Hayek on the Meaning of “Planning”

As promised, here is a passage from Hayek’s Road to Serfdom (pp. 34-35) elucidating the meaning of “planning.”  It is only by ignoring or misconstruing Hayek’s discussion of the different significations that the word “planning” can have that central banking can be confused with central planning.

‘Planning’ owes its popularity largely to the fact that everybody desires, of course, that we should handle our common problems as rationally as possible and that, in so doing, we should use as much foresight as we can command.  In this sense everybody who is not a complete fatalist is a planner, every political act is (or ought to be) an act of planning, and there can be differences only between good and bad, between wise and foresighted and foolish and shortsighted planning.  An economist, whose whole task is the study of how men actually do and how they might plan their affairs, is the last person who could object to planning in the general sense.  But it is not in this sense that our enthusiasts for a planned society now employ this term, nor merely in this sense that we must plan if we want the distribution of income or wealth to conform to some particular standard.  According to the modrn planners, and for their purpsoses, it is not sufficient to design the most rational permanent framework within which to the various activities would be conducted by differeent persons according to their individual plans.  This liberal plan, according to them, is no plan — and it is indeed, not a plan designed to satisfy particular views about who should have what.  What our planners demand is a central direction of all economic activity according to a single plan [my emphasis], laying down how the resources of society should be ‘consciously directed’ to serve particular ends in a definite way [my emphasis].

The dispute between the modern planners and their opponents is, therefore, not a dispute on whether we ought to choose intelligently between the various possible organizations of society; it is not a dispute on whether we ought to employ foresight and systematic thinking in planning our common affairs.  It is a dispute about what is the best way of so doing.  The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals are given the best scope so that they [Hayek’s emphasis] can plan most successfully; or whether a rational utilization of our resources requires central [Hayek’s emphasis] direction and organization of all our activities according some consciously constructed ‘blueprint‘ [my emphasis].   The socialists of all parties have appropriated the term ‘planning’ for planning of the latter type, and it is now generally accepted in this sense.  But though this is meant to suggest that this is the onlyrational way of handling our affairs, it does not, of course, prove this.  It remains the point on which the planners and the liberals disagree.

11 Responses to “Hayek on the Meaning of “Planning””

  1. 1 David Pearson September 5, 2011 at 8:51 am


    Monetary stimulus relies on a set of “consciously constructed” price distortions. The whole point is to reduce real wages and therefore increase the profit from hiring a new worker. This is a desired reallocation of resources from labor to shareholders. Further, stimulus reallocates investment gains, through the real interest rate, from liquid savers to holders of inflation hedges. It also allows governments to finance net fiscal spending at lower rates, which creates distortions across the economy. A “transparent” central bank works by creating arbitrage opportunities that favor certain financial intermediaries. “Rates will be low for an extended period” is the same as saying, “gains from maturity transformation by shadow banks are guaranteed.” Similarly, the promise to “support well-functioning money markets,” is a free put on liquidity risk offered to speculators. Finally, by working through the exchange rate, monetary stimulus reallocates profits and wages from the service sector to the traded sector.

    The test of whether something is “planning” should be, “if you spoke to somebody negatively affected by it, would it seem like planning to them?” Telling a senior with her life savings in a bank CD, “its not planning because everyone will be better off as a result,” might make them feel better about it, but it probably won’t change their mind as to the dynamic at work.

    I understand why stimulus proponents must try so hard to refute the claim that the Fed had much to do with oil prices in 2008 and 2011: it gets to the heart of the “price distortions” argument. (BTW, global growth is slowing — a demand “shock” — and the lost Lybian supply has been restored; Brent crude is $109 vs. $75 pre-Jackson Hole.)

    David, I’m not saying stimulus is never a good idea; its just that its proponents seem to go to great lengths to deny its intended and unintended consequences, and to downplay the long-term risks. Engineers don’t set about designing bridges by arguing, “an earthquake probably won’t happen.” Rather, they have to spend most of their time dealing with the question, “what if it does?”

  2. 2 W. Peden September 6, 2011 at 2:31 am

    David Pearson,

    “Monetary stimulus relies on a set of “consciously constructed” price distortions.”

    So does banning the sale of heroin to children: it distorts the price system, by preventing a market price for heroin sales to the child market from coming to be. Is what Hayek means by “planning”? Is this what you mean by “planning”?

    If Hayek’s version of the socialist calculation problem dealt with price distortions, I’m sure Hayek would have defined central planning thusly. He wasn’t a notably opaque writer.

    “The test of whether something is “planning” should be, “if you spoke to somebody negatively affected by it, would it seem like planning to them?””

    No it isn’t. As a kidnapper (a man with a trade!) I might feel that the government is unnecessarily planning the course of society by banning me from legally practicing my trade. What that has to do with the Austrian School socialist calculation problem is anyone’s guess.

    In general, I think your comment totally overlooks the point of David Glasner: regardless of whether or not you want to call monetary stimulus “planning”, it’s not what HAYEK meant by “planning” in the Road to Serfdom. Frankly, I think David Glasner wins this one 4 sets to nil.

    (As for the extrangeous effects of monetary stimulus, I quite agree. Successful monetary stimulus involves distorting asset prices, which have a lasting & complex effect on the money supply and therefore the entire economy. One of my problems with inflation targeting is that it only works by distorting asset prices and the money supply in a much worse way than even the strongest K-percent rule, a fact only overlooked for so long because asset prices and the broad money stock have been largely expunged from monetary theory by the New Keynesian and RBC paradigms.)

  3. 3 David Pearson September 6, 2011 at 6:53 am

    W. Peden,

    Society’s interest in preventing heroin addiction is a bit different than preventing a 70-yr old widow from earning a positive return on her savings. For one thing, we are fairly certain less heroin addiction is a positive societal outcome; we are less certain that putting a widow’s savings at risk will produce a positive outcome. Some claim it will obviously, but that is not the same thing.

    I understand Hayek’s distinction between good and bad planning; I’m not sure it is as clear-cut as he makes it out to be in this excerpt. Is it all really down to a “single plan” as a requirement to be the “bad” form? Or does the persistent direction of resources to specific groups in order to achieve certain aims also qualify?

  4. 4 David Pearson September 6, 2011 at 7:16 am

    A more specific question: I have lived in countries that sought to use inflation primarily as a means of directing the resources of society to the public sector. There was no “single plan” — they were not “centrally planned” economies. Did they qualify as Hayekian “bad” planning?

  5. 5 W. Peden September 6, 2011 at 10:12 am

    David Pearson,

    I don’t see how the morality of one price distortion over another is relavant to the epistemic issues that Hayek is exploring.

    “Or does the persistent direction of resources to specific groups in order to achieve certain aims also qualify?”

    Presumably not, since that’s so vague that it includes law & order, national defence, the operations of private businesses, and giving toys to your kids. I honestly don’t think that Hayek had any of those things in mind in the Road to Serfdom.

    “A more specific question: I have lived in countries that sought to use inflation primarily as a means of directing the resources of society to the public sector. There was no “single plan” — they were not “centrally planned” economies. Did they qualify as Hayekian “bad” planning?”

    Just because it’s bad, it doesn’t make it central economic planning. We might say that all planning, of the sort to which Hayek is referring, is bad policy, but not all bad policy is that kind of planning.

  6. 6 David Pearson September 6, 2011 at 11:33 am

    W. Peden,

    So Hayek would not have a problem with bad economic planning, just with central planning. In that sense, one could use David’s excerpt to defend just about any policy regime except for communism. This would be accurate, but not terribly useful.

  7. 7 David Glasner September 6, 2011 at 1:01 pm

    David Pearson and W. Peden, Interesting exchange. It seems to me that to qualify as planning in the sense in which Hayek used the term in the Road to Serfdom and elsewhere, the planner must be aiming at a detailed allocation of resources and a comprehensive control over all production in society. This does not require a communist or even a socialist regime, but it does require a level of control over society that approaches totalitarianism. That is was the main point of the Road to Serfdom to teach the “socialists of all parties” that the comprehensive control over the economy that they wanted was not compatible with a free society because the degree of control over the economy would be so great that free institutions and democracy could not survive. That’s planning as Hayek understood it. Hayek himself not only admitted but constantly reiterated that the argument against planning did not exclude a fairly substantial amount of government activity, the provision of various services and public goods as well as significant amount of government intervention in markets. But the intervention had to be of a kind that allowed prices to adjust in response to the interventions to achieve equilibrium between supply and demand. Hayek would not have ruled out in carbon taxes to discourage the emission of greenhouse gasses to limit global warming. I have no idea what position he would have taken on whether it would be desirable to limit the emission of greenhouse gasses, but clearly he would not have regarded it as a form of central planning even though such a tax would have very major implications on the allocation of resources and the distribution of wealth and income across groups and individuals. So simply showing that a particular intervention hurts some people and helps others does not come even remotely close to establishing that the intervention qualifies as central planning in the sense that Hayek, or even von Mises, used the term.

  8. 8 W. Peden September 6, 2011 at 1:57 pm

    David Pearson,

    “So Hayek would not have a problem with bad economic planning, just with central planning. In that sense, one could use David’s excerpt to defend just about any policy regime except for communism. This would be accurate, but not terribly useful.”

    One could defend any regime that did not engage in central planning of the direction of the economy (not all of which would be communist- in the 1960s, the French, Indians and British both engaged in indicative planning, and National Socialist Germany of course was a planned war economy even before 1939) from this PARTICULAR critique of Hayek’s in the Road to Serfdom. It wasn’t like he was a one-trick poney; the epistemological implications of evolutionary rationalism extend across society.

    Quite why Hayek’s version of the socialist economic calculation problem should be the only reason to criticise economic policy is unclear to me. If people want to argue against central banking, then fine. I think there are sound arguments against central banking per se. But Hayek’s socialist calculation problem isn’t one of them.

    Incidentally, I think von Mises’s critique is also sound, though all it tells us is that the Eastern Bloc economies weren’t production-for-use economies because no such large scale economies are logically possible.

    The way I break down the socialist economic calculation problems is as follows-

    1. Hayek’s: an epistemological argument that applies to all planned economies, both actual and ideal.

    2. Von Mises’s 1rst problem (that there is no basis on which to formulate a production-for-use plan because of the total absence of a price system): an axiological problem that only applies- in the excluding sense- to ideal planned economies.

    3. Von Mises’s 2nd problem (the entrepeneurial problem): hard to characterise, but one could say it’s simply a logical point- an economy with no entrepeneurs has no entrepeneurship, and we assume (correctly) that this matters.

  1. 1 When central banking becomes central planning « The Market Monetarist Trackback on October 23, 2011 at 4:58 am
  2. 2 Central Banking and Central Planning Once Again « Uneasy Money Trackback on October 23, 2011 at 10:10 pm
  3. 3 Freedom Under Law | Scourge of Progressivism Trackback on May 23, 2015 at 1:44 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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