Great Antidote Extras: Peter Boettke on Don Lavoie and Central Planning

central planning where do prices come from knowledge and information knowledge problem

Janet Bufton for AdamSmithWorks

"What keeps Lavoie’s work relevant is the clarity with which he outlines the underlying problems, the ‘knowledge problem’ and the ‘power problem’, facing those who would do away with the messy work of markets."
This is part one of a two-part series. Read Part 2 here.

In 1985, in the introduction to Rivalry and Central Planning, Don Lavoie wrote, 
References to the [socialist calculation] debate (or at least to some of the writings of which it is composed) can be found not only in most texts in comparative economics but also in many treatments of socialist economics, welfare economics, and general histories of economic thought. Significantly, many of these works take the debate as their theoretical starting point…
In the spring of 2009, in the last few minutes of the last class of my last undergraduate advanced macro course, my professor begged us to care enough to look up the calculation debate, which the university no longer considered useful enough to include in our formal undergraduate education. 

In her interview with Peter Boettke on The Great Antidote podcast, Juliette Sellgren discusses the work of Boettke’s teacher Don Lavoie and Lavoie’s work in the final days of the socialist calculation debate. Lavoie’s work focussed on the problems with both comprehensive and non-comprehensive economic planning. In the 1970s and 1980s, non-comprehensive planning took the form of industrial policy, which is seeing a resurgence in popularity today. Sellgren and Boettke discuss Lavoie’s twin 1985 books, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered and National Economic Planning: What is Left?.

“Science is the great antidote to the poison of enthusiasm and superstition” said Adam Smith in the podcast’s namesake quotation. But, as hinted at by Boettke in the course of the conversation, to many people a belief in markets that can act as though guided by an invisible hand seems like a superstition that can only be explained by the kind of partisan enthusiasm Smith warned against. 

Lavoie was forceful and clear in his exploration of how markets coordinate what people want to do. Lavoie was convincing—even to his critics—but his arguments weren’t updated for the challenges economies faced when transitioning out of a market, or as they exist in the post-Soviet world, in large part because he died young and in 2001.

Sellgren and Boettke explore the debate about economic systems in the 20th century: the question about whether markets, which often seem to duplicate effort and include a lot of bad investments and mistakes, are the best system for economic production. The socialist economic dream was to plan economic production in order to make it rational, eliminate waste, and so move humanity toward a post-scarcity world. 

Total war mobilization of national economies in World War I captured the imaginations of would-be economic planners by showing that it was possible to direct nearly all the resources in an economy toward national ends. This spiced up the debate about what kind of economic planning is not just theoretically, but actually possible. 

If you want to plan an economy, you need to do what’s called ‘economic calculation’ to decide, as Boettke puts it, “how, what, and for whom?” economic activity takes place. “The functional significance of economic calculation is that it allows the economic system to sort from the array of technologically feasible projects, those projects which are economically viable.” A lot of things are technically possible but, in a world where many people could use the same resources to do many things, not every technically possible idea can be pursued without making it harder for other people to try their own things. Markets, when they’re allowed to work, point us in the direction of ideas that are worthwhile to others while encouraging us to leave as many resources for others to pursue their own plans as possible.

That’s a standard argument for markets, one Boettke effortlessly deploys. But it was not, in these terms, persuasive to those who wanted to do away with the “anarchy of production” in markets and replace it with a more consciously planned system. 

What keeps Lavoie’s work relevant is the clarity with which he outlines the underlying problems, the ‘knowlege problem’ and the ‘power problem’, facing those who would do away with the messy work of markets. I’ll focus on the knowledge problem today. 

Boettke mentions that Lavoie was a computer scientist as well as an economist. So Lavoie anticipated many of the proposed solutions to problems with planning as technology improved. He wouldn’t be surprised today to hear from those who think the success of predictive algorithms show us that a market to determine what people want is becoming less relevant. 

But Lavoie wouldn’t be moved—he argued that the belief that markets are just very good at processing data to determine what’s needed (and could be replaced by a sufficiently sophisticated computer) is grounded in a mistake. The problem isn’t processing the data you’d need, but getting it in the first place. From National Economic Planning:
A planning agency could, of course, collect mountains of data. The question is whether the data that is feasible to collect correspond to the knowledge that really guides economic decisions. The issue of the possibility of making policymakers more knowledgeable about the economy involves the question of obtaining that specific practical knowledge which is actually involved in the dynamics of changing productive techniques. The truly relevant ‘data’ that a planning organization would need to ‘uncover’ a modern economy’s ‘interacting empirical realities,’ resides deeply embedded in and dispersed among the separate minds of millions of people. In the relevant sense of the term, the data do not exist. The knowledge relevant for economic decisionmaking exists in a dispersed form that cannot be fully extracted by any single agent in society. But such extraction is precisely what would be required if this knowledge were to be made usable by a single planning agency.
(p. 56, emphasis original)
The economic decisions that people make, and that markets coordinate, are made based on information unique to each of us. Markets don’t just take that information and process it, says Lavoie. Markets bring that information out into the world so that we can use it at all. The key to bringing out this information is competition—what Lavoie calls rivalry.

Lavoie is making explicit the often misunderstood point of Friedrich August von Hayek’s essay The Use of Knowledge in Society: markets aren’t the best, most efficient way to use the sort of information that helps us make economic decisions. Markets are the only way we can meaningfully access the information we need to coordinate economic decisions at all. It’s not a question of the use of knowledge, but its accessibility so that it can be used.

The reason is this: what determines how we make an economic decision is not the same thing as our opinions if you ask us about them. We’ve all headed to the store thinking we’d get one thing, then when we’re actually faced with the trade-offs of the available options—when we actually have to part with the money to make the purchase—we make a different choice. It’s, again, the rivalry: the actual choice in the actual moment that we make it, between the different products at their different price points that draws out our actual economic preferences. 

We only know how to access that information by making the purchase. Prices are the only vehicle for unlocking them, and we can only engage in economic production without ending up with “negative value added firms”--economic activity that destroys resources rather than creating wealth. 

As Lavoie puts it (again in National Economic Planning), 
Whether applied to comprehensive or noncomprehensive planning, the knowledge problem argument crucially depends on the view that knowledge is not the same as data, that is, given pieces of explicit information. If this conception of knowledge is valid, then what really is at stake in the knowledge problem goes far beyond the issue of merely gaining access to scattered bits of explicit information, and implies the whole standard approach to economic planning has been based on a misconception of the problem to be solved.
(p. 57, this time emphasis is mine)
This was the argument through which Lavoie stressed that it was, as Boettke puts it, crucial to study exchange and the institutions within which exchange takes place. To start anywhere else is to assume away the biggest problem in understanding economic action. 

Lavoie’s teaching, and his writing, makes clear and demonstrates the importance of rivalry in the market process, which seems to have been a threshold concept for many of his students. Getting to the heart of Lavoie’s teaching, which I was privileged to explore with Boettke’s classmate and friend, Steve Horwitz, unlocks a deeper understanding of prices, markets, and allows us to see the beauty that Boettke sees when he thinks about Adam Smith’s invisible hand. 

Both of Lavoie’s books are worth reading in full, but National Economic Planning is more broadly accessible, and Boettke is right that it feels eerily relevant nearly 40 years after publication. In National Economic Planning Lavoie also articulates well the political problems with economic planning--but that’s a topic for another day. 

(Citations are from the Cambridge University Press edition of Rivalry and Central Planning and the Cato Institute edition of National Economic Planning. You can find both books more cheaply and easily these days on Amazon, reprinted by the Mercatus Center at George Mason University.)

Read Part 2 of this series here.

Want to learn more?
Adam Smith and the Follies of Central Planning: Who is the Man of System? a video from Learn Liberty with James Otteson
Peter Boettke's Essay “Hayek’s Epistemic Liberalism” at Liberty Matters
Steven Horwitz's Essay Spontaneous Order in Adam Smith at AdamSmithWorks