Planning & The Rule of Law

A government should ultimately be bound by rules that are fixed and announced before it takes up any activity, this allows an individual to plan how they will go about their affairs, or in a more macro sense how firms should behave as they understand the manner in which government may use coercive power. Of course this system is not perfect in that the creators and administrators of these laws are fallible.

However, it does create the assurance that a pursuit of certain aims will not be stifled by a governing body, in the case where all the conditions are realised, so that law rather than stifling freedom allows it to flourish. Here Hayek makes a distinction between the rule of law which enables a government to fix conditions in which resources are used, but the ends they meet is ultimately decided by the individual, and arbitrary government where it directs the means of production to particular ends.

Central planning cannot allow the first to exist, in that the formal rules we have provide a framework rather than step by step guidance, central planning would require these rules to be exact in what they suggest in that the particular ends are met, and it is not by the individuals whim the product of these means. Here arises another problem with central planning and as such collectivism. When a government has to make every decision framework rules are useless, imagine trying to solve at this very moment how many buses should operate. Whereas in our current society the government provides the legal framework for their operation but it then comes down to competition, market forces, etc. which decides the operation of buses. A controlling government would have to make this decision under the circumstances that the problem arises, and this means that it would have to balance all the different aims and needs at that given moment as to not favour one, but inevitably somebody’s views have to be given greater significance.

Hayek uses the example of the Highway Code, which does not instruct people on where to go and exactly how they go about it (planning attempts to do this), it instead offers a framework in which the individual can operate but also ensure that society is not harmed, and is better off on the whole. It is here that the concept of formal rules is developed, in that we create rules that are useful to a yet unknown people, under circumstances which cannot be foreseen in detail.  They are formed on the basis that society is better off due to their existence. Thus, this avoids the need of dealing with each individual’s means and ends, the recognition that precise results are hard to come by, and that by providing a structure of which everyone is aware of, everyone will be better off.

Micromanagement is unsuccessful as concrete rules for a given situation would have to be applied, but we lack this information, and in the ultimate end only one aim can be pursued as otherwise it may conflict with another. Thus Hayek notes that the state should confine itself to providing rules to general types of situations as only the individual currently in the current circumstance possess the correct information to make a viable decision. Also there is the recognition that we cannot see into the future, the state would struggle to see the effect of certain actions on particular people. Furthermore, the state chooses between the different ends consequently favouring one over the other, as it cannot know what would have happened if the other aimed were to be picked. Thus planning in regards to law in the creation of definite rules means that it perpetuates the problem of asymmetric information, whereas formal rules reduce the asymmetry’s influence.

Hayek emphasises that as planning becomes increasingly extensive the struggle in asserting what is “fair” or “reasonable” increases. Providing the need for more authority in making executive decisions, and that this facilitates more deliberate discrimination between the particular needs of different people. It would ultimately determine how “well-off” a certain person will be compared to another, in that only one’s needs are met through this discrimination in choice. The rule of law in a non-planned system ensures that there is an absence of legal privilege. Hayek establishes the paradox that in aiming for equality it is necessary to facilitate a legal system in which not everyone is equal in front of it.

“To produce the same result for different people it is necessary to treat them differently.”

The rule of law undeniably can lead to economic inequality (but to some extent this is the only thing that is truly inevitable), thus socialism protests against “formal justice” in that judges are too independent for example. Hayek ascertains that the rule of law is only effective if it is universal and as such does not work in socialist system, in which again there is the breakdown of political freedom. “It does not matter whether we all drive on the left or on the right-hand side of the road so long as we all do the same.” Rules are meant to enable us to predict each other’s behaviour to a needed extent, in that I won’t drive onto the motorway and find that people are driving in the opposite direction.

The individual should be able to foresee the actions of the state on the basis of the rules of law, and as a consequence use this knowledge to form his own plans and how he goes about his affairs. Here the individual knows where the state can stifle his efforts, and that it is not set arbitrarily on the specific circumstance of that moment. From this Hayek makes an acute reference to the Enlightenment:

“Man is free if he needs to obey no person but solely the laws” – Immanuel Kant

In a socialist system the rule of law will be applied in a manner which is as if a person were to be commanded by another. Legislation in a democratic government is confined by the continued discourse and disagreement, whereas in a socialist system in will be pushed through ultimately serving one individual’s ends at the cost of another.

When a state embarks on the complete control of economic life the significance of minority rights, and individual rights are diminished, without even breaking the rule of law at times. Hayek states that ruthless discrimination occurred through a change in economic policy first before and statutory change. Due to the nature of Socialism and the need for an overriding decision to be made, power lands in the hands of few and in that there is the inevitable service of their vested interests, or an ability to go against a large minority.

The “Inevitability” of Planning

There was an argument for the inevitability of planning for example technological change bringing about the existence of natural monopolies, consequently requiring government planning as to some extent the lesser evil than production by private monopolies.

Hayek breaks down this argument once more by considering social infrastructure and existing policies. He asks the question whether the development of natural monopolies is a consequence of new technology, or more simply the economic conditions in which they operate. Hayek argues that the latter is true. He uses the breakdown of the following example:

A large firm having superiority over a small firm, due to technological change may result in greater economies of scale, and an as such lower cost per unit produced and thus begins a process of underbidding and driving out small firms in order to increase market share.

Now at first glance the argument stated above is reasonable, but Hayek notes how this is not the case from a congressional report by the temporary national economic committee in that it states:

“The superior efficiency of large establishments has not been demonstrated; the advantages that are supposed to destroy competition have failed to manifest themselves in many fields. Nor do the economies of size, where they exist, invariably necessitate monopoly.”

This leads Hayek on to argue that it was the policies within countries which facilitated the growth of monopolies, which would then drive out smaller firms. He takes the creation of cartels, and syndications as a consequence of governments seeking regulation in prices and sales as the factor that led to the growth of large monopolies. This goes back to his overarching argument of travelling down one road completely or not at all, as there is greater flaw in attempting a mixture. Then going on to state that “monopoly capitalism” became acceptable even more so as countries such as the United States erected protectionist policies and pursued semi-isolation. He uses the example of Great Britain in stating that planning is not inevitable, in that yet again policy had promoted the growth of natural monopolies. He notes that the British system had been extremely competitive up until 1931 where similar to America protectionist policies arose, and economic planning was introduced and thus monopolies came about. Not of technological change, but the actual structure of the economic system.

He then delves into another segment where planning is not inevitable. Arguing against those who make the assertion that the complexity of modern industrial civilisation creates the need for central planning otherwise we cannot combat its problems effectively. They additionally state that it is increasingly difficult to obtain a coherent picture of economic process, thus things should be coordinated or else dissolve into chaos.

Hayek breaks this down by simply stating that if conditions were simple enough for one person or board to have perfect information then planning works, but as they note in their own argument there is this existing complexity where it is increasingly difficult to attain this information. Thus Hayek argues that decentralisation becomes imperative, as then there is the coordination between separate agencies to bring about “mutual adjustment”. Furthermore, he states that “nobody can consciously balance all the considerations bearing on the decisions of so many individuals.” Thus he arrives at the price system and how it operates without the need for recording every single change in information by a central body. It also allows for the greater complexity in our system which helps the growth of the industrial system and that planning ultimately stifles it.

It is here that he comes to point which is of particular interest to me, he writes about how technological change can be stifled in order to maintain the status quo. For example the industrial revolution promised to enhance the productivity of labour; however it came at the cost of employment for many people. So here arises the argument for the need of central planning to efficiently create the change over such that the short term loss does not override the short term gain. To this Hayek states that planning is not needed as either the short term loss can be accepted, or the change can be delayed up until the necessary infrastructure or policy is erected to minimise any loss.

Specialisation & the Allure of Planning

Hayek states there are many good things, which all agree are highly desirable, and possible, that are difficult to achieve within our own lifetime. This develops the allure of planning in that it seems possible to circumvent the barrier that is time, collective action leading to the achievement of these goals.

He then brings this into regards of specialists (technocrats) in that a planned society seems to offer a route to achieving their objectives. He states that this is an illusion and a misdirection of resources, in that the specialist will obviously place greater importance on his aims then others. Hayek uses a nice example to illustrate this:

“The lover of the country-side who wants above all that its traditional appearance should be preserved and that the blots already made by industry on its fair face should be removed, no less than the health enthusiast who wants all the picturesque but insanitary old cottages clear away, or the motorist who wishes the country cut up by big motor roads, the efficiency fanatic who desires the maximum of specialisation and mechanisation no less than the idealist who for the development of personality wants to preserve as many independent craftsmen as possible.”

However, they all have a wish to go about this planning and therefore they will ultimately come into conflict with each other. As such this brings about the central issue, that not everyone can be pleased. It’s attractive to those who have devoted their lives to a single task and want to see it done universally. But practically this cannot occur, also defining to some extent the authoritarian nature of central planning, only one direction can be pursued and thus not everyone will be pleased.

The Abandoned Road?

It is here that Hayek develops what can be seen as his doctrine of freedom, this is more of political science then economics but it is integral in understanding his ultimate support of capitalism and the threat socialism and communism pose on liberty.

He identifies how it was the liberation of action and thought which had resulted in the improvement in our general living standards whether at the top or bottom of the social ladder.

“During the whole of this modern period of European history the general direction of social development was one of freeing the individual from the ties which had bound him to the customary or prescribed ways in the pursuit of his ordinary activities”

The example of science and its development alongside freedom is noted as a direct benefit of allowing individual thought, he notes the remarks of Auguste Comte “the perennial Western malady, the revolt of the individual against the species” but rather than Hayek noting this in a derogatory sense he uses it an example of freedom being the force which created Western civilization.

Hayek is often bundled in with far right wing economic policy, with taking a completely laissez-faire approach, but he to some extent is more of an opponent to socialism then a proponent of laissez-faire policy. This originates from his core ideology of libertarianism which he states can be a mobile creed that does not stay on set values when conditions of society change. The other supporters of the liberal cause had made laissez-faire a “hard and fast rule” in which there was a failure to recognise the need for developing institutions to support it. This is identified as the cause for the picking apart of the liberal argument and then the slow progress of policy, as it was (and still is) difficult to change the institutional framework of society.

He uses a delightful metaphor to summarise this:

“The attitude of the liberal towards society is like that of the gardener who tends a plant and in order to create the conditions most favourable to its growth must know as much as possible about its structure and the way it functions.”

Moving on from this he accounts for the rise of the argument for planning, “conscious direction”, and socialism. In that he looks at how society changed from the rough rules of the 18^th century accompanied by new thought but slow progress in making gaps which were yet to be filled. Thus, there were those who argued that “it was no longer a question of adding to or improving the existing machinery [of society], but of completely scrapping and replacing it.” Consequently, leading to the removal of unseen forces that produce unforeseen results, and its place have a collective and conscious direction towards deliberately chosen goals.

He accounts for the spread of similar thought throughout Europe as a consequence of the import of German ideas, he notes that the ideas may have not been first conceived in Germany but were “developed to perfection”, and that during Germany’s materialist accumulation these ideas were spread and were encompassed in the government itself which had a large socialist party in the parliament. He then notes a distinction that German thinkers developed in that “Western” was west of the Rhine, and that the society become opponents of this “Western” ideology which was constituted in liberalism, democracy, capitalism, and individualism. As the German people conceived these things to be shallow ideals, or “the rationalisation of selfish interest” thus defining the nature of German society in the early 20^th century.

Under Capitalism

“Under capitalism, man exploits man. Under communism, it’s just the opposite.”

-John Kenneth Galbraith

Command Economy Vs. Free Market (Round 1)

Winter Is Coming, and The Soviet Cupboard Is Bare

http://www.businessweek.com/stories/1991-11-03/winter-is-coming-and-the-soviet-cupboard-is-bare

International Business

WINTER IS COMING, AND THE SOVIET CUPBOARD IS BARE

Tensions are running high at Moscow’s sprawling Gastronom food store near Byelorussia Railway Station. With coupons ready, two dozen people are lined up at the counter to get sugar rations they were supposed to have had three months ago. Management claims there’s no sugar–but it turns out that 20 sacks of sugar have been hidden in the back. For hours, the angry crowd refuses to leave, forcing police to clear the store when closing time comes at 8 p.m.

As winter approaches, such scenes are becoming common. The question being asked in capitals from Brussels to Washington is: How bad will it get in the former Soviet Union? Mass starvation is unlikely. But a combination of poor harvests and breakdowns in food distribution will mean pockets of serious shortages throughout the country. The repercussions are being felt on world commodity markets. Plans are afoot for the U. S. to extend $1 billion in emergency food credits and aid, prompting American grain prices to shoot up.

Across the Soviet Union, cities loom as the most vulnerable spots. Perm, an industrial town in the Urals, already witnessed major protests when sugar supplies dried up. In Moscow, frustrated tipplers ransacked a liquor outlet that had no vodka. In Alma Ata and St. Petersburg, bread is running short. Most at risk are retirees, who struggle along on pensions of 140 rubles a month and can’t afford the plentiful but expensive food in private markets.

The biggest immediate threat is a poor grain harvest, which many expect to come in at 170 million metric tons–down 22% from last year. Of that amount, about 70 million metric tons were to have been sold to state distribution agencies run by Moscow. But in the aftermath of August’s failed coup, central authority has all but evaporated, allowing state and collective farms to sell what they please. By Oct. 1, they had sold only 35.4 million metric tons to the government.

The rest is being hoarded by farmers in hopes of selling it privately later at higher prices. Since spring, for example, grain prices have jumped from 900 rubles to 2,000 rubles a ton. And with the ruble losing value by the day, farmers are using grain to barter for consumer goods, cement, or other items they need.

Yet state and collective farms do not have adequate storage facilities and may face big grain losses, as Vladimir A. Tikhonov, a Soviet agricultural expert, told an Oct. 18 conference at the Geonomics Institute of Vermont’s Middlebury College. The resulting shortages could touch off food riots by spring, he says.

RUMBLING BELLIES. In Russia, the most populous republic, food supplies are tight. Meat purchases for the first nine months of the year were down 20%, and dairy sales sank 15%. In more than 50 Russian cities, meat, butter, and vodka are being rationed.

Finding additional supplies will be difficult. Now that they’ve declared their independence, such food-producing republics as Moldavia, the Baltic states, the Ukraine, and Kazakhstan are reluctant to ship food to Russia, since they want to feed their own people first. Russian cities in the heavily industrial Urals region, for example, used to get livestock from the Baltic states. But shipments have fallen off dramatically. The republics are supposed to adhere to their commitments to sell food or pay penalties in hard currency. But, says Tikhonov, “a period has come when no agreements can be relied upon.”

Western countries, fearful of the chaos that food shortages could spawn, are gearing up with emergency plans. The U. S., Japan, the European Community, and Saudi Arabia have earmarked $10 billion in aid and credits primarily for food. But last year, when the situation was less than dire, the Soviets cried wolf: Much of the emergency food aid sent by the West ended up wasted or absorbed by the black market. The question now is figuring out how to send help when it’s really needed–and before it’s too late. Rose Brady in Moscow and Peter Galuszka in Middlebury, Vt.

Questions:

How is the basic economic problem being handled by the use of coupons? Why might this be less successful than money?

The coupons are in a way a different form of currency for the people and businesses, since the coupon is being exchanged directly for a given product. Through the use of coupons there is the elimination of opportunity cost, as a coupon only entitles you to one given product. The reason this may be less successful than money is because the value of the product may increase as there is a shortage of supply, but a coupon entitles the person to the same amount of the product as before. This encourages those with the product to hoard it and sell it on the black market for immediate monetary gains and a greater profit then would have been received if the coupons were taken.

Suggest reasons why there may be a shortage of sugar?

• The main reason there is a shortage of sugar is because the producers are hoarding the sugar. There are two markets in existence the black market and the coupon market. The producers rather sell in the black market to increase profit rather than sell in the coupon market, therefore the creation of shortage.
• Another possible reason is that product is being used to barter for other product, this direct trade skips the use of coupons or the black market therefore not establishing a supply.
• The final reason for a drop in supply would be the independence of former Soviet Union states not exporting their product

Use demand and supply diagram to explain why there is a shortage of some foodstuff.

Use a demand and supply diagram to demonstrate the surge in the price of food.

Does the article demonstrate the failing of the command or free market based solutions to the basic economic problem?

To an extent the article highlights what occurs when there is an economic transition from one system to another. The main issue that the article highlights is the undermining of the command economy system with the use of the black market. In essence the black market is a free market without regulation but with similar aspects such as equilibrium and price signals. The article mentions an immediate threat with the poor grain harvest, and the resulting surge in prices; this is not entirely an issue that only a command economy would face but also a free market economy. An example of this occurring in free markets can be noticed often when there is scarcity of a resource, what a command economy attempts to do by rationing is to reduce the issue of scarcity.

What can be noted about the transitioning economy is the behaviour of the sellers of commodities. Since there is no longer the regulation forcing them to give their produce to the government they are free to do with it as they like. So immediately they go for the short-term positive personal gain, rather than thinking about the greater community. This is why the black market prospers at this time, because the profit margin for selling in the black market is much greater than the margin in the transitioning economy; this relates back to the issue of the coupons.