✨ Central planning in the Age of AI: A Quick Q&A with … economist and regulation expert Lynne Kiesling

'Even though history has shown the failures of central planning, it still retains an evocative lure.'

A key part of my Conservative Futurist™, Up Wing approach toward policymaking is what Nobel laureate economist Friedrich Hayek called “the fatal conceit” — the mistaken belief that tinkering human beings can deliberately design complex social orders and economic systems better than what emerges spontaneously through decentralized human actions and decisions. As I write in my 2023 book:

[My vision] rejects commanding society and its resources toward fulfilling some detailed central plan created by governmental and other elites. Such blueprints would assume impossible powers of prescience. But our society and economy are complex and fluid systems created by the decisions of all of us, as well as our leaders. No lone genius or government panel of geniuses can know all or process all the information generated by our decisions nor predict all the consequences of our actions. Humility about our powers of prescience doesn’t mean all planning or consideration of various possible scenarios is useless. But as Nobel laureate physicist Niels Bohr once put it, “Prediction is very difficult, especially about the future.” It’s an especially relevant observation during a time of radical technological change when it’s far easier to imagine things going very wrong rather than very right, easier to imagine destruction rather than creation, and easier to imagine how AI/ML might enslave humanity rather help turn its greatest dreams into reality.

That said, in this age of populism of the left and right, loud voices are calling for more regulation, more bureaucracy, more government economic guidance and direction (and less trust in markets). I asked economist Lynne Kiesling, an expert on energy regulatory law, a few quick questions about what we can learn from economic history when it comes to the successes and failure on top-down decision making — and what that history tells us about central planning in the Age of Artificial Intelligence.

Kiesling is a nonresident senior fellow at the American Enterprise Institute, where she leads the Electricity Technology, Regulation, and Market Design Working Group. She is also the president of Knowledge Problem, an advisory and analytics firm. Additionally, she serves as the director of the Institute for Regulatory Law and Economics and an adjunct professor at the Institute for Sustainability and Energy at Northwestern University. Kiesling is also a research professor at the University of Colorado Denver.

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1/ What originally led some people to think that a centrally planned economy could distribute resources effectively without relying on the price mechanism and private? What is the historical origin of the debate?

The idea of a centrally planned economy is in many ways older than human trade itself. If we think about the origin of human societies, first they lived in extended kin groups, and only later did they start living in groups that went beyond their relations. In those smaller societies, economic activity more generally took the form of central planning, and when it did involve exchange, it started out as barter and only over millennia evolved into using money as a means of exchange (in the 1870s the Austrian economist Carl Menger wrote about money as an emergent phenomenon).

Much later, humans started exchanging with people who were strangers, forming what Hayek called an extended order. By the time economists were debating the role of central planning in the socialist calculation debate in the early 20th century, human exchange and trade in the extended order had created millennia of economic growth and improved living standards through trade, specialization, and innovation. In that sense, Hayek saw the argument for central planning as an attempt to return to the social institutions of an atavistic, narrow order, which is incompatible with an extended order that benefits from the division of knowledge and the use of the price system as the nervous system of the economy.

2/ What is the significance of the distinction between knowledge and data?

Although he wasn't the only person to do so, Hayek made the clearest distinction between knowledge and data. Knowledge is personal, private, often hard to articulate, and frequently tacit so we don't realize what we know. Knowledge has a cognitive and perceptual dimension. In "The Use of Knowledge in Society" he refers to the "knowledge of time and place" of the "man on the street" as being essential to economic calculation and decision-making. But that knowledge is very personal, and no one can capture it or create it in a spreadsheet without experiencing it. So much of our personal economic calculation takes place in this experiential context.

It's only through some form of social decision-making, like market exchange, that we take action on our private knowledge, and that's how our knowledge becomes legible to others. Until I buy a quart of milk for $3.99, no one knows my preferences or what I'm willing to pay for milk. Once I do that, that transaction generates data: one person in a particular location bought a quart of milk for $3.99. It's through social exchange, through markets with price systems, that knowledge gets turned into information and becomes accessible as data.

For the calculation debate, that distinction means that no one can aggregate knowledge and make decisions based on it unless there is some mechanism for people to express their knowledge by acting on it. Central planning is based on making decisions using data, which misses a lot of the actual individual inputs into decision-making, so that's one reason why centrally planned economies do such a poor job of coordinating production and enabling open-ended innovation. Markets play the role of knowledge ecosystems that coordinate across so many people, mostly strangers, so that they can each achieve their plans.