Decades Later, Hayek’s Warning on Planning Echoes Louder than Ever

 

Governments are fixated on the idea that climate change should be mitigated through planning. The problem is that planning is less efficient and effective at processing information than markets.

In March 1977, three years after winning the Nobel Prize in Economics and more than three decades after writing his magnum opus, Friedrich Hayek penned an essay for Reason magazine, in which he, yet again, addressed and assessed “planning.” The essay, “‘Planning’” Our Way to Serfdom,” was written in response to newer, less centralized forms of planning that had been rapidly gaining support in the West. Specifically, Hayek dispatched “indicative” planning, whereby government “guides” private industry in the proper forms and direction of economic growth, and planning done to achieve “social justice.” About the former, he wrote that “that halfway house between a completely planned system and a free market would indeed be the worst of all possible worlds,” while about the latter, he intoned:

The belief in a society in which the remuneration of individuals is made to correspond to something called social justice is a chimera which is threatening to seduce modern democracy to accept a system that would involve a disastrous loss of personal freedom. George Orwell and others ought by now to have taught even the layman what to expect from a system of such kind.

Unfortunately, Hayek’s dismissal of the newer, subtler forms of planning was not as successful as his earlier assault on the centralized variety. In the nearly five decades since the essay in Reason, global governments and other organizations have largely ignored or forgotten his admonitions and have placed greater and greater faith in the power of marginally decentralized planning. This has especially been the case in the 15+ years since the Great Recession.

The most obviously visible form of planning extant in the West today is the response to climate change and the push toward “net-zero.” This also includes the even more thoroughly evolved version of planning—Environmental, Social, and Governance investing (ESG)—which substitutes private actors for governments and utilizes the very mechanisms of capitalism to preempt the power of markets in favor of carefully calculated presumptive economic outcomes. Governments and their private-sector allies are fixated on the idea that climate change can and should be mitigated through the virtues of planning.

The problem with all of this, unsurprisingly, is that even the newer, subtler, and privatized versions of planning are still far less efficient and effective at processing information than are markets. Hayek’s complaint about planning is that it is arrogant and foolishly so. It presumes that the calculations and machinations of a handful of “experts” can be more accurate than the market signals gathered by millions of individual capitalists calculated millions of times a day over millions of locations. Planning projects imprecise information based not on the wants, needs, and tastes of consumers but on the biases of the planners. It misidentifies and miscalculates economic inputs and outputs, distorting both the demand and supply curves.

In the case of net-zero and ESG, the distortions created in the demand curve are readily apparent and growing more so every day. As long as four months ago, car dealers were warning the Biden Administration that consumers had little or no interest in electric cars, which were piling up on their lots. Twice in the last six months, Ford has announced layoffs at the factories producing its F-150 Lightning electric pickup. And while it has dramatically cut production of electric trucks, it has shifted much of that capacity to building Broncos and Rangers, two gas-powered vehicles. More recently, Tesla slashed prices on its cars, Mercedes announced a five-year delay in its plans to electrify its fleet, and Hertz announced that it “would sell one-third of its global EV fleet, or about 20,000 cars, citing weak demand and the expense of repairing the vehicles.” Even companies that mine lithium, the primary component in electric vehicle batteries, are laying off employees, as real-world demand for net-zero-friendly vehicles dramatically trails the demand calculated and demanded by the planners.

The good news here is that in a nominally free economy, the distortions to the demand curve can be addressed and, presumably, fixed. That will come at a considerable cost, but in most places—California being a notable and stubborn exception—the changes necessary are still mostly feasible.

The bad news is that such quick fixes are not likely to ameliorate the distortions net-zero and ESG have made to the supply curve. At present, supply looks to be stable and, if anything, improving to meet the market’s non-planned demands. Despite President Biden’s tough talk on energy and the transition to a “clean” net-zero future, as well as his occasional dramatic misstep (his export ban on liquid natural gas, for example), the United States is a clear leader in fossil fuel production, producing more today than at any time in history. Unfortunately, because energy is a long-term business that requires years and even decades to organize and enable production, present circumstances are likely misleading.

Consider, for example, what the Wall Street Journal reported last summer, namely the fact that energy companies are struggling mightily to find qualified workers, and conditions are likely to get dramatically worse going forward. “At U.S. colleges, the pool of new entrants for petroleum-engineering programs has shrunk to its smallest size since before the fracking boom began more than a decade ago. European universities, which have historically provided many of the engineers for companies with operations across the Middle East and Asia, are seeing similar trends.”

This only makes sense, of course, given the ubiquitousness of the planners’ message on the future of energy. Why would any bright, sensible young student make the conscious decision to study petroleum engineering when government, businesses, and the broader culture are relentlessly insisting that petroleum and other fossil fuels are “evil” and will, therefore, be phased out in the near future? There’s no good answer to that question, which explains why the future supply of trained professionals needed to help the world meet its energy needs is likely to be woefully inadequate.

If that weren’t troubling enough, this just happens to be one rare occasion in which the effects of planning on the long-term supply curve are discernable, even if not likely correctable. Most such effects are not going to be as easy to spot. “Unintended consequences” are the omnipresent soft underbelly of planning.

The world would be a better place—today and in the future—if the planners insistent on net-zero and ESG would read Hayek’s 1977 essay. They might learn something.