1970s >> 1978 >> no-891-november-1978

Planning the road to nowhere

Professor F.A. Hayek, in his recent lecture on “The Market Economy” (published in the Listener, 3, 10 & 17 August), performed one useful service, though it was not intentional. Hayek wants to go back to the open competitive market as envisaged by Adam Smith, with a minimum of government interference. In particular he denounces the vogue for government planning of the economy that came to the fore with the acceptance of Keynesian doctrines thirty years ago. He has no difficulty in showing that the attempt has been a failure. Two examples will suffice to show how great the failure has been. When the Labour Party pledged itself to “plan” jobs for all, did it also plan for over a million and a half unemployed? And when Labour (and Tory) Governments planned the investment of hundreds of millions of pounds to expand the steel industry did they also foresee the current plan, reported in the Sunday Telegraph (24 September 1978)?

British Steel Corporation & Department of Industry officials are believed to have reached a private agreement to reduce the State-owned concern’s work force by 140,000, nearly three-quarters, over the next five years.

This is in addition to the many tens of thousands already made redundant.

Hayek calls this Keynesian fiasco a failure of “socialist” planning, but does not deal at all with the real concept of planning in a socialist society. He does not notice that his open market doctrine and the Keynesian doctrine are both of them attempts to plan the capitalist market, while Socialism is concerned with a non-market society.

Hayek’s useful contribution is that he spells out the unforeseeable and uncontrollable factors that dominate the market in both sets of circumstances, his own and the Keynesian.

His argument, the familiar laissez-faire case of Adam Smith, is that if prices are left to find their own level with no government interference or planning, each worker and capitalist will be guided by changing wage levels in each occupation and by changed selling prices to seek new jobs and change production lines, in harmony with the overall total demands of the market, and that this will minimize unemployment and maximise production. But he candidly admits that nobody knows or can know in advance what the overall result of all these separate judgments is going to be: it can at best be only a question of trial and error, or partially informed guess-work. He says, for example, that “all economic problems are caused by the occurrence of unforeseen events”. He calls price (and wage) changes arising out of market forces the “guiding signal” but admits: “even the most perfect market prices do not take into account all the circumstances we would wish to be taken into account”; he lamely adds that “a signal that takes account of most of them is better than none”.

So his case for the open market as against the Keynesian planners boils down to the argument that while both of them mean operating largely in ignorance, the government planners, through greater rigidity, are likely to fare worse. His example of the success of the open market is the second half of the 19th century, which included, though he does not mention the fact, the Great Depression of 1875-1895.

The people, especially the Labour Party, who have thought they could plan capitalism have relied on the big increase of statistical material in recent years and the numerous governmental and private bodies engaged in forecasting. The record has been one of almost consistent error. It was population “experts” who forecast for the government in 1956 that by the end of the century the population of this country would be 53 million; but amended it in 1962 to 68 million. Their short term forecasts were equally wrong.

It was a commercial Market Survey in 1939 that,in line with current fashion about population trends, forecast a population for Great Britain of 39 million in 1961: it turned out to be 51 million.

Samuel Brittan in his The Treasury under the Tories 1951-1964 has a chapter headed “Crystal gazers in Chief” in which he describes the dismal record of the government’s economic advisers in the field of forecasting. A typical comment is:

Export forecasting has a particularly bad record – even worse than forecasting in general. In the last few years shaking dice might actually have led to better results.

One outstanding failure of the Labour Government was the National Plan of 1965. It planned for a growth of the National Product of 25 per cent between 1964 and 1970. Apart from the problems of coordinating all the separate industry plans into a comprehensive national plan, it overlooked that the products had to be sold at a profit, which depended on uncontrollable world market factors. The actual increase in those years turned out to be 15 per cent. Of course it is a hopeless endeavour. In order to know how British Companies and the whole economy will fare in future years the government would need to know the secret plans of all companies and governments in the world, to know which harvest would fail, what wars will break out and at what point the world market will lurch into one of its periodic depressions. They can guess but they cannot know.

Looking ahead

Professor Hayek gives the impression that while company market planning is not perfect it is nevertheless pretty accurate. This is not borne out by the forward planning of Royal Dutch-Shell. Mr. Frank S. McFadzean, a managing director of the group, in Galbraith & the Planners not only made scathing criticism of the National Plan, but admitted the limitations of planning by his own company.

Except in the very short period ahead, we are not really impressed by the detailed results shown by our plans. It will be the sheerest fluke if we ever achieve them Looking back to 1962 and what we then prognosticated . . .  we were wrong on many counts. We were wrong on volumes, we were wrong on prices, we were particularly wide of the mark on our estimates of the demand for and price of naphtha, we were wrong on our cost projections, we were wrong on the level of investment we would need to make. We did not fully foresee the increase in the size of tankers; we did not foresee the extent of Libya’s crude oil production; we did not foresee the dominant role that natural gas would play in Holland . . . we did not foresee the closure of the Suez Canal.”

(Sunday Telegraph 6 April 1969)

What of planning in a world socialist society?

Here the problem is quite different because production will be solely for use, not for sale. There will be no market curtailments of production, such as happen under capitalism, because particular industries have over-produced for their market and can no longer make profit. There will be coordinated planning of production and distribution to meet known human needs. It will have to provide safe margins for growth and to allow for harvest failures and other natural disasters. It will have access to all the world’s productive resources not, as under capitalism, have many of these resources not used because there is no profit in their use.

Here also Professor Hayek provides us with the evidence about capitalism, where he condemns “the fatal mistake, frequently made by engineers, to imagine that there are long-lasting, technically determined production methods which are superior to all others”. Hayek says that under the guidance of price changes the production method favoured by capitalism may not be the one favoured by the engineers; “This is an academic and not a technological problem”, in other words, one determined by profitability.

Edgar Hardcastle