A Model of Total Factor Productivity Built on Hayek’s View of Knowledge: What Really Went Wrong with Socialist Planned Economies?

Harashima, Taiji (2011): A Model of Total Factor Productivity Built on Hayek’s View of Knowledge: What Really Went Wrong with Socialist Planned Economies?

Abstract

Because Hayek’s view goes beyond the Walrasian framework, his descriptive arguments on socialist planned economies are prone to be misunderstood. This paper clarifies Hayek’s arguments by using them as a basis to construct a model of total factor productivity. The model shows that productivity depends substantially on the intelligence of ordinary workers. The model indicates that the essential reason for the reduced productivity of a socialist economy is that, even though human beings are imperfect and do not know everything about the universe, they are able to utilize their intelligence to innovate. Decentralized market economies are far more productive than socialist economies because they intrinsically can fully utilize human beings’ intelligence, but socialist planned economies cannot, in large part because of the imagined perfect central planning bureau that does not exist.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hayek; Market economy; Socialist planned economy; Total factor productivity; Innovation; Experience curve effect; China
• Subjects: P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P20 - General; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; P - Economic Systems > P1 - Capitalist Systems > P10 - General; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

References

Adler, Paul S. and Kim B. Clark. (1991) “Behind the Learning Curve: A Sketch of the Learning Process,” Management Science, Vol. 37, No. 3, pp. 267-281.

Aghion, Philippe and Peter Howitt. (1998). Endogenous Growth Theory, Cambridge, MA, MIT Press.

Alchian, Armen A., (1963) “Reliability of Progress Curves in Airframe Production,” Econometrica, Vol. 31, No. 4, pp. 679–693.

Argote, Linda, Sara L. Beckman and Dennis Epple. (1990): “The Persistence and Transfer of Learning in Industrial Settings,” Management Science, Vol. 36, No. 2, pp. 140-154.

Argote, Linda and Dennis Epple. (1990) “Learning Curves in Manufacturing,” Science, Vol. 247, No. 4945, pp. 920-924.

Argote, Linda, Bill McEvily and Ray Reagans. (2003) “Managing Knowledge in Organizations: An Integrative Framework and Review of Emerging Themes,” Management Science, Vol. 49, No. 4, pp. 571–582.

Arrow, Kenneth J. (1962). “The Economic Implications of Learning by Doing,” Review of Economic Studies, Vol. 29, No. 3, pp. 155–173.

Asher, Harold. (1956) Cost-Quantity Relationships in the Airframe Industry, Report 291, RAND Corporation, Santa Monica, Ca.

Ayres, Robert U. and Katalin Martinas. (1992), “Experience and Life Cycle: Some Analytical Implications”, Technovation, Vol. 12, No. 7, pp. 465-486.

Baldwin, Carliss, Christoph Hienerth and Eric von Hippel. (2006) “How User Innovations Become Commercial Products: A Theoretical Investigation and Case Study,” Research Policy, Vol. 35, No. 9, pp. 1291-1313.

Barro, Robert J. (1991) “Economic Growth in a Cross Section of Countries,” Quarterly Journal of Economics, Vol. 106, No. 2, pp. 407-43.

Becker, Gary S. (1962) “Investment in Human Capital: A Theoretical Analysis,” The Journal of Political Economy, Vol. 70, No. 5, pp. 9-49.

Becker, Gary S. (1964) Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Columbia University Press, New York.

Benhabib, Jess and Mark M. Spiegel, (1994) “The Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data,” Journal of Monetary Economics, Vol. 34, No. 2, pp. 143-173.

Boston Consulting Group (BCG). (1972) Perspectives on Experience, Boston, Mass.

Criqui, Patrick, Jean-Marie Martin, Leo Schrattenholzer, Tom Kram, Luc Soete and Adriaan Van Zon.. (2000) “Energy Technology Dynamics,” International Journal of Global Energy Issues, Vol. 14, No. 1-4, pp. 65-103.

Dudley, Leonard. (1972) “Learning and Productivity Changes in Metal Products,” American Economic Review, Vol. 62, No. 4, pp. 662-69.

Dutton, John M. and Annie Thomas. (1984) “Treating Progress Functions as a Managerial Opportunity,” Academy of Management Review, Vol. 9, No. 2, pp. 235-247.

Growiec, Jakub (2008) “A New Class of Production Functions and an Argument Against Purely Labor-Augmenting Technical Change,” International Journal of Economic Theory, Vol. 4, No. 4, pp. 483-502.

Hall, Graham and Sydney Howell. (1985). “The Experience Curve from the Economist's Perspective,” Strategic Management Journal, Vol. 6, No. 3, pp. 197-212.

Harashima, Taiji. (2009) “A Theory of Total Factor Productivity and the Convergence Hypothesis: Workers’ Innovations as an Essential Element,” MPRA (The Munich Personal RePEc Archive) Paper, No. 15508.

Harashima, Taiji. (2010) “An Asymptotically Non-Scale Endogenous Growth Model,” MPRA (The Munich Personal RePEc Archive) Paper, No. 26025.

Hayek, Friedrich August. (1937) “Economics and Knowledge,” Economica, Vol. 4, No. 13, pp. 33-54.

Hayek, Friedrich August. (1945). “The Use of Knowledge in Society,” American Economic Review, Vol. 35, No. 4, pp. 519-530.

Hayek, Friedrich August. (1967) Studies in Philosophy, Politics and Economics, The university of Chicago Press, Chicago.

Hayek, Friedrich August. (2002) “Competition as a Discovery Procedure, The Quarterly Journal of Austrian Economics, Vol. 5, No. 3, pp. 9–23.

Hirsch, Werner Z. (1952) “Manufacturing Progress Functions,” The Review of Economics and Statistics, Vol. 34, No. 2, pp. 143-155.

Hirsch, Werner Z. (1956) “Firm Progress Ratios,” Econometrica, Vol. 24, No. 2, pp. 136-143.

Hollander, Samuel. (2003) The Sources of Increased Efficiency: A Study of DuPont Rayon Plants, MIT Press, Cambridge.

Jacobs, Jane. (1969). The Economy of Cities, Random House, New York.

Jones, Charles I. (1995a). “Time Series Test of Endogenous Growth Models,” Quarterly Journal of Economics, Vol. 110, No. 2, pp. 495–525.

Jones, Charles I. (1995b). “R&D-Based Models of Economic Growth,” Journal of Political Economy, Vol. 103, No. 4, pp. 759–784.

Jones, Charles I. (2005) “The Shape of Production Functions and the Direction of Technical Change,” The Quarterly Journal of Economics, Vol. 120, No. 2, pp. 517-549.

Joskow, Paul L. and George A. Rozanski. (1979) “The Effects of Learning by Doing on Nuclear Plant Operating Reliability,” Review of Economics & Statistics, Vol. 61, No. 2, pp. 161-68.

Krueger, Alan B. and Mikael Lindahl. (2001) “Education for Growth: Why and for Whom?” Journal of Economic Literature, Vol. 39, No. 4, pp. 1101–1136.

Lange, Oskar. (1936) “On the Economic Theory of Socialism: Part One,” Review of Economic Studies, Vol. 4, No. 1, pp. 53-71.

Lange, Oskar. (1937) “On the Economic Theory of Socialism: Part Two,” Review of Economic Studies, Vol. 4, No. 2, pp. 123-42.

Lange, Oskar. (1938) On the Economic Theory of Socialism, University of Minnesota Press, Minneapolis.

Lavoie, Don. (1981). “A Critique of the Standard Account of the Socialist Calculation Debate,” Journal of Libertarian Studies, Vol. 5, No. 1, pp. 41-73.

Lazear, Edward P. (2003) “Firm-Specific Human Capital: A Skill-Weights Approach,” NBER Working Paper, No. 9679.

Lee, Samson S., John C. Dugger and Joseph C. Chen. (1999) “Kaizen: An Essential Tool for Inclusion in. Industrial Technology Curricula,” Journal of Industrial Technology, Vol. 16, No. 1.

Lerner, Abba Ptachya. (1944) The Economics of Control: Principles of Welfare Economics, Macmillan, New York.

Lieberman, Marvin B. (1984) “The Learning Curve and Pricing in the Chemical Processing Industries,” The RAND Journal of Economics, Vol. 15, No. 2, pp. 213-228.

Lieberman, Marvin B. (1987) “The Learning Curve, Diffusion, and Competitive Strategy,” Strategic Management Journal, Vol. 8, No. 5, pp. 441-452.

Lucas, Robert E. Jr. (1990) “Why Doesn't Capital Flow from Rich to Poor Countries?” American Economic Review, Vol. 80, No.2, pp. 92-96.

Luecke, Richard and Ralph Katz (2003). Managing Creativity and Innovation, Harvard Business School Press, Boston, MA.

Lynch, Lisa. (1991) “The Role of Off-the-Job Vs. On-the-Job Training for the Mobility of Women Workers,” American Economic Review, Vo. 81, No. 2, pp. 151-156.

Marshall, Alfred. (1890). Principles of Economics, Macmillan, London.

McDonald, Alan. and Leo Schrattenholzer. (2001) “Learning Rates for Energy Technologies,” Energy Policy, Vol. 29, No. 4, pp. 255-261.

Miketa, Asami and Leo Schrattenholzer. (2004) “Experiments with a Methodology to Model the Role of R&D Expenditures in Energy Technology Learning Processes; First Results,” Energy Policy, Vol. 32, pp. 1679–1692.

Mincer, Jacob. (1958) “Investment in Human Capital and Personal Income Distribution,” The Journal of Political Economy, Vol. 6, No. 4, pp. 281-302.

Mises, Ludwig. (1920) “Economic Calculation in the Socialist Commonwealth (Die Wirtschaftsrechnung im sozialistischen Gemeinwesen),” the Archiv für Sozialwissenschaften, Vol. 47.

Nemet, Gregory F. (2006) “Beyond the Learning Curve: Factors Influencing Cost Reductions in Photovoltaics,” Energy Policy, Vol. 34, No.17, pp. 3218-3232.

OECD/IEA (2000) Experience Curves for Energy Technology Policy, The Organization for Economic Co-operation and Development (OECD), Paris, France.

Papineau, Maya. (2006) “An Economic Perspective on Experience Curves and Dynamic Economies in Renewable Energy Technologies,” Energy Policy, Vol. 34, No. 4, pp. 422-432.

Peretto, Pietro and Sjak Smulders. (2002). “Technological Distance, Growth and Scale Effects,” The Economic Journal, Vol. 112, pp. 603–624.

Pisano, Gary P., Richard M.J. Bohmer and Amy C. Edmondson. (2001) “Organizational Differences in Rates of Learning: Evidence from the Adoption of Minimal Invasive Cardiac Surgery,” Management Science, Vol. 47, No. 6, pp. 752-768.

Preston, Lee E. and E. C. Keachie. (1964) “Cost Functions and Progress Functions: An Integration,” American Economic Review, Vol. 54, No. 2, pp. 100-107.

Rapping, Leonard. (1965) “Learning and World War II Production Functions,” The Review of Economic Statistics, Vol. 47, No. 1, pp. 81–86.

Reis, Dayr A. (1991) “Learning Curves in Food Services,“ The Journal of the Operational Research Society, Vol. 42, No. 8, pp. 623-629.

Romer, Paul Michael. (1986) “Increasing Returns and Long-run Growth,” Journal of Political Economy, Vol. 94, No. 5, pp. 1002-37.

Searle, Allan D. and C. S. Goody. (1945) “Productivity Increases in Selected Wartime Shipbuilding Programs,” Monthly Labor Review, Vol. 61, No. 6, pp. 1132-1147.

Sheshinski, Eytan. (1967) “Tests of the ’Learning by Doing’ Hypothesis,” The Review of Economics and Statistics, Vol. 49, No. 4. pp. 568-578.

Sorenson, Olav. (2003) “Interdependence and Adaptability: Organizational Learning and the Longterm Effect of Integration,” Management Science, Vol. 49, No. 4, pp. 446-463.

Stiglitz, Joseph E. (1994) Whither Socialism? MIT Press, Cambridge, Mass. and London.

Stobaugh, Robert B. and Phillip. L. Townsend. (1975) “Price Forecasting and Strategic Planning: The Case of Petrochemicals,” Journal of Marketing Research, Vol. 12, pp. 19-29.

Sultan, Ralph G. (1976) Pricing in the Electrical Oligopoly, Vol. 2: Business Strategy, Division of Research, Graduate School of Business Administration, Harvard University.

van der Zwaan, Bob and Ari Rablc. (2003) “Prospects for PV: A Learning Curve Analysis,” Solar Energy, Vol. 74, No. 1, pp. 19–31.

van der Zwaan, Bob and Ari Rablc. (2004) “The Learning Potential of Photovoltaics: Implications for Energy Policy,” Energy Policy, Vol. 32, No. 13, pp. 1545–1554.

Weisbroad, Burton A. (1966) “Investing in Human Capital,” The Journal of Human Resources, Vol. 1, No. 1, pp. 5-21.

Wiersma, Eelke. (2007) “Conditions That Shape the Learning Curve: Factors That Increase the Ability and Opportunity to Learn,” Management Science, Vol. 53, No. 12, pp. 1903-1915.

Williams, Robert H. and Terzian, G. (1993), “A Benefit/Cost Analysis of. Accelerated Development of Photovoltaic Technology,” PU/CEES Report No. 281, Center for Energy and Environmental Studies, Princeton University, NJ.

Womer, Norman Keith. (1984) “Estimating Learning Curves from Aggregate Monthly Data,” Management Science, Vol. 30, No. 8, pp. 982-992.

Womer, Norman Keith and J. Wayne Patterson. (1983) “Estimation and Testing of Learning Curves,” Journal of Business & Economic Statistics, Vol. 1, No. 4, pp. 265-272.

Wright, T. P. (1936) “Factors Affecting the Cost of Airplanes,” Journal of the Aeronautical Sciences, Vol. 3, No. 4, pp. 122-128.

Yelle, Louis E. (1979) “The Learning Curve: Historical Review and Comprehensive Survey,” Decision Sciences, Vol. 10, No. 2, pp. 302-328.

Zimmerman, Martin B. (1982) “Learning Effects and the Commercialization of New Energy Technologies: The Case of Nuclear Power,” Bell Journal of Economics, Vol. 13, No. 2, pp. 297-310.