The Central Planning Arms Race

Regular readers here know that myself and my co-bloggers (both present and former) spend a lot of time talking about the problems of central planning.[1] There are many, many problems with central planning: the Hayek-Lavoie knowledge problem, issues revealed by public choice analysis, and so on. In this post, I want to highlight a big one: creativity.

Human beings are insanely creative. Seemingly unique in the world, we are abstract thinkers and often find ways around what appear at first to be insurmountable problems. Every day, new inventions, innovations, music, and art come about to solve some problem and/or make our lives better. When we want something, we can make it happen. Indeed, Ball State University economics professor James McClure places that creativity as the core of economics:

The economic problem of society is rapid adaptation, in the face of resource scarcity, to changes in the particular circumstances of time and place.

This creativity is a problem for central planners. Central planners tend to think of the economy not as a complex system of relationships among people, but as a system that’s more like water flowing through a pipe. If you don’t like the course, simply pull some lever and change it.[2] What central planners fail to appreciate is that the economy is not like water in a pipe, but rather the result of billions of people pursuing their goals, given their constraints and alternatives. These goals are chosen by the people themselves. And when barriers toward those goals are thrown up, say by some central planner who wants the people’s goals to be different, people find creative ways around those barriers. Those creations may be illegal in nature (e.g., smuggling) or may become a whole new way of doing things.

Of course, not all forms of creativity are equal. People may get creative in gaming the system to get what they want out of it at the expense of others (e.g., rent-seeking).

Regardless, creativity poses a problem for central planners when their plans do not come to fruition. The central planner must then devote more resources to their plan to check these new behaviors not aligned with the plan. And again, more resources are then consumed by people to be creative in getting around these new barriers. Consequently, we have a sort of arms race. More and more resources are spent, but there is no relative gain by either side. Even assuming the central planner’s plans aren’t frustrated, the resource cost is significantly higher than expected. Consequently, other plans by the planner are necessarily frustrated. Even if the central planner didn’t suffer from the knowledge problem or face public choice constraints and had perfect information about outcomes that could be improved, this arms race tells us that it is quite unlikely that central planning can improve upon market outcomes.

Long story short, central planning gets frustrated because people are people.

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[1] Note: Historically, “central planning” has referred to total government control of the economy. I am using the term more broadly to include all sorts of government interventions and schemes including (but not limited to): industrial planning, wartime planning, social-justice interventions like income inequality measures, “leveling the playing field,” and so on.

[2] This metaphor is deliberate. Economists borrow heavily from fluid dynamics.