Thursday, July 21, 2011

The Hayekian Argument Against Socialism

We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based — a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed. - FA Hayek-Nobel Prize Lecture
A couple of somewhat political posts (Richard Nikoley and Jamie Lewis) got me thinking about the nature of socialism. I used to think socialism (and communism which is just a more extreme case socialism) was bad because it went against human nature. When I came across Hayek's argument of the division of kowledge, which was fairly recently, I was completely astounded.

I'm just an economics dilletante, the concept of the division of knowledge is probably common knowledge to any student of economics, although I never came across it in the economics classes I took in college (five of them).

The profound idea is this: socialism--any sort of top-down structure or system--destroys information. Hayek made a lot of good arguments against socialism but, for me, this one really goes to heart of the problem. Socialism destroys knowledge. This is why it is so goddamned inefficient.
The dilemma of a socialized system is that the information flow overwhelms a centralized system if it is open to new ideas and data, that closing the system and forcing the plan to work forecloses alternatives and risks unhedged mistakes, and that decentralizing without real markets poses the problems discussed by Hayek. These information problems permeate virtually all economic processes. [Richard Nelson and Sidney Winter, in An Evolutionary Theory of Economic Change (1982), p. 365]
Information theory is a fascinating subject. And by fascinating I mean ridiculously nuanced and incomprehensible. But the basic idea of Hayek's argument is that there is a hell of a lot of knowledge available in a free market.

People, no matter their education level, are very, very good at adjusting their levels of consumption. Price, in a free market, simply conveys information. If the price of gasoline increases, this signals that gasoline has become scarcer. Some people will decide to drive less. Others will decide it doesn't matter because they have more money or because most of their driving is necessary to their existence, like employment.

Millions of decisions will be made and the price of gasoline will fluctuate accordingly.

For a socialist these millions of independent decisions are some sort of necessary evil. For a communist, these millions of decisions simply don't exist, the government will decide the price of gasoline so shut the fuck up.
The key importance of the amount of information available and the frequent lack of relevant information have been dealt with only in the last decades. L. von Mises and F. A. von Hayek can rightly be regarded as pioneers in this connection. [Jan Tinbergen, in 1979, as quoted in Recollections of Eminent Economists (1988) by J. A. Kregel, Vol. 1, p. 90]
Under socialism information is destroyed. All these independent decisions are destroyed.

Humans are very good at looking out for their self interest. Call it what you want. Greed? When I shop for a better deal is that because I'm greedy? Or is it because I don't want to be exploited by the evil corporations who are so obviously greedy. When I'm fiercely protective of my child, is that because I'm greedily trying to foist my offspring/DNA onto the next generation?

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