European Central Bank President Mario Draghi told The Wall Street Journal last month that the "European social model has already gone." If his fellow Europeans have read Friedrich Hayek, they would also understand why.

 

Friedrich August Hayek, who passed away 20 years ago today, was one of foremost social scientists of the last century. A Nobel laureate in economics, Hayek is often associated with a crucial intuition that informs his critique of socialist systems. There is, in society, a "knowledge problem": Economic life requires the coordination of individual planning. The relevant knowledge for economic planning is dispersed rather than concentrated in society. If this makes coordination challenging enough in a market system, it also makes coordination a virtual impossibility under central planning: The planner can never secure and process all the necessary information to provide detailed guidance to any given development in society.

 

Even though this argument was originally deployed against hard-core socialism, it works pretty well against the soft-core version widely adopted by European democracies. Centralized welfare systems are necessarily run by a bureaucratic leadership. Pace Max Weber, the "technical superiority" of such an organization is simply not enough to master the nuances of a complex society. Centralized government allocates resources badly—regardless of its intentions. The very nature of centralization makes impossible for it to collect and compute all the information that is needed. This is as true for any grand scheme of industrial planning as it is for the government-led welfare systems that characterize Europe's "social model."..