There are a lot of opinions going around about the latest set-up by Prime Minister Tun Dr Mahathir Mohamad, the National Economic Action Council (NEAC).
There’s one little part of it that is of specific interest to me as it has a relevant connection to classic Hayek.
And I intend to use that to point out why it’s so hard to actually try and plan an economy. Initially I had thought this was part and parcel of what pretty much every economist knew.
Yet, in this case, the idea of the former deputy governor of Bank Negara and Harvard educated economist Dr Lin See Yan, is that the council is an attempt to plan the economy but here’s where I can find inconsistency in his thoughts.
First, he stated that the government must first form a clear national economic plan. Then, that plan should go to this new economic panel, which will be made up of wise people who are for the consumers and know what is in the market.
That’s the problem. I’m not against economic planning. All economies are planned. All economic systems involved planning. This is not in dispute. The real question is who gets to do the planning? NEAC? I think not.
As F. A. Hayek, the Nobel Laureate economist wrote in his 1948 book Individualism and the Economic Order:
“This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.”
The core idea of Hayek is that we are all planners.
Companies and entrepreneurs, do indeed plan what they’re going to try, compete and do to see which plan works best. They have some set of assets, money and labours all over the place planning where and how can they put those things to best use in what combination.
Say, what actually is the business model? What is it that we’re trying to optimise with our plan for the economy? Who should grow how many red onions and what their price should be? So what actually is it that we’re going to try and maximise the output of? I don’t and cannot know, neither Dr Lin.
This just isn’t something we can know before we watch what people actually do. All we can actually do is make a guess, see how people react and then adjust to that reaction.
Even something as simple as red onions isn’t something that we can accurately plan. Think how much harder trying to plan something complex is going to be therefore.
Yes, there are plenty of economic studies. But again, what is it that we do when using them? We attempt to design experiments to disprove the assertions being made. If they survive such attempts at disproof then we upgrade assertions and speculations into something quite possibly true. That is my point, we planners attempt to go and find out by trial and error.
I also understand the political imperatives that someone, something should happen about the economy.
Dr Lin is absolutely right when he said blaming the government for thinking of the council only now, and only now they are being clear on what is to be done, isn’t the point here. In fact this is simply the evidence of how difficult economic planning is.
So any deficiencies and mistakes in work, execution or thoughts happen because central planning wouldn’t work even if the planners themselves worked as hard as they could. But the real killer point is that they simply don’t know what it is that they’re trying to plan.
Suppose the Sarawak government planned to give up on agriculture, specialise in natural resource extraction like oil, and invite big retails to set up stores which would have become huge improvement for our consumers. How much of a difference would it have made then?
I’d say big difference. What is missing is that how constantly changing in response to other economic changes. Just think of the fall and rise of retailers. While natural resource extraction technology is a long way from static over time, and what technology you need at any moment depends on the constantly changing conditions of each field. To simplify, the nature of planning changes and so does the prevalence of innovation and the ability to adopt it.
All of which rather brings us to Dr Lin’s predictable response, that this new economic panel should be able to admit a mistake and if a member needs to be replaced, then the prime minister must be able to replace him there and then.
Clearly the NEAC panel can give poor advice because they are influenced by known or unknown biases, and react to incentives just like the rest of us.
Even if the panel does everything perfectly and if it cannot adequately communicate the message to the decision-maker, then it will result in failure because of the ignorant panel members trying to do the planning.
Of course, there will be decisions by the economic panel which are very controversial but the Cabinet should think of the people first and endorse these decisions. Well, it doesn’t work that way.
What really works is the increased competition among experts as a means of solving expert failure. Competition between experts may indeed reduce this expert failure but it ultimately rests on the head of the decision maker which is the people, the consumers.
And indeed the more complicated a subject is, the more the reliance on expert opinion is needed, which increases the likelihood of expert failure. The more complex an issue is the less one would want to centralise it. Why?
Because we never do have the detailed information of 31 million Malaysians with 31 million different preferences in real time that we would need to be able to do such planning and effectively serves their needs.
Don’t forget that as prices change, then so does each and every one of those preferences. They also change as technology changes: what rational planner would have predicted the success of the iPhone back in 2007?
Here’s another task I would ask whether NEAC would like to plan.
The average well-stocked supermarket carries tens of thousands of different items.
Let’s suppose NEAC puts you in total control of getting just one item to a supermarket, say apples.
Let’s not make it easy by having the help of apple wholesalers. Thus, you would have to figure out all of the inputs necessary to get apples to your local supermarket.
Let’s look at just a few. You need crates to ship the apples. Count all the inputs necessary to produce crates. There’s wood, but you need chainsaws to cut down trees.
The chainsaws are made of steel, so iron ore must be mined, and mining equipment is needed. The workers must have shoes.
The complete list of inputs to get apples to the market comes to a very large, possibly an unknowable, number.
Forgetting any one of them, such as spark plugs, would probably mean no apples at your supermarket.
The beauty of this example is that, no one person needs to know all that’s necessary to get apples to your supermarket.
The bottom line here is that each one of us is grossly ignorant about the world in which we live in.
Nothing’s wrong with that ignorance, but we are stupid if we believe that NEAC can produce a better life by central planning.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the New Sarawak Tribune.
