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Planning and the Two Coordinations,
With Illustration in Urban Transit

Daniel B. Klein
Department of Economics
Santa Clara University
Santa Clara, CA 95053



"It turns out, of course, that Mises was right." Thus the economist Robert Heilbroner concluded on the great debate over central economic planning. Yet for urban transit, researchers and planners still argue that central planning is necessary to coordinate the system. Do Mises and Hayek not apply to transit? Planners might associate the Hayekian learning with rarified economic models, and the Hayekian prescription with perfect competition. They might maintain that a policy of "free competition" for urban transit leads to numerous problems. But are such problems a failure of the Hayekian philosophy? Hayek's idea of the free economy was not atomistic exchange and mechanistic markets, but rather a system of voluntary planning embodied in the nexus of property, consent and contract. Hayek’s line of reasoning points toward proprietary governance. Urban transit serves as a contextual example to clarify Hayekian thinking about planning and coordination.

Print VersionCONTENTS

  1. Introduction

  2. Schelling Coordination And Hayek Coordination

  3. "Free Competition" For Urban Transit

  4. Problems With "Free Competition" In Urban Transit

  5. Is "Free Competition" Really Hayek's Message?

  6. The Hayekian Proposal: Proprietary Governance

  7. A Sketch Of The Hayekian Argument For Urban Transit

  8. Can Local Government Mimic Proprietary Governance?

  9. Conclusion





United cooperative societies are to regulate national production upon a common plan, thus taking it under their own control and putting an end to the constant anarchy and periodical convulsions ... of capitalist production.

-- Karl Marx ([1871], 213)

Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence.

-- Friedrich Hayek (1960, 159; italics added)

Urban and transportation planners seem to believe in the necessity and desirability of urban planning. This belief is so fundamental that it is often taken for granted. The pattern of thought among transportation planners has been noted by Donald Chisholm (1989, 13): "coordination and centralization have become virtually synonymous. Where a need for coordination is perceived, the reflexive response is centralization."

Why ought the urban transit system be planned by government? The common response is as follows: In a large urban society the transit needs of the people, and the schedules, routes, and modes of the vehicles that serve them, become so numerous and so complex that the only way to coordinate the pieces is by central administration.

To a student of economic thought, this argument might ring a lot of bells, for this argument sounds essentially identical to the argument at the heart of one of the greatest debates within economic theory during the twentieth century. What one may find so powerfully striking is that this argument, which seems to be accepted wisdom among urban and transportation researchers today, was in fact on the losing side of the great debate.

I refer to the debate over economic calculation and planning in a socialist system. Advocates of central planning had long cited the complexity of industrial activity as a prima facie argument against the "anarchy of the marketplace." Karl Marx said (1867, 530), "The capitalist mode of production ... begets by its anarchical system of competition, the most outrageous squandering of labour-power and of the social means of production." In the capitalist economy, "great disturbances may and must constantly occur." Under socialism economic affairs would be organized like "one immense factory," "upon a common plan" (1885, 315; 1871, 213). Nicolai Bukharin again criticized capitalism for being guided by "blind power ... not by a conscious calculation by the community." He called for a "new society which is consciously planned and consciously executed" (1917, 49; 1920, 68).

In the early 1920s Ludwig von Mises (1920, 1922) forcefully argued that only by the competitive forces of the free-market regime are the decentralized elements of the economy appropriately utilized. The system is indeed complex and beyond human comprehension. But that is no reason to attempt to replace it by a system of central direction. Price signals and the pursuit of profit lead the vast and varied lines of activity to be self-coordinating.

Oskar Lange (1938) declared that it was Mises's "powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy." Lange declared that "a statue of Professor Mises ought to occupy an honorable place in the great hall of the ... Central Planning Board of the socialist state" (p. 57). He conceded that Mises's point was valid, yet believed that it was not fatal to socialism. The solution that Lange and others (1) proposed was a scheme whereby the workings of the market economy, or, at any rate, the workings according to the model of perfect competition, would be simulated within the socialist system. Factory managers would be instructed to minimize average cost, set output to equate marginal cost and price, and so on. Prices would be dictated by the central planning authority. In each period, information about excess demands and excess supplies would be relayed to the central authority, which would revise prices with the aim of making markets clear. In this procedure of trial-and-error the system would coordinate itself by mimicking the self-coordinating forces of the market economy.

Friedrich Hayek, who had studied closely with Mises in Vienna, responded to the market-simulation solution. His criticism (1940) exposed many fundamental problems of the scheme. Hayek showed that Lange's scheme was founded on the rarified and even misleading representation of market forces that was cutting edge theory of the day, and which nowadays is textbook boilerplate. Hayek argued that without making the incentives genuine from the bottom up, and giving agents the freedom and flexibility to act on their hunches and expectations and special opportunities, nothing like a free-market economy would come from the simulation effort.

The broad question over government planning has revolved around the issue of coordination within complex systems. In The Road to Serfdom (1944) Hayek summarizes the view of the planners in this way: "What they generally suggest is that the increasing difficulty of obtaining a coherent picture of the complete economic process makes it indispensable that this should be co-ordinated by some central agency." Hayek of course dissents: "[In the market economy we depend] on that division of knowledge between individuals whose separate efforts are co-ordinated by the impersonal mechanism for transmitting the relevant information known by us as the price system." The view of the planners was not merely incomplete or inadequate, it was dead wrong: "Any further growth of its complexity, therefore, far from making central direction more necessary, makes it more important than ever that we should use a technique which does not depend on conscious control" (pp. 48-50).

There can be little dispute that Mises and Hayek were correct in the debate about centralized economic planning. In 1990 the former socialist Robert Heilbroner (1990, 92) declared, "It turns out, of course, that Mises was right."

It is curious that while the Hayekians have won the socialism debate, transit planning remains intellectually unimpeached. Either the Hayekian arguments do not apply to transit planning or they are not well understood. Hayek would maintain that the lessons of the great debate do apply: "planners do not yet realise that they are socialists and that, therefore, what the economist has to say with regard to socialism applies also to them" (Hayek 1933, p. 32).

In this paper I use the example of urban transit to clarify Hayek’s position. I will argue that Hayekian claims about "coordination through the price system" are often misunderstood because the term "coordination" has two distinct meanings. Distinguishing between the two coordinations leads us into clarification of another critical term, "planning." This paper is not intended as a manifesto for the Hayekian policy position in urban transit. Rather, it utilizes the example of urban transit to clarify the nature of that position on any similar urban issue, and merely sketches how argumentation for that position proceeds.

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