ext_123483 ([identity profile] whswhs.livejournal.com) wrote in [personal profile] nancylebov 2010-04-04 03:51 pm (UTC)

R. H. Coase's "The Nature of the Firm" opened up this question of central planning in corporations back in the 1930s; the modern theory of the firm (as in Spulber's book on it, which I edited last year) grows out of that. Spulber would be a good starting point, if you don't want to reinvent the wheel. His book's listed on amazon, and your local university library might have a copy.

Demand is one of the three big problems with central planning. There's the complexity of analyzing the information; a systematic analysis of economic planning might well show that it's NP-hard. There's the complexity of getting all the information together in one place, which Hayek emphasized in "The Use of Knowledge in Society." But then there's the fact that the key information about what sort of production is desirable exists in the minds of individuals . . . and in getting it out you have to deal with the ability of individuals to misrepresent their own priorities for strategic purposes.

One of the most basic measures against this is "skin in the game" requirements: If people have to pay the costs of their own assertions of priorities, they have an incentive not to report those priorities as higher than they really are. If you subsidize people, you encourage them to give inaccurate reports up to the measure of the subsidies; if you give them unlimited subsidies, you render their reported priorities meaningless by making it impossible to falsify their claims about how much a desire means to them. Say's law, which says that supply creates demand, because commodities are paid for with commodities, has a corollary: that meaningful demand, "effective demand," is exerted by suppliers of things that other people demand. If you require people to go to the effort of producing something exchangeable to get into the game (or of getting other people who have produced something to sponsor their presence), you give them a solid reason not to demand things idly or manipulatively. In a centrally planned system, where all production is carried on by the state, it's harder to get meaningful input about how much people want things to be produced.

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