It is time to actually respond to some of the postings my coblogger 7*6 has been making. It will not surprise my readers that I disagree with most of them (as I disagree with almost everything on general principles).

“Socialism does not work because it is impossible for the preferences of millions of individuals to be collated at the global level. Hence we libertarians advocate that decisions be made at a local level. But with information gathering techniques and computing powers improving, centralised decision-making will be possible and the inefficiency and waste of capitalism will be avoided.”

This is of course the gist of what my co-blogger is saying below. Interestingly, that is roughly what a particular socialist economist said a few decades back. (Who exactly was it Yazad? Gunnar Myrdal?) Except that he did not use the future tense as SS has done. He thought that it was already possible.

Fredrich Hayek tangled with him on the question. The problem with the economist’s argument was not that we lack computational power to do the required calculations. The problem is that the kind of knowledge that resides in scattered members of society is impossible to codify using computers. Take the Walmart example given by 42. Yes, Walmart collects a vast amount of data and probably knows everything about the relative preferences of Americans for ketchup vs. mayonnaise. But does it know that at this very moment someone sitting in her kitchen laboratory has come out with an entirely new kind of seasoning?
I am sure it can run every kind of number and accurately predict how much bread will be consumed by Americans. But does it know that some idiot has just published a new book touting a new kind of diet and suddenly, bread has fallen out of favour among them and meat has gained ascendency?

Or does it know that there will soon be a terrorist strike in Saudi Arabia, striking an oil field for the first time, as a result of which oil prices will go through the roof, as a result of which its costs will go through the roof and it had better look at its inventory management practices?

Or does it know that someone has thought up a radically new supply chain management system that eliminates the cost advantage that Walmart has over many other retail chains?

These are the kind of disruptions that capitalism handles better than socialism. None of these have to do with shortage of computing power, or even with a shortage of data that computers can crunch. Most of the “new information” is of the type that cannot be processed by computer. And the pace of such change has gone up over the past decades. It used to be that busines cycles had to do with increase and fall in demand for commodities. These days, business cycles have to do with the rise and fall of entire industries.

And all this before I even get to the other problem of socialism, i.e. incentives. Suppose their powerful computers and their superior analyses start telling the Walmart executives that they must start cutting down on stores, laying off employees and returning money to shareholders failing which, Walmart will go bankrupt in ten years. You are a mid-level executive in Walmart. Will you follow the analysis or will you fudge the data and contrive to confuse the issue just enough to keep your career going? In a capitalist economy, every so often, a Walmart or an Enron collapses because of the blindness of its executives (and opponents of capitalism claim such collapses as an example of capitalism failing). In a socialist economy, such people man the offices of bureaucrats and the State fails to correct its course till it is too late.

I can think of some societies where socialism can make sense, but the conditions required for them would make the society so boring that it life wouldn’t really be worth living.