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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.
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