Knowledge And Decisions

Much depends on the incentives and constraints facing the individual on the spot who is supposed to transfer his knowledge to the central planners. A Soviet plant manager knows what his plant can and cannot do better than anyone in Moscow — just as settlers in colonial America knew what was and was not economically feasible under local conditions better than anyone in London, and just as slaves knew what they could and could not do better than any overseer or slave owner. The basic problem is the separation of knowledge and power. Incentives can be contrived by those with power to elicit the knowledge, but such incentives are themselves constrained by the need to preserve the basic relationship — central planning, colonialism, and slavery, in these examples.

Because the central planners’ estimates of each plant’s capacity will become the basis for subsequently judging each plant manager’s success, in transmitting information to the central planners Soviet managers consistently “understate what they can do and overstate what they need.”¹²¹ The central planners know that they are being lied to, but cannot know by how much, for that would require them to have the knowledge that is missing. One way of trying to get performance based on true potential rather than articulated transmissions is a system of graduated incentive payments for “overfulfillment” of the assigned tasks. Soviet managers, in turn, are of course well aware that much higher production will lead to upward revisions of their assigned tasks, so that a prudent manager is said to “overfulfill” his assignment by 5 percent, but not by 25 percent.¹²² In short, a “mutual attempt at outguessing the other”¹²³ goes on between Soviet managers and central planners. Knowledge is not transmitted intact.

The distortion of knowledge is far more serious when the whole economy is coordinated on the basis of such articulation, supplemented by central planners’ guesses. In a market economy, decisions are made through an entirely different process. The individual enterprise that wants raw material, capital equipment, etc., goes into the market to bid for them on the basis of their own best estimate of what they can achieve with them. Competition with other potential users of the same inputs forces them to bid as high as they can afford to, in the light of their own on-the-spot knowledge of their enterprise and its customers. It is not a question of articulating anything to anybody, but of conveying knowledge implicitly through prices bid. Similarly, there is no point overstating production costs to the customer, when competitors will undercut the price and take customers away. In short, the unarticulated knowledge made implicitly through prices has more reason to be accurate than the explicitly articulated knowledge conveyed to central planners.

The special disadvantages of central planning in agriculture — symbolized by massive importations of American grain by the Soviet Union — are due to special problems of transmitting knowledge. There is great variability in agricultural production and in agricultural output, so that the volume of knowledge that would be needed for central planning on the same scale as in industry would be even more staggering. For example, land varies considerably — even within a few hundred yards — in rockiness, chemical composition, physical contours, and proximity to water (horizontally and vertically), all of which affect what can be grown at what cost. The output varies, often literally from unit to unit, and the freshness, nutritional value and perishability also varies, from day to day and sometimes from hour to hour. All this is in marked contrast to steel production, for example, where a given combination of iron ore and coal in a given furnace produces a given product, whether in Moscow or Vladivostok, and the product can remain in its original condition for years.

The Soviets themselves have long recognized “the very varied conditions which always exist in agriculture.”¹²⁴ But there is a big gap between such recognition and being able to construct incentives to deal with it, while at the same time not abandoning the political and economic structure of the country. Innumerable “reforms” have swept over Soviet agriculture in succession, trying to cope with that inherent constraint. Many sound agricultural policies originating with the central planners — crop rotation, planting systems, etc. — have been applied categorically “regardless of local conditions” and over the opposition of local agronomists, in places where the environment necessary to make them successful was not present.¹²⁵ Sometimes this was due to following orders from above, but even when the Soviet Premier warned against “excesses,” many local authorities found it safer to follow general official policy rather than risk a personal deviation which might or might not work.¹²⁶