Planning an Economy Is Not Elementary
March 06, 2014
In the absence of prices, could a central planner efficiently run an economy? Before you answer, I'll drop the Hayekian proviso that the planner be vile. Instead, I'll only ask you to consider a planner who is a soccer mom wanting to maximize happiness among all. Would you still answer in the negative?
I live in a neighborhood that has an adjoining elementary school. Most mornings, a significant number of mothers (typically) drive their children to school. As I travel to work in the morning, the last left-hand turn before leaving the neighborhood leads to a school service road. There are cars and buses coming off the main road into the neighborhood, wanting to turn right onto the service road; there are folks leaving the service road, wanting to turn both right and left; there are folks coming from the neighborhood wanting to turn left onto the service road; and there are folks like me wanting to get past the service entrance in order to get to work as quickly as possible.
To no one's surprise, this situation leads to congestion, delays, and anger. Now, enter the selfless central planner.
Oftentimes, as I sit stacked in line, I notice that cars in my lane seem to wait more than cars coming from other directions. And as I slowly advance toward the head of the line, I see the cause: the first driver in my lane is waiving others by, with those drivers returning waves and smiles.
You see, when you are the first car in the lane, with each iteration, you are presented with only two faces: the driver wanting to enter the service road and the driver wanting to leave — and you decide who goes.
So, in that position, the selfless driver becomes a central planner of sorts, using her altruistic heart to balance the wants of all other drivers — balancing the costs of waiting with the benefits from a returned wave and smile, and quickly calculating the aggregate psychic profit of all the drivers in all lanes.
That is the seen. Unseen are the sad faces growing longer behind her. Since folks in my neighborhood typically do not sound their anger through a horn or otherwise, there is no signal to reflect the cost suffered by those waiting in line.
So it may not be until the tenth iteration — the tenth time the driver waves a car to go ahead of her — that she deems the perceived marginal benefit of the wave and smile to be less than the assumed cost suffered by those waiting behind her. But the costs and benefits perceived while sitting in the first position are not real costs and benefits, nor are they proxies. They are nothing more than her perceptions, and her perceptions alone.
Without a means to recognize actual prices, the central planner, no matter how much she desires to maximize happiness among all, cannot efficiently rule the intersection. And substituting perceptions for prices is no solution at all.
I can assure you that, if the selfless mom knew the anger brewing behind her, she would attempt to adjust her actions accordingly. But, again, without a cost signal, she would only be groping for a better solution. And, one can assume, would finally abdicate her position (à la Mises) due to the inability to allocate efficiently.
The solution, of course, is property rights, a free market, and prices determined by both. In the absence of all three, even the selfless heart cannot efficiently allocate for all.