Taking a stroll down Wikipedia Lane this fine Saturday afternoon (having unfortunately missed what I hear will be a kick ass birthday party for my good friend Andrew, complete with a moon bounce and a keg of Yuengling), I found this interesting paragraph in the article on planned economies:
Taken as a whole, a centrally planned economy would attempt to substitute a number of firms with a single firm for an entire economy. As such, the stability of a planned economy has implications with the Theory of the firm. After all, most corporations are essentially 'centrally planned economies', aside from some token intra-corporate pricing (not to mention that the politics in some corporations resemble that of the Soviet Politburo). That is, corporations are essentially miniature centrally planned economies and seem to do just fine in a free market. As pointed out by Kenneth Arrow and others, the existence of firms in free markets shows that there is a need for firms in free markets; opponents of planned economies would simply argue that there is no need for a sole firm for the entire economy. (My emphasis)
The above excerpt contains several interesting points (the Politburo comparison is delicious!), but I emphasized the idea I find most central and far-reaching. I'm not familiar with Arrow's work, but I plan to look into it. The observation that firms exist in free markets, after all, begs the question about whether what we have now is actually a free market.
As I and many others have remarked before, corporations do resemble little planned economies. Within their own internal domains they have the same problems of allocation, cost accounting, and informational distortion that plague any communist bureaucracy. However, whether or not the corporation is the most economically efficient mechanisms for doing business is not at all clear, given the extent of forcible state intervention on their behalf. It may be that in an actual free market, no central planning of any kind is needed!
Now, there's nothing wrong with planning per-se: even in the type of free market I advocate, free of any sort of privilege, individuals would plan all the time. But this goes back to one of my central themes on this blog - corporations are not human beings. This suggests some simple axioms that distinguish collective organization from individual self-determination:
- Scale matters. Human beings make good decisions as well as bad decisions, but either way their planning process can only take so much complexity into account. At a certain level of hierarchical organization, I assert that humans simply lose touch with the full consequences of their plans. It's all just too much for anybody to deal with, and often this makes it easy to ignore.
- Interests matter. The willingness to take on risks must be informed by a personal stake. This is the natural way humans make moral decisions: by being personally subject to the positive or negative consequences, a sort of conservation of conscience occurs. But too often in hierarchical systems (like representative democracy and corporate management), leaders engage in plans that have significant costs for the people underneath them or third parties.
- Severability matters. People associate in market situations for mutual advantage, but the benefit of these associations are not necessarily indefinite. The ultimate vote of no confidence is to leave the company of those who no longer share your interests. The more locked into an association you are, the more you'll feel like a victim and the less you'll feel like taking responsibility. I believe this describes the decision making politics in many institutions where people cannot leave. Once plans are made that they feel are wrong, they simply shut down and refuse to fight them. There's just too much work involved in changing a majoritarian consensus.
Planned economies are typically constructed to achieve some discrete goals. In Soviet Russia they sought class solidarity and equality of outcomes. In the planned sectors of the American "mixed" economy we seek to preserve competition, promote economies of scale, and enforce standards. Note that in neither example am I suggesting that these goals were achieved, but there was some discrete (if abstract) intent involved.
I'm not skeptical of humans - in groups or as individuals - pursuing ends according to their intentions, but I do think they achieve these ends most efficiently on terms that internalize the consequences of those ends. When a person directly benefits or suffers as a result of his or her actions, he or she is far more inclined to act in truly self-interested ways. As other people respond to a person's individual actions, information is distributed through the market. This information has no inherent value, other than that other valuing actors interpret the market information in light of their own personal interests.
This is where a planned economy fails most abysmally. Markets allow actors to define their own interests - to internalize all aspects of their decision making and externally act through the market to achieve their goals. But there's no need to have a single interest or set of interests that summarizes all the individually digested goals. A planned economy may coordinate activities around some key outcomes, but it is never clear whether the organizing goals are necessarily good for everybody involved. These individual internal interests are hard to translate to the aggregate. All too often, planners resort to simply ignoring the complexity of the situation, prefering some grand collectivist utopian result. But assuming an arrogant disregard for others - as most politicians do - doesn't dispel the complexity, the need for those other interests to be addressed, or the consequences.
Rather, it's interesting to view the core motivation of central planning in contrast to a market system. F.A. Hayek described markets as expressly functioning without a central guiding goal. They existed instead as ad-hoc systems for moderating the various interests involved: they are the means for realizing interests, but they don't themselves have an overriding directive. Individuals pursue their goals by taking advantage of the decentralized and information distributing characteristics of a market economy.
What intrigues me about Arrow's conclusion is that he didn't seem to want to take his finding to its logical conclusion. Yes, markets tend to benefit from having a plurality of less powerful central planners, as opposed to one omnipotent central planner. So following that logic, how much more benefit could be derived from further decomposing the collective decision making structures inherent in our supposedly "free market"? Why don't we simply remove the statist supports for such large scale organizing and give individuals perfect freedom to associate as they see fit?
After all, if the corporation is such an efficient mechanism, it should continue to exist without government intervention, as Arrow seemed to imply. However, I think given a real choice between a system individuals can fully comprehend and internalize, most people would choose to live their lives and do their business on their own terms. Without coercion, humans naturally come first and do best. At their best, corporations and states are usually mechanisms through which individuals find some sort of wierd way of dealing with other corporations and states.