Much to learn from Hayek on efficiency - The Centre for Independent Studies
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Much to learn from Hayek on efficiency

Here are two figures I think of when I think about regulation. The first is Lord Acton. He's famous for one of the best quips about politics and government until the advent of that torrent of insights provided by Yes Minister.

Acton suggested that rowing was an excellent preparation for public life because it enabled you to go in one direction while facing in the other.

There's an even more profound problem than the Acton problem. I call it the Friedrich Hayek problem. Hayek blew the whistle on the fundamental problems of central planning. He anatomised the way in which the cheerleaders for communism glorified the knowledge of the engineer, the person who can work it all out in theory.

Hayek theorised, quite rightly that central planning is a dysfunctional way to run an economy, that markets are much better at using the local information that central planners cannot be aware of and have minimal incentives to take advantage of. But really large organisations are necessarily centrally planned. And since at least the time of the big American railroad corporations, they've been wrestling with the dilemmas of central planning themselves.

One particularly promising development occurred in Toyota in the 1950s and '60s. Under the influence of American statistician Edwards Demming, Toyota developed a system in which management – the central planners – went to then unusual lengths to get feedback and engagement from workers on the assembly line, the company's customers and its suppliers.

This wasn't a suggestion box in the corner of the factory. Toyota formed its workers into quality circles and paid them to meet regularly to constantly strategise ways of improving their productivity, their service to the company and its customers.

I'm guessing they hadn't read Hayek but they understood the importance of supplementing the scientific knowledge of the engineer, and the directive commands of the manager with the local knowledge and ingenuity of the workers on the line and of others in the extended production system that forms the firm and all its immediate relationships.

Hayek was right about the inadequacies of central planning. If the last quarter of the 20th century marked Hayek's ascendancy, when we realised his insights about the necessary limits of government, perhaps the next few decades might be dedicated to taking those insights further than he took them himself.

Given that large islands of central planning are inevitable in a modern economy, within large firms and within governments (whatever their size), we need to take a leaf out of Toyota's book and start finessing the inevitable dilemmas that central planning throws up.

Nicholas Gruen is chief executive of Lateral Economics and presented the paper Finessing the dilemmas of central planning. Can Hayek Help Us Regulate Better? to the Centre for Independent Studies' seminar on Hayek in March 2008.