weak.

  15. Senators Schumer and Sanders just proposed that the SEC prohibit companies from buying back their stock unless they pay all their workers at least $15/hr. They warned that if a company thinks it can get around that by raising its dividends, well they will make that illegal too.

    The real elephant in this room which I am sure Schumer and Sanders have no clue about is that this proposal for the SEC to act would only apply to publicly traded companies. There is almost no non-fraud related financial regulations against non-publicly traded companies.

    If so, that’s a heck of a reason to take your company private. The fatal conceit of their proposal is that doing so removes any potential earnings from the general public, and concentrates it within the “super rich” – the opposite of what they are intending.

  16. Central planning is at the core of the Democratic Communist Part. AOC, Bernie Sanders, and the Congressional Black Caucus are proud Marxists who want to control everything.

  17. A laissez-faire economic system is a fucking central plan. Just a bad one.

    1. I’m sure you know exactly how much steel the country will need next quarter, don’t you Tony?

    2. “A laissez-faire economic system is a fucking central plan. Just a bad one.”

      Up = down.
      Black = white.
      Front = back.
      Tony’s tiny brain believes this.

  18. Speaking of Hayek — If you’ve never read The Road to Serfdom, please do. A bit of a slog in places, but *well* worth it.

  19. Blasphemy!
    Central planning of a state economy has always worked.
    That’s why the ruling elites of socialist nations live so high off the hog while the masses starve.
    So how can you say that centralized planning of a country’s economy fails?
    After all, you didn’t see Stalin, Mao or Castro go hungry, did you?

    1. “After all, you didn’t see Stalin, Mao or Castro go hungry, did you?”
      Or U.S. presidents or members of Congress, for that matter…..

      Turns out, “socialism” has many the same faults as “capitalism”.
      A few ALWAYS use STATE POWER to enrich themselves and their cronies.

      “Progressives” have the exact same faults.
      Sanders and Warren are in the 1 percent economic class.
      Ocasio-Cortez is statistically likely to be there within a few years.

      THE POINT?

      It’s interesting to note that “Libertarians” like the Koch’s are heavily invested in Qualcomm, which is pushing heavy for (and receiving) public subsidies for V2X implementation.
      They’re profiting from special-interest legislation.

      And that “free market” proponent Bill Gates uses his foundation to force government policies that result in greater profits for his stock holdings (common core, vaccinations, etc.)
      Not to mention that Berkshire Hathaway is one of his largest holdings, and is one of the largest owners of both Tesla and BYD in China (the largest electric auto maker in the world) – BOTH OF WHICH HAVE BENEFITED SIGNIFICANTLY OFF GOVERNMENT SUBSIDIES.

      1. Yes, any system can be corrupted, but not all systems are equally corruptible, nor is every corruption equally bad

        I’ll take the faults of capitalism over the faults of socialism any day

        1. Remember you can vote out socialism but you are stuck with large corporations that pay their way in Congress. I’ll pick socialism over capitalism corruption any day.

  20. Sooo….
    What’s the difference between central-planning by a government or bureaucracy, versus central-planning by a few ultra-wealthy corporate Lords?

    The U.S. is already engaged in a system of central-planning, at the behest of the wealthiest .001 percent.

    Apple. Google. Samsung, etc. are all ultimately largely owned, and thus controlled by the same firms, their largest institutional shareholders (which are largely owned by, & thus controlled by the .001 percent).

    Ditto for Facebook, Netflix, Amazon, Microsoft, Twitter, and so on, and so on, and so on……

    Ditto for Coca-Cola, PepsiCo, even the “uncola” 7-Up (via Keurig Dr Pepper).
    Ditto for Verizon, AT&T, even the “uncarrier” T-Mobile.

    Don’t believe it? Go to a site like and do a search (where you can view the largest shareholders).

    Why do you think so many different products by different manufacturers have the same general features?

    This is just another HUGE FAIL for

    So quick to point out the failures of one system, without recognizing the same failures of that they endorse.

    1. There is no true competition in the “capitalist” market anymore.
      These largest shareholding firms have found legal loopholes in anti-monopoly laws, via large share holdings.

      CEO’s and Boards answer to these largest shareholders.
      By holding such large swaths of shares, these largest shareholders posses the voting power to instill or remove Executives and Board Members.

      Thus Executives and Boards exist at their behest.
      Those Executives and Boards will do as they are directed by those largest shareholders, or be replaced.

      Think Pizza Hut, Papa Johns and Dominos are competitors?

      Laissez faire, free-market Philosopher/Economist Adam Smith wrote that TRUE free markets were free of ALL external controls. That includes controls by market participants, not just governments.

      Reason continually faults government interference in markets, yet excuses the same by a few wealthy individuals, whom have acquired their wealth by state-capitalism (crony-capitalism).

      1. What a pile of lefty bullshit.

    2. philoeleutheria|2.7.19 @ 8:51PM|#
      What’s the difference between central-planning by a government or bureaucracy, versus central-planning by a few ultra-wealthy corporate Lords?”

      Guns, you fucking ignoramus.

  21. The only thing our pols have learned from the past is that “the right people” weren’t in charge, but they are now.

  22. So the end result of this “central planning” was to force utilities to use more renewable energy resources. I’m looking around and I definitely see a lot of renewables being used today. Would we be here without this law? I highly doubt it, we’d still be burning a lot of coal because it’s cheap. Is the law needed anymore today? No it’s not, renewables have been given a chance to artificially compete with coal and has lowered it’s costs over time. Let’s remove the law and consider it a success and move on.

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