Francis Fukyama writes a brilliant review of Friedrich Hayek's "The Constitution of Liberty" (1960) in New York Times Book Review. Hayek's insights about the limits of aggregated knowledge reveals the impossibility of perfect central planning, but - contrary to himself and his followers - not the impossibility of pragmatic and limited central planning.
Hayek’s skepticism about the effects of “big government” are rooted in an epistemological observation summarized in a 1945 article called “The Uses of Knowledge in Society.” There he argued that most of the knowledge in a modern economy was local in nature, and hence unavailable to central planners.
“The Constitution of Liberty” builds on this view of the limits of human cognition to make the case that no government can know enough about a society to plan effectively. The government’s true role is more modest: to create laws that are general and equally applied; these laws constitute the matrix in which the spontaneous interactions of individuals can occur. (It may, however, surprise some of Hayek’s new followers to learn that “The Constitution of Liberty” argues that the government may need to provide health insurance and even make it compulsory.)Hayek was certainly right about the local nature of much of the knowledge humans need to make economic decisions, a fact that drove central planners crazy in Soviet Union and China and ultimately led to the economic and political reforms. But this does not mean that all planning is impossible or must lead to tyranny. Modern society would not be possible without local, regional and central planning. The modern large corporations are bureaucratic giants excelling in central planning, and governments use it to protect its citizens from food-borne illness, nature's whims and corporate abuse of market power. Power corrupts for sure, and human beings tend to think they know more than they actually do know, but that is an argument for protecting competition, a basic equality and democracy - not an argument against government, taxation and planning.