Dr. Walker is an associate professor of economics at Loyola University in New Orleans.
With the collapse of Communism, economists have finally figured out that economic planning does not work. This does not mean, of course, that the economic planners don’t continue to try; some will never concede defeat, even when theory and history tell them to give up. Along with the economic planners are the social planners, who usually call themselves egalitarians or defenders of social justice. But the truth is, they, too, along with the economic planners, should throw in the towel. Interestingly, the reason why the social planners should give up is the same reason why the economic planners should consign their visions to the dustbin. It all has to do with knowledge.
Let me explain by focusing on one social movement in the United States which is ripe with social planning: mainstream feminism. Although feminists generally argue that the use of legislation as social planning has its limitations, they see legislative change as at least a partial means to positive cultural change.[1]
Complete cultural change requires an entire transformation of many existing institutions such as “the family, childrearing arrangements, the economy, the wage labor market, and human consciousness.”[2] So, in fact, legislation is seen as a compromise to real reform, which requires the abolition of markets.
The Problem With Planning
Since the whole abolition of markets is not feasible to most, legislative mandates are the next best thing. Always keep in mind that planning is planning; whether on a large or small scale, the same problem arises. This problem is what F. A. Hayek calls a knowledge problem.
Each individual in an economy possesses knowledge only some of which is known by others. This subjective knowledge of particular time and circumstances is that of one’s values, tastes, plans, talents, desires, and so on. This knowledge, of a contextual nature, is dispersed throughout the economy, and is constantly changing.[3] Furthermore, much of this knowledge is inarticulate or tacit. Because of the contextual and subjective nature of knowledge in society, any one person or group of persons cannot possess all of this knowledge. The basic economic problem that all societies face, therefore, is how to utilize this knowledge.
Ludwig von Mises explains exactly why economic calculation, the utilization of subjective and dispersed knowledge, in a planned economy is technically impossible.[4] According to Mises, there are really two processes of economic valuation in an economy: that of the consumer and that of the producer. Both processes are necessary for economic calculation and coordination. For example, even if the planners could know the subjective valuations of goods by the consumers in an economy (or even assume that they know what should be valued by consumers) and the best production techniques for producing these goods, economic calculation would still be impossible. This is because there would be no means for knowing or calculating how the scarce productive resources should be utilized. That is, how would the planners know if a piece of land should be used as a site for a factory or for a potato farm or for any other number of uses? Mises explains that what is necessary for economic calculation is private ownership of the means of production. Without the existence of prices and the profit calculations they make possible, central planners could never possess the knowledge necessary to direct resources so that people’s basic wants are satisfied. It is the private ownership of the means of production which leads to a competitive bidding process among resource owners, which in turn generates market prices for these resources.[5] It is with the use of these market prices that economic calculation takes place.
What is important to note here is that the economic phenomena being conveyed or “calculated” in a market price are subjective in nature. That is, they are the subjective valuations of individual actors in any market. The “objective” price seen in a market is the result of the interaction of the subjective valuations of numerous market actors. As Mises explains, “The subjective use-value of each [commodity] is not immediately comparable as a purely individual phenomenon with the subjective use-value of other men. It only becomes so in exchange value [price], which arises out of the interplay of the subjective valuations of all who take part in exchange.”[6] It is this subjective nature of economic phenomena that dismisses the possibility of economic calculation under socialism.
And it is also the subjective nature of social phenomena which dismisses the possibility of successful social planning. Just as economic planners must “guess” where resources should be utilized because it is impossible for them to know the subjective valuations of consumers and producers, social planners, attempting to produce equal opportunities for both men and women, must also “guess” at what the subjective term “opportunity” means to all women. But this is also an impossibility.
Opportunities Cannot Be Objectified
Opportunities are subjective in nature. Furthermore, the knowledge regarding what different individuals value as opportunities is dispersed throughout society, is contextual in nature, and is constantly changing. Social planners could never possess all of this information. How, then, could they be successful at organizing society such that all opportunities are “equal”? In fact, since opportunities are subjective in nature, they cannot be objectified or thereby “equated” one with another.
In a planned system, whereby women are told that they must play a certain role (or roles) in society, it is difficult to argue that this is a system which allows for individual women to plan their own lives and decide their own opportunities. This will always be the major problem with centralized social planning of any scale: the individual woman can never be the focus of attention, only women in some sort of generic sense. Therefore there will always be a large number, if not the vast majority, of women who are not satisfied with what the planners decide to do. Decentralized planning, with each woman planning her own life, would be more successful than centralized social planning in fostering an atmosphere in which opportunities remain where they actually are: in the minds of individual women.
Furthermore, planners do not seem to comprehend the complexity of our society. Because of the complexity of market orders, they cannot be planned with any degree of success. This is also true, for the social order in general. In fact, the more complex an order is, the more spontaneous it must be. Attempting to plan the order such that a particular end is reached will be futile. But just as important, this attempt will also produce unintended and undesirable consequences, only some of which can be predicted.
Important in this idea of markets as spontaneous orders, as Hayek explains, is that individuals within markets must be guided by general rules, not by specific commands. General rules provide a framework under which individuals act in a more or less similar way. Because these rules are general, they are applicable to a variety of circumstances and, most important, allow people to utilize their individualized “knowledge of time and circumstance.” Hayek explains, “They [the rules governing a spontaneous order] will have to be applied by the individuals in the light of their respective knowledge and purposes; and their application will be independent of any common purpose, which the individual need not even know.”[7]
In her book Reclaiming the Mainstream: Individualist Feminism Rediscovered, Joan Kennedy Taylor argues that the feminist movement in the United States has gone through several important changes since its conception. The most important of these was the movement from a focus on individualism to that of collectivism.[8] Another way of approaching this idea is that when feminists focused on the individual, the desire was to change the general rules of society so that they applied to both men and women in the same (or near same) manner. In other words, the focus was on equality under the law in general, or equality with respect to the process, to the rules of the game—not equality with respect to specific ends.
Women, therefore, demanded the right to own property, to sue, to make contracts, and to vote, all of which men could already do. Hayek explains that general rules “must be the same, if not necessarily for all members, at least for whole classes of members not individually designated by name.”[9] Although one can argue that there should be general rules which apply differently to men and women (for example, whether women should enter combat or not), these should be exceptions and not norms, especially if women themselves desire to have the same general rules in all cases. This is because the general rules of society should change as cultural norms change. In actuality, some general rules are cultural norms, while others are deliberately designed. And, in fact, these two “types” of general rules work together or influence one another.
It was a change in the cultural norms that led women to call for changes in the deliberately designed general rules of society (the demand for property rights and the like). And, in turn, these changes in the general rules influence cultural norms.[10]
Women Enter the Market Arena
Two of the most important changes individualist feminism made with regard to the general rules of society were giving women the right to own property and to make contracts. Both of these rules are prerequisites of a market order. Allowing women these rights therefore opened up the possibility for women to enter the market arena.
Before explaining the importance of these particular changes, it should first be noted that both the freedom to own property and to make contracts are general rules, and not specific commands, because the actual ownership rights and the terms of individual contracts are left to the market participants. The general rule is that contracts can be made, and then can be legally upheld. Legislative mandates, which force the terms of particular contracts, are not general rules, but are instead specific commands. The terms of contracts are no longer left to market participants, but are instead stipulated across the board.
It is unfortunate, but today most feminist goals are often set in very specific terms: the desire for more women in upper management or public office (a set number or percentage of population is often given), the desire for equal wage rates between men and women, or the desire for all businesses to offer very specific terms of employment, to name a few examples. Given these particular or specific goals, legislative mandates are set in place in order to bring them about. Instead of the intended goal, however, what we get are unintended consequences such as an increase in sex discrimination and a decrease in self-determination by women.
Now, why is freedom of contract, specifically, so important to women? First, again, as Hayek explains, “although we can endeavor to improve a spontaneous order by revising the general rules on which it rests, and can supplement its results by the efforts of various organizations, we cannot improve the results by specific commands that deprive its members of the possibility of using their knowledge for their purposes.[11] In other words, specific commands hinder market actors by not allowing them to adjust the general rules to their individual circumstances by utilizing their unique knowledge.
Women and the “Knowledge Problem”
Why is the utilization of individual knowledge in labor markets so important to women? In essence, employers face a “knowledge problem” regarding which employees to hire. They must trade off the costs of screening individual employees with the costs of missing out on hiring very productive workers. This is why firms, indeed market forces, have produced different ways by which employers can screen employees at lower costs. These include employment agencies, interviews, references, different types of employment tests (such as aptitude or skill level tests), as well as brand names in educational and vocational institutions.
All of these devices decrease screening costs for employers and thereby increase the likelihood that potential employees will be hired on the basis of their individual attributes rather than on the basis of their group membership. This is especially applicable to women because men and women are biologically, and sometimes culturally, different. These differences are often viewed by employers as statistical differences in terms of employment practices. For example, women, on average, have higher turnover rates than men; women, on average, are more likely to take time off upon the birth of a child, and so on. Anything which increases the flow of information regarding individual employees will lead to a decrease in employer discrimination based upon these group averages. Insofar as the flow of information is interrupted, employers’ screening costs remain high and they resort to hiring on the basis of statistical averages. Legislation that prohibits the use of employment tests, for example, on the basis that the tests are biased against particular groups in society will actually decrease the likelihood that individual members of these groups can set themselves apart from the group and be hired on individual merit considerations.[12]
The freedom to make creative, individualized employment contracts can be a vital source of information to employers and thereby decrease discrimination. Legislative mandates take away this means for individual women to distinguish themselves, but more important, they take away the very method by which women can bring about social change without the use of legislation.
In fact, it is the unique ways in which individual economic actors can utilize their specific knowledge within a market order that will determine the changes in the order over time. “The particular content of the order will depend on the concrete circumstances known only to the individuals who obey the rules and apply them to facts known only to them. It will be through the knowledge of these individuals both of the rules and of the particular facts that both will determine the resulting order.”[13] The point being, the order will change over time as individuals apply their particular knowledge to the rules of the order. But note that the order changes according to this knowledge, which contains individual tastes and subjective values of market actors. The resulting order is something which emerges spontaneously in the sense that there was no deliberate design of the whole order. Instead, the order adjusts to the individual actions of people within the order.
What message does this give to feminists who desire social change? It says that it is up to women themselves to change the order from within. The order cannot be changed through legislative mandates for two reasons: the unintended consequences which result in decreased opportunities for women, and because mandates actually destroy the very means to social change that women have—the utilization of individual knowledge through freedom of contract.
This idea of social change through freedom of contract does not appeal to many feminists because it places the responsibility for change on those who desire the change. It provides the message to women that they are not passive agents in social evolution, but are instead responsible for a large amount of that evolution. It maintains that markets do not take opportunities away from women, but instead, that markets actually provide opportunities for women to instigate social change. []
Notes
- 1. See, for example, H. Hill Kay, “Models of Equality,” University of Illinois Law Review, 39, 1985; S. Law, “Rethinking Sex and the Constitution,” University of Pennsylvania Law Review, 955, 1984; A. C. Scales, “Toward a Redefinition of Sexual Equality,” Harvard Law Review, 95, 1981; and K. T. Bartlett & R. Kennedy, eds., Feminist Legal Theory:Readings in Law and Gender (Boulder, Colo.: Westview Press, Inc., 1991).
- 2. Law, p. 965.
- 3. Friedrich A. Hayek, “The Use of Knowledge in Society,” Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 77-91.
- 4. Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” in Collectivist Economic Planning, ed. Friedrich A. Hayek (New York: Augustus M. Kelley, 1975 [1935]), pp. 87-130.
- 5. Ibid., see p. 108.
- 6. Ibid., p. 97.
- 7. Hayek, p. 50.
- 8. Joan Kennedy Taylor, Reclaiming the Mainstream: Individualist Feminism Rediscovered (Buffalo, N.Y.: Prometheus Books, 1992).
- 9. Hayek, p. 50.
- 10. The moral arguments for the fights of women to own property and to make contracts are beyond the scope of this paper. However, they are not considered to be unimportant.
- 11. Hayek, p. 51.
- 12. See Richard Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws (Cambridge, Mass.: Harvard University Press, 1992).
- 13. Hayek, p. 46.