Freedom and Economic Order

by Linda C Raeder

  To avoid such a fate, benevolent planners might resort to one final option, that is, a direct survey of each individual member of society regarding his personal needs and wants. Perhaps they establish a website and instruct every individual to convey to the authorities everything he knows regarding his preferences (his “demand”), as well as his knowledge of local circumstances relating to conditions of supply. By such means the planners hope to collect all relevant knowledge dispersed among the populace and incorporate it into the economic plans they formulate for society as a whole. Assume for purposes of illustration that all members of society eagerly support the government’s goal and conscientiously strive to ensure its success. Each individual earnestly pursues his personal project of trying to transmit all his relevant knowledge to the central planners in Havana or Washington. Most people would probably begin by communicating their own specialized or technical knowledge, for instance, plumbing, automobile mechanics, hairdressing, web design, and so on. They might also include their knowledge of particular local resources, for instance, the availability of physicians or cat food in their communities, that is, their personal knowledge of available supply. Each person would further attempt to identify his personal demand, his individual needs, desires, tastes, and preferences.

  A moment’s reflection, however, should reveal the impossibility of obtaining relevant economic knowledge and information in such a manner. We have discussed the fact that an economic system serving the actual needs and wants of the populace must have a means of incorporating into production plans all relevant kinds of knowledge, not only explicit or conscious but also fleeting and tacit. Neither of these latter forms of knowledge are transmissible in advance to a central authority devising plans for the future. The discovery and utilization of fleeting knowledge requires a man-on-the-spot able to perceive and then respond to a largely opportunistic situation, one that, by definition, does not endure over time. Tacit knowledge is of a kind that cannot be articulated in advance of some triggering event that raises it to consciousness. Even the most zealous comrade would be incapable of communicating such kinds of knowledge to a central authority, both of which are crucial to a rational allocation of scarce resources.

  A further difficulty arises from the very nature of things: the fact that human existence is inseparable from unpredictability and ever-changing circumstance. The difficulty arises not from lack of intelligence or will but rather factors beyond human control: the inherent limitations of the human mind in a world characterized by contingency and unexpected turns of events. Human beings are constitutionally incapable of foreseeing the future with any degree of certainty, from knowing in advance the particular goods and services they will need to deal with existence in a world such as ours. No one can be certain that the items he needs or desires today will be the same items he needs or desires in six months, let alone over a more extended time horizon. Indeed, it is not always possible to know in advance everything an individual may need even to get through a single day. Unforeseen circumstances continually arise in the life of every person—pipes leak; a car breaks down; a new romance develops; a hungry kitten appears in the roadway. Few if any people would have the foresight to include plumbing equipment, automobile parts, a dozen roses, or cat food in the list they prepare for the planner. Even those who possess such foresight, however, cannot be certain they will actually need such items. Perhaps the car will not break down or the existing pipes will hold up fine. The production of items that subsequently prove unnecessary is a waste of scarce resources. Well-meaning government planners will undoubtedly want to ensure access to roses or cat food should the need for such items unexpectedly arise, but it is highly unlikely such aims will be realized in practice. The future cannot be predicted with certainty, and the possible need for any particular good or service depends on largely unforeseeable future circumstances. The relevant facts of economic activity are continually in flux, changing in unpredictable ways. All forms of centralized economic planning encounter the irremediable fact that human existence is not static. We have seen the difficulty if not impossibility of precisely anticipating even one’s own future needs and wants with any specificity.

  It is thus simply inconceivable that government planners could achieve a corresponding feat for a complex modern society composed of millions upon millions of individuals. Such a conclusion follows from the impossibility of centralizing relevant economic knowledge. Individual knowledge of present and future conditions of demand and supply cannot be transmitted to a central authority because, first, such knowledge is often held by individual minds only as tacit knowledge, inaccessible to the conscious mind unless and until evoked by a particular concrete circumstance; second, fleeting knowledge, by definition, is of a kind that cannot be incorporated into future plans; and, third, the contingency of human experience renders it impossible accurately to foresee either future demand or future sources of supply, both of which depend on unforeseeable future conditions. The inevitable conclusion derived from such epistemological facts is that centralized economic planning, even if motivated by the best intentions, cannot lead to solution of the economic problem. Such a method of economic organization has no means of garnering the knowledge and information requisite to the efficient allocation of scarce resources in service of actual human needs and wants.

  The Pretense of Knowledge

  The simplest way of expressing the fundamental flaw of all centrally planned economic systems, then, is that planners simply do not possess, and cannot acquire, the relevant knowledge and information required for rational economic planning. Such information can only be acquired through the free and spontaneous formation of a structure of relative prices, which, as we have seen, depends upon the institution of private property. No mind or group of minds can possibly grasp the enormous concrete complexity of modern society. It is impossible to know the actual needs and wants of millions and millions of individuals, needs and wants, moreover, which do not remain stable over time and which individuals themselves may not recognize until some circumstance raises them to consciousness. Nor can planners possess more than an insignificant fraction of relevant knowledge concerning actual and potential supply of scarce resources. An overwhelming portion of such knowledge is dispersed throughout society, held only in the minds of millions of individuals, and of a kind, as we have seen, that cannot be consciously communicated. Central planners feel confident in the wisdom of their plans only because they are blind to the extent of their own ignorance. Their confidence is a false confidence, based on illusion or self-deception, on the mere “pretense of knowledge,” in Hayek’s well-known phrase.[30] Advocates of central planning are victims of what he calls the “synoptic delusion”—“the fiction that all the relevant economic facts are known to some one mind, and that it is possible to construct from this knowledge of the particulars a desirable social order.”[31] Such, as we have seen, is impossible.

  The reason why the market economy has generated the greatest prosperity ever known in human history is its superior ability to facilitate the solution of the economic problem that, in the end, is a problem of knowledge. The decentralization of decision processes permits the potential discovery and utilization of all relevant economic knowledge existing in society while a centralized or planned system can only utilize the limited knowledge possessed or acquired by the planners. In the absence of accurate price signals, planners have no means of obtaining knowledge of relevant sources of supply or actual demand. Neither tacit nor fleeting knowledge of local time, place, and circumstance nor knowledge of subjective personal preference can guide the direction of scarce resources. For such reasons centralized or socialized economies invariably fail to produce the results intended by their planners, oblivious as they must be to the limits of their own knowledge.

  The market process, by contrast, represents a humble acquiescence to the intractable complexity of actual human experience and the irremediable limits of the human mind. In this instance, the meek do indeed inherit
the earth. For accepting the guidance of supra-rational market forces permits individuals to bypass the inherent limits of their minds and limited range of their concrete perception. Their ability to read and speak the abstract language of prices grants access to the vastly greater supra-personal knowledge and information summarized in the simple symbol of a market price—knowledge of real conditions prevailing not only within individual societies but across the world. Centralized or planned systems, by contrast, are characterized by the hubristic refusal to acknowledge the constitutional limits of the human mind—the inherently circumscribed range of any individual’s possible knowledge—in the face of the complexity of human existence. However well-meaning the intentions, the socialist endeavor to “organize society as a whole” must, in the end, be regarded as an arrogant and illusory presumption of knowledge and dangerous disregard for the nature of things—the actual conditions of human existence. Adam Smith was among the first to recognize such unfortunate human propensities:

  The man of system . . . is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. . . . He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.[32]

  The “Mixed Economy”

  The goal of classic communism, as we have seen, is the replacement of capitalism with an economic system controlled and administered by central authority, that is, transfer of the direction of resources from private to public hands. As previously observed, however, such a goal is not an end-in-itself, desirable for its own sake, but rather a means toward realization of the ultimate goal of all collectivized economic systems, namely, the moral goal of establishing a putatively more just and equitable society. Collectivists of all persuasions regard significant disparities in income or wealth as inconsistent with justice. A just society is said, on the contrary, to require a relatively even distribution of wealth among members of society; capitalism, which fails to meet such a requirement, is thus condemned as unjust. The early modern champions of economic collectivism, such as Marx, believed that the best way to achieve justice so conceived was the outright appropriation and transfer of the means of production from private to public ownership, the so-called “nationalization” of industry. Classic communism or “hot socialism” on the Marxian model, however, has fallen from favor in the wake of the uniformly dismal results of the communist and socialist experiments of the twentieth century. Even proponents of collectivist ideology have come to recognize that direct nationalization of industry and complete elimination of private ownership produces disastrous economic and social consequences.

  Despite the dismal performance of actual socialized economies in the twentieth century and beyond, Marx’s prodigious efforts did not prove in vain. Although his economic theory has been successfully refuted both theoretically and in practice, by both reason and history, Marx nevertheless has grounds to claim victory. His triumph, however, would ultimately relate not to economics but rather morality, more particularly, the successful transmission of his moral vision to succeeding generations. Marx vigorously asserted the moral superiority of economic collectivism over capitalism. His most important legacy is to have won the moral high ground for socialist ideals. The views he championed have been widely assimilated throughout Western society and, to the present day, millions of people are convinced that socialism embodies a morality superior to that embodied in capitalism. The validity of such a conviction will be thoroughly explored in a subsequent chapter.

  Our present interest involves the simple fact that many individuals in modern society came to embrace, and continue to embrace, the socialist moral ideal: a society is often adjudged more or less just to the extent it achieves or fails to achieve greater equalization of wealth. Marx himself believed that violent revolution would be necessary to realize a just society so conceived.[33] Capitalists, he assumed, would not voluntarily relinquish their privileges. The overthrow of existing capitalist arrangements must therefore entail revolutionary violence and indeed a temporary “dictatorship of the proletariat.”[34] Numerous Western converts to socialism, however, were discomforted by the violence Marx regarded as necessary to institute socialized economic organization in formerly capitalist societies. Fellow travelers such as the British Fabians, among others, embraced the Marxian goal but disavowed violence as a means of achieving it. They came to believe, moreover, that violent revolution was not only undesirable but also unnecessary. The establishment of socialism, they recognized, need not require violence or dictatorship but can rather be achieved by peaceful and democratic means, through political evolution, not revolution. They further recognized that pure communism (“hot socialism”)—outright confiscation of private property and nationalization of industry—was far from necessary to achieve socialist economic and moral goals. Such could also be achieved by permitting nominal private ownership of resources but regulating and taxing such resources in a way that would further the realization of the overarching moral-economic ideal—greater equalization of material wealth. Yet others who embraced the Marxian moral vision but disavowed Marxian violence came to champion the so-called “mixed economy” or “Third Way,” one combination or another of capitalist and socialist economic methods. An economy that united the two principles of economic arrangement, it was argued, could preserve the engine of capitalist productivity and prosperity and simultaneously employ its material achievements to effectuate a more even distribution of wealth.

  The contemporary economic system of the United States is a classic instance of such a “mixed economy.” Although American economic order relies upon market forces to a significant degree, it is far from a purely capitalist system ordered exclusively through voluntary exchange. Throughout the course of American history, numerous measures were enacted by government that grafted various socialistic programs onto the infrastructure of the market system, a process that continues to the present day.

  The narrow textbook definition of socialism as “public ownership of the means of production” does not adequately capture the essence of socialist economic organization, namely, direction of resources by government. The fundamental distinction between capitalism and socialism is not the merely nominal assignment of property rights, private or public, but rather actual and ultimate decision rights—who actually and ultimately decides how resources shall be employed, private individuals or political authority. Socialism exists, in practice if not in name, wherever government assumes authority to direct the use of resources rather than permitting private individuals to direct their use in accord with their individual purposes. Governmental direction or control of such resources does not, as radical communism anticipated, require outright nationalization of industry and confiscation of private property. Such control may rather be achieved by far less draconian methods. It can be accomplished, for instance, by tax and regulatory policy and other kinds of legislation that transfer, in one way or another, ultimate decision rights over nominally private resources from private individuals to public officials.

  A conventional measure of the degree of socialization of a nation’s economy is the percentage of its so-called Gross Domestic Product (GDP)—the total dollar amount of the goods and services produced within a given society in a given time frame, usually one year—spent, controlled, or otherwise directed by government. In the United States, government expenditure as a percentage of GDP has continuously increased over the course of the twentieth century. At its turn, researchers estimate that the federal government controlled or spent approximately 3% of the GDP of the United States; as of 2014, this percentage is estimated at 21%. Total government spending, including federal, state, and loca
l governments, during the early twentieth century is estimated at about 7% of GDP; as of 2014, that percentage had risen to about 38%.[35] This means that 38% of all resources measured by GDP are ultimately controlled and directed not by private individuals but rather government. In a pure or ideal communist society, government of course directs or controls one hundred percent of all resources; all “spending” is “government spending.” As a general rule, the higher the percentage of government spending as a portion of GDP, the greater the socialization of an economy. By such a measure, economic order within the United States is moving ever further away from capitalism and ever closer toward full-fledged socialization. Individuals who are required by law to transfer 38% of their income or other resources to government via taxation no longer possess decision rights over 38% of their personal resources. Government officials decide how such resources are to be employed.

  Outright government spending, moreover, is not the only measure of economic socialization and taxation not the only means of controlling nominally private resources. Governmental control of resources can also be achieved by regulatory policy and legislation not directly related to taxation. Recent Congressional legislation, for instance, requires every individual to purchase health insurance by penalty of law.[36] This means that individuals no longer possess decision rights over that portion of personal income that must be spent for the mandated purchase of medical insurance; government has decided how their personal resources are to be employed. There is little difference between such policy and outright confiscation of an individual’s property, even if such a “taking” of personal property leads to provision of governmental benefits of one kind or another. In either case, the individual’s right to decide how his personal resources are to be employed, that is, his right to property, has been compromised if not invalidated. The defining attribute of socialism or economic socialization is governmental control and direction of resources. Such control is of course direct and explicit in the draconian methods of classic communism, that is, utter abolition of private property and total confiscation of the personal assets of the populace. Similar governmental control and direction of resources, however, is achieved indirectly and implicitly by the methods employed in many nominally capitalist societies, that is, tax and regulatory policy and other legislative enactments. The latter is the procedure employed by most “Progressive” governments in the Western democracies throughout the twentieth century, including the United States.