Posted by on November 14, 2019 1:47 pm
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By Erik Sass, TES Editor-in-Chief

 

The rise of populism has brought with it the return of statism in the economic sphere, especially regarding international trade, where previous moves towards freer trade have been roundly rejected in favor of old-fashioned mercantilism and bilateral brinksmanship. Another aspect of the economic déjà vu is the revival of the concept of a national industrial policy, for example calling for government intervention to “save” threatened companies or industries from foreign competitors.

 

The return of the concept of national industrial policy is especially noteworthy because it has been debunked on so many occasions, recalled Veronique de Rugy, a Sorbonne-trained economist and senior research fellow at the Mercatus Center at George Mason University, who demolished the idea yet again on the second day of the 8th International Austrian Conference on “The Austrian School of Economics in the 21st Century,” hosted by free market think tanks in Vienna on November 13-14.

 

Among these serial debunkings, de Rugy asserts that pride of place must go to two books by Austrian school economist Don Lavoie, “Rivalry and Central Planning: The Socialist Calculation Debate,” and “National Economic Planning: What Is Left,” both published in 1985. Described as a “one-two punch” by de Rugy, the books combine theoretical elements drawn from Hayek and Mises with empirical evidence to demonstrate the fallacies underlying all attempts at central planning to whatever degree, from all-embracing Stalinist regimes to supposedly limited one-off interventions.

 

Setting the stage, de Rugy noted that current calls for industrial policy are rooted in two main arguments based (as they typically are) on an external threat: “First, that we need an industrial policy in the U.S. to defeat China’s 2025 plan and its desire to dominate globally,” and second, that “China has been extremely successful with its industrial policy, and so have the Asian countries of the so-called Asian miracle… because they instituted in the 60s very important industrial policies.”

 

After summarizing the recent empirical evidence against these justifications – principally the fact that the Chinese “miracle,” like that of the “Asian tigers” before it, largely took place in spite of centralized planning rather than because of it – de Rugy then took the audience back more than three decades to Lavoie’s works, written at the height of the Cold War.

 

Recreating the immediate context, she noted that in the mid-1980s the “calculation debate,” in essence an argument about whether central planners could set prices as accurately and efficiently as the market, had entered a critical phase, supposedly turning against the Austrian economists: “When the first book, ‘Rivalry’ was published, the notion that was out there was that Hayek and Mises had lost the calculation debate. The reason for this was that market socialist economists could [supposedly] prove mathematically that there were a series of prices that we could figure out to clear all markets.”

 

Lavoie’s books were a reasoned response to this, grounded in the practical details that have always bedeviled proponents of central planning: “Austrian economists don’t deny the possibility at all that math can allow you to find prices that clear all markets,” de Rugy summarized. “What they deny is that they can actually be done by a real world central planner.”

 

Thus Lavoie confirmed and expanded on the insights of Hayek and Mises, according to de Rugy: “The Austrian case against central planning fundamentally rests on the understanding that those prices that work to clear the market, can only be discovered through the rivalry of market policies. This is why ‘Rivalry’ is the first word in the title. That information, which is needed to discover prices for the market to clear, is dispersed among not only millions of people, but millions and millions of decision makers – all of us, throughout the day, and it’s all so fleeting. So no central planner could actually accumulate all that knowledge and spit out the price.”

 

Beyond this, Lavoie’s works also served to reinforce Hayek’s insight that, contrary to the assurances of moderate socialists, no amount of central planning is compatible with a market system: “The world is struggling with socialism and communism in radical form, but by the way minor forms of centralization can’t work either. Because central planners have to systematically deal with the information problem, and it goes beyond the discovery of prices. Let’s imagine the central planners guess the right price, but as people consume and exchange, things change, tastes change, and the central planner can’t know that so prices [may be] adjusted.”

 

De Rugy summarized Lavoie’s conclusion in terms that still resonate today: “No matter what the form of planning, whether it’s the radical all-encompassing takeover of the economy or just the nationalization of small industries, or run-of-the-mill intervention to save an industry or company, that creates a problem: people need to delegate power and put themselves under the control and the authority of the government… you can’t have freedom surviving with planning.”