Four Fatal Challenges to Participatory Planning

Participatory economics (parecon), Michael Albert and Robin Hahnel's economic model, employs decentralized participatory planning rather than markets or central planning to coordinate economic agents.  Despite its sound ethical foundations, participatory planning cannot work.  In this article, I argue that participatory planning cannot coordinate and satisfy the preferences (and desires[1]) of agents in a state that has over a million[2]residents, and that consequently, agents cannot be satisfied living under participatory planning.  A significant implication of my challenges to participatory planning is that it is hard to imagine how any non-market economic model can avoid the same problems; thus, this article strongly suggests that markets are necessary to satisfy economic agents.

Indeed, many socialists believe in parecon, despite its severe flaws, and I wish to direct socialists away from this unworkable economic model.  To do so, I present four jointly-fatal challenges to participatory planning: (1) it is too inflexible; (2) it cannot coordinate economic information effectively; (3) prices cannot be accurately determined under it; and (4) either domestic and international trade undermine it, or participatory planning undermines (negative) freedom.  I begin by outlining participatory planning and then present the four challenges, aiming to make the arguments accessible to those without any background in economics or participatory economics; the numerous endnotes that are not citations present non-essential considerations or elaborations of economic ideas.

I. An Outline of Participatory Planning

(This section can be skipped by anyone familiar with parecon and participatory planning.)

As Hahnel explains, parecon has four main components:

(1) democratic councils of workers and consumers, (2) jobs balanced for empowerment and desirability, (3) remuneration according to effort as judged by work mates, and (4) a participatory planning procedure in which councils and federations of workers and consumers propose and revise their own activities under rules designed to yield outcomes that are efficient and equitable.[3]

This article evaluates objections against (4) and (1), insofar as councils involve participatory planning. 

This is how councils are organized.  Each workplace is controlled by a worker’s council through which workers decide on questions of production.  Workers’ councils are members of federations of all workplaces belonging to each industry, and all industry councils in turn belong to a federation of workplaces in a region.  Ultimately, there is a national workers’ council that helps coordinate all production.  There are multiple levels of councils because interests differ in each region or workplace, so each lower-level council has a degree of autonomy yet requires approval of the higher-level councils.[4]  Consumers’ councils follow the same pattern:  neighborhood councils federate into city councils, which federate into regional or state councils, which federate into a national council.  These councils are where consumers decide how much they want to consume and what kind of public projects to finance.[5]

This is how consumers and workers' preferences are coordinated.  Each year, consumers enter lists into computers of which and how many goods and services they wish to consume.[6]  Similarly, workers list how much they want to work.  Higher-level councils aggregate proposals, and facilitation boards take the information and determine how much quantity supplied differs from quantity demanded (i.e. the difference between how much workers prefer to produce and how much consumers prefer to consume); facilitation boards then revise prices so they reflect "the true social cost[]" of each good.[7]  Facilitation boards exist at multiple levels and merely "facilitate information exchange and processing”[8] among various councils, which then vote and decide on consumption-production plans.  If there is still a difference between quantity supplied and quantity demanded after four iterations of voting on consumption-production plans, facilitation boards can come up with five similar plans that equalize quantity supplied and quantity demanded, and a vote can be taken by "everyone affected" by the differences among the plans; otherwise, voting continues until quantity supplied equals quantity demanded.[9]

II. Four Jointly-Fatal Challenges to Participatory Planning

(1) As David Schweickart argues, the planning process is too inflexible and people’s wants are too unpredictable for them to be able to stick to their yearly plans.[10]  Albert thinks consumers and workers can adjust their plans throughout the year.  He proposes consumers record their consumption on "'credit card' computers," which quickly inform councils and boards of how much consumers are deviating from their plans, and he proposes councils renegotiate throughout the year to coordinate consumers' and workers' changed wants.[11]  However, there are immense bargaining costs (especially time) of renegotiating.[12]  Even if renegotiation occurs every quarter, the time it takes to equalize quantity supplied and quantity demanded would be quite large.  To deal with the difficulty of equalizing quantity supplied and quantity demanded, Albert proposes plans be loose enough for plan deviations throughout the year.[13]  This proposal appears promising, but Albert does not explain how a loose plan can ultimately coordinate preferences effectively.  A loose plan seems to risk serious shortages or oversupplies of goods; Albert does not explain how a loose plan can avoid the risk of consumers getting less or more goods than they prefer, or how it can avoid the risk of workers working longer or shorter than they prefer.

Some specific aspects of consuming also undermine planning's effectiveness.   Consuming is often imprecise:  when we go to the grocery store, even with a grocery list, choosing produce depends on how good it looks that day, and many items catch our eye that we had not thought of.[14]  Moreover, newly-developed products often harm sales of older products.  Although consumers may know about a new product, they usually do not choose to buy until they have seen it used.  And once they want to buy, most do not want to wait until next year.  Accordingly, some products can quickly develop unpredictable demand that affects the demand for other products, making it hard for councils and boards to adjust everyone's plans.  Thus, unpredictability due to imprecise consuming and due to new products may severely disrupt plans.  One may object that markets involve the same difficulties of adjustment or that consumers would not mind waiting on new products; I will address these objections below. 

In sum, participatory planning has potentially-fatal flexibility problems.  Although I concede that without decisive empirical evidence their severity is unclear, the burden of proof is on the participatory planning advocate, given the flexibility failures common to all past centrally-planned economies and given the lack of large-scale economic experiments in decentralized planning.

(2) Participatory planning has a fundamental problem coordinating economic information effectively.      

This problem derives from Austrian economist F.A. Hayek's views of economic information.  Despite his problematic and flawed valorization of capitalism,[15] these arguments are compelling.  Hayek views "the economic problem of society" as "a problem of the utilization of knowledge which is not given to anyone in its totality."  Every economic agent has local information[16] of "particular circumstances of time and place," and agents with distinct information coordinate decisions through the shared medium of prices.  Each producer knows what circumstances (e.g. prices of related goods) affect his or her production costs, and each consumer knows precisely what he wants.[17]  Further, the mind cannot consciously access all its local information, since much of it is "elicit[ed]" only through particular actions in particular contexts.[18]  Moreover, he argues central planners cannot possess sufficient information about every important factor that impacts production, largely because productive efficiency—defined as maximizing the quantity of economic output (i.e. produced goods and services) at a given quantity of inputs (i.e. resources used in production[19]) and minimizing the costs of producing a given quantity of output—is a process of "adaptation to the unknown"; economic conditions change quickly and firms must adapt to maintain productive efficiency.[20]  (Productive efficiency is important because without it, firms would waste resources that can be employed more efficiently elsewhere, and firms would thus preclude the ability to produce more or cheaper goods—that is, productively inefficient results “misallocate” productive resources.)  Hayek also emphasizes that aggregated information and statistics hide important local information by "lumping together" heterogeneous facts and subtle differences integral to productive efficiency.  Yet even if central planners were presented with all local information, sorting through its complexity would be impossible.  In practice, planners use limited information which still takes long to process, and by the time they can generate a plan, economic conditions have changed, rendering the plan inefficient or damaging if implemented.  In sum, the economy is too complex, and the mind too limited, to be planned by "deliberate human design";[21] consequently, he argues for markets.

Participatory planning faces the same complexity of the world and limits of the mind.  Let me illustrate the problem with a famous example.  Production of a pencil involves hundreds of geographically dispersed firms and laborers employing numerous machines and tools (e.g. mining equipment and saws) to process dozens of resources (e.g. graphite and brass). These firms minimize costs and maximize output only by each taking the variables relevant to its productive efficiency into account; all variables involved in producing this one product are too complex for anyone to know them all.[22]  For councils’ plans to achieve productive efficiency, councils must take into account such complex information from all firms, be sensitive to changes in economic conditions, and coordinate effects of each firm's actions on other firms.

In addition to considering productive efficiency, councils and facilitation boards must of course consider how much and what consumers want to buy and how much workers want to work.  Councils and boards then must equalize quantity supplied and quantity demanded of each good; economists label this equalization allocative efficiency.  (Note that allocative efficiency is an important goal because it maximizes preference-satisfaction of all agents, holding constant the levels of distributional inequality or unjust social relations like oppression.[23])   As with achieving productive efficiency, achieving allocative efficiency involves processing complex information from workers and consumers, being sensitive to changes in consumers' and workers' preferences, and coordinating agents' effects on each other.  Thus, for councils and boards to achieve (or approach) productive efficiency and allocative efficiency is near-impossible.  Since in practice councils would use simplified and aggregated information, plans would be greatly allocatively inefficient and productively inefficient.  For example, without being sensitive to all specific relationships among the firms and goods involved in pencil production—including alternative inputs and effects of complements and substitutes on demand[24]—the chosen plan would make workers use inefficiently expensive inputs and produce more or fewer pencils than consumers prefer.

Let me scrutinize three lines of argument:

(a) As councils federate and communicate with facilitation boards, they employ aggregates and statistics, which obscure local information.  The more simplified and processable aggregates are, the worse the plan.  But the more complex they are, the longer it takes to process them.  Although there is a best option in between the two extremes, that option still does not take into account sufficient local information.  (This argument, of course, ignores that consumers and workers may forget unique contextual information or may make other mistakes in the "initial step" of planning.)

Hahnel, an economist, says surprisingly little about the aggregates problem.  By saying that under markets, "100% of consumers' desires [are] guess work for producers,"[25] Hahnel implies that participatory planning can aggregate consumer information effectively and that markets coordinate information worse than participatory planning can.  He even suggests prices can be adjusted "by formula";[26] thus, he does not see information loss as a serious problem with employing aggregates.  That Hahnel only mentions Hayek and his predecessor, Ludwig von Mises, in passing[27] implies he considers their arguments insignificant.  One objection to the aggregates problem is that the consequences of information loss are small or tolerable, but this seems implausible given how much detail is lost in aggregates.  One may further object that businesses and corporations use aggregates as well.  Although their narrower aggregates obscure information, they obscure less than those used by higher-level councils and they are interpreted by people focused on the contextual features relevant to their productive efficiency.  Even if higher-level councils employed these aggregates, they would not be able to process them quickly enough or from all important perspectives unless they ignored the distinct impacts on every relevant firm.  If one still wishes to argue that councils and boards can use narrower aggregates effectively or that aggregates in general do not obscure vast amounts of information, empirical evidence is required.

(b) Economic conditions change quickly and participatory planning cannot respond in time.  Hahnel's twofold reply is that participatory planning's response is faster and markets' response slower than I contend.  Of course, without reliable data, there is no certainty in how quickly each responds, yet we can engage on theoretical grounds.  Hahnel thinks the market is slow to respond to allocatively inefficient circumstances, partly because it takes time for wages and prices to adjust to shifts in supply or demand.[28]  Indeed, markets usually take time to adjust, but given that boards and councils cannot process sufficient economic information, slow adjustment is better than implementing a (sufficiently) allocatively and productively inefficient plan; implementation would unintentionally harm many individuals and communities.  Moreover, most economists, including Hayek, think markets adjust faster than Hahnel contends, and if they are right, adjustment time is not as harmful as Hahnel may think.[29]  One could argue that processable aggregates allow participatory planning to respond quickly and effectively.  The point of contention here is whether the benefits of quick response outweigh the costs of implementing an imperfect plan.  Unlike with markets, under which a firm or industry can respond to a change without considering its impact on all agents, participatory planning requires coordinating production changes with all workers and consumers.  Given there are hundreds of important changes in economic conditions per year (e.g. bad corn crop yields, oil price increases, and natural disasters), participatory planning's "fatal conceit"[30] is incredible.

(c) The human mind is too limited to take sufficient economic information into account.  I will consider three sets of objections.

(i) One may say that although people cannot make sense of billions of variables affecting millions of people, we can use computers to process economic information sufficiently well. I graciously concede that if all information could be processed quickly by a near-perfect program on sufficiently powerful computers, participatory planning would work.  Perhaps such computers exist, but the central problem is having a program that (sufficiently) accurately maps the billions of variables and considers them from each agent's local perspective.  No such program exists, so computers face the same flaws as higher-level councils and boards.  Moreover, the likelihood of ever coming up with an accurate program is dubious. 

(ii) One may object that I demand participatory planning coordinate information perfectly and that I say markets do so.  Indeed, no economic system is perfect, and as Hahnel quite brilliantly argues, unregulated markets have devastating consequences.[31]  I argue not that participatory planning is merely imperfect; rather, I argue its flaws are fatal and incurable, despite its sound ethical basis.  Hence, I gesture toward markets, which despite their inequities under capitalism, coordinate information relatively effectively and arguably are tamable.

(iii) One may contend that consumers under participatory planning are willing to tolerate some inefficiencies and are not materialistic enough to care what exact goods and services they receive.  If consumers are satisfied with not reliably (or consistently) consuming what they wish (which is a consequence of allocative inefficiency), if they are satisfied with paying more than necessary for items (which is a consequence of productive inefficiency), and if everyone is satisfied with an unreliable, possibly-erratic economy, then participatory planning could satisfy agents.  Of course, without data we cannot know exactly how allocatively and productively inefficient participatory planning would be—yet given my arguments and the lack of evidence supporting participatory planning's viability, the burden of proof is on the participatory planning advocate. 

There seem to be roughly two types of economies that non-materialistic people could consider living under:  non-uniform economies (i.e. economies that produce diverse goods that cater to people's specific preferences) and uniform economies (i.e. economies that produce roughly the same goods for everyone (as did the Soviet Union)).

A non-uniform economy would be quite allocatively inefficient due to difficulties coordinating information, so even if its residents would not mind not getting exactly what they prefer, they will mind if they do not receive goods that are important to their meaningful endeavors or projects.  For example, an unreliable economy may deprive a musician of a replacement for his broken violin, or it may deprive a philosopher or writer of a replacement for a broken computer that is needed for writing and research.  Thus, if a participatory-planning economy is largely non-uniform, its allocative inefficiencies (and possibly its productive inefficiencies) will almost certainly disrupt some people’s meaningful endeavors, given economic information coordination problems.  Nonetheless, if an economy could be allocatively efficient while being moderately productively inefficient—if it could consistently produce goods while using resources inefficiently—then a non-materialistic populace may be satisfied by it.  But given problems coordinating information and problems I discuss in (3) and (4), I see no way for productive inefficien

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