A very striking feature of our times is the accelerating rate at which change occurs. The magnitude and speed of the changes that humankind has undergone in the past century and a half have been unparalleled in our history. In every area of human endeavour a great deal of new knowledge is being generated, and old practices are being rejected one after another. At this point in history, no one can possibly deny that society, in all its aspects – social, economic, political, religious and cultural – is going through a process of fundamental transformation.
In this past century and a half, every country and region of the world has seen old structures swept away through radical reform or revolution. The ideals motivating these deliberate, sometimes violent, attempts to change society have often been extremely noble and laudable.
Yet, it is now an historical fact that these attempts have, by and large, failed to generate this sense of purpose, the values and the standards of behaviour that are essential for the creation of a new society. As a result, for decades humanity has been living in a state of crisis that seems to deepen almost daily. In the midst of all this crisis, of course, we often hear the voices of traditionalists, of those who romanticize the past and urge us to go back to our old ways. The fact is, however, that return to the standards of the past is not possible, for the forces released during this period have set in motion a process of transformation that is clearly irreversible. The unavoidable conclusion we reach when we examine modern history is that old moral codes and belief systems have proven entirely inadequate when faced with the challenges of an age of transformation. So, as we explore elements of the framework for a new process of moral education, some of the first questions we must ask ourselves are: What is the nature of the great transformation that is taking place in human society? What are the basic concepts that can help us to understand the significance of the times in which we live? What are some of the great forces that are operating within society in this crucial stage of human evolution?
Clearly, this is not the occasion to examine in detail a theory of history, but I would like to present a few ideas that will help our explorations in the next few days.
During the cycle of human life, an individual passes through the stages of infancy, childhood and adolescence, before undergoing the transition to adulthood. We achieve great clarity about the meaning of our times if we accept that humanity, in its collective life, also goes through similar stages, and that we live at a time when mankind has emerged from its childhood and stands at the threshold of maturity. The turbulence and the upheavals that prevail in society today can then be seen as characteristic of adolescence, which is the period of transition. The onset of maturity, of course, brings new capacities and presents new demands, for which the attitudes, thoughts and habits of childhood are inadequate. The challenge now facing humanity is to leave behind the ways of youth and to develop those qualities and capabilities that will allow it to respond to the requirements of a new age.
As for the forces that have to be reckoned with at this historical moment, let me suggest that they are associated with two parallel processes. One process is essentially destructive, while the other is integrative. The operation of the destructive process is evident in such phenomena as the upsurge of racial animosity and nationalism, the spread of terrorism and violence, the breakdown of families and the corrosion of human relations, the increasing signs of suspicion and fear, and the unquenchable thirst for vanities and misdirected pleasures. Although negative and often devastating, the forces that accompany this destructive process tend to tear down barriers that block mankind’s progress towards maturity. In relation to this point, let me share with you a favourite passage of mine:
“If long-cherished ideals and time-honoured institutions, if certain social assumptions and religious formulae have ceased to promote the welfare of the generality of mankind, if they no longer minister to the needs of a continually evolving humanity, let them be swept away and relegated to the limbo of obsolescent and forgotten doctrines. Why should these, in a world subject to the immutable law of change and decay, be exempt from the deterioration that must needs overtake every human institution? For legal standards, political and economic theories are solely designed to safeguard the interests of humanity as a whole, and not humanity to be crucified for the preservation of the integrity of any particular law or doctrine.”
The destructive process described above, of course, is quite visible and its effects are seen everywhere, every day. To see clearly the other parallel process, which is constructive in character, does not prove to be as easy. But if we analyze the events of the past century with a mind that is free from the very social, political and economic theories which, in themselves, are destructive, we will become thoroughly convinced of the operation of a vast and powerful process of integration. Earlier stages of this process have successively called into being the family unit, the tribe, the city-state and the nation. The distinguishing feature of the present period of history is that the integrative process will now bear its finest fruit: the unification of the entire human race in a world civilization.
This world civilization is not to stifle the flame of a sane and intelligent patriotism in men’s hearts. It will not abolish the system of national autonomy so essential if the evils of excessive centralization are to be avoided. It will not attempt to suppress the diversity of ethnic origins, of climate, of history, of language and tradition, of thought and habit that differentiate the peoples and nations of the world. It will call for a wider loyalty and the subordination of national interests to the claims of a unified world. It will oppose both excessive centralization and all attempts at uniformity. Its most cherished concept will be unity in diversity. To continue with the quotation I read earlier, this principle of the oneness of mankind:
“is no mere outburst of ignorant emotionalism or an expression of vague and pious hope. Its appeal is not to be merely identified with a reawakening of the spirit of brotherhood and good-will among men, nor does it aim solely at the fostering of harmonious cooperation among individual peoples and nations. Its implications are deeper, its claims greater than any which the Prophets of old were allowed to advance. Its message is applicable not only to the individual, but concerns itself primarily with the nature of those essential relationships that must bind all the states and nations as members of one human family. It does not constitute merely the enunciation of an ideal, but stands inseparably associated with an institution adequate to embody its truth, demonstrate its validity, and perpetuate its influence. It implies an organic change in the structure of present-day society, a change such as the world has not yet experienced.”
With these ideas in mind, let me express now what we may consider as the first basic concept of the framework of moral education that we are going to explore during the next two days. A new process of moral education must be developed within the context of mankind’s passage to maturity and for the emergence of a world civilization that embodies the principle of unity in diversity. The individuals educated by this process will need to develop a clear vision of the requirements of the age of maturity and learn to contribute to the transformation of present-day society. They will have to aim constantly to express more fully the virtues inherent in mankind, and weed out faults, harmful habits and tendencies inherited from their environment. Yet they will have to be conscious of the unique characteristics and contributions of their own nation and people and dedicate themselves to the enrichment and advancement of their own culture. Above all, they will have to lend their strength to processes that counteract the negative forces undermining the foundations of human existence and align themselves with the forces leading mankind to the fulfilment of its destiny.
A second concept, which is basic to a framework for moral education, is that, in order to act effectively during the age of transition, the moral person we are envisioning here must possess a strong sense of purpose. Goodness, defined in passive terms – to mind one’s own business and not to harm anyone, a definition that throughout history has only facilitated oppression – simply is not adequate for our times. But neither is it sufficient to say that a moral person has to be purposeful. The nature of this purposefulness will have to be explored carefully in the process of moral education.
To begin with, I would like to suggest that the moral purpose of an active individual must necessarily be twofold, directed simultaneously towards the development of one’s vast potentialities, including both those virtues and qualities that distinguish the human race and those talents and characteristics that are an individual’s unique endowment. On a social level, it is expressed through dedication to promoting the welfare of the entire human race.
These aspects of the sense of twofold purpose are fundamentally inseparable, for a person’s standards and behaviour shape the environment, and in turn are moulded by social structures and processes. To quote another passage:
“We cannot segregate the human heart from the environment outside us and say that once one of these is reformed everything will be improved. Man is organic with the world. His inner life moulds the environment and is itself also deeply affected by it. The one acts upon the other and every abiding change in the life of man is the result of these mutual reactions.”
It is essential, then, that we should develop a profound awareness of the reciprocal relationship between personal growth and organic change in social structures. We cannot develop virtues and talents in isolation, but only through effort and activity for the benefit of others. Idle worship and prolonged withdrawal from society, advocated by some philosophies of the past, neither promote individual development nor aid the progress of mankind. People whose sense of purpose focuses only on the development of their own potential soon lose objectivity and perspective. With no outside interactions and social goals, how does one judge one’s own progress and measure one’s development? Morality centered on the self only leads to subtle forms of ego – combinations of guilt, self-righteousness and self-satisfaction.
Conversely, a sense of purpose driven only by the desire to transform society, with no attention to the need for personal growth and transformation, is easily misdirected. The person who blames society for every wrong and ignores the importance of individual responsibility loses respect and compassion for others and is prone to acts of cruelty and oppression. Recent developments in many countries of the world are showing us what a fragile endeavour social transformation can be when divorced from the desire to transform one’s own character.
Now, accepting that a new process of moral education must transcend the limitations of unfettered individualism and of suffocating collectivism, and must direct the energies of the individual toward a complementary and balanced approach to the twofold purpose of personal and collective transformation, we come to the question of how to direct moral purpose and protect it from the distorting influence of the negative forces that abound in this age of transition. For example, we all know how easy it is to veil group or personal interest in the guise of morality. Experience has also taught us that mere idealism and indignation at the sight of suffering are not sufficient bases for moral action. The sense of purpose that is to be developed through a process of moral education, then, must be shaped by forces and convictions that influence moral orientation and protect it from distortion and misdirection.
The basic forces that need to shape an individual’s sense of purpose are attraction to beauty and thirst for knowledge. Attraction to beauty gives proper direction to purpose. Beauty and perfection become standards and guiding lights by which one is able to judge one’s own behaviour. On one level, this attraction manifests itself in love for the majesty and diversity of nature, in the impulse to fashion beauty through the visual arts, music and crafts, and in the pleasures of beholding the fruits of these creative endeavours. It is also evident in one’s response to the beauty of an idea, the elegance of a scientific theory, and the perfection of a good character in one’s fellow human beings.
On another level, attraction to beauty underlies an individual’s search for order and meaning in the universe, which extends itself to a desire for order in social relations.
Our inherent desire for knowledge, on the other hand, impels us toward an understanding of the mysteries of the universe and its infinitely diverse phenomena, both on the visible and on the invisible plane. It also directs us toward an understanding of the mysteries within ourselves. When we are oriented by a vision of beauty and perfection, and motivated by a thirst for knowledge, we become, in our approach to life, investigators of reality and seekers after truth.
Now, if investigation of truth is to guide our twofold purpose it must necessarily be based on an accurate understanding of human nature. It would certainly not be an exaggeration to say that much of the crisis and confusion of our times is caused by mistaken conceptions of human nature that we have inherited from mankind’s age of childhood. The absurd concept of original sin, the equally absurd concept that man is perfect and just one step from being God, the concept of man as merely a more highly developed animal, the concept of man as a free agent who should follow the dictates of every basic desire, the concept of man as a piece of the machinery of State: these are all fruits of the imagination of the philosophers and thinkers of the age of childhood and are based on insufficient historical and spiritual evidence. What is certain and easily observable is that human nature has two aspects, the material and the spiritual. Man’s material nature is the product of physical evolution, and its basic objective is survival. Although necessary to his existence in this world, if allowed to dominate his consciousness, it leads him to express injustice, cruelty, and egotism. Man’s spiritual nature, on the other hand, is characterized by qualities such as love, mercy, kindness, generosity, and justice. The individual attains his true station by strengthening his spiritual nature so that it dominates his existence.
Up to now, we have said that attraction to beauty and thirst for knowledge are basic forces that should shape moral purpose. We have also suggested that if properly guided by these forces, our approach to life becomes that of investigators of truth, rather than imitators of others, but that this investigation of truth must be carried out with the correct understanding of human nature. When this is done, one of the first fruits that we harvest from our investigation is the conviction that man has been created noble. When we are truly convinced of this, our powers to transform our own character and contribute to the transformation of society are multiplied. And, what is extremely important, in pursuing our purpose, we avoid unworthy means of achieving goals and overcoming problems, and choose methods and approaches that are consistent with this innate condition of nobility. We do not fall prey to that most harmful concept that the ends justify the means, an idea that has been the cause of immense suffering.
Another fruit of our investigation of truth is a growing consciousness of the organic unity of the human race. Being convinced of the oneness of mankind enables us to recognize that we are each part of an organic whole, and that injury to any part results in injury to all. We remember that our accomplishments are built on the sacrifices and achievements of those who came before us and are supported by the efforts of our fellow human beings. We become convinced that our own fulfillment lies in helping to bring about welfare and happiness of others. We then strive to transcend the conflicts that have characterized relations between individuals and groups in every society throughout history. Our determination to eliminate injustice from society and to oppose cruelty and prejudice will not be shaped by anger and hatred. Our actions will be infused with the feelings of love, harmony, and kindness that only belief in the unity of mankind can create.
Yet another fruit of unfettered investigation of reality, one which is indispensable for moral integrity, is a vision of human existence that extends beyond the exigencies of day-to-day life. Such a vision enables us to distinguish between superficial and lasting results, and directs our purpose towards that which has permanence. An understanding of the eternal realities of existence helps define the nature of true happiness; we realize that “the happiness and greatness, the rank and station, the pleasure and peace, of an individual have never consisted in his personal wealth, but rather in his excellent character, his high resolve, the breadth of his learning, and his ability to solve difficult problems.”
In trying to understand the nature of this twofold sense of moral purpose, there is at least one more question that I would like to bring to our attention. How does a purpose that is shaped and directed by forces and convictions such as the ones mentioned above express itself? I would like to suggest that the only legitimate channel for the expression of such a purpose is service to others – not ruling over others, not manipulating the lives of others, but serving others. In a process of moral education, then, it is important to develop an understanding that the perfection of one’s own character should naturally find expression in efforts to serve others, and that one’s desire to serve others should enhance the refinement of one’s character. In this way, the motivation to help carry forward an ever-advancing civilization is not imposed from the outside; it rises from within the individual and is bound inextricably with opportunities for personal growth. Helping others and helping oneself become two aspects of one process; service unites the fulfilment of individual potential with the advancement of society and ensures the integrity of one’s sense of moral purpose.
In addition to issues concerning the historical context of a new process of moral education, and to questions having to do with the definition of moral purpose and the forces that shape it, our search for the framework for our educational activities must also reexamine relationships between man and nature, among individuals and groups, within the family, and between the individual and social institutions. Observations of the conditions of the world around us can leave no doubt that the way we look at and understand these old conceptions of these relationships, have shattered some, and have rendered others meaningless. Ironically, many of these distortions seem to be the results of material progress, which in itself is desirable. The problem is that material civilization should advance together with spiritual civilization. The past few centuries have seen the advancement of material civilization and the decline of spiritual civilization. The confusion and crisis that exist in essential human relationships today are merely the symptoms of the spiritual bankruptcy of modern society.
While there is no need at this general level of exploration to discuss in detail the changes that should occur in the conception of essential human relationships, a few examples may be useful. The growing environmental crisis proves beyond any doubt that man cannot continue to act as a predator in relation to the natural environment. We must become rational users and conservers of the resources of the planet. We must understand that nature exists in a dynamic balance and that interconnectedness, reciprocity, and cooperation are laws that govern the universe. We must come to a comprehension of the fact that, within this endless web of relationships, diversity is most essential, and we must learn to appreciate the beauty of diversity. Man’s attitude towards life should cease to be one of exploitation, whether of people or of nature. Our relationship with nature cannot be shaped by greed, whether this greed is individual or the trait of an entire people or nation. Man needs to abandon the attitude of arrogance that in these decades of rapid industrialization has characterized the interactions of society with nature, and approach progress with much more humility and care. Seen in this light, there can be no doubt that profound change in the relationship between man and nature is fundamentally a moral matter, and that the issues surrounding it must be examined within the framework of a new process of moral education.
Another profound change that has to occur as humanity passes from childhood to maturity is in the relationship among individuals and groups. Societies in every part of the world are pervaded by relations of dominance: dominance of one individual over another, of one race over another, of one nation over another, or of one sex over another. These relations of dominance are, of course, highly violent in nature, whether this violence is shown in physical ways or is clothed in the robes of legality and custom. The violence inherent in dominance makes these relations harmful to both the perpetrator and the victim. In a sense, both the subject and the object of such relations are victims of violence.
One relation of dominance that is not limited to any class, race or nation, is that which exists between men and women. Most people do not escape the effects of this relation for they are initiated into it from infancy. The growing child, living in an atmosphere of prejudice against women in the family itself, learns the habits of domination and carries these habits into education, the workplace, political and economic activities, and eventually into all social structures.
A conception of individual and group relationships that belongs to the age of maturity of humanity, then, must reject dominance. A process of moral education that is to help humanity reach adulthood should foster in every individual the desire to seek fulfilment – not by seeking power over others, but by serving them. Satisfaction needs to come from seeing everyone’s potentials and talents blossom and develop, and not from the imposition of one’s personal tastes and desires on others.
Yet another profound change needs to occur in the family structures of every society in the world. One of the most devastating effects of the forces of disintegration in our times has been the weakening of family bonds. The family is a fundamental institution of human civilization. It is the first environment within which every child begins to build moral structures and form patterns of behavior. But here again, the need is for a new conception of family relationships that responds to the demands and dictates of the age of maturity. It is not desirable, for example, to perpetuate a model of the family in which man dominates woman. Conceptions that place family loyalty above everything else, and thus impede the development of loyalty to the entire human race, cannot be accepted either. Strong and healthy family bonds are needed to make the family a vital unit of society. As a building block of society, the family needs to be educated according to the rules of sanctity, so that it becomes the first environment where nobility, integrity, respect, generosity, love, unity and justice are learned by every human being.
Finally, the relationships between the individual and social institutions must be conceptualized in a totally different way than has been customary throughout the childhood of humanity. Traditionally, individuals and institutions have lived in an unhealthy state of tension, the individual always trying to achieve greater and greater freedom, and the institutions trying to achieve greater degrees of control, always, of course, in the name of the common good. This tension must now be replaced by reciprocity and the desire to serve. The institutions of a new age cannot be built as instruments of the selfish desires of a group of people or as mechanisms for the control of the population. The mission of every institution should be conceived, somehow, as that of a channel through which the talents, abilities and collective energies of the people can be expressed in service to society.
This profound change in the mission of social institutions implies, of course, a corresponding change in the attitudes of individuals towards society and its institutions. Of special importance is a true understanding of the concept of freedom. Desire for freedom is undoubtedly one of the most powerful forces operating within individuals and within societies, and surely, the passage from childhood to maturity means the building of a society that embodies the principle of freedom. But freedom cannot be simply dealt with through slogans and empty promises. What is the nature of true freedom? What should we be free of? What are the chains that tie us down and take away our freedom? What are the sources of those forces that enslave us? What are the sources of those forces that can move us towards lasting freedom?
Once again, it becomes clear that many of the fundamental questions that we face in organizing the institutions of a new society, whether these institutions and structures are political, economic, social, or cultural, are basically moral questions. This brings us back to the fact that the moral purpose we defined at the beginning must indeed be twofold. The framework we are seeking for our moral education is a framework for the parallel transformation of the individual character and of social structures.
The Use of Knowledge in Society
What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.
This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the "data" from which the economic calculus starts are never for the whole society "given" to a single mind which could work out the implications and can never be so given.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But, as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.
In ordinary language we describe by the word "planning" the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system.
The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.
Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.
It will at once be evident that on this point the position will be different with respect to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts. If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.
It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be "given." The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.
If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the "planners" differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.
It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.
Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?
The fairly widespread belief in the affirmative is not, as far as I can ascertain, borne out by the practical experience of the businessman. In a competitive industry at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an inefficient manager to dissipate the differentials on which profitability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be allowed to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work.
One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the "law of large numbers" or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.
This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."
If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the "man on the spot" cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.
How much knowledge does he need to do so successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?
There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.
It is in this connection that what I have called the "economic calculus" proper helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or "values," or "marginal rates of substitution"), i.e., by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.
Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.
We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.
Of course, these adjustments are probably never "perfect" in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or "normal" level.
I have deliberately used the word "marvel" to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for "conscious direction"—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously—should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.
The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them." This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.
The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coördinated utilization of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization. It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type. All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it—such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill.
It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views. The thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion. When we find Leon Trotsky arguing that "economic accounting is unthinkable without market relations"; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice. The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences.
A recent statement by Professor Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist "from the elementary proposition that consumers in evaluating ('demanding') consumers' goods ipso facto also evaluate the means of production which enter into the production of these goods."
Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter's "ipso facto" presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers' goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers' goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.
The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.
That an economist of Professor Schumpeter's standing should thus have fallen into a trap which the ambiguity of the term "datum" sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem.
Notes for this chapter
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J. Schumpeter, Capitalism, Socialism, and Democracy (New York; Harper, 1942), p. 175. Professor Schumpeter is, I believe, also the original author of the myth that Pareto and Barone have "solved" the problem of socialist calculation. What they, and many others, did was merely to state the conditions which a rational allocation of resources would have to satisfy and to point out that these were essentially the same as the conditions of equilibrium of a competitive market. This is something altogether different from knowing how the allocation of resources satisfying these conditions can be found in practice. Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical problem, in fact explicitly denies that it can be solved without the help of the market. See his Manuel d'économie pure (2d ed., 1927), pp. 233-34. The relevant passage is quoted in an English translation at the beginning of my article on "Socialist Calculation: The Competitive 'Solution,' " in Economica, New Series, Vol. VIII, No. 26 (May, 1940), p. 125.