I promised to write a blog post on the Economic Calculation problem at some point, but in lieu of a summative piece (which I assure you shall be forthcoming), I present here an idea interrelating the Hayek’s comments on calculation with Kornai’s ideas on innovation.
The ‘Determination of Entrepreneurship’
It stands to reason that central planners would want to copy the entrepreneurial system of capitalism, due to the undeniable advantages it holds1. The way they would achieve this by constructing an artificial system of Schumpeterian innovation and a loosened capital market.
Simulating Schumpeterian innovation is especially hard, as it requires an intense level of dynamism that planned economies cannot develop.
Connecting to Hayek
We can see immediately how this connects to Hayek’s critiques of planning2. First, we come to the question of knowledge. Obviously, innovators rely upon many forms of knowledge. A simulated Schumpeterian “innovative market” would run into many of the issues Hayek discusses. The knowledge of competition and innovation cannot be planned and simply distributed. Either this market is an actually-planned system, which in that case it would be stagnant and useless, or it would be free and therefore be incompatible with a truly-planned system.
A second consideration is the shape of the capital flow. Kornai contemplates this already. Assuming a planner has already read his work, on what level could they internalize it? How would either a free capital market work in a planned system or a sizeable flow of capital persist without extreme inefficiency? It would be very difficult.
On Relevancy
You may wonder how relevant this is to modern policy. After all, for all intents and purposes, planning is dead. However, I believe this problem actually strikes at the heart of the direct investment debate, which is increasingly important.
I believe direct investment is a tradeoff between efficiency and output. Essentially, we can increase short-term output via the extra capital flow, as I described earlier, but due to lack of markets, there is a sizeable amount of inefficiency and a damage to long-term innovational capacity.
P.S. This video is a great summary of Hayek’s (unfortunately) obscure calculation essays.
Kornai, János. “Capitalism, Socialism, and Technical Progress.” Essay. In Dynamism, Rivalry, and the Surplus Economy: Two Essays on the Nature of Capitalism, 5–25. New York, NY: Oxford University Press, 2014.
Hayek, F. A. “Socialist Calculation I, II, and III.” Essay. In Individualism and Economic Order, Reissue, 119–209. Chicago, IL: University of Chicago Press, 1996.