Existing global capitalism is more Leninist than Hayekian
Kaveh Pourvand, 18 September 2013
When critics of industrial policy say the government can’t ‘pick winners’ they are echoing the arguments of the great free-market economist Frederich Hayek. In his seminal essay, ‘The Use of Knowledge in Society’, he argued that central planning does not work because governments do not have access to all the relevant information to make the right decisions. The problem is insuperable because much of this information is ‘tacit’; it can’t be captured by statistics for example. Hayek convincingly argued that planning has to be dispersed and can’t be done centrally. This was the basis of his contention that free-market capitalism was superior to communism.
Hayek did exaggerate his argument. Economies playing catch-up can to a certain extent ‘plan’ to enter certain sectors and succeed, as shown by East Asian Tiger economies and European countries like France after the Second World War. Even the Soviet Union managed to modernise their economy in the early stages of central planning, albeit at horrific and catastrophic human cost. A degree of central planning is possible during catch-up because one is following a path already tread on. However, it is far less effective when one is at the ‘technology frontier’. That is one of the key reasons why the Soviet Union stagnated later on. It is also true that central planning was paradoxically more effective in market economies where the government had genuine market driven prices to help in its calculations. No one can seriously dismiss the force of Hayek’s argument and it is a testament to the legacy of his thought that many, even on the left, are now much more instinctively suspect about the prospects of central planning than they used to be.
Yet there remains a problem with criticising active industrial policy on the basis that it contradicts Hayekian tenets of social organisation. This is that existing global capitalism is not Hayekian. It is to a large degree characterised by large, privately-owned command economies. As Martin Wolf (quoting Professor John Nolan) points out, many sectors in the global economy are dominated by a handful of large firms:
‘Using data from 2006-09, Prof Nolan concludes that the number of globally dominant businesses in the manufacture of large commercial aircraft and carbonated drinks was two; of mobile telecommunications infrastructure and smart phones, just three; of beer, elevators, heavy-duty trucks and personal computers, four; of digital cameras, six; and of motor vehicles and pharmaceuticals, 10. In these cases, dominant businesses supplied between half and all of the world market.’
If anything, the global capitalism is not Hayekian enough. It is too monopolistic. But the point I am trying to make here is that for better or for worse, large-scale planning is already a part of how capitalism actually operates. It is not cogent to simply say ‘planning does not work’ when the government tries to get into the game too.