Thus far, I have reviewed the first six parts of F. A. Hayek’s “The use of knowledge in society.” This leaves the last part (Part 7) of Hayek’s knowledge paper, where Hayek responds to Joseph Schumpeter’s defense of central planning in Schumpeter’s influential work Capitalism, Socialism, and Democracy (CSD), the cover of which is pictured below.

In summary, although Schumpeter concludes CSD by stating “I do not advocate socialism” and “do not ‘prophesy’ or predict it” (Schumpeter 1942, p. 422), Schumpeter devotes an entire chapter of his book (Ch. 16) explaining how central planning could, in principle, work just as efficiently as capitalist systems in practice. In that chapter, Schumpeter acknowledges the argument against socialist planning: “our central board would be confronted with a task of unmanageable complication.” (See Schumpeter 1942, p. 185. Here, Schumpeter also refers to Hayek by name. See ibid., n.11.)

Nevertheless, Schumpeter explains why central planning “is eminently operational.” (Ibid., p. 185.) According to Schumpeter, socialist central planners would face less uncertainty than capitalism managers:

“… solution of the problems confronting the socialist management would be not only just as possible as is the practical solution of the problems confronting commercial managements: it would be easier. Of this we can readily convince ourselves by observing that one of the most important difficulties of running a business—the difficulty which absorbs most of the energy of a successful business leader—consists in the uncertainties surrounding every decision. A very important class of these consists in turn in the uncertainties about the reaction of one’s actual and potential competitors and about how general business situations are going to shape. Although other classes of uncertainties would no doubt persist in a socialist commonwealth, these two can reasonably be expected to vanish almost completely.” (Schumpeter 1942, p. 186, emphasis added.)

Do you find this “Knightian uncertainty” argument persuasive? I don’t. It is true that in a socialist system, central planners don’t have to worry about competitors, but in a free market system, the level of uncertainty about the future will already be reflected in the prices of goods and services. For Hayek, however, the main flaw of this defense of the socialist planning was that Schumpeter has assumed away the knowledge problem altogether:

“The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.” (Hayek 1945, p. 530.)

Hayek further adds: “The practical problem [of the production and distribution of knowledge] … arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.” (Ibid.)

In closing, even if Hayek’s critique of Schumpeter is right, and it is, I still have my work cut out for me. To begin with, I must address several salient objections to Hayek’s defense of the price system, and after that, I must also show how Hayek’s analysis of prices supports my modest “truth markets” proposal. After all, it is one thing to buy and sell futures in a raw material like tin (to borrow Hayek’s own example), but what about “fake news futures” or “belief contracts”? Stay tuned: I will identify several possible problems with the price system (and respond to these objections), and I will then make a Hayekian defense of truth markets in several future posts.