To early 20th-century intellectuals, capitalism looked like anarchy. Why, they wondered, would we trust deliberative, conscious guidance when building a house but not when building an economy?
It was fashionable among these socialist intellectuals to espouse “planning” as a much more rational way to organize economic activity. (F.A. Hayek wrote a famous essay on the phenomenon.) But this emphasis on central planning was utterly confused both conceptually and empirically.
Ludwig von Mises made the most obvious rejoinder, pointing out that there is “planning” in the market economy, too. The difference is that the planning is decentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers. Thus, in the debate between socialism and capitalism, the question isn’t, “Should there be economic planning?” Rather, the question is, “Should we restrict the plan design to a few supposed experts put in place through the political process, or should we throw open the floodgates and receive input from millions of people who may know something vital?”
Planning is decentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers.
This second question came to be known as the “knowledge problem.” Hayek pointed out that in the real world, information is dispersed among myriad individuals. For example, a factory manager in Boise might know very particular facts about the machines on his assembly line, which socialist planners in DC could not possibly take into acco…