Rising Mathematician: Planned Economies Don’t Work

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When you say “government” you often conjure an image of a magical unicorn that impartially redistributes wealth. Sadly, it’s often a corrupt bureaucracy. 

What is so wrong with a planned economy? Many students of economics are quick to argue that in a free market, market failure is the rule rather than the exception. Some common examples of market failure include asymmetric information, monopolies, negative externalities such as pollution, and inequality. However, one particularly relevant argument concerns property rights.

John Locke wrote that individuals can legitimately gain property rights by mixing their labor with natural resources. If we accept property rights as legitimate, then we must have some system of enforcing these rights. If individuals are tasked with such enforcement, then it comes at a cost such as the effort spent in warding off intruders. This cost is an example of a market failure.

Now say that the government steps in and arbitrates property disputes. Transaction costs are certainly reduced. But what if the government does more than arbitrate disputes, but has the final say in them? Furthermore, what if the government has such great power in regulating private property that it is no longer clear if it is the individual or the government who owns the property? If more government is the solution to market failure, then there will be unintended consequences.

When advocates of a planned economy point out a market failure such as income inequality, they undoubtedly jump to some sort of conclusion that “the government should do X, Y, and Z to fix income inequality.” As Michael Munger observes in his article “Unicorn Governance,” when you say “government” you often conjure this magical unicorn that fairly redistributes wealth. However, the reality is far from a magic unicorn. Instead, the government often take the form of a corruptible faceless bureaucrat. What planned economy advocates neglect is government failure. Government failures include collective action problems, delegation, democratic coherence, rent-seeking, and the information problem. Government failure always goes hand-in-hand with economic failure: they feed off of each other. To propose a government solution to a market failure without considering government failure is to suggest that the government is somehow exempt from the same inherent problems that characterize markets and human nature.

As a utilitarian libertarian, I believe that a government, which allows individuals to act in their best interest except in cases of aggression, is the government under which everyone in a society has the best chances of being better off. This is not a convoluted philosophical, religious, or political belief. It is based on economic reasoning and the simple belief that individuals know what is best for themselves. In order to make a case for limited government, it is necessary to demonstrate that the cost of government failures far outweighs the benefit of using government to combat economic failure. Therefore, it is reasonable to impose the following criterion whenever Statists “cry unicorn”: (1) point out market failures, (2) if you must, propose government actions in response to these failures, and (3) assess whether or not said market failures outweigh impending government failures. Economic failure alone should not be enough to justify government intervention.

But what would keep society and markets from devolving into chaos, they may say? The most severe fallacy made by planned economy advocates is that government is sole the purveyor of social and economic order. To suggest that markets emerge as the design of a single entity is akin to suggesting that humans were intelligently designed by their creator, a belief largely incompatible with modern science. Economic order, like the cellular organization of life, emerges as an evolutionary process. This process is spontaneous order.

Spontaneous order was a concept first formalized by Frederick Hayek in his Law, Legislation, and Liberty. However, the inception of the more general concept can only be credited to Charles Darwin himself. As Matt Ridley puts it in The Rational Optimist, “Human society… [is] an emergent order generated by an invisible hand of individual transactions, not the product of top-down determinism.” Hayek describes spontaneous order by its distinguishing property: it is not that there a lack of rules or laws. Rather, the rules are natural. They inherently govern the actions of individuals yet are not known to each individual. They are not the result of deliberate design. Hayek claims that natural laws governing spontaneous order exist because mankind existed for at least 200,000 years without articulated or formal laws. His argument is certainly plausible, but it is still unclear what these rules are or how they recombine in some evolutionary process.

This uncertainty breeds a skepticism of spontaneous order and more generally of free markets. Whether the evolutionary process, but the existence of spontaneous order—at least in the mathematical sense—cannot be disputed. The Invisible Hand is not invisible. Around the end of Hayek’s career in the 1970s, computer scientist-mathematicians John Conway and Stephen Wolfram discovered cellular automata, simple computer programs that produce strange and bizarre order—including “replicators,” and “gliders”—from a random initial configuration of cells in a rectangular array. Cells in the array change each turn based only on properties of neighboring cells, obeying a natural law.

Cellular automata remains a compelling model for spontaneous economic order. Furthermore, spontaneous order is a localization of rights: rights of organization are transferred from the state to the individual. In the words of Ludwig von Mises: “What those calling themselves planners advocate is not the substitution of planned action of letting things go. It is the substitution of the planner’s own plan for the plans of his fellow man.”

From this, we can conclude that while a planned economy is limited by the will and imagination of one, free markets are limited only by mankind’s willingness to be social—to recombine their visions, resources, and wants in ways that are both spontaneous and stunningly effective.

Hans Riess is a recent graduate of Duke University and an incoming PhD candidate at University of Pennsylvania. 

Editor’s note: This article was revised from its original April 13, 2017 publication.

Hans Riess graduated from Duke University with a degree in mathematics and is working towards a PhD in electrical engineering at the University of Pennsylvania. He is interested in applying concepts from mathematics to theories of optimal political decision-making.

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