Information and Economics:

A Critique of Hayek

Allin F. Cottrell and W. Paul Cockshott

October, 1994

1 introduction

Neither the theoretical arguments put forwardin the West, nor the fact of the collapse ofSoviet socialism, historic landmark as it un-doubtedly is, warrant the belief that socialisteconomic planning tout court is an untenablenotion whose time has passed. Indeed, mod-ern developments in information technologyopen up the possibility of a planning systemthat could outperform the market in terms ofefficiency (in meeting human needs) as wellas equity. Such are the claims that we havedefended in a number of recent publications,designed to re-open a debate over socialisteconomics.1 We do not expect that our ideaswill meet with immediate political success,but we do venture to hope that open-mindedeconomists will consider our economic argu-ments on their merits.

We do not intend to reiterate our generalarguments in favour of planning here. Our ob-ject is to refute the objections to socialist plan-

1Our ideas were first presented in Cockshott andCottrell (1989), and are set out most fully in Cockshottand Cottrell (1993). Cottrell and Cockshott (1993a)re-examines the historic socialist calculation debate,with emphasis on the arguments of Mises and Lange.In Cottrell and Cockshott (1993b) we stress the dif-ferences between our proposals and the system thatexisted in the Soviet Union. Technical details of thealgorithm we propose for short- to medium-term plan-ning are spelled out in Cockshott (1990).

ning put forward by Hayek in his classic arti-cle ‘The Use of Knowledge in Society’ (1945).The relevance of such an argument to the read-ership of this journal might be questioned.Doesn’t Hayek lie outside of the mainstreamof British (increasingly, Anglo-American) pro-fessional economics, with its dual roots in Mar-shallian pragmatism and the formal generalequilibrium theory of the Lausanne school?Wasn’t Hayek’s defence of the market alwaysa bit too strident and doctrinaire to suit thesensibilities of a profession that (in Britainat any rate) has traditionally had a broadlysocial-democratic outlook? Maybe so, but it isour impression that Hayek’s star is on the risein the post-Communist world, and that eventhose who baulk at his extreme enthusiasm forthe unfettered market are often quite ready tosee his arguments used to bury any form ofthorough-going socialism.

And so to business. We offer below an expo-sition and point-by-point contestation of theideas in Hayek (1945). We should make it clearthat some, though by no means all, of our criti-cisms of Hayek are anachronistic—that is, theydepend on advances in information technologythat have taken place since Hayek wrote. Wethink this is justified for two reasons. First,Hayek clearly thought he was putting for-ward a very general argument, which he didnot expect to see undermined by technologicalchange. Second, Hayek’s followers (e.g. Lavoie,

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1985) continue to support his arguments ofseveral decades ago, and to assert that devel-opments in information technology are largelybeside the point.

In our exposition of Hayek we try to bal-ance concision with the need to produce a suf-ficiently full and fair account to obviate thesuspicion that we may be attacking a strawman. We begin with a brief summary of thephilosophical views that inform the argumentof ‘The Use of Knowledge in Society’, whichare spelled out more fully in The Counter-Revolution of Science (Hayek, 1955).

2 hayek’s argument out-lined

2.1 The philosophicalbackground

In The Counter Revolution of Science Hayekis concerned to contrast the natural and socialsciences, whose relation to their subject mat-ter, he claims, is fundamentally different. Inthe natural sciences, advances involve recog-nising that things are not what they seem.Science dissolves the immediate categories ofsubjective experience and replaces them withunderlying, often hidden, causes. The study ofsociety on the other hand has to take as itsraw material the ideas and beliefs of people insociety. The facts studied by social science

differ from the facts of the physical sci-ences in being beliefs or opinions held byparticular people, beliefs which as suchare our data, irrespective of whetherthey are true or false, and which, more-over, we cannot directly observe in theminds of people but which we can recog-nise from what they say or do merely be-cause we have ourselves a mind similarto theirs. (Hayek, 1955, p. 28)

He argues that there is an irreducible sub-jective element to the subject mater of the so-cial sciences which was absent in the physicalsciences.

[M]ost of the objects of social or humanaction are not “objective facts” in thespecial narrow sense in which the termis used in the Sciences and contrastedto “opinions”, and they cannot at all bedefined in physical terms. So far as hu-man actions are concerned, things arewhat the acting people think they are.(Hayek, 1955, pp. 27–27)

His paradigm for the social or moral sciencesis that society must be understood in terms ofmen’s conscious reflected actions, it being as-sumed that people are constantly consciouslychoosing between different possible courses ofaction. Any collective phenomena must thusbe conceived of as the unintended outcome ofthe decisions of individual conscious actors.

This imposes a fundamental dichotomy be-tween the study of nature and of society, sincein dealing with natural phenomena it may bereasonable to suppose that the individual sci-entist can know all the relevant information,while in the social context this condition can-not possibly be met.

2.2 The basic economic problem

From this philosophical ground Hayek (1945)poses the question: ‘What is the problem wewish to solve when we try to construct a ra-tional economic order?’

He continues:

On certain familiar assumptions the an-swer is simple enough. If we possess allthe relevant information, if we can startout from a given system of preferencesand if we command complete knowledgeof available means, the problem whichremains is purely one of logic. That is,

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the answer to the question of what isthe best use of the available means isimplicit in our assumptions. The condi-tions which the solution of this optimumproblem must satisfy have been fullyworked out and can be stated best inmathematical form: put at their briefest,they are that the marginal rates of sub-stitution between any two commoditiesor factors must be the same in all theirdifferent uses. (Hayek, 1945, p. 519)

He immediately makes it clear, however,that the ‘familiar assumptions’ upon which theabove approach is predicated are quite unreal.

This, however, is emphatically not theeconomic problem which society faces. . . The reason for this is that the datafrom which the economic calculus startsare never for the whole society given toa single mind which could work out theimplications, and can never be so given.(ibid .)

Hayek then spells out his own perspectiveon the nature of the problem:

The peculiar character of the problem ofa rational economic order is determinedprecisely by the fact that the knowledgeof the circumstances of which we mustmake use never exists in concentratedor integrated form, but solely as the dis-persed bits of incomplete and frequentlycontradictory knowledge which all theseparate individuals possess. (ibid .)

The true problem is therefore “how to se-cure the best use of resources known to anyof the members of society, for ends whose rel-ative importance only these individuals know”(Hayek, 1945, p. 520, emphasis added). Thatthis is not generally understood, Hayek claims,is an effect of naturalism or scientism, that is“the erroneous transfer to social phenomenaof the habits of thought we have developed indealing with the phenomena of nature” (ibid .).

2.3 Against centralisation

The point at issue between Hayek and theproponents of socialist economic planning isnot “whether planning is to be done or not”.Rather it is “whether planning is to be donecentrally, by one authority for the whole eco-nomic system, or is to be divided among manyindividuals” (Hayek, 1945, pp. 520–21). Thelatter case is nothing other than market com-petition, which “means decentralized planningby many separate persons” (Hayek, 1945, p.521). And the relative efficiency of the two al-ternatives hinges on

whether we are more likely to succeed inputting at the disposal of a single cen-tral authority all the knowledge whichought to be used but which is initiallydispersed . . . or in conveying to individ-uals such additional knowledge as theyneed in order to fit their plans in withthose of others. (ibid .)

The next step in Hayek’s argument in-volves distinguishing two different kinds ofknowledge: scientific knowledge (understoodas knowledge of general laws) versus “unor-ganized knowledge” or “knowledge of the par-ticular circumstances of time and place”. Theformer, he says, may be susceptible of central-ization via a “body of suitably chosen experts”(Hayek, 1945, p. 521) but the latter is a differ-ent matter.

[P]ractically every individual has someadvantage over others in that he pos-sesses unique information of which ben-eficial use might be made, but of whichuse can be made only if the decisionsdepending on it are left to him orare made with his active cooperation.(Hayek, 1945, pp. 521–22)

Hayek is thinking here of “knowledge of peo-ple, of local conditions, and special circum-stances” (Hayek, 1945, p. 522), e.g., of the fact

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that a certain machine is not fully employed,or of a skill that could be better utilized. Healso cites the sort of specific, localised knowl-edge relied upon by shippers and arbitrageurs.He claims that this sort of knowledge is oftenseriously undervalued by those who considergeneral scientific knowledge as paradigmatic.

2.4 The importance of change

Closely related, in Hayek’s mind, to the un-dervaluation of knowledge of local and specificfactors is underestimation of the role of changein the economy. One key difference betweenadvocates and critics of planning concerns

the significance and frequency ofchanges which will make substantial al-terations of production plans necessary.Of course, if detailed economic planscould be laid down for fairly long pe-riods in advance and then closely ad-hered to, so that no further economic de-cisions of importance would be required,the task of drawing up a comprehen-sive plan governing all economic activ-ity would appear much less formidable.(Hayek, 1945, p. 523)

Hayek ascribes to his opponents the ideathat economically-relevant change is some-thing that occurs at discrete intervals and ona fairly long time-scale, and that in betweensuch changes the management of the produc-tive system is a more or less mechanical task.As against this, he cites, for instance, the prob-lem of keeping cost from rising in a competi-tive industry, which requires considerable day-to-day managerial energy, and he emphasisesthe fact that the same technical facilities maybe operated at widely differing cost levels bydifferent managements. Effective economicalmanagement requires that “new dispositions[be] made every day in the light of circum-stances not known the day before” (Hayek,1945, p. 524). He therefore concludes that

central planning based on [aggregated]statistical information by its nature can-not take direct account of these circum-stances of time and place, and . . . thecentral planner will have to find someway or other in which the decisions de-pending upon them can be left to theman on the spot. (ibid .)

Rapid adaptation to chang-ing circumstances of time and place requiresdecentralisation—we can’t wait for some cen-tral board to issue orders after integrating allknowledge.

2.5 Prices and information

While insisting that very specific, localisedknowledge is essential to economic decisionmaking, Hayek clearly recognises that the“man on the spot” needs to know more thanjust his immediate circumstances before hecan act effectively. Hence there arises the prob-lem of “communicating to him such furtherinformation as he needs to fit his decisionsinto the whole pattern of changes of the largereconomic system” (Hayek, 1945, p. 525) Howmuch does he need to know? Fortuitously, onlythat which is conveyed by prices. Hayek con-structs an example to illustrate his point:

Assume that somewhere in the world anew opportunity for the use of some rawmaterial, say tin, has arisen, or that oneof the sources of supply of tin has beeneliminated. It does not matter for ourpurpose and it is very significant thatit does not matter which of these twocauses has made tin more scarce. Allthat the users of tin need to know isthat some of the tin they used to con-sume is now more profitably employedelsewhere, and that in consequence theymust economize tin. There is no need forthe great majority of them even to knowwhere the more urgent need has arisen,

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or in favor of what other uses they oughtto husband the supply. (Hayek, 1945, p.526)

Despite the absence of any such overview,the effects of the disturbance in the tin marketwill ramify throughout the economy just thesame.

The whole acts as one market, not be-cause any of its members survey thewhole field, but because their limited in-dividual fields of vision sufficiently over-lap so that through many intermedi-aries the relevant information is commu-nicated to all. (ibid .)

Therefore the significant thing about theprice system is “the economy of knowledgewith which it operates” (Hayek, 1945, pp. 526–7). He drives his point home thus:

It is more than a metaphor to describethe price system as a kind of machin-ery for registering change, or a systemof telecommunications which enables in-dividual producers to watch merely themovement of a few pointers, as an engi-neer might watch the hands of a few di-als, in order to adjust their activities tochanges of which they may never knowmore than is reflected in the price move-ments. (Hayek, 1945, p. 527)

He admits that the adjustments producedvia the price system are not perfect in thesense of general equilibrium theory, but theyare nonetheless a “marvel” of economical co-ordination. (ibid .)

2.6 Evolved order

The price system has not, of course, arisen asthe product of human design, and moreover“the people guided by it usually do not knowwhy they are made to do what they do” (ibid .).

This observation leads Hayek to a very char-acteristic statement of his general case againstcentral planning.

[T]hose who clamour for “consciousdirection”—and who cannot believethat anything which has evolved with-out design (and even without ourunderstanding it) should solve prob-lems which we should not be ableto solve consciously—should rememberthis: The problem is precisely how to ex-tend the span of our utilization of re-sources beyond the span of the controlof any one mind; and, therefore, how toprovide inducements which will make in-dividuals do the desirable things with-out anyone having to tell them what todo. (Hayek, 1945, p. 527)

Hayek generalises this point by reference toother “truly social phenomena” such as lan-guage (also an undesigned system). Againstthe idea that consciously designed systemshave some sort of inherent superiority overthose that have merely evolved, he cites A.N. Whitehead to the effect that the progressof civilisation is measured by the extension of“the number of important operations whichwe can perform without thinking about them”(Hayek, 1945, p. 528). He continues:

The price system is just one of those for-mations which man has learned to use. . .after he had stumbled upon it withoutunderstanding it. Through it not onlya division of labor but also a coordi-nated utilization of resources based onan equally divided knowledge has be-come possible. . . [N]obody has yet suc-ceeded in designing an alternative sys-tem in which certain features of the ex-isting one can be preserved which aredear even to those who most violentlyassail it such as particularly the extentto which the individual can choose hispursuits and consequently freely use hisown knowledge and skill. (ibid .)

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The outline of Hayek’s argument is now, wetrust, clearly in view. We are ready to pro-ceed to our criticisms, which are structured asfollows. We first challenge the subjectivist phi-losophy that underpins Hayek’s conception ofinformation. We then offer an alternative per-spective on the nature of the problem faced bya planned economic system, and we disputeHayek’s claims regarding the benefits of de-centralisation. This then leads into a critiqueof the idea that the market constitutes an effi-cient telecommunications system. Our critiqueis developed by means of a formal model of theinformation exchanges required under marketand plan. The penultimate section of the pa-per deals with the idea that change is all im-portant; and the concluding section takes upthe issue of the market as a ‘spontaneouslyevolved’ system.

3 hayek’s subjectivism: cri-tique

Hayek’s radically subjectivist view of the so-cial sciences is open to the objection thatits constitutive category, the rational subject,is by no means obviously given. As Lawson(1992) has argued, a wealth of psychologicaland sociological research has revealed that hu-man behaviour is highly routinized, and co-ordinated in the main by unconscious brainfunctions. Indeed, as Dennett (1991) relates,experiments in neuropsychology indicate thatpeople act first and become concious of theirintention to act later.

For the more limited domain of economics,there is the problem that the ‘subjects’ inquestion are more likely to be juridical thanpersonal. In the main, the economic actors inindustrial production are firms, not human in-dividuals. Nor can the actions of a firm be re-duced to the inner subjective life of its man-

aging director. In any large firm, the coursesof action taken result from a complex set ofpractices, reviews, and decision-making proce-dures involving many people, and in which theprocedures can be as important as who fillswhich particular positions. We would arguethat the economic subject that Hayek takesas his starting point is not empirically givenat all, but is rather a reification of economictheory. The rational economic subject makessense only in terms of formalised calculatingprocedures, which, if they are realised in prac-tice, are more likely to be materialised in theaccounting and management practices of firmsthan in the brains of individuals. Economictheory then projects back these practices, ra-tional for the enterprise as a juridical subject,onto a supposedly constitutive human subject.

The historical conditions for this projectionare clear enough. In the early stages of cap-italism the distinction between personal andjuridical subjects was as yet ill defined. Theagent of economic practice thus appeared tobe the person of the capitalist or entrepreneurrather than the firm. But from the standpointof the current state of economic development,it can be seen that the rational calculating sub-ject is the property-maximising juridical sub-ject. To the extent that in a property systemsome of the juridical subjects are individualhuman animals, the reified subject of economictheory provides an account of what would berational action on their part. But the assertionthat these animals do engage in such rationalaction is more an act of faith than an empiricalresult of science. By starting out with this actof faith Hayek aimed to mark off economics asessentially a branch of moral philosophy ratherthan science.

But once the category of subject is recog-nised for what it is, not an empirically exist-ing property of the human animal, but some-thing ascribed to it both by the structures oflanguage and of juridical discourse (Althusser,

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1971), then this exclusion of science from thestudy of society becomes untenable. It be-comes just one more of the special pleas bymorality to hold the encroachments of scienceat bay.

Hayek’s subjectivist philosophical stand-point has an important bearing on his argu-ments against socialist planning, since thesearguments hinge on the notion of subjective in-formation. Despite the fact that The Counter-Revolution of Science was published after theestablishment of a scientific information the-ory by Shannon and Weaver (1949), Hayek’snotion of information remains resolutely pre-scientific. Admittedly, it takes time for the dis-coveries of one discipline to percolate throughto others. In the mid-1950s the idea of the ob-jectivity of information had not yet spread farbeyond the study of telecommunications. Butnow, when it has revolutionised biology, be-come the foundation of our major industries,and begun to transform our understanding ofsocial ideologies (Dawkins, 1982), its absencevitiates Hayek’s entire argument.

For Hayek information is essentially subjec-tive; it is knowledge in people’s minds. Thuswe have the problem of how information thatis dispersed in the minds of many can, throughthe operations of the market, be combined forthe common good. By taking this subjectiviststandpoint, attention is diverted away fromthe very practical and important question ofthe technical supports for information. It be-comes impossible to see the production andmanipulation of information as both a tech-nology and a labour process in its own right,whose development acts as a constraint uponthe possibility of economic relations.

In any but the most primitive of economies,economic relations have depended upon thedevelopment of techniques for objectifying in-formation. Consider the relationship betweenlandlord and tenant, and thus rent. This canonly stabilise once society has a means for

recording ownership and tenancy contracts,whether as written documents or the mortgagemarker stones so hated by the peasantry of At-tica.

The development of price relies upon thetechnology of counting and calculation, whichcan never in a commercial society be a purelymental operation. Calculation demands a ma-terial support, whether it be the calculi orsmall stones of the early Romans, or the coinsand reckoning tables of late Antiquity and themiddle ages. Economic rationality is an al-gorithmic process supported by a machineryfor computation and information storage. Thefact that until recently the machinery was sim-ple and hand-operated—the abacus, the coinbox, or the ledger—allowed it to be ignored ineconomic theory. But the means of rationalityare as essential to economic relations as themeans of production. Trade without a technol-ogy of calculation and record is as impracticalas agriculture without instruments to turn thesoil. Once these aspects of information the-ory and information technology are consid-ered, quite different answers can be given toHayek’s problem of economic information.

4 the calculation problemand its misrepresenta-tion

We have argued elsewhere (Cottrell and Cock-shott, 1993a) that the classic ‘socialist calcu-lation debate’ in the first part of this cen-tury took place on the terrain of the neo-classical critics of socialism rather than itsMarxian advocates. This had an effect indefining the structure of the problem. In theneoclassical variant, the problem starts withthe preferences of the individual agents andtheir production possibilities. This formula-tion is vulnerable to Hayek’s critique, on the

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grounds that individuals’ preferences are inno sense ‘given’ to the planners. But Marxianeconomists would not accept that these indi-vidual preferences have any meaningful pre-existence;2 they do not, therefore, form partof the problem.

The practical problem is to bring produc-tion potential into alignment with a pattern ofsocial need revealed by a combination of demo-cratic political decisions (as in the case of,say, the appropriate level of public health ser-vice provision) and aggregate consumer pur-chases. Given a reasonable data-collection sys-tem reporting on the rates at which consumergoods are selling, and assuming a pricing sys-tem based on labour values (Cockshott andCottrell, 1993), deriving a target net-outputvector demands no special telepathic powerson the part of the planning system. It is per-haps harder to gather the information aboutproduction possibilities. It is in this practicalcontext that Hayek’s discussion of centralisedversus decentralised control systems must beplaced.

5 to centralise or not?

5.1 ‘One mind’

Austrian opponents of socialism talk as if so-cialist planning has to be carried out by oneman. Mises (1949) personified him as ‘the di-rector’. Hayek continues the metaphor, statingthat the “data from which the economic calcu-lus starts are never for the whole society givento a single mind”. How then, he asks, can onemind presume to improve on the combined re-sult of the cogitations of millions (as achieved

2Take the homely example of Christmas shopping.Many of us find it impossible to draw up a completeplan for such shopping in advance. We have to go to theshops, look at the goods and their prices, and see whatstrikes our fancy. Our ‘demand functions’ are revealedto ourselves in the act of choosing.

via the market)? Surely only a megalomaniac,or at any rate one blinded by scientific hubris,could propose such a thing.

Of course no single individual has the brain-power to understand all of the interconnec-tions of an economy, but when have social-ists ever asserted anything so foolish? Not eventhe most avid personality cultists claimed thatStalin drew up the 5-year plans himself. Whatsocialists have proposed is the replacement ofmarket information processing by the process-ing of economic information within a planningorganisation. In the past, because of techno-logical limitations, the planning organisationhas proceeded by a division of mental labouramong a large number of people. In the future,the information processing is likely to be donemainly by computing machines.

In neither case—and here our critique ofHayek’s subjectivism comes into play—is theinformation concentrated in one mind. In theformer case it is obviously not in the mindof a single worker, but it is not even in theminds of a collection of workers. Instead, theinformation is mainly in their written records,forms, ledgers, etc. These constitute the in-dispensible means of administration. From theearliest temple civilisations of Sumer and theNile, the development of economic adminis-tration was predicated upon the developmentof means of calculation and record. The hu-man mind enters in as an initial recorder ofinformation, and then as a manipulator of therecorded information. By procedures of calcu-lation strings of symbols are read and trans-formed ones written down. The symbols—whether they be arabic numerals, notches ontally sticks or quipu—represent physical quan-tities of goods; their transformations model ac-tual or potential movements of these goods.

By posing the question in terms of con-centrating the information in a single mind,Hayek harks back to a pre-civilised condition,abstracting from the real processes that make

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any form of administration possible. If instead,his objection is that no system of admin-istration can possibly have the information-processing capacity required for the task, thenhe is liable to the attack that information tech-nology has revolutionised the amount of infor-mation that can be effectively administered.

5.2 Forms of knowledge

The dichotomy that Hayek operates betweenthe natural sciences and the social domainalso leaves its imprint on his categorisationof forms of knowledge. In his view, thereare but two such forms: knowledge of gen-eral scientific laws, and (subjective) knowl-edge of ‘particular circumstances of time andplace’. But this leaves out of account a wholelayer of knowledge that is crucial for eco-nomics, namely knowledge of specific technolo-gies. Such knowledge is not reducible to gen-eral scientific law (it is generally a non-trivialproblem to move from a relevant scientific the-ory to a workable industrial innovation), butneither is it so time- or place-specific that it isnon-communicable. The licensing and transferof technologies in a capitalist context showsthis quite clearly. A central registry of avail-able technologies would form as essential com-ponent of an efficient planning system. Howwould such information be assembled? Again,Hayek’s notion of knowledge existing solely ‘inthe mind’ is an obstacle to understanding. Itis increasingly common—indeed, it is by nowall but universal practice—for firms to keeprecords of their inputs and outputs in the formof some sort of computer spreadsheet. Thesecomputer files form an image of the firm’sinput–output characteristics, an image whichis readily transferable.3

3Admittedly, such an image does not of itself pro-vide any information on how, for instance, a particu-larly favourable set of input–output relations can beachieved , only that it is possible. We offer some fur-

Further, even the sort of ‘particular’ knowl-edge which Hayek thought too localised tobe susceptible to centralisation is now rou-tinely centralised. Take his example of the in-formation possessed by shippers. In the 1970sAmerican Airlines achieved the position ofthe world’s largest airline, to a great extenton the strength of their development of theSABRE system of computerised booking offlights (Gibbs, 1994). Since then we have cometo take it for granted that our local travelagent will be able to tap into a computer net-work to determine where and when there areflights available from just about any A to anyB across the world. Hayek’s appeal to localisedknowledge in this sort of context may havebeen appropriate at the time of writing, butit is now clearly outdated.

We would not dispute, however, that somelocalised knowledge, important for the fine-grained efficiency of the system, may be toospecific for any meaningful centralisation. Ourobjection here is that Hayek seems to overlookthe possibility that this sort of knowledge maysimply be used locally, without prejudice to theoperation of a central plan. The question hereconcerns the degree of recursiveness of plan-ning, that is, the extent to which plans canbe formulated in general terms by the higherplanning authorities, to be specified in pro-gressively fuller detail by successively lower ormore local instances. Nove (1977, 1983) has ar-gued persuasively that as regards the compo-sition of output, the degree of recursiveness ofplanning is rather small. If a central authoritysets output targets in aggregated terms, andleaves it to lower instances to specify the de-tails, the result is bound to be incoherent. Inthe absence of the sort of horizontal links be-tween enterprises characteristic of the marketsystem, the enterprises simply cannot know

ther thoughts on the transmission of such ‘know how’in Section 6 below.

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what specific sort of output will be needed,unless they are told this by the planning au-thority. This may be granted.4 But low recur-siveness with respect to decisions on the com-position of output does not imply that all de-cisions relating to production have to be takencentrally. Consider the knowledge, at the levelof the enterprise, of which particular workersare best at which tasks, who is the fastestworker and who the most reliable and so on(and similarly for the particular machines op-erated within the enterprise). Why shouldn’tsuch knowledge just be used locally in draw-ing up the enterprise’s own detailed schedulesfor meeting an output plan given from the‘centre’? Isn’t this precisely what happens atplant level in the context of planning by a large(multiplant) capitalist enterprise?

5.3 Disadvantages of dispersal

Having argued that the centralisation of mucheconomic information is feasible, we now con-sider its desirability. When economic calcu-lation is viewed as a computational process,the advantages of calculation on a distributedor decentralised basis are far from evident;the question hinges on how a multiplicity offacts about production possibilities in differ-ent branches of the economy interrelate. Theirinterrelation is, partially, an image in the fieldof information of the real interrelation of thebranches of the economy. The outputs of oneactivity act as inputs for another: this is thereal interdependence. In addition, there are po-tential interactions where different branches of

4Although Nove’s case is surely exaggerated in onerespect: if the central plan calls for enterprise A tosupply intermediate good x to enterprise B, where itwill be used in the production of some further goody, and if the planners apprise A and B of this fact,surely there is scope for horizontal discussion betweenthe two enterprises over the precise design specificationof x, even in the absence of market relations betweenA and B.

production function as alternative users of in-puts.

It is important to distinguish the two typesof interaction. The first represents real flowsof material and is a static property of a snap-shot of the economy. The second, the variationin potential uses for goods, is not a propertyof the real economy but of the phase spaceof possible economies. The latter is part ofthe economic problem insofar as this is consid-ered to be a search for optimal points withinthis phase space. In a market economy, theevolution of the real economy—the real inter-dependencies between branches—provides thesearch procedure by which these optima aresought. The economy describes a trajectorythrough its phase space. This trajectory is theproduct of the trajectories of all of the indi-vidual economic agents, with these individualagents deciding upon their next position onthe basis of the information they get from theprice system.

Following up on Hayek’s metaphor of theprice system as telecoms system or machin-ery for registering changes, the market econ-omy as a whole acts as a single analog pro-cessor. A single processor, because at any onepoint in time it can be characterised by a sin-gle state vector that defines its position in thephase space of the economic problem. More-over, this processor operates with a very slowcycle time, since the transmission of informa-tion is bounded by the rate of change of prices.To produce an alteration in prices, there mustbe a change in the real movement of goods (weare abstracting here from the small number ofhighly specialised futures markets). Thus thespeed of information transmission is tied tothe speed with which real goods can be movedor new production facilities brought on line.In sum, a market economy performs a single-threaded seach through its state space, witha relatively slow set of adjustments to its po-sition, the speed of adjustments being deter-

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mined by how fast the real economy can move.

Contrast this now with what can poten-tially be done if the relevant facts can beconcentrated, not in one place—that wouldbe impossible—but within a small volume ofspace. If the information is gathered into oneor more computing machines, these can searchthe possible state space without any change inthe real economy.

Here the question of whether to concentratethe information is very relevant. It is a basicproperty of the universe that no portion of itcan affect another in less time than it takes forlight to propagate between them. Suppose onehad all the relevant information spread arounda network of computers across the country. As-sume any one of these could send a messageto any other. Suppose that this network wasnow instructed to simulate possible states ofthe economy in order to search for optima. Theevolution from one simulated state to anothercould proceed as fast as the computers couldexchange information regarding their own cur-rent state. Given that electronic signals be-tween them travel at the speed of light this willbe far faster than a real economy can evolve.

But the speed of evolution will be muchfaster still if we bring all of the computers intoclose proximity to one another. Massively par-allel computers attempt to place all the proces-sors within a small volume, thereby allowingsignals moving at the speed of light to prop-agate around the machine in a few nanosec-onds, compared to the hundredths of a secondrequired for telecoms networks. Hence, in gen-eral, if one wishes to solve a problem fast, theinformation required should be placed in thesmallest possible volume.

It may be objected that the sheer scaleof the economic problem is such that al-though conceivable in principle, such com-putations would be unrealisable in practice

(Hayek, 1955;5 see also Nove, 1983). We haveestablished elsewhere (Cockshott and Cottrell,1993; Cottrell and Cockshott, 1993b) thatgiven modern computer technology this is farfrom the case.

6 inadequacy of the priceform

Prices, according to Hayek, provide the tele-coms system of the economy. But how ade-quate is this telecoms system and how muchinformation can it really transmit?

Hayek’s example of the tin market bearscareful examination. Two preliminary pointsshould be made. First, the market system doesmanage to achieve a reasonable degree of coor-dination of economic activities. The “anarchyof the market” (Marx) is far from total chaos.Second, even in a planned system there will al-ways be scope for the disappointment of expec-tations, for projects that looked promising exante to turn out to be failures and so on. Fail-ures of coordination are not confined to marketsystems. That said, it is nonetheless clear thatHayek grossly overstates his case. In order tomake rational decisions relating to changingone’s usage of tin, one has to know whether arise in price is likely to be permanent or tran-sient, and that requires knowing why the pricehas risen. The current price signal is neverenough in itself. Has tin become more expen-sive temporarily, due, say, to a strike by the tinminers? Or are we approaching the exhaustionof readily available reserves? Actions that are

5The specific reference here is to p. 43, andmore particularly to note 37 on pp. 212–213, of TheCounter-Revolution of Science. In the note, Hayek ap-peals to the judgment of Pareto and Cournot, thatthe solution of a system of equations representing theconditions of general equilibrium would be practicallyinfeasible. This is perhaps worth emphasising in viewof the tendency of Hayek’s modern supporters to playdown the computational issue.

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rational in the one case will be quite inappro-priate in the other.

Prices in themselves provide adequateknowledge for rational calculation only if theyare at their long-run equilibrium levels, butof course for Hayek they never are. On thispoint it is useful to refer back to Hayek’s owntheory of the trade cycle (Hayek, 1935; seealso Lawlor and Horn, 1992; Cottrell, 1994),in which the ‘misinformation’ conveyed by dis-equilibrium prices can cause very substantialmacroeconomic distortions. In Hayek’s cycletheory, the disequilibrium price that can dosuch damage is the rate of interest, but clearlythe same sort of argument applies at the microlevel too. Decentralised profit-maximising re-sponses to unsustainable prices for tin or RAMchips are equally capable of generating misin-vestment and subsequent chaos.

At minimum, prices may be said to carryinformation regarding the terms on which var-ious commodities may currently be exchanged,via the mediation of money (so long as marketsmarkets clear, which is not always the case). Itdoes not follow, however, that a knowledge ofthese exchange ratios enable agents to calcu-late the profitability, let alone the social use-fulness, of producing various commodities. Acommodity can be produced at profit if itsprice exceeds the sum of the prices of the in-puts required to produce it, using the pro-duction method which yields the least suchsum, but the use of current prices in this cal-culation is legitimate only in a static con-text: either prices are unchanging or produc-tion and sale take zero time. Hayek, of course,stresses constant change as the rule, so he ishardly in a position to entertain this sort ofassumption. Whether production of commod-ity x will in fact prove profitable or not de-pends on future prices as well as current prices.And whether production of x currently ap-pears profitable depends on current expecta-tions of future prices.

If we start from the assumption that priceswill almost certainly not remain unchanged infuture, how are agents supposed to form theirexpectations? One possibility is that they areable to gather sufficient relevant informationto make a definite forecast of the changes thatare likely to occur. This clearly requires thatthey know much more than just current prices.They must know the process whereby pricesare formed, and form forecasts of the evolutionof the various factors (at any rate, the moreimportant of them) that bear upon price de-termination. Hayek’s informational minimal-ism is then substantially breached. A secondpossibility is that described by Keynes (1936,esp. chapter 12): agents are so much in thedark on the future that, although they aresure that some (unspecified) change will occur,they fall back upon the convention of assum-ing that tomorrow’s prices will equal today’s.This enables them to form a conventional as-sessment of the profitability of producing vari-ous commodities, using current price informa-tion alone; but the cost of this approach (fromthe standpoint of a defender of the efficiencyof the market) is the recognition that those exante assessments will be regularly and perhapssubstantially wrong.

6.1 Prices, efficiency and ‘knowhow’

It is one of the progressive features of capi-talism that the process of competition forcessome degree of convergence upon least-costmethods of production (even if the cost inquestion is monetary cost of production, whichreflects social cost in a partial and distortedmanner). Hayek reminds us, and rightly so,that this convergence may in fact be far fromcomplete. Firms producing the same commod-ity (and perhaps even using the same basictechnology) may co-exist for extended periodsdespite having quite divergent costs of pro-

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duction. If the law of one price applies to theproducts in question, the less efficient produc-ers will make lower profits and/or pay lowerwages. This situation can persist provided themobility of capital and labour are less thanperfect.

The question arises whether convergence onbest practice could be enforced more effec-tively in a planned system. We believe this isso. If all workers are paid at a uniform ratefor work done, it will be impossible for in-efficient producers to mask their inefficiencyby paying low wages. Indeed, with the sort oflabour-time accounting system we have advo-cated elsewhere (Cockshott and Cottrell, 1989,1993), differentials in productive efficiency willbe immediately apparent. Not only that, butthere should be a broader range of mecha-nisms for eliminating differentials once theyare spotted. A private firm may realise thata competitor is producing at lower cost, butshort of industrial espionage may have no wayof finding out how this is achieved. Conver-gence of efficiency, if it is attained at all, mayhave to wait until the less efficient produceris driven out of business and its market shareusurped by more efficient rivals. In the contextof a planned system, on the other hand, someof the managers or technical experts from themore efficient enterprises might, for instance,be seconded as consultants to the less effi-cient enterprises. One can also imagine—in theabsence of commercial secrecy—economy-wideelectronic bulletin boards on which the peopleconcerned with operating particular technolo-gies, or producing particular products, sharetheir tips and tricks for maximising efficiency.The present popularity of this sort of thingamongst users of personal computers suggeststhat it might easily be generalised.

7 information flows undermarket and plan

One of Hayek’s most fundamental argumentsis that the efficient functioning of an economyinvolves making use of a great deal of dis-tributed information, and that the task of cen-tralising this information is practically impos-sible. In what follows we attempt to put thisargument to a quantitative test. We comparethe communications costs implicit in a mar-ket system and a planned system, and exam-ine how the respective costs grow as a functionof the scale of the economy. Communicationscost is a measure of work done to centralise ordisseminate economic information: we will usethe conceptual apparatus of algorithmic infor-mation theory (Chaitin, 1982) to measure thiscost.

Our strategy is first to consider the dynamicproblem of how fast, and with what commu-nications overhead, an economy can convergeon equilibrium. We will demonstrate that thiscan be done faster and at less communicationscost by the planned system. We consider ini-tially the dynamics of convergence on a fixedtarget, since the control system with the fasterimpulse response will also be faster at trackinga moving target.

Consider an economy E = [A, c, r, w] withn producers each producing distinct productsunder constant returns to scale using technol-ogy matrix A, with a well defined vector offinal consumption expenditure c that is inde-pendent of the prices of the n products, anexogenously given wage rate w and a compati-ble rate of profit r. Then there exists a possibleSraffian equilibrium e = [U,p] where U is thecommodity flow matrix and p a price vector.We will assume, as is the case in commercialarithmetic, that all quantities are expressed tosome finite precision rather than being realnumbers. How much information is required

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to specify this equilibrium point?Assuming that we have some efficient binary

encoding method and that I(s) is a measurein bits of the information content of the datastructure s using this method, then the equi-librium can be specified by I(e), or, since theequilibrium is in a sense given in the startingconditions, it can be specified by I(E) + I(ps)where ps is a program to solve an arbitrary sys-tem of Sraffian equations. In general we haveI(e) ≤ I(E) + I(ps). In the following we willassume that I(e) is specified by I(E) + I(ps).

Let I(x|y) be the conditional or relative in-formation (Chaitin, 1982) of x given y. Theconditional information associated with anyarbitrary configuration of the economy, k =[Uk,pk], may then be expressed relative tothe equilibrium state, e, as I(k|e). If k is inthe neighbourhood of e we should expect thatI(k|e) ≤ I(k). For instance, suppose that wecan derive Uk from A and an intensity vec-tor uk which specifies the rate at which eachindustry operates then

I(k|e) ≤ I(uk) + I(pk) + I(pu)

where pu is a program to compute Uk fromsome A and some uk. Since Uk is a matrixand uk a vector, each of scale n, we can assumethat I(Uk) > I(uk).

As the economy nears equilibrium the con-ditional information required to specify it willshrink, since uk starts to approximate to ue.6

Intuitively we only have to supply the differ-ence vector between the two, and this will re-quire less and less information to encode, thesmaller the distance between uk and ue. A

6Note that this information measure of the distancefrom equilibrium, based on a sum of logarithms, differsfrom a simple Euclidean measure, based on a sum ofsquares. The information measure is more sensitive toa multiplicity of small errors than to one large error.Because of the equivalence between information andentropy it also measures the conditional entropy of thesystem.

similar argument applies to the two price vec-tors pk and pe. If we assume that the systemfollows a dynamic law that causes it to con-verge on equilibrium then we should have therelation I(kt+1|e) < I(kt|e).

We now construct a model of the amountof information that has to be transmitted be-tween the producers of a market economy inorder to move it towards equilibrium. We makethe simplifying assumptions that all produc-tion process take one timestep to operate, andthat the whole process evolves synchronously.We assume the process starts just after pro-duction has finished, with the economy insome random non-equilibrium state. We fur-ther assume that each firm starts out with agiven selling price for its product. Each firm icarries out the following procedure.

1. It writes to all its suppliers asking them theircurrent prices.

2. It replies to all price requests that it gets,quoting its current price pi.

3. It opens and reads all price quotes from itssuppliers.

4. It estimates its current per-unit cost of pro-duction.

5. It calculates the anticipated profitability ofproduction.

6. If this is above r it increases its target pro-duction rate ui by some fraction. If profitabil-ity is below r a proportionate reduction ismade.

7. It now calculates how much of each input jis required to sustain that production.

8. It sends off to each of its suppliers j, an orderfor amount Uij of their product.

9. It opens all orders that it has received and

(a) totals them up.

(b) If the total is greater than the avail-able product it scales down each orderproportionately to ensure that what itcan supply is fairly distributed amongits customers.

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(c) It dispatches the (partially) filled ordersto its customers.

(d) If it has no remaining stocks it increasesits selling price by some increasing func-tion of the level of excess orders, whileif it has stocks left over it reduces itsprice by some increasing function of theremaining stock.

10. It receives all deliveries of inputs and deter-mines at what scale it can actually proceedwith production.

11. It commences production for the next period.

Experience with computer models of thistype of system indicates that if the readinessof producers to change prices is too great, thesystem could be grossly unstable. We will as-sume that the price changes are sufficientlysmall to ensure that only damped oscillationsoccur. The condition for movement towardsequilibrium is then that over a sufficientlylarge ensemble of points k in phase space, themean effect of an iteration of the above proce-dure is to decrease the mean error for each eco-nomic variable by some factor 0 ≤ g < 1. Un-der such circumstances, while the convergencetime in vector space will clearly follow a loga-rithmic law—to converge by a factor of D in invector space will take time of order log 1

g(D)—

in information space the convergence time willbe linear. Thus if at time t the distance fromequilibrium is I(kt|e), convergence to within adistance ε will take a take a time of order

I(kt|e)− εδ log( 1

g )

where δ is a constant related to the number ofeconomic variables that alter by a mean fac-tor of g each step. The convergence time ininformation space, for small ε, will thus ap-proximate to a linear function of I(k|e) whichwe can write as ∆I(k|e).

We are now in a position to express the com-munications costs of reducing the conditional

entropy of the economy to some level ε. Com-munication takes place at steps 1, 2, 8 and9c of the procedure. How many messages doeseach supplier have to send, and how much in-formation must they contain?

Letters through the mail contain much re-dundant pro forma information: we will as-sume that this is eliminated and the messagesreduced to their bare essentials. The whole ofthe pro forma will be treated as a single symbolin a limited alphabet of message types. A re-quest for a quote would thus be the pair [R,H]where R is a symbol indicating that the mes-sage is a quotation request, and H the homeaddress of the requestor. A quote would be thepair [Q,P ] with Q indicating the message is aquote and P being the price. An order wouldsimilarly be represented by [O,Uij ], and witheach delivery would go a dispatch note [N,Uij ]indicating the actual amount delivered, whereUij ≤ Uij .

If we assume that each of n firms has on av-erage m suppliers, the number of messages ofeach type per iteration of the procedure willbe nm. Since we have an alphabet of messagetypes (R,Q,O,N) with cardinality 4, thesesymbols can be encoded in 2 bits each. Wewill further assume that (H,P,Uij , Uij) caneach be encoded in binary numbers of b bits.We thus obtain an expression for the commu-nications cost of an iteration of 4nm(b + 2).Taking into account the number of iterations,the cost of approaching the equilibrium will be4nm(b+ 2)∆I(k|e).

Let us now contrast this with what would berequired in a planned economy. Here the pro-cedure involves two distinct procedures, thatfollowed by the (state-owned) firm and thatfollowed by the planning bureau. The firms dothe following:

1. In the first time period:

(a) They send to the planners a messagelisting their address, their technical in-

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put coefficients and their current out-put stocks.

(b) They receive instructions from the plan-ners about how much of each of theiroutput is to be sent to each of theirusers.

(c) They send the goods with appropriatedispatch notes to their users.

(d) They receive goods inward, read thedispatch notes and calculate their newproduction level.

(e) They commence production.

2. They then repeatedly perform the same se-quence replacing step 1a with:

(a) They send to the planners a messagegiving their current output stocks.

The planning bureau performs the comple-mentary procedure:

1. In the first period:

(a) They read the details of stocks andtechnical coefficients from all of theirproducers.

(b) They compute the equilibrium point efrom technical coeffients and the finaldemand.

(c) They compute a turnpike path (Dorf-man, Samuelson and Solow, 1958) fromthe current output structure to theequilibrium output structure.

(d) They send out for firms to make deliv-eries consistent with moving along thatpath.

2. In the second and subsequent periods:

(a) They read messages giving the extentto which output targets have been met.

(b) They compute a turnpike path from thecurrent output structure to the equilib-rium output structure.

(c) They send out for firms to make deliv-eries consistent with moving along thatpath.

We assume that with computer technology thesteps b and c can be undertaken in a timethat is small relative to the production pe-riod (Cockshott 1990, Cockshott and Cottrell1993).

Comparing the repsective information flows,it is clear that the number of orders and dis-patch notes sent per iteration is invariant be-tween the two modes of organisation of pro-duction. The only difference is that in theplanned case the orders come from the cen-ter whereas in the market they come from thecustomers. These messages will again accountfor a communications load of 2nm(b+ 2). Thedifference is that in the planned system thereis no exchange of price information. Instead,on the first iteration there is a transmission ofinformation about stocks and technical coeffi-cients. Since any coefficient takes two numbersto specify, the communications load per firmwill be: (1 + 2m)b. For n firms this approxi-mates to the nm(b + 2) that was required tocommunicate the price data.

The difference comes on subsequent itera-tions, where, assuming no technical change,there is no need to update the planners’ recordof the technology matrix. On i− 1 subsequentiterations, the planning system has thereforeto exchange only about half as much infor-mation as the market system. Furthermore,since the planned economy moves on a turn-pike path to equilibrium, its convergence timewill be less than that of the market econ-omy. The consequent communications cost is2nm(b+ 2)(2 + (i− 1)) where i < ∆I(k|e).

The consequence is that, contrary toHayek’s claims, the amount of informationthat would have to be transmitted in a plannedsystem is substantially lower than for a marketsystem. The centralised gathering of informa-tion is less onerous than the commercial corre-spondence required by the market. In addition,the convergence time of the market system isslower. The implication of faster convergence

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for adaptation to changing rather than stableconditions of production and consumption areobvious.

In addition, it should be noted that in ourmodel for the market, we have ignored any in-formation that has to be sent around the sys-tem in order to make payments. In practice,with the sending of invoices, cheques, receipts,clearing of cheques etc., the information flowin the market system is likely to be twice ashigh as our estimates. The higher communi-cations overheads of market economies are re-flected in the numbers of office workers theyemploy, which in turn leaves its mark on thearchitecture of cities—witness the skylines ofMoscow and New York.

8 the argument from dy-namics

Does Hayek’s concentration on the dynamicaspect of prices, price as a means of dy-namically transmitting information, make anysense?

In one way it does. Consider the price ofa cup of coffee. Notionally this can be writ-ten in a couple of digits—80 pence, say—which would imply that on information the-oretic grounds it transmits about 7 bits ofinformation. But look more closely, and thisis almost certainly an overestimate. Not onlyis the price likely to be rounded up to thenearest 5 pence, implying an information con-tent of about 5 bits, but yesterday’s price wasprobably the same. If the price changes onlyonce a year, then for 364 days the only infor-mation that it conveys is that the price hasnot changed. The information content of this,− log2

364365 , is about 0.0039 of a bit. Then when

the price does change its information contentis − log2

1365 + b where b is the number of bits

to encode the price increase. For a reasonable

value of the increase, say 10 pence, the wholeamounts to some 12 bits. So on the day theprice changes, it conveys some 3000 times asmuch information as it did every other day ofthe year.

So it is almost certainly true that most ofthe information in a price series is encodedin the price changes. From the standpoint ofsomeone observing and reacting to prices, thechanges are all important. But this is a view-point internal to the dynamics of the marketsystem. One has to ask if the information thusconveyed has a more general import. The pricechanges experienced by a firm in a marketeconomy can arise from many different causes,but we have to consider which of these rep-resent information that is independent of thesocial form of production.

We can divide the changes into those thatare direct results of events external to the pricesystem, and those which are internal to thesystem. The discovery of new oil reserves oran increase in the birth rate would directly im-pinge upon the price of oil or of baby clothes.These represent changes in the needs or pro-duction capabilities of society, and any sys-tem of economic regulation should have meansof responding to them. On the other side,we must count a fall in the price of acrylicfeedstocks and a fall in the price of acrylicsweaters, among the second- and third-orderinternally generated changes consequent upona fall in oil prices. In the same category wouldgo the rise in house prices that follows anexpansion of credit, any fluctuation in shareprices, or the general fall in prices that marksthe onset of a recession. These are all changesgenerated by the internal dynamics of a mar-ket system, and as such irrelevant to the con-sideration of non-market economies.

Hayek is of course right that the planningproblem is greatly simplified if there are nochanges, but it does not follow from this thatall the changes of a market economy are po-

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tential problems for a planned one. We havedemonstrated elsewhere that the problem ofcomputing the appropriate intensities of oper-ation of all production processes, given a fullydisagregated input–output matrix and a tar-get final output vector, is well within the ca-pacity of computer technology. The computetime required is sufficiently short for a plan-ning authority, should it so wish, to be ableto perform the operation on a daily basis. Inperforming this calculation the planners arriveat the various scales of production that themarket economy would operate at were it ableto attain general equilibrium. Faced with anexogenous change, the planners can computethe new equilibrium position and issue direc-tives to production units to move directly toit. This direct move will involve the physicalmovement of goods, laying of foundations, fit-ting out of buildings etc, and will thereforetake some considerable time.

We now have two times, the time of calcu-lation and the time of physical adjustment. Ifwe assume that the calculation is performedwith an iterative algorithm, we find that inpractice it will converge acceptably within adozen iterations. Since each of these iterationswould take a few minutes on a supercomputerthe overall time would probably be under anhour. In a market economy, even making themost favourable assumptions about its abilityto adjust stably to equilibrium, the individualiterations will take a time proportional to thephysical adjustment time. The overall relax-ation period would be around a dozen timesas long as that in the planned system.

But of course these assumptions are unreal-istically favourable to the market system. Longbefore equilibrium was reached, new externalshocks would have occurred. Even the assump-tion that the system seeks equilibrium is ques-tionable. There is every reason to believe thatfar from having stable dynamics, it is liable tooscillatory or chaotic behaviours.

Hayek is to be commended on his ability tomake the best of a bad case, to make virtuesout of necessities. The unavoidable instabili-ties of the market are disguised as blessings.The very crudity of prices as an informationmechanism are seen as providentially protect-ing people from information overload.

9 conclusion: evolution andhistory

Hayek contrasts the ‘spontaneously evolved’price system with the artificiality of consciousattempts to control the economic process, acontrast that he feels is to the disadvantage ofthe latter. At best, this is no more than themaxim that one is better to ‘hold tightly ontonurse for fear of meeting something worse’. Atworst it degenerates into a Panglossian com-placency about the existing order of things.Voltaire’s rejoinder on earthquakes—these tooare spontaneous—is apposite. But while wecan hope to do no more than forecast earth-quakes, it fallacious to think that we are forcedendure their economic equivalent with thesame stoicism.

By writing of spontaneous evolution, Hayeksurreptitiously slips in connotations from biol-ogy, with its associations of fitness of form tofunction. But the analogy of a market economywith a naturally evolved order is superficial,with regard both to its operation and gene-sis. If we consider the operation of a marketeconomy as the procedural search for an opti-mum, it obvious that while there is a great dealof parallelism going on—lots of people mak-ing decisions at the same time—it remains thecase that the whole search is single-threaded.Taken as a whole, the state space of the econ-omy is a Cartesian product of the state spacesof its components, and within this total statespace the economy is located at a unique point

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at every moment in time. As such, it can onlyvisit a small proportion of the possible set ofsolutions, and for it to progress towards any-thing other than a local optimum presupposesa particular and very simple topology to thespace.

In this sense, the movement of a marketeconomy differs from the process of biologicalevolution. A species evolves towards increas-ing adaptation to its environment by a highlyparallel process. The state space in this caseconsists of the genetic code. But a species isnot in one position in this space at any onetime: it is at as many positions as there areindividual members of the species, each witha unique combination of genes. A species rep-resents a neighbourhood in gene space. It ap-plies a parallel search procedure: millions of al-ternative designs are produced and comparedeach generation. Although a market economycan to some extent emulate this in the area ofproduct development within individual com-petitive markets, the economy as a whole actsas a single processor.

It equally invalid to treat the genesis ofthe capitalist world system as an evolution-ary outcome. It is an historical outcome, buthistory and evolution are not the same thing.Evolutionary adaptation is impossible withoutvariation, competition and selection. To ap-ply evolutionary concepts one would have tohypothesise a substantial population of simul-taneously existing international economic sys-tems. In fact there is only one. For a whilethere were two, of which only one has survived.That is not a statistically valid sample. Tosay that one economic order was evolutionarilybetter adapted than another, one would need alarge enough ensemble for stochastic effects tocancel out—an ensemble including instanceswhere the market system was restricted to onepoor and backward economy surrounded by anindustrialised socialist world.

The logic of the analogy with evolution, con-

tra Hayek, is to let a hundred flowers bloom.

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