Ruminations on Central Planning

Since the semester ended, I have had some more free time on my hands to read for pleasure, not just for work.  One of the books I picked up was Don Lavoie’s 1985 book Rivalry & Central Planning: The Socialist Calculation Debate Reconsidered.  While I have only just started reading it, it’s an interesting reexamination on the age-old central planning question.  What follows are two thoughts of mine on the same matter.

Writing at Intellectual Takeout, Michael De Sapio discusses Soviet efforts to eliminate Christmas from the USSR:

Following the Russian Revolution, the new atheist government began an anti-religious campaign. All symbols deemed religious and/or “bourgeois” were eradicated and replaced with new, secular versions. Thus Christmas (which in the Russian Orthodox calendar occurs on January 7) was abolished in favor of New Year’s, and several traditional Christmas traditions and characters received new identities.  St. Nicholas/Santa Claus gave way to Ded Moroz or “Old Man Frost” (a popular figure originating in pagan times), and the new “nativity scene” featured him and his granddaughter the Snow Maiden in place of Joseph and Mary, sometimes with the “New Year Boy” added in place of Jesus. Christmas cards often featured Ded Moroz riding alongside a Soviet cosmonaut in a spacecraft emblazoned with a hammer and sickle.

He also points to similar efforts by Puritans and French Revolutionaries (to eliminate the traditional Christian calendar) .  Judging by the fact Christmas is still celebrated in Russia, America, and the French still use the Christian calendar, these efforts were failures.  It in through this lens we see the difference between law (the customs, institutions, and norms that arise in a society) and legislation (formalized rules).  While the legislation may become most “seen”, the law it is trying to eradicate becomes “unseen” but no less real (to borrow phrases from Bastiat).  And, eventually, the law triumphs (this is true even in the face of Stalinist or Maoist purges!).

The reason I say with confidence that the triumph of law over legislation is a virtual certainty is that law, unlike legislation, arises naturally; it arises from a need for law.  Legislation may arise in a similar manner (say, to codify or clarify some aspect of law), but is also developed arbitrarily, often to cement the rule of those in power (such as the Soviet and Puritan anti-Christmas thing).  As such, legislation begins on shaky ground, and does not contain popular support (for lack of a better phrase) since it is trying to replace law already established by people.

What does this have to do with central planning an economy?  Central economic planning is using legislation en masse to control the economy.  The socialist planners of the 30’s, 40’s, and beyond who engaged in debate with Hayek and Mises, often misunderstood the Hayekian knowledge problem.  They assumed they just needed bigger computers, more calculation power.  Enrico Barone, in 1908, demonstrated that a central planner board could arrive at prices by solving a system of equations, similar to how the market operates (pg 14).  Oskar Lange and Abba Lerner further argued (directly with Hayek and Mises) that such planning boards were possible since the planners would get the same information the market participants would (pg 13).  Indeed, in 1980 Martin Cave proclaimed:

The potential impact of computers on economic planning is enormous.  To appreciate this one has only to recall one of the arguments made in the debate in the 1930’s on the feasibility of central planning [between Lange-Lerner and Hayek-Mises].  It was asserted then that an efficient allocation of resources in a centrally planned economy was inconceivable because such an allocation would require the solution of “millions of equations.”  At that time, of course, no electronic computers were available.  Today the situation is quite different  and the computational objection would have much less force  (pg 15).

I submit that the above arguments are a misinterpretation of Hayek-Mises because Hayek-Mises did not argue solely about “seen” data collection, but also “unseen” information necessary, unseen information like the law.  And that, along with the particular knowledge of time and place Hayek discussed, would be impossible for a computer to “solve.”  Law is a unique force best understood by those who are involved in it.  From the outside looking in, it is difficult for a wealthy American to understand the law of a poor African.  Or, for that matter a Virginian to understand the law of a Massachusetts-ite.  Or even for a Washingtonian to understand the law of a Bostonian.  It cannot be programmed into a computer simply because the knowledge doesn’t exist in a programmable way.  And even if it did, I submit that the outcomes the computer spits out would be virtually identical to those already generated, thus removing the need for any central planner.

The role of the central planner is unenviable.  He must attempt to take all the information available, and magnitudes more not available, and plan an allocation of resources at the speed of information (which, as Douglas Adams might say, is faster than the speed of light) that achieves Pareto Optimality (that is, no one is made better off without making someone else worse off).  This is not a calculation problem but rather an information problem.  The planner is battling not only the forces of time, but the cultural forces of his civilization, too.  Human history has shown time and time again that it is impossible to repress culture, and the central planner will have no more luck doing so.

11 thoughts on “Ruminations on Central Planning

  1. “[I]n 1980 Martin Cave proclaimed: ‘The potential impact of computers on economic planning is enormous.'”

    Yep. This time centralized planning will work. The famous statement of all those who want to rule. They have to deny history in their quest for power over their fellow fallible human beings.


  2. This is not a calculation problem but rather an information problem.

    Indeed. Despite the many orders of magnitude computational power has increased, the Information Problem is as great as it ever was.


  3. “Since the semester ended, I have had some more free time on my hands to read for pleasure, not just for work. One of the books I picked up was Don Lavoie’s 1985 book Rivalry & Central Planning: The Socialist Calculation Debate Reconsidered.”

    If that is what you “read for pleasure,” I’d hate to see what you read for work. 🙂

    PS: Shouldn’t you be watching Doctor Who or something?


    • My reading list from this past semester:

      I. Basic Economic Theory (Review)
      *1. Alchian & Allen, Exchange and Production, chs. 1, 2.

      *2. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 1.
      *3. Vickrey, Microstatics, pp. 3-11.
      4. Buchanan & Tullock, The Calculus of Consent, chs. 1, 2.
      5. Boulding, A Reconstruction of Economics, pp. 3-38.
      6. Wiener, The Human Use of Human Beings, pp. 1-66. (This is perhaps the best popular book on
      *1. Friedman, Milton “The Methodology of Positive Economics,” in Essays in Positive Economics, pp.
      *2. Nagel, “Assumptions in Economic Theory,” AER, (May 1963), pp. 211-19.
      *3. Machlup, “The Problem of Verification in Economics,” Southern Economic Journal SEJ, 1955, pp.
      II. The Theory of Exchange and Demand
      A. Exchange
      *1. Alchian & Allen, Exchange and Production, ch. 3.

      *2. Hirshleifer & Hirshleifer Price Theory & Applications, chs. 2, 14
      *3 Vickrey, Microstatics, ch. 3.
      4. Smith, Adam, Wealth of Nations, Book I, chs. 1-4.
      *5. Demsetz, “Toward a Theory of Property Rights,” AER, (May 1967), pp. 347-59.
      *6. Posner, Economic Analysis of the Law, chs. 1-2.
      7. Demsetz, “The Exchange and Enforcement of Property Rights,” JLE, October, 1964.
      B. Indifference Curves
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, chs. 3,4.
      *2. Vickrey, Microstatics, pp. 20-51.
      *3. Baumol, Economic Theory and Operations Analysis, ch. 9.
      *4. Hicks, John, Value and Capital, ch. 1.
      *5. Buchanan, James, Cost and Choice, ch. 3.
      *6. Stigler, George J., & Becker, Gary S., “De Gustibus Non Est Disputandum” AER, (March 1977), pp.
      C. Demand Theory
      *1. Hirshleifer & Hirshleifer Price Theory & Applications, ch. 5.

      *2. Alchian & Allen, Exchange and Production, chs. 4, 5.
      *3. Friedman, “The Marshallian Demand Curve,” in JPE, (December 1949), pp. 463-95.
      *4. Bailey, “The Marshallian Demand Curve,” JPE, (June 1954), pp. 225-61.
      *5. Stigler, “The Economics of Information,” Journal of Political Economy JPE, (June, 1961), pp. 213-25.
      *6. Hayek, Friedrich, “The Use of Knowledge in Society,” AER, 35, (September 1945), pp. 519-530.
      Mid-Term Examination (Date to be announced)
      III. Cost and Supply
      A. Costs & Output
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 6.
      *2 Viner, “Cost Curves and Supply Curves,” (Reprinted in AEA,

      *3. Baumol, Economic Theory and Operations Analysis, ch. 11.

      *4. Alchian, “Costs and Outputs,” in The Allocation of Economic Resources, by Moses Abramovitz
      *5. Buchanan, Cost and Choice, chs. 1, 3.
      *6. Alchian & Allen, Exchange and Production, chs. 7, 8.
      B. The Firm and the Market
      *1. Stigler, “The Division of Labor is Limited by the Extent of the Market,” JPE, (June 1951), pp. 185-193.
      *2. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 7.
      *3. Coase, “The Nature of the Firm,” Economica, (November 1937), (Reprinted in AEA readings).
      *4. Becker, Gary, “Competition and Democracy,” JLE, pp. 105-109.
      *5. Coase, “The Problem of Social Cost,” JLE, (October 1960), pp. 1-44.
      *6. Alchian, “Uncertainty, Evolution and Economic Theory,” JPE, June, 1950.
      7. Posner, Economic Analysis of Law, ch. 6.
      IV. Competition and Monopoly
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 8.
      *2. Alchian and Allen, Exchange and Production, chs. 9, 10, 11.
      *3. Alchian and Kessel, “Competition, Monopoly and the Pursuit of Money,” in Aspects of Labor
      *4. Demsetz, Harold, “Do Competition and Monopolistic Competition Differ?” JPE, (February, 1959), pp.
      *5. Posner, Economic Analysis of Law, chs. 7, 9, 10.
      V. Other Models of the Firm
      A. Monopolistic Competition
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 9.
      2. Chamberlain, The Theory of Monopolistic Competition, chs. 3-5.
      *3. Baumol, Economic Theory and Operations Analysis, ch. 14.
      *4. Posner, Economic Analysis of Law, chs. 11, 12.
      B. Oligopoly
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 10.
      *2. Stigler, “A Theory of Oligopoly,” JPE, February, 1964.
      *3. Posner, Economic Analysis of Law, ch. 14.
      *4. Alchian and Allen, Exchange and Production, chs. 12, 13.
      C. Other
      1. Baumol, Economic Theory and Operations Analysis, ch. 13.
      VI. Demand and Supply of Factors of Production
      A. Labor
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, chs. 12, 13.

      *2. Alchian and Allen, Exchange and Production, chs. 14, 15.

      *3. Posner, Economic Analysis of Law, chs. 8, 21.
      4. Hicks, Theory of Wages, chs. 1-6.

      B. Capital
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, ch. 15.
      *2. Baumol, Economic Theory and Operation Analysis, ch. 18.
      *3. Dewey, “The Geometry of Capital and Interest,” AER, (March 1963), pp. 134-139.
      *4. Alchian and Allen, Exchange and Production, chs. 6, 16, 19.
      5. Fisher, Irving, The Nature of Income and Capital, chs. 1, 2, 4, & 7.
      6. Fisher, Irving, The Theory of Interest, chs. 4-11.
      VII. Miscellaneous
      *1. Hirshleifer & Hirshleifer, Price Theory & Applications, chs. 15, 16.
      *2. Baumol, Economic Theory and Operations Analysis, chs. 15, 16.

      *3. Bator, “The Simple Analytics of Welfare Maximization” AER, (March 1957), pp. 22-59


      Lecture 1: –This is a great introduction to
      the Solow growth model.
      Romer, Paul (1987). “Crazy Explanations for the Productivity Slowdown,” NBER
      Macroeconomics Annual 2, pp. 163-201
      Gordon, Robert J. (2010) Revisiting U. S. Productivity Growth Over the Past Century with a
      View to the Future, NBER Working Paper 15834
      Loren Brandt, Johannes Van Biesebroeck, and Yifan Zhang (2011) “Creative Accounting or
      Creative Destruction? Firm-level Productivity Growth in Chinese Manufacturing”
      Journal of Development Economics. Also availiable as: NBER Working Paper No. 15152
      July 2009
      Lecture 2:
      Lei, Vivian and Charles N. Noussair “An Experimental Test of an Optimal Growth Model,”
      American Economic Review, June 2002, 92(3) pp. 549 – 70. (This paper tests the RCK model
      using experimental economics.)
      Lecture 3:
      Barsky, Robert B., N.G. Mankiw, and Stephen Zeldes (1986) “Ricardian Consumers with
      Keynesian Propensities,” American Economic Review 76 (September) pp. 676-691
      Lecture 4:
      *Mankiw, N. Gregory, David Romer, and David N. Weil (1992) “A Contribution to the
      Empirics of Economic Growth,” Quarterly Journal of Economics 107 (May), pp. 407-437
      Lucas, Robert (1988) “On the Mechanics of Economic Development,” Journal of Monetary
      Economics 22 (July) pp. 3-42
      Murphy, Kevin, Andrei Shleifer, and Robert Vishny (1989) “Industrialization and the Big
      Push,” Journal of Political Economy 97 (October) pp. 1003-1026
      Romer, Paul (1990) “Endogenous Technological Change,” Journal of Political Economy 98
      (October, Part 2) pp. S71-S102
      Baumol, William (1990) “Entrepreneurship: Productive, Unproductive, and Destructive,”
      Journal of Political Economy 98 (October, Part I) pp. 893-921
      Lecture 5:
      *Diamond, Jared. Guns, Germs, and Steel. Norton 1997. pp. 13-32, 85-113, 405-425.
      Easterly, William and Ross Levine (2001) “It’s Not Factor Accumulation: Stylized Facts and
      Growth Models,” March, (available on line from Web address:
      *Kremer, Michael (1993) “Population Growth and Technological Change: One Million B.C.
      to 1990,” Quarterly Journal of Economics 108 (August) pp. 681-716
      *Landes, David. The Wealth and Poverty of Nations: Why Some are So Rich and Some So
      Poor. Norton 1998. pp. 200 – 291
      *Barro, Robert J. (1991) “Economic Growth in a Cross Section of Countries.” Quarterly
      Journal of Economics 106 (May), pp. 407-43.
      Sachs, Jeffrey D. (2003) “Institutions Matter, but Not for Everything,” Finance and
      Development, June, pp. 38 – 41.
      *Durlauf, Steven N. and Danny Quah (1999) “The new empirics of economic growth” in
      John B. Taylor and Michael Woodford, eds., Handbook of Macroeconomics, North-Holland
      Elsevier Science, Ch. 4, pp. 231—304.
      Acemoglu, Daron, Simon Johnson, and James A. Robinson (2004). “Institutions as the
      Fundamental Cause of Long-Run Growth.”
      Bils, Mark J. and Peter J. Klenow (2000) “Does Schooling Cause Growth?” American
      Economic Review, December, pp. 1160-1183.
      Jones, Charles I. (1999) “Growth: With or Without Scale Effects?” American Economic Review
      89 (May), pp. 139-44.
      Pritchett, Lant (1997) “Divergence, Big Time,” Journal of Economic Perspectives, Vol. 11
      (Summer), pp. 3-17.
      Brander, J.A., and M. Scott Taylor, “The Simple Economics of Easter Island: A RicardoMalthus
      Model of Renewable Resource Use,” American Economic Review, 88(1) March
      1998, 119-138. (An environmental model of growth.)
      Gennaioli, Nicola, Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer (2013)
      “Growth in Regions,” Working Paper 18937
      Gurus in Economic Growth
      If you are interested in finding out more about issues in growth, you should visit the
      following websites:
      2. (Russ Roberts
      interviews Robert Barro.)
      3. Charles I. Jones (
      Lecture 6 and 7:
      Blinder, Alan (1991) “Why are Prices Sticky? Preliminary Results from an Interview Study,”
      American Economic Review Papers and Proceedings 81 (May) pp. 89-101 — Offers an introduction to what
      New Keynesian economics are all about.
      Gray, Jo Anna (1976) “Wage Indexation: A Macroeconomic Approach,” Journal of Monetary
      Economics 2 (April) pp. 221-235
      Fisher, Stanley (1977) “Long-Term Contracts, Rational Expectations, and the Optimal
      Money Supply Rule,” Journal of Political Economy 85 (February) pp. 191-205, (Also in Mankiw
      and Romer (1991), Vol. 1, Chapter 7)
      Mankiw, N. Gregory and David Romer (1991) New Keynesian Economics: Vols. I, MIT
      Press (Read Chps. 1, 3, 6)
      Ball, Laurence, N.G. Mankiw, and David Romer (1988) “The New Keynesian Economics
      and Output-Inflation Tradeoff,” Brookings Papers on Economic Activity 1, pp. 1-65 (Also in
      Mankiw and Romer (1991), Vol. 1, Chap. 6)
      Romer, David (1993) “The New Keynesian Synthesis,” Journal of Economic Perspectives 7, pp. 5-
      Blanchard Olivier, and Jordi Gali (2005) “Real Wage Rigidities and the New Keynesian
      Model” NBER Working Paper No. 11806
      Bils, Mark J. (1985) “Real Wages Over the Business Cycle: Evidence from Panel Data,”
      Journal of Political Economy 93, pp. 666-689
      Solon, Gary, Robert Barsky, and Jonathan Parker (1994) “Measuring the Cyclicality of Real
      Wages: How Important is the Composition Bias?” Quarterly Journal of Economics 109
      (February) pp. 1-25
      Lucas, Robert (1976) “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester
      Conference Series on Public Policy 1, pp. 19-46
      *Lucas, Robert E. (1981) “Understanding Business Cycles” in Robert Lucas, ed. Studies in
      Business Cycle Theory, MIT Press
      *Lucas, Robert E. (1972) “Expectations and the Neutrality of Money,” Journal of Economic
      Theory 4 (April), pp. 103-124
      *For a good introduction to the Mundell-Fleming model, visit the following website:
      Friedman, Benjamin (1988) “Lessons on Monetary Policy from the 1980s,” Journal of Economic
      Perspectives 2 (Summer) pp. 51-72
      Friedman, Milton (1968) “The Role of Monetary Policy,” American Economic Review 58
      (March) pp. 1-17
      Joan Sweeney, Richard James Sweeney (1977) Monetary Theory and the Great Capitol Hill
      Baby Sitting Co-op Crisis: Comment, Journal of Money, Credit, and Banking, Issue 1, pp. 86-89.
      Lecture 8:
      Introduction to DSGE modeling. Simulation of an RBC model.
      King, R.G., and S.T. Rebelo (1999) ‘Resuscitating real business cycles’ in Handbook of
      Macroeconomics, volume 1B, by J.B. Taylor and M. Woodford (Eds), Elsevier, 927–1007.
      (Just Google the title, and you will find it online.)
      More complete models are discussed in David Romer’s AM Chapter 7.
      Lecture 9:
      Keynes, John M. (1936) The General Theory of Employment, Interest, and Money.
      Macmillan pp. 65-110
      *Hall, Robert (1978) “Stochastic Implications of the Life Cycle-Permanent Income
      Hypothesis: Theory and Evidence,” Journal of Political Economy 86 (December), pp. 971-987
      Hall, Robert (1988) “Intertemporal Substitution and Consumption,” Journal of Political
      Economy 96 (April), pp. 339-357
      Flavin, Majorie (1981) “The Adjustment of Consumption to Changing Expectations about
      Future Income,” Journal of Political Economy 89 (October) pp. 974 – 1009
      Campbell, John and N. Gregory Mankiw (1989) “Consumption, Income, and Interest Rates:
      Reinterpreting the Time Series Evidence,” NBER Macroeconomics Annual 4, pp. 185-216
      Mehra, Rajnish and Edward C. Prescott (1985) “The Equity Premium: A Puzzle,” Journal of
      Monetary Economics 15 (March), pp. 145-161
      Mankiw, N.Gregory (1986) “The Equity Premium and the Concentration of Aggregate
      Shocks,” Journal of Financial Economics 17 (September), pp. 211-219
      Carroll, Christopher D., J. Overland, and D. N. Weil (2000) “Savings and Growth with
      Habit Formation,” American Economic Review, Vol. 90, No. 3, June, pp. 341-355.
      Lecture 10:
      *Hall, Robert E. and Dale Jorgenson (1967) “Tax Policy and Investment Behavior.”
      American Economic Review 57 (June), pp. 391-414
      Caballero, Ricardo J. (1997) “Aggregate Investment” NBER Working Paper No. W6264.
      Hayashi, Fumio (1982) “Tobin’s Marginal Q and Average Q: A Neoclassical Interpretation.”
      Econometrica 50 (January), pp. 213-224
      Poterba, James (1984) “Tax Subsidies to Owner-Occupied Housing: An Asset-Market
      Approach.” Quarterly Journal of Economics 99 (November), pp. 729-752
      *Summers, Lawrence (1981) “Taxation and Corporate Investment: A Q-Theory Approach.”
      Brookings Papers on Economic Activity 1, pp. 67-127
      Lecture 11:
      *Stiglitz, Joseph and Andrew Weiss (1981) “Credit Rationing in Markets with Imperfect
      Information.” American Economic Review 71, pp. 393-410
      *Bernanke, Ben and Alan Blinder (1988) “Credit, Money, and Aggregate Demand.” American
      Economic Review 78 (May), pp. 435-439.
      *Bernanke, Ben and Mark Getler (1989) “Agency Costs, Net Worth, and Business
      Fluctuations.” American Economic Review 79 (March), pp. 14-31
      Diamond, Douglas (1984) “Financial Intermediation and Delegated Monitoring.” Review of
      Economic Studies 51 (July), pp. 393-414
      Gorton, Gary B. (2008) “The Panic of 2007” National Bureau of Economic Research Working
      paper number 14358. This paper offers an overview of the ongoing financial crisis in the U.S.
      Brunnermeier, Markus K. (2009) Deciphering the Liquidity and Credit Crunch 2007-08,
      Journal of Economic Perspectives, Vol. 23, No. 1. Available as NBER Working Paper Number
      14612. This paper also offers a very detailed overview of the ongoing crisis.
      *Bernanke, Ben (1983) “Nonmonetary Effects of the Financial Crisis in the Propagation of
      the Great Depression.” American Economic Review 73 (June), pp. 257-276
      *Fazzari, Steven, R. Glenn Hubbard, and Bruce C. Petersen (1988) “Financing Constraints
      and Corporate Investment.” Brookings Papers on Economic Activity 1, pp. 141-195
      *Getler, Mark and Simon Gilchrist (1994) “Monetary Policy, Business Cycles, and the
      Behavior of Small Manufacturing Firms.” Quarterly Journal of Economics 109 (May), pp. 309-
      *Hubbard, R. Glenn (1998) “Capital Market Imperfections and Investment,” Journal of
      Economic Literature 36, pp. 193-225
      Kiyotaki, Nobuhiro, and John Moore (1995) “Credit Cycles.” National Bureau of Economics
      Research Working Paper No. 5083 (April)
      Pagano, Marco (1993) “Financial Markets and Growth, An Overview.” European Economic
      Review 37, pp.613-622
      Bertrand Marianne, and Sendhil Mullainathan (2005) “Profitable Investments or Dissipated
      Cash? Evidence on the Investment-Cash Flow Relationship From Oil and Gas Lease
      Bidding” NBER Working Paper No. 11126
      Lecture 12:
      Introduction to the main issues:
      *Yellen, Janet L. (1984) “Efficiency-Wage Models of Unemployment,” American Economic
      Review 74 (May), pp. 200-205
      Shapiro, Carl and Joseph E. Stiglitz (1991), “Efficiency Wages and the Interindustry Wage
      Blanchard and Summers (1991). “Hysteresis in Unemployment” In Mankiw and Romer
      Blanchard, Olivier and Katz, Larry (1999) “Wage Dynamics: Reconciling Theory and
      Evidence” NBER Working Paper No. 6924

      (The above Macro list doesn’t include textbook readings)

      Math Econ was just textbook stuff.


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