On Planners, Entrepreneurs, And The Uncertain Future

Central economic planners like Chacha Manmohan S Gandhi and his crony, montek, claim they have their eyes on the future - which is why they call their plans "Five Year Plans." If we study their plans in "Indian Economics" textbooks, our minds are trained to believe that this claim is valid; that these planners indeed "allocate resources" thinking 5 years ahead.

But, reality bites - and bites hard. After our Indian Economics exams are over, and we have passed with flying colours, and we look around at our actual problems in life, we become painfully aware that there is a shortage of anything and everything that is being planned. When the Indian people clamour for bijli, sadak and paani (electricity, roads, and water), we are distressed to find that all three are State monopolies; that their supply is being "planned."

Yet, when people like me advocate closure of central planning - leave everything to The Market - voices are raised against the proposition, arguing especially that someone has to look at the future, for businessmen are only looking at short-term profits.

When central planning has failed, it is vital that we all understand the "social function of the entrepreneur." And the economist who understood this function most clearly was Ludwig von Mises, who said:

The social function of the entrepreneur is to make provision for an uncertain future.

Yes, the future is uncertain - but only entrepreneurs "make provision" for it.

While I was in Hassan, it rained one morning. I waited for it to stop, but the rain only intensified. It became apparent that if I wanted to go to the cyber cafe to write my daily blog post, I would need an umbrella. I stepped out on to the street and asked where I could purchase one. Amazingly, the shop where umbrellas were being sold was right next door. Soon, I had my umbrella, and could walk comfortably to my place of work despite the rain.

I marveled at The Market - that you want something and it is immediately available. The credit should go to entrepreneurship. There were those who manufactured umbrellas, thinking these might be useful to consumers in the likelihood of rain. And there were shopkeepers who stocked them - "made provision" out of their Capital - hoping to be able to satisfy the needs of such consumers on the spot. If central planners were responsible for umbrellas, as they were in the Soviet Union, we wouldn't get any. There would be shortages, rationing and quotas. Those who recall our miserable lives in the 60s and 70s must be painfully aware of how nothing much was freely available in India then. Cars, scooters and motorcycles, for example, came with very long waiting lists - because of central planners. In all our cities, milk was rationed.

Having understood this - that resource allocation is best accomplished in the interest of society by private owners of these resources, and not by The State - let us now ask why planning fails. After all, their "theory" in their Indian Economics textbooks seems sound enough, and their intentions are noticeably pious. Then why this dismal failure?

To answer this question, we must turn to Mises' student from his Vienna years, the Nobel laureate Friedrich Hayek, and his essay on "The Use of Knowledge in Society." In a nutshell, central planning fails because it wants knowledge to be centralized. Markets work because they depend on decentralized decision-making and the use of widely dispersed real knowledge. Each private resource owner "speculates" on the needs consumers might express in the uncertain future - and hence this works. Of course, some entrepreneurs get it wrong - but many get it right. So when you are suddenly thirsty (in Goa, at least) you are sure to find a beer bar nearby. Or a tea stall.

Hayek himself expressed it thus:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

[If you are a student of Indian Economics, I strongly advise you to read the entire essay.]

So, I hope you are now convinced of two things that must go from our lives - first, the Indian Economics textbook; and second, the Planning Commission.