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

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  • Harashima, Taiji

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29107.

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Date of creation: 26 Feb 2011
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Handle: RePEc:pra:mprapa:29107

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Keywords: Hayek; Market economy; Socialist planned economy; Total factor productivity; Innovation; Experience curve effect; China;

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Cited by:
  1. Harashima, Taiji, 2014. "Division of Work and Fragmented Information: An Explanation for the Diminishing Marginal Product of Labor," MPRA Paper 56301, University Library of Munich, Germany.
  2. Harashima, Taiji, 2012. "A Theory of Intelligence and Total Factor Productivity: Value Added Reflects the Fruits of Fluid Intelligence," MPRA Paper 43151, University Library of Munich, Germany.

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