You can't plan it all
Imagine yourself to be the government official deciding which companies open when the lock-down(s) end.
You decide that some services are essential for functioning, and some are not. But what are those essential goods?
Food is an obvious one. Everyone needs food to eat. So you go and issue a press release saying that grocery stores are allowed to run. But after a few days, you get complaints that the grocery stores have no rice. Why? The farms are not considered essential in your economy, and they are not running.
With a sigh (and a glare from your epidemiologist), you decide to allow farms to open up. Farms open up, and the farmers have a plentiful harvest. But a few days later you get another complaint. The farmers cannot sell their food, and the shelves are empty at the stores again!
Your economic advisers inform you that this is because you have not allowed transport agencies to function like normal, as they are not essential. You then decide to allow trucks to move as normal, and for a few days things are normal. There is food in the shelves, the farmers can sell their goods and the truckers are happy.
But after a few days you get another complaint. The truckers are unhappy. Normally, they have restaurants on the highways to eat. But now restaurants are closed because they are clearly not essential. (This is not a hypothetical. In India, dhabas are very important for the functioning of the truck industry.)
Exasperated with all of this, you throw your hands up in the air, and give a sigh of despair. Who can help you?
Why can't things just work like you want it?
Source: Mises Institute
The hero of our story, an economist called Friedrich Hayek shows up, and tries to explain things to you. Hayek’s main insight was that knowledge is local and distributed among people. [1]
What does that sentence mean?
It means that the knowledge of economic conditions is local. What a truck-driver wants, he knows by himself. That knowledge is not known to the policymaker at the top. You, the government official, don’t know what is needed to do a truck-driver’s job.
If you don’t know what is needed to do a very simple thing like ensuring that people have food, how can you plan the entire economy?
This is the idea Hayek tried to explain in his essay The Use of Knowledge in Society. Information about economic activities is spread around. Nobody knows enough to command and control an entire economy. Not me, not you, not even the bureaucrats with their daily surveys and gigabytes of data.
And if, you cannot know everything, you cannot decide everything.
Not even the most well-informed person, with the best intentions, and the best computational resources can incorporate the local information people have about their own lives.
So, if you were hoping for an engineered recovery with a bureaucrat deciding what’s in and what’s out, keep your hopes low.
[1] He had many many more insights, but in this essay, this is the most important one.
[2] Well if I don’t know everything and you don’t know everything? Who does? How is information transferred across places? Hayek’s answer is the price system.
A price acts as a signal and an incentive. If the price of pencils went up 10%, that is a signal to pencil producers and consumers that pencils are scarce. Along with that, it is also an incentive for them to produce more as they now get paid more for the same good.
If the price system is eliminated (like it is in parts of the world now), then how are people supposed to know what to produce? How is the pencil manufacturer supposed to know what the demand for his good is?
To quote Hayek directly:
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.
When I make pencils, I don’t need to worry about the production of all the other goods. The price system is the transmitter of that knowledge.