On Reason... And "Planning"

Yesterday, I commented on the fact that we have 548 MPs but no mayors.

Today, we can add to that and say we have 79 ministers in New Delhi – but no mayors.

In other words, we have a totally centralised State.

We have no “government.”

Now, this centralised State is based on the idea that knowledge itself can be centralised – what they call “rational socialism.” This is the leitmotif of central economic planning, which Chacha Manmohan and his deputy Montek champion.

But what is “reason”? And, more importantly, what are the limits to human reason? Can human reason be used to “plan” an economy? Aristotle the Geek has a post today on reason, quoting Mises. Geek says that both Adam Smith and Friedrich Hayek “placed less emphasis on human rationality.” This confusion over reason and rationality requires thorough clarification. Let us begin with Adam Smith.

In the Wealth of Nations, Book I, Chapter 2, titled “Of the Principle which gives Occasion to the Division of Labour,” Adam Smith begins by saying:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

(Read the entire chapter here.)

What Adam Smith means is that the exchange economy has evolved slowly. It was never “planned.” No great thinker thought it up. Like Topsy in Uncle Tom’s Cabin, it “just growed.”

Hayek went one step further. The first chapter of his Fatal Conceit: The Errors of Socialism is titled “Between instinct and reason.” I cannot find a pdf of this excellent book online, but as this review says:

Hayek approaches ethics from an entirely different angle from most philosophers. While philosophical ethics usually entail rationalistic system-building from certain assumptions about human nature or from bits of empirical data, Hayek’s ethics are non-rationalistic and based upon the historical process. Hayek rejects the explicit, rationalistic construction of most ethical systems because such constructions rest upon the “fatal conceit” of human reason. Reason, Hayek argues, is incapable of commanding the information necessary to design an ethical system.

Hayek believes that ethics lie somewhere between instinct and reason. Ethics—like language, the marketplace, and the common law—are a spontaneous order that, in the words of Adam Ferguson, is the product of “human action, but not human design.”

Our ethical system was not designed by anyone; it is traditional, handed down from generation to generation, and learned by imitation. Its progress and development were achieved by a process of social evolution: those cultures which adopted “good” ethical systems survived and flourished, while those with “bad” ones either floundered or adopted more successful ethical systems. This subtle process of trial-and-error has produced Western ethics, a highly successful system.

Having understood Adam Smith and Hayek’s views on the instrumentality of reason, let us now turn to Mises. As quoted by the Geek, from Human Action, Mises says:

Human action is necessarily always rational. The term “rational action” is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.

However, this quote does not really sow the seeds of confusion. The laws of praxeology that Mises discovered, which are laws of thought, are based entirely on the “logical structure of the human mind.” All human action is based on forethought, which uses the categories of thinking already embedded in the mind. But this mind is only capable of directing its owner towards the attainment of his own ends. This mind is incapable of thinking of an entire economic system covering all. In other words, there is no discrepancy between the views of Smith, Mises and Hayek.

Look at it this way: The logical structure of the human mind, which is reason, powers a “sense of gain.” We therefore know what makes us better off and what doesn’t – in the immediate context of our impending action. We "calculate" profit and loss, capital and income, cost and yield. However, this reason has huge limitations. Hayek’s main message is this: The market economy based on the division of labour was not created by reason, and therefore cannot be substituted for by reason. This is the “fatal conceit of reason” that socialist central planners suffer from.

Thus, Chacha, Montek and their gang of 79 ministers in New Delhi do not possess the mental capabilities required to plan an economy. Their reason cannot be used to replace what was not created by reason.

As Mises says, “The division of labour is a fundamental social phenomenon.” This fundamental social phenomenon has come about because each of us sees ourselves benefiting from social co-operation as against isolated lives engaged in mere subsistence. But this has evolved only gradually, and, what is more important, it has been severely stunted in countries like India, whose “great leaders” – from Gandhi and Nehru down to Chacha Manmohan – did not comprehend the market order correctly.

This itself is evidence that the exchange economy lies “between instinct and reason.”

Its corollary is that socialist central planners possess feeble minds.