Many argue that as an economy becomes larger and more complex that a central authority needs to handle the economic decisions. In other words, central planning is necessary as the large economy and complex economy appears as chaos and the apparent chaos needs “organized”.
F.A. Hayek pointed out and argued successfully that as an economy becomes larger and more complex that decentralized decision making by individuals is the route to pursue. That no central authority is capable of gathering all the knowledge necessary to run a dynamic economy. Hayek was proven correct by the dismal results of the former Soviet Unions and their central planning. Hayek pointed out that the mundane knowledge of households and firms (decentralized authority) is the correct way to handle large complex economies. (1)
That it’s a paradox that as size grows and what some view as chaos that needs organized by a central authority is exactly opposite in that decentralized authority is the route. The chaos is not chaos. Apparent chaos is an economy based on price signals and the mundane knowledge of the individual households and firms is the best and most timely knowledge base to react to the price signals.
Large Central Authority and Large Mistakes
However, what gets little press time in the above Hayek argument is the sub-topic he raises about size and mistakes. That a centralized authority would be by definition absolutely enormous. The enormous centralized authority has to make assumptions leading to plans. If the assumptions are poor or incorrect, then the mistakes are of the enormous variety affecting many. If decision making is decentralized, then large numbers of households and firms make plans also based on assumptions. At any one time good and poor plans are devised. However, in the decentralized model only small decentralized mistakes occur affecting few.
Larger and Larger Government (Government Creep)
If one takes Hayek’s centralized authority with its inability to collect complete and timely knowledge, then takes the poor plans leading to enormous mistakes proposition, then larger and larger government becomes more apt to fail due to partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. One might point to the recent $800 billion stimulus as a plan based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. When the enormous mistake occurs many are harmed e.g a 17.3% u6 unemployment measurement.
Running in the Background
As government enlarges as a percentage of the economy then of course the centralized decisions of government increase as well. Hence in the foreground we have a decentralized private sector functioning within an economy based on price using mundane up to the minute information to devise plans. Functioning in the background is a centralized authority (government) based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.
Centralizing Authority in the Health-Care Sector of the Economy
Health-Care is currently a decentralized mundane dynamic knowledge sector being replaced by ObamaCare which is a centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.
It would likely be Hayek's contention that problems occurring within an economic sector, what ever those underlying reasons are regarding the perceived problems, the underlying reasons for the problems are not solved by applying centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.
(1)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach