We are and always shall be in favour of a centralised economy, and companies will have to conform to the Government’s planning. Salvador Allende
They (the socialists) have criticized freely enough the economic structure of “free” society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen, which they have revealed elsewhere, not always with success. Economics, as such, figures all too sparsely in the glamorous pictures painted by the Utopians. They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place. Ludwig von Mises, Economic Calculation in the Socialist Commonwealth
The other day I was listening to a fascinating podcast with Tim Harford. Harford has a new book out now called Adapt, which deals with the role of failure. In it he tells a story which I had not heard before and I immediately went to check it out. The story was about an unlikely collaboration between Salvador Allende, the democratically elected Marxist leader in Chile and Anthony Stafford Beer, a British theorist, consultant and professor at the Manchester Business School. Project Cybersyn, sought to avoid the pitfalls of the planned economies of Cuba and the Soviet Union by applying cybernetics, the study of communication, feedback and control mechanisms in complex systems.
Project Cybersyn used a network of 500 Western Union telex machines to rapidly transmit data between the factory floor and the government. It was supposed to be in real time, but in reality each firm could only transmit data once per day. The futuristic operations room, with definite airs of the bridge of the Starship Enterprise, was furnished with seven swivel chairs, as they were deemed best for creativity. These chairs, which were arranged in an inward facing circle, had armrests with buttons which controlled several projection screens, each displaying the data collected from the nationalised enterprises.
Allende was to hold power from 1970-73. The role of the United States’ government and companies in his downfall and substitution is notorious. On the morning of 11 September 1973 Augusto Pinochet launched a coup against the Allende government. By 2 p.m. Allende lay dead, his dream of democratic Marxism vanished as the flames engulfed the presidential palace, La Moneda. Following the coup, the military made a number of attempts to understand how the Cybersyn Project worked. They eventually decided to dismantle the operations room.*
It became one of the many casualties of the Pinochet dictatorship. His dictatorship would last until 1998 and many people would be tortured. Fortunately for Stafford Beer, he was in London on the day of the coup. Afflicted by survivor’s guilt, he ended up abandoning his family and moving to a cottage in rural Wales. He died in 2002 at the age of 76.
How can we judge this ill-fated experiment? I realise that it was carried out under extreme duress, but it does raise some intriguing questions about the role of information in decision-making.Chile’s economy collapsed, due to a number of interrelated factors: the chaos created by Allende’s ambitious programme of nationalisation, strikes that paralysed the country and the ceaseless efforts of theUnited Statesto undermine the regime. Moreover, Chile did not have much computing power. They had a single I.B.M. 360/50 mainframe. We need to put into some kind of perspective. Not only was it far less powerful than an iPhone, it had less storage capacity than most flash drives today.
However, the underlying problem with this kind of central planning may well have nothing to do with computing power. Perhaps there just aren’t enough molecules in the universe to make a computer capable of mapping the interactions of a country of millions of people who constantly interact with the outside world. Moreover, it would be impossible to know all of the critical information required to make such decisions ex ante. So much of what we learn about the economy is after the fact. The planners had to rely on people in the factory giving the information that you want, but many of these would have their own agendas.
The complex nature of economies has been one of my tropes since I began blogging three years ago. The question needs to be seen within what is known as the Socialist Calculation Debate. On the left were those who believed in market socialism. At the beginning of the last century some socialists began to believe that they could manage the economy scientifically, blending neoclassical economics with social planning. In 1908 Enrico Barone proposed the concept of market socialism. The invisible hand would be replaced by the ministry of planning. Barone advocated the establishment of a planned society in which markets would operate. Then the baton was taken up by Oscar Lange. He believed that the development of high-speed computers would make planning a reality:
“Were I to rewrite my  essay today my task would be much simpler. My answer to Hayek and Robbins would be: So what’s the trouble? Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome atonnements appears old fashioned. Indeed, it may be considered as a computing device of the pre-electronic age.”
Opposing them were the Austrian school, notably Ludwig Von Mises and Friedrich Hayek. The first critic to enter the fray was Von Mises, who set out his stall in a famous article in 1920 – Economic Calculation in the Socialist Commonwealth. Von Mises made the argument in a very interesting way. Traditionally the criticism of communism had been that socialism was a wonderful ideal but humanity had somehow failed to live up to it. This view is reflected in the entomologist Edward O. Wilson’s famous quip about Communism: “Great idea: wrong species.” But Mises goes much further. What he shows is that socialism is a bad idea because it cannot deal with the demands of a complex world. In a small band of hunter-gatherers this kind of system may work, but when you have a lot of strangers together, it becomes impossible. You have the intractable problem of how to use scarce resources. As there are no real prices, the central planners would not know how to allocate the available resources efficiently. Murray Rothbard summed up Mises’s critique:
All right, suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?
In his groundbreaking 1945 essay, The Use of Knowledge in Society Hayek foresaw many of the problems that would be beyond the scope of even the most powerful computer. Hayek argued that the market was the best mechanism for calculating and coordinating choices; markets and competition were the best way to discover information. Prices were an information signal in the market; competition led to decentralized social planning. Here is Tim Harford writing about Hayek:
What Hayek realised, is that a complex world is full of knowledge that is very local and fleeting. Crucially, the local information is often something that local agents would prefer to use for their own purposes. Hayek’s essay pre-dated modern computers, but his argument will retain its force until the day that computers can read our minds.
Who won this great intellectual battle? What is interesting is that there has a certain ideological to and fro since it all began in the 1920s. I find the Austrians’ critique of Marxism utterly devastating. However, there will never be a definitive solution to these questions. The idea of an efficient market has taken rather a battering since the onset of the current financial crisis. But all the problems that have bedevilled central planning cannot be just made to go away. We would be making a tragic mistake if we went back to the kind of grandiose top-down planning that has failed time and time again.
Could technology become a game changer in the future.? Lenin was quoted as saying that the West was so hungry for profits that they would sell us the rope to hang them with. I have often wondered what would happen if a capitalist firm came up a computer that was so powerful it would actually make centralised planning feasible. I don’t really see it ever happening but it’s a tantalising thought.
* What I also noticed was the different strikingly different interpretations given to this fact. In the Guardian Andy Becket had a rather different take:
But they found the open, egalitarian aspects of the system unattractive and destroyed it.
These differing interpretations are typical of this whole episode.
There are some excellent resources about Project Cybersyn online:
Free As In Beer: Cybernetic Science Fictions. A 22:56 video.