> Hayek never explained how global corporations, the > outputs of which matched that of a small or medium-sized economy were capable of organizing the requisite information, but the planning department of > such a government would not be up to the task. > Michael Perelman The difference is that an economy engages in production, exchange, and consumption, while a firm engages only in production. A completely centrally planned economy would need to plan the consumption of each individual, whereas the maximization of utility is based on individual preferences which change and cannot be known to the central planner. Central planning can work in a very small economy which uses market prices for its inputs and outputs. For example, a family is a micro-economy which is run with central planning and communist principles. But the greater the number of people in a family, the less effective is the central planning. If we model the interactions of n people as n squared, the complexity grows by the square of the number of individuals. Hayek's concept of decentralized knowledge becomes ever more applicable the greater n is. A huge army can be centrally planned because the consumption by the individuals soldiers is not a priority; the main desired consumption is the destruction of the enemy. A large firm is effective because consumption depends on the unplanned demands of its custormers, and the prices of inputs and outputs are set outside the firm. Fred Foldvary