Planning Insights from a Non-Austrian

An interesting article in the QJE from 1964 offers some nice non-Austrian insights into the problems of central planning, by looking at problems of large organizations , be they large firms or governments, and their bureaucracy.

The first insight is in this nice paragraph, imagine yourself standing in a central statistical bureau of the government - or maybe the Fed - trying to work out how to save an ailing economy:

Statistics at the center must lose cognizance of individual psychologies, attitudes, and tendencies that are too detailed, amorphous or untactful to put into summary reports, but that can be thoroughly useful in decisions. The central staff live in the midst of aggregates, trends, averages, and over-all generalizations. They are remote from the individual reality behind the words and figures that flow and jumble over their desks. They are dealing with symbols: their input is items on paper, and their output is items on paper. The individual is expendible-- both to the American Telephone and Telegraph and to the Soviet Union.

(my emphasis)

Of course, if AT&T deals with you that way, you, hopefully, can find another phone company (so long as government hasn't given them a monopoly). The point about aggregates goes deeper than is made clear here. In particular, aggregates cannot tell you the micro-level reasons for problems with coordination and growth, and macro-level targets cannot aid individuals in the coordination necessary for growth, to reach those targets.

Another good paragraph is this one. Think of Obama's community service projects and call to the spirit of "public service". Hopefully the insight is well known, if often forgotten:

Conventional wisdom in most communities of the world approves of harnessing the "highest motives," rather than the strongest motives, to achieve social goals. Down-grading the profit motive (discussed above) is only one example. Public exhortation and praise are focused on community service, mutual help traditions, and cooperate ventures. Looking after oneself, and one's own family, earns no special applause. But economic efficiency and progress mainly depend, as Alfred Marshall advises us, on making effective use of the strongest, and not necessarily the highest, motives of mankind.

He then cites Khrushchev who tried to invoke Lenin, when he realized the need for profit motive, and stressed to the people "the exceptional importance of the Leninist principle of material incentives," explaining that "It is completely erroneous to oppose material stimuli to moral ones, material incentives to ideological-education work..." -- Indeed, Adam Smith couldn't have said it better.

The two points come together when the author then goes on to discuss corruption. The author makes the important point that planners can only make decrees, they cannot set up institutions that allow the actors to fulfill the goals by following their own strongest motives. If they did the latter, they would not be planning, but providing an environment for free choice -- a market. Instead the planner must use command, which cannot ensure the target is met, but just direct the actions of the individuals. If the actions won't produce the desired ends of the individual, he may break the law, making the results unreliable. If he follows the law from fear, but knowing it won't achieve the ends, the plan won't be fulfilled.

To the extent a central authority relies on incentives-- income, status, etc-- to get work done, it is trying to make the public interest and private interest coincide. To the extent it relies on regulations or laws -- backed in the case of government by police, courts, and army -- it is forcing people to do, in the purported general interest, what they would otherwise not do. That is, giving incentive to avoidance, evasion and corruption.

On the point of corruption, the author also wins my heart with this footnote about how the more laws imposed, the more are broken, creating a social acceptance of violation of law:

It seems plausible to estimate that the average respectable citizen in the United States breaks at least one law a day (for example, did he come to a complete stop at the last stop sign?), whereas in 1800 it is doubtful whether his predecessor broke one law a year (did he murder or steal last year?).

Thank you-- still respectable even if I get fined for California stopping.