Knowledge And Decisions

It is not merely the enormous amount of data that exceeds the capacity of the human mind. Conceivably, this data might be stored in a computer with sufficient capacity. The real problem is that the knowledge needed is a knowledge of subjective patterns of trade-off that are nowhere articulated, not even to the individual himself. I might think that, if faced with the stark prospect of bankruptcy, I would rather sell my automobile than my furniture, or sacrifice the refrigerator rather than the stove, but unless and until such a moment comes, I will never know even my own trade-offs, much less anybody else’s. There is no way for such information to be fed into a computer, when no one has such information in the first place.

Market transactions do not require any such knowledge in advance. When actually faced with either an escalating price for a good which one normally purchases, or a real bargain on something one normally does not purchase, then and only then does a decision between the two goods have to be made — and it is not uncommon for persons in such situations to make decisions that they would not have expected of themselves, even if the results are sufficiently good to cause a permanent change of consumption patterns. Most of us need not think about what our choice would be as between owning a yacht and an airplane, much less an incremental choice between a longer yacht verses a higher-powered airplane. In a market economy, one individual or decision making unit need be concerned with only a minute fraction of the trade-offs in the economy. Under central planning, somebody has to try to reconcile them all simultaneously. In a market economy, even a manufacturer of yachts or a manufacturer of airplanes need not concern himself with the trade-offs between the two products, much less trade-offs between these and numerous other products which compete for the same metal, glass, fuel, storage space, worker skills, etc. Each producer need concern himself only with the trade-off between his own product and money — a fungible medium in which other people measure the trade-offs for their respective products. As a figure of speech, it may be said that the economy trades off one use for another through this medium. This is not only true, but an important truth, for it helps explain why knowledge is economized through price allocation. Another way of saying the same thing is that central planning would require far more knowledge to be actually known by the central planners to achieve the same net result.

Although it may be empirically true that different ideologies generally regard central planning in different ways, it is not ultimately in principle an ideological question. Marx and Engels were unsparing in their criticisms of their fellow socialists and fellow communists who wanted to replace price coordination with central planning. Proudhon’s theory that the government should fix prices according to the labor time required to produce each commodity was blasted by Marx in the first chapter of The Poverty of Philosophy:

Let M. Proudhon take it upon himself to formulate and lay down such a law, and we shall relieve him of the necessity of giving proofs. If, on the other hand, he insists on justifying his theory, not as a legislator, but as an economist, he will have to prove that the time needed to create a commodity indicates exactly the degree of its utility and marks its proportional relation to the demand, and in consequence, to the total amount of wealth.¹¹⁶

It was clear from the rest of the chapter that he expected Proudhon could do no such thing. Thirty years later, Engels denounced another socialist theoretician who wanted to abolish markets: