Knowledge And Decisions

While there is much modern literature on the vicissitudes of Soviet planners, the point here is not that the Soviets are inefficient or that “planning” has difficulties. All human life has difficulties. The point is that a particular kind of institutional incentive structure has a specific set of difficulties, traceable to the articulation and transmission of knowledge. The point is reinforced by the appearance of the same kind of difficulties with the same incentive structures under entirely different historical and ideological conditions.

In colonial America, Georgia was the most elaborately “planned” colony, directed and heavily subsidized from London for twenty years by a nonprofit group of philanthropists, to whom the British government had entrusted the governance of that colony. They issued rations, appropriated funds for teachers and midwives, as well as for cooking utensils and items of clothing — all for people living 3,000 miles away in a land the London trustees had never seen.¹²⁷ No other colony had the benefit of so much “planning” or central direction. Yet Georgia ended up “the least prosperous and the least populous of the colonies.”¹²⁸

Its problems were the classic problems of planning. Initial miscalculations based upon the inadequate knowledge of the distant planners were not readily correctable by feedback based on the knowledge possessed or acquired by the experience of those actually on the scene. For example, property rights were not freely transferable, so that the London trustees’ initial estimates of the amount of Georgia land necessary or optimal for farming became frozen into colonial practice. While their articulated decisions were in terms of “land” — as if it were a homogeneous resource — as already noted, land always varies in chemistry, topography, and all the other variables which affect its output potential. Equal rations of land surface were not equal rations of these economically relevant variables, nor was there any way to trade off these characteristics without actual trades between those on the scene and familiar with the nature of the land, and of themselves as farmers, the interaction of which would determine “fertility.” In short, the distortions of planning involved not merely inequities, but inefficiencies. Had the initial allotments been freely transferable, the inefficiency at least could have been corrected.¹²⁹

Under the rule that farms must be entailed to a male heir, those settlers with an allotment and no male heir to leave it to had an asset with a shorter time horizon than others — and therefore had less incentive to make long-run improvements, since it could not be sold in the market.¹³⁰ The discontents and neglects to which this incentive system led eventually forced the London trustees to relax some of their control over the transfer of land, each concession being made grudgingly “as if it were a sacrifice of principle.”¹³¹

The London planners’ lack of knowledge was also reflected in their choice of economic activities to promote. Because Georgia had mulberry trees, it was decided that it would be a good place for silkworms and therefore for a silk industry. As often happens, “expert” testimony (from an expert on the Italian silk industry) was enlisted to promote the project, leading to a report “as rich in enthusiasm as it was poor in firsthand knowledge. ...”¹³² A crucial piece of firsthand knowledge that was lacking was that the particular variety of mulberry tree in Georgia was different from the kind of mulberry tree used by silkworms in the Orient. Nor was the climate the same, and half the silkworms in Savannah died as a result.¹³³ Nor was the labor available in Georgia the same as that in the Orient in skill, diligence, or low pay. Still, there was a favorable “demonstration project” — a gown of silk produced in Georgia for the Queen — though Georgian silk never became commercially successful.¹³⁴