Adam Smith Institute

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Certainly there will be some planning, but who does it and how much?

A useful reminder from Ronald Coase:

In my 1937 article [“The Nature of the Firm“], I argued that in a competitive system there would be an optimum of planning since a firm, that little planned society, could only continue to exist if it performed its co-ordination function at a lower cost than would be incurred if it were achieved by means of market transactions and also at a lower cost than this same function could be performed by another firm.  To have an efficient economic system it is necessary not only to have markets but also areas of planning within organizations of the appropriate size.  What this mix should be we find as a result of competition.

The importance here being that we need not just a market in things, or services, but a market in forms of organisation. 

We do not know all of what is possible within the current technological envelope - nor, obviously, what will be possible with that of tomorrow. We're also rather at sea over what people would like among the things which are possible. Thus we must use markets to explore that joint set of possibilities.

But more than that, we don't know what is the efficient mode of organisation to do any of these things. Which means we must use markets again. If a planned - and there is some planning in everything of course - solution works better then it will outcompete those non-planned in such markets.

An interesting corollary of this is that a state monopoly on something is the wrong way to go. Precisely because such competition cannot happen. If the state running something, a politically planned operation, really is more efficient then it will outcompete, won't it? And we'll never know unless people can compete with it, will we?