I have a friend whose job is to attract high-tech businesses to Montana. He knows that folks with integrity, intelligence, and a strong work ethic-people with high human capital-are the key to success. He's trying to develop the financial and physical resources to lure these scientists and entrepreneurs. He's got a big stake in the state's economic future and I wish him luck. He'll need it.

My friend has explained the ingredients of progress to our governor. Constructive policies include substantial investments in higher education and fundamental tax reform. Relaxed environmental standards, poor schools, and high marginal income and business taxes invite economic failure. All repel entrepreneurs.

Global forces are shaping new economic landscapes. Past policies focusing on agriculture and extraction no longer work well. The state should foster entrepreneurship and attract and retain high human capital, not try to guess likely winners.

Two realities influence our economic future. Montana's prospects will be much dimmer if our leaders ignore them or pretend them away.

First, there's no magic economic elixir; it's impossible to plan economic development. Economic life evolves by technological innovation and competition, just as biological life evolves by genetic mutation and natural selection. Both involve the undirected actions of millions of participants, each independently pursuing his own interests.

Economic planning fails because the information and resources required to create value are vast and widely scattered. These insights are well articulated in the classic 1945 article, "The Use of Knowledge in Society" by Nobel laureate F.A. Hayek. Hayek's simple, powerful insight is as important today as it was then.

He explains why we can easily plan at small scales (e.g., a family). Here it is relatively easy to agree on goals. Also, the people involved have the relevant time- and place-specific knowledge of available resources. But at larger scales, both agreement and knowledge decrease. Hence, centralized planning attempts to determine the economic lives of people with widely different ideas and values and does so with very poor information. Those who neglect these facts should learn from the history of the West. Here's an example:

Between 1933 and 1938 the Columbia Basin Project (CBP) impounded water behind the Grand Coulee Dam. It was to provide irrigation and power to 100,000 family farms, and turn the desert of eastern Washington into lush farmland. Two generations later, only a few thousand farmers and corporations work the irrigated land-at great cost to taxpayers and the environment.

What was the problem? Planners designed policies for an unknown future, the only kind we have. The CBP plans did not anticipate changes in technology such as the replacement of horses by tractors. The tractors, tillers, and harvesters all became much, much larger and faster. This led to huge consolidation rather than 40-acre farms. Social preferences are even more difficult to predict (e.g., for healthy runs of wild salmon instead of more dams for irrigation).

Here is the second point. Montana is fundamentally two states. The fast-growing western counties (e.g., Missoula, Flathead, Gallatin, and Ravalli) are economically and culturally linked with major metropolitan areas. Their economic growth is driven by the region's environmental amenities.

In contrast, the eastern two-thirds of the state is part of the high desert plains extending east to the 98th meridian. It has fewer people today than during World War I. Economic and ecological forces have proved that John Wesley Powell got it right in his 1878 Report on the Lands of the Arid Region of the United States. He warned that the region's adverse mix of climate and topography would preclude repeating the successful homesteading experience in the Midwest.

In this region, as elsewhere in the developed world, information, transportation, and technological improvements drive out higher-cost agricultural producers. The consolidation of farms and ranches follows and towns decline. While economic analysis and market forces suggest abandonment, this is an unpopular prescription. Montanans value their rural heritage.

The question remains: What to do with a bad hand dealt the high plains? Unfortunately, my friend's problem is that there are no simple, politically palatable answers.

But here's what we know. Human capital is ever more mobile. Across time and cultures, it gravitates toward better opportunities. Further, every technological advance requires fewer people to work the land. In addition, farmers and ranchers face global competition. Many will survive only if federal subsidies continue to rise.

The market is an evolutionary process. We don't know what will succeed. But let's start by recognizing our state's natural advantages. If we neglect them, hope for economic prosperity is doomed.