"Planning" Our Way to Serfdom

It is a regrettable but undeniable fact that economics, more than other scientific disciplines, is liable to recurrent fashions and fads, the periodic reintrusion into professional discussion of popular superstitions which earlier generations of economists had successfully driven back into the circles of cranks and demagogues. Inflationism is one of these irrepressible themes which again and again attract some half-trained economists, and the advocacy of collectivist economic planning has become another since it first became popular under this name through its use by the Russian communists. The conception, originally developed by some of the organizers of the German war economy during World War I, was thoroughly discussed by economists in the 1920's and 1930's.

Nobody is of course bound to accept what seemed then the conclusions of those discussions, which were very favorable to central planning: in any scientific discipline the discovery of new facts or new considerations may lead to the revision of conclusions arrived at in the past. But what one must expect from a professional economist of recognized standing is that he not talk as if those past discussions had never taken place, and that he not use expressions in the ambiguous and misleading senses which had been painfully eliminated in the course of the earlier discussion.

It is in this respect that the pronouncements of Professor Wassily Leontief, recently of Harvard University, in the course of the reopened debate on the subject are so bitterly disappointing. A senior economist of international reputation uses the term "planning" in all the ambiguity in which one would expect it to be used these days only by less responsible persons as a propaganda catchword. He simply disregards the essential, if perhaps provisional, conclusions that emerged first from the earlier discussion of central economic planning and then from the no less intensive discussion of "indicative planning" more recently. This is wholly inexcusable.

Although the statements with which I shall deal here have been issued mostly on behalf of an "Initiative Committee for National Economic Planning," it would seem that for the economic argument embodied in those statements Professor Leontief must bear the principal responsibility. He is the visible prime mover of the committee and he clearly is the economist among its spokesmen who has the most relevant background of professional work. His co-chairman, Mr. Leonard Woodcock, President of the United Auto Workers, is not, of course, a professional economist and has publicly acknowledged that he did not start to think seriously about economic planning on the part of government until the oil embargo. Indeed, some of the comments he has made rather suggest that he has not thought much about it even now.

The worst confusion by which the new American agitation for "planning" is permeated, not excluding the various statements by Professor Leontief himself, was most naively expressed in the first sentence of a lead editorial in the February 23, 1975, issue of the New York Times. It asked, "Why is planning considered a good thing for individuals and business but a bad thing for the national economy?"

It is almost unbelievable that at this date an honest seeker after truth should innocently become the victim of the equivocal use of the word planning and believe that the discussion about economic planning refers to the question of whether people should plan their affairs and not to the question of who should plan their affairs. In reply to this I can only repeat what more than 30 years ago I had, as I even then believed at unnecessary length, explained in a popular book.

"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, and there can be differences only between good and bad, between wise and foresighted and foolish and shortsighted planning. An economist, whose whole task is the study of how men actually do and how they might plan their affairs, is the last person who could object to planning in this general sense. But it is not in this sense that our enthusiasts for a planned society now employ this term, nor merely in this sense that we must plan if we want the distribution of income or wealth to conform to some particular standard. According to the modern planners, and for their purposes, it is not sufficient to design the most rational permanent framework within which the various activities would be conducted by different persons according to their individual plans. This liberal plan, according to them, is no plan—and it is, indeed, not a plan designed to satisfy particular views about who should have what. What our planners demand is a central direction of all economic activity according to a single plan, laying down how the resources of society should be "consciously directed" to serve particular ends in a definite way.

The dispute between the modern planners and their opponents is, therefore, not a dispute on whether we ought to choose intelligently between the various possible organizations of society; it is not a dispute on whether we ought to employ foresight and systematic thinking in planning our common affairs. It is a dispute about what is the best way of so doing. The question is whether for this purpose it is better that the holder of coercive power 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." [The Road to Serfdom, University of Chicago Press, pp. 34ff.]

I should, perhaps, explain that this was written in a book concerned with the moral and political consequences of economic planning, written ten years after the great discussion of the question of its economic efficiency or inefficiency to which I shall now have to turn. And I might, perhaps, also add that J.A. Schumpeter then accused me with respect to that book of "politeness to a fault" because I "hardly ever attributed to opponents anything beyond intellectual error." I mention this as an apology in case that, on encountering the same empty phrases more than 30 years later, I should not be able to command quite the same patience and forbearance.

The great debate of the 1920's and 1930's turned mainly on the question of the justification of the socialist hopes of increasing productivity by substituting central planning for marketplace competition as the instrument for guiding economic activity. I don't think it can now be gainsaid by anybody who has studied these discussions that those hopes were shattered and that it came to be recognized that an attempt at centralized collectivist planning of a large economic system was, on the contrary, bound greatly to decrease productivity. Even the communist countries have to various degrees felt compelled to reintroduce competition in order to provide both incentives and a set of meaningful prices to guide resource use. We can deal with those older ideals of centralized planning fairly briefly, then, since even the proponents of the schemes under discussion today disclaim that they aim at a system of planning of the kind in which a central authority commands what the individual enterprise is to do—although it must remain doubtful whether what they aim at can be achieved without this sort of regimentation.

The chief reason why we cannot hope by central direction to achieve anything like the efficiency in the use of resources which the market makes possible is that the economic order of any large society rests on a utilization of the knowledge of particular circumstances widely dispersed among thousands or millions of individuals. Of course, there always are many facts which the individual conductor of a business ought to know in order to be able to make the right decisions but which he can never know directly. There are two possible alternatives for coping with these difficulties: either conveying to a central directing authority all the relevant information possessed by the different individuals, or communicating to the separate individuals as much as possible of the information relevant for their decisions. And we have discovered a solution for the second task only: the market and the competitive determination of prices have provided a procedure by which it is possible to convey to the individual managers of productive units as much information in condensed form as they need in order to fit their plans into the order of the rest of the system. The alternative is clearly impossible—simply because all the individual managers of businesses never can know beforehand which of the many concrete circumstances about which they have knowledge or could find out might be of importance to the central planning authority.

We have come to understand that the market and the price mechanism provide in this sense a sort of discovery procedure which both makes possible the utilization of more facts than does any other known system and provides the incentive for constant discovery of new facts, improving adaptation to the ever-changing circumstances of the world in which we live. Of course this adaptation is never as perfect as the mathematical models of market equilibrium suggest, but it is certainly much better than any which we know how to bring about by any other means. I believe there is substantive agreement on these points among serious students of these matters.

But, curiously, one begins to hear more and more frequently a new argument, which inverts the historical role that the market and the price mechanism have played in maximizing order and efficiency in individual economies and in the world economy at large. It is contended that the market may have been an adequate mechanism of coordination under earlier, simpler conditions, but that in modern times economic systems have become so complex that we no longer can rely on the spontaneous forces of the market for the ordering of economic priorities. We must resort instead to central planning or direction. Such an argument carries some superficial plausibility, but, on examination, turns out to be particularly silly. In fact, of course, the very complexity of the structure of modern economic systems makes it progressively less and less imaginable that any one mind or planning authority could picture or survey the millions of connections between the ever more numerous interlocking separate activities which have become indispensable for the efficient use of modern technology and even the maintenance of the standard of life Western man has achieved.

The market system functions because it is able to take account of millions of separate facts and desires, because it reaches with thousands of sensitive feelers into every nook and cranny of the economic world and feeds back the information acquired in coded form to a "public information board." What the marketplace and its prices give most particularly is a continuing updating of the ever-changing relative scarcities of different commodities and services. In other words, the complexity of the structure required to produce the real income we are now able to provide for the masses of the Western world—which exceeds anything we can survey or picture in detail—could develop only because we did not attempt to plan it or subject it to any central direction, but left it to be guided by a spontaneous ordering mechanism, or a self-generating order, as modern cybernetics calls it.

Apart from such occasional flare-ups of old misunderstandings in lay circles, the efficiency argument for central economic planning has almost universally been abandoned. If central direction of all economic activity is still sometimes demanded by serious students, this is on the different and logical argument that only in this manner could the distribution of income and wealth between individuals and groups be made to conform to some preconceived moral standard. Apparently a good many idealist socialists would be prepared to tolerate a substantial sacrifice of material welfare if thereby what they regard as greater distributive or social justice could be achieved.

The objections to this demand for greater social justice, of course, must be and are of an entirely different character from those against the presumed greater efficiency of a planned system. There are two different fundamental objections to these demands, each of which seems to me to be decisive. The first is that no agreement exists (or appears even conceivable) about the kind of distribution that is desirable or morally demanded. The second is that whatever particular distributive scheme were to be aimed at could in fact be realized only in a strictly totalitarian order in which individuals would not be allowed to use their own knowledge for their own purposes but would have to work under orders on jobs assigned to them for purposes determined by government authority.

Freedom in the choice of activity as we know it is possible only if the reward to be expected from any job undertaken corresponds to the value the products will have to those fellow men to whom they actually are supplied. But this value often will unavoidably bear no relation whatever to the deserts, needs, or other claims of the producer. The belief in a society in which the remuneration of individuals is made to correspond to something called social justice is a chimera which is threatening to seduce modern democracy to accept a system that would involve a disastrous loss of personal freedom. George Orwell and others ought by now to have taught even the layman what to expect from a system of such kind.

The new American advocates of planning will claim, however, that they know all this and that they never have advocated a system of central direction of individual economic activities and even have said so. Yet it is very doubtful whether what they do advocate would not in fact lead that way. They leave a great deal obscure, and it is precisely this state of muddle which is the sure way to hell. To be sure, the statement of the Initiative Committee for National Economic Planning (The Case for Planning) says: "It should be clear that the planning Office would not set specific goals for General Motors, General Electric, General Foods, or any other individual firm. But it would indicate the number of cars, the number of generators, and the quantity of frozen foods we are likely to require in, say, five years, and it would try to induce the relevant industries to act accordingly." But one cannot help wondering how that "inducement" of an "industry" would work if, as the Initiative Committee's statement at another point makes clear, the "means of influencing" the decisions of industry would include "selective credit controls, guidance of basic capital flows, limits to the use of air, water and land, and mandatory resource allocation [italics added]."

Indeed, as one reads on, it becomes increasingly difficult to find out what precisely the authors of the statement mean by National Economic Planning. Nor, in spite of its magniloquent language, is the text of the proposed Balanced Growth and Economic Planning Act of 1975, inspired by the committee and introduced in the Senate by Senators Humphrey, Jackson, Javits, McGovern and others, in this respect more revealing. While the bill is loquacious on the organization of a proposed Economic Planning Board, it is remarkably reticent on the methods and powers by which this body is to secure the execution of the "balanced economic growth plan" which it is to draw up.

Underlying some of these arguments for central economic planning appears to be the curious conception that it would be an advantage, enhancing orderliness and predictability, if the gross outline, a sort of skeleton, of the future distribution of resources between industries and firms could be laid down for a fairly long period. But the exact opposite would be the result of such planning: the uncertainty for managers would be greatly increased, since the opportunity they would have to adapt to changes in their immediate environments (i.e., the quantities they would have to buy or sell and the prices at which they could do so) would depend on the "mandatory resource allocation," the "guidance of basic capital flows," etc., of the government planning office. For the manager of an individual firm, that halfway house between a completely planned system and a free market would indeed be the worst of all possible worlds, since his ability to make changes would become critically dependent on the red tape, delay, and unpredictability that are characteristic of bureaucratic decisions.

Implied in the argument for government planning of industrial and commercial activity is the belief that government (with an appropriately increased bureaucracy, of course) would be in a better position to predict the future needs of consumer goods, materials, and productive equipment than are the individual firms. But is it really seriously contended that some government office (or, worse, some politically sensitive plan-making committee) would be more likely to foresee correctly the effects of future changes in tastes, the success of some new device or other technical innovation, changes in the scarcity of different raw materials, etc., on the amounts of some commodity that ought to be produced some years hence, than the producers or professional dealers of those things? Would it even be desirable that various companies in an industry all act on the same guess? Is it not the very rationale of the method of competition that we allow those who have shown the greatest skill in forecasting to make preparations for the future?

In some sections of the statements made by the new advocates of "planning" it becomes clear, however, that they are thinking mainly of another kind of planning, one which also has been thoroughly examined in the past in a discussion of which its present protagonists show as little awareness as of any other of the earlier scientific examinations of the problem. The earlier extensive discussion of these problems, from which the American proponents of that other sort of planning ought to have profited, took place chiefly in France in the early 1960's under the heading of "indicative planning." This conception had for a short while attracted much attention, until it was decently buried after a thorough discussion at the Congress of French Speaking Economists in 1964 had revealed all the confusion and contradictions involved in it. There is no excuse whatever for ignorance of the upshot of these discussions, which are clearly expounded in an excellent book in English by Dr. Vera Lutz.

The whole idea of "indicative planning," it turned out, rests on a curious combination, or rather confusion, of actions—making a prediction and setting a target. It was conceived that somehow a forecast of the quantities of the different commodities and services that will be produced would assist in determining the respective quantities which ought to be produced. The plan is conceived as a forecast by government at the achievement of which industry is to aim.

This sort of self-fulfilling prophecy may at first appear plausible, but on reflection it turns out, at least so far as a market economy based on competition is concerned, to be an absurdity. There is absolutely no reason at all to assume that announcement of a target will make it likely that the aggregates of output named in it will actually be realized by the efforts of a number of producers acting in competition. Nor is there any reason to think that the government, or anybody else, is in a better position than are individual managers acting as they now do to determine beforehand appropriate quantities of different outputs of different industries so that supplies and demands will match.

It is at this point that it becomes clear that the present revival of the planning idea in the United States is inspired by the input-output representations developed by Professor Leontief and rests entirely, I am sorry to say, on a colossal overestimation by its author of what this technique can achieve.

Professor Leontief's input-output tables show in an instructive manner, how, during some period in the past, various quantities of the products of different main branches of productive activity were used up by other branches. How the production of the tens of thousands of different things which are needed to produce a much smaller but still very large number of final products is determined by the market process is a matter of infinite complexity; and how order is brought about by a spontaneous mechanism which we do not fully understand is best illustrated by the very fact that we needed a Professor Leontief to give us even a very rough outline of the gross categories of commodities that in the past have passed from certain main groups of industries to others. One can understand that Professor Leontief wishes to refine and extend that technique and to construct input-output tables not for a few dozen but for a few thousand main classes of products. But the idea that such broad-outline information about what has happened in the past should be of significant help in deciding what ought to happen in the future is absurd. Even if we could get and organize the information, it would tell us about just one of an infinite number of possible input combinations that could produce a particular array of final products. It would tell us nothing at all about whether that specific combination of inputs or any other combination would be economical under changed conditions.

The source of belief in the value of input-output representations is the wholly wrong idea that the efficient use of resources is determined mainly by technological and not by economic considerations. That belief is evident in the fact that the advocates of planning visualize a team of a few hundred technical experts—most of them scientists and engineers rather than economists—working on planning for either the White House or Congress. (New York Times, February 28, 1975, "Diverse Group Advocates Economic Planning for U.S.")

This, I am afraid, betrays a complete lack of understanding of how in the complex order of a great society the efficient use of resources can alone be determined. There is no need, to take a very simple example, for a particular quantity of a particular raw material in order to make a particular quantity of tarpaulins. In a situation in which the buyers of tarpaulins are indifferent to the raw material from which they are made, output can be maximized by choosing among hemp, flax, jute, cotton, nylon, etc., that material which costs least—that is, that which we can obtain for this purpose at the least sacrifice of other desirable products. There is, therefore, without a knowledge of prices, no possibility for determining from statistics of the past how much of different materials will be wanted in the future. And statistics of the past help us little to predict what prices will be and therefore what quantities will be needed of different commodities.

Even if it were possible, however, to say beforehand for every kind of commodity (or variety of a commodity) how much of it ought to be produced some years hence, it is difficult to see how this should lead the individual enterprises to produce just those amounts which together correspond to a desired quota—except, indeed, on the assumption that it is desired that the different firms should conspire together to produce an output of a certain size (presumably that must be profitable to them). This, in fact, is the ideal which clearly guided the French advocates of "indicative planning." And one cannot help feeling sometimes that the new American advocates of planning have become the innocent dupes of some aspiring cartelists.

The whole idea of "guiding" private industry by announcing beforehand what quantities of different goods firms ought to produce over a long period of the future is a muddle from beginning to end, wholly ineffective and misleading if left without sanctions constraining industry to do what it is predicted that it will do, destructive of the competitive market and free enterprise, and leading by its inherent logic straight to a socialist system.

There is, however, yet another undercurrent discernible in the present demands for planning which indeed expresses a very legitimate dissatisfaction with prominent features of our economic life. The current agitation in the United States for a broad new planning initiative explicitly includes, in most of its variants an indictment of government for its failure to think out its policies for the longer future. The hope is for government to plan its own activities ahead for long periods, announce and commit itself to the execution of these plans, and thereby make government action more predictable. But the legitimacy of that indictment is not a justification for the demand that the same government which so notoriously fails to plan its own affairs should be entrusted with the planning of business.

The Balanced Growth and Economic Planning Act of 1975—popularly known after its chief sponsors as the Humphrey-Javits bill has now been laid to rest. But its sponsors and advocates have united behind an even worse bill, the Humphrey-Hawkins bill.

It is difficult for an outsider to understand how, after introducing so ill-considered and irresponsible a piece of legislation—which promised merely an empty machinery with no stated purpose, which would perhaps give us input-output tables for a few hundred commodities that will be of no conceivable use to anybody except some future economic historian, but which may incidentally be used to enforce the disclosure of various sorts of information that would be exceedingly useful to a future authoritarian government—Senator Humphrey should be able to boast that it is his "single most important piece of legislation" (Challenge, March-April 1975, p. 21).

Somebody as innocent of American politics as this writer might suspect that the Senator from Minnesota is the unwitting tool of some other, presumably collectivist, wire-pullers who want to use the machinery thus created for aims they prefer not to disclose. But when one rereads the accounts of how the campaign for national planning has evolved in the articles of the editor of the magazine Challenge, whose hand one seems to recognize also in several of the other statements supporting the plan, one feels reassured that nothing more sinister than sheer intellectual muddle is at work.

F.A. Hayek shared the 1974 Nobel Prize in Economics with Gunnar Myrdal. He has written widely on economic and political topics for both professional and popular audiences. REASON interviewed him in its February 1975 issue. This article is adapted from Hayek's "The New Confusion about 'Planning'" printed in the Morgan Guarantee Survey, published by the Morgan Guarantee Trust Company of New York.