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Hayek Proved Right Again

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A central conceit of Friedrich Hayek’s was that the centre – the government is usually taken to be that centre but it doesn’t have to be – simply never can have enough knowledge, in real time, to be able to manage anything in detail. This is the foundational point in his Nobel Lecture, The Pretence of Knowledge.

We can observe this in a number of different ways. As O’Rourke pointed out, for all the messing East Germany did in banana republics they never could actually proffer bananas to their own citizenry:

What’s especially odd is that a banana company is an island of central planning in our free market world. The system is owned, usually at least, from end to end. The plantation is planned, it is known how much the production will be. The fruit are transported on specialist – planned – ships and the technology of stopping them ripening before they get to market is well known.

That such a basic commodity was a luxury good in East Germany tells you all you need to know about that system’s manifest failings. The fruit’s absence typified the shortages and penury of life in the old GDR. Indeed, when a shipment did come in there would be queues around the block.

Meanwhile over in West Germany, the banana was a potent symbol of the country’s 1950s economic miracle – so much so that West German president Konrad Adenauer once brandished one in the Bundestag and hailed it as “paradisical manna”.

We can think of it at a higher level of abstraction. Say that we’re going to do Keynesian demand management of the economy. To do so we need to know what is the growth rate of the economy. What the inflation rate is. What the unemployment rate is. A rather crude form of Keynesianism but with those three we should be able to fine tune demand so as to maximise the first while minimising the later pair. Except, GDP figures – accurate ones that is – turn up two months after the end of the period under discussion. Decent unemployment figures – so, not just those claiming dole but also those disengaged from the labour force altogether – a month late at best. And inflation, well, we usually think that the impact of decisions now will turn up in 18 months or so. We donl;t, and can’t, have the information necessary to do said planning in anything like the real time that would make said planning effective or efficient.

Or another example, rather closer to our own time:

Models which projected that there could be 4,000 deaths a day at the peak of a second wave were not intended to “scare people”, the Government’s Chief Scientific Adviser has insisted.

Speaking at the Science and Technology select committee on Tuesday afternoon, Sir Patrick Vallance defended now controversial models presented at the pivotal press conference on Saturday.

“I don’t think it is fair to say it is discredited,” he said, in response to accusations that the data included was old.

But Sir Patrick did concede that, because there is a lag in key indicators, the models were not able to factor in all of the data about the new tiered system, which came into effect on October 14.

Detailed planning doesn’t work because we don’t – and cannot – have the detailed information in good time to be able to do the planning.

Hayek was right.

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3 COMMENTS

  1. Stopping takeovers of “strategic” firms by foreigners is clearly an exception to this. I mean, the government must be able to know what firms are “key” before blocking a takeover otherwise it wouldn’t work, would it?

    • I suspect a firm’s ‘keyness’ is a function of the decibels generated by those who oppose its takeover. It’s a special case of Government By Being Pushed Around.

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