How should we ideally construct a good economy? According to F.A. Hayek, "If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic". Unfortunately, he claims, this is really not possible in reality. Hayek's argument is that centralized knowledge and control of goods and resources based on theoretical models will not be as successful as a decentralized system that operates according to the price mechanism. He gives the example of a shortage of tin due to some unknown cause and shows how there is simply no need for each individual to know all the specifics about the shortage, but merely knowing that tin costs more will prompt changes within each business. The problem with centralized economic planning is that it is impossible to have all the information needed at any one time in order to make informed and wise choices. The market system automatically adjusts itself as individuals make the necessary adjustments in response to changes in supply and demand. As much as I understand it, Hayek's argument seems valid. But I also do not clearly understand what it would mean to have a completely centralized and planned economy as opposed to a market economy. Anyone with a better knowledge of political economy is welcome to enlighten me.
Monday, April 28, 2008
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Good question. In section II Hayek draws a three-way contrast between 'Central Planning', 'Competition', and 'Monopoly'. He argues for the competitive market mechanism as against central planning. While the argument may have been a useful counterpoint to Soviet Planned Economies during the Cold War, is he attacking a straw man in arguing against Central Planning? What about some mixed form of regulation-plus-competition like we have now?
To me it seems like he is saying one person or one small group of people cannot keep track of all the changes as well as a group focusing on different, specific areas of interest and their changes. I'm not sure he addresses the idea of partial regulation. I think he just lumps it into a free market, although he really shouldn't. We have seen failure of both a strictly regulated economy such as the Soviet Union and a purely free market economy such as that of Haiti. Unless there is some sort of regulation, people are free to create products that may be detrimental to society. Imagine if Kraft could sell us salad dressing filled with nicotine and cocaine.
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