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Capitalist Planning and Socialist Chaos Part 1

Capitalist Planning and Socialist Chaos Part 1
Profile photo of George Reisman

AnticStore-Large-Ref-5540_01Most of this essay has been extracted from portions of the author’s Capitalism: A Treatise on Economics, specifically pp. 137-139 and 269-273.


 

Economic planning is almost always thought to be an activity performed by governments. In contrast, the activities of private individuals and business firms under capitalism, each of whom acts separately and independently, for his own self-interest, are assumed to be described by the epithet “anarchy of production.” According to the prevailing view, which derives from Marxism, governments rationally plan, while private individuals and business firms run around like chickens without heads, each vainly seeking to benefit himself without regard for the consequences of his actions on others, and thus to the detriment of others.

In contrast, socialism is usually thought to be a system of rational, central economic planning, in which the government operates each part of the economic system with an eye to the effect on all the other parts, and thereby is able to replace the allegedly planless, mutually destructive chaos of capitalism with a rationally planned system that controls and coordinates the actions of each for the benefit of all. In this way, the overthrow of capitalism, and its replacement by socialism, was long thought to be essential to the furtherance of the values of reason and rationality in economic life.

The prevalence of such views is a leading testimony to the ability of wrong ideas sometimes to cause blindness to the most obvious facts of reality.

Capitalism Has All-Pervasive But Unrecognized Economic Planning

The truth is that under capitalism the economic system already has economic planning. Economic planning is omnipresent under capitalism. And this economic planning is overwhelmingly rational, with the separate, self-interested plans of each individual and business firm harmoniously coordinated and integrated with the separate, self-interested plans of all other individuals and business firms.

Yet the fact that capitalism has economic planning is almost completely unknown. Practically everyone under capitalism has been in the position of Molière’s M. Jourdan, who spoke prose all his life without ever knowing it, prose being the somewhat fancy technical term that stands for ordinary, everyday speech. The overwhelming majority of people have not realized that all the thinking and planning about their personal and business economic activities that they perform in their daily lives actually is economic planning.

The truth is that each individual under capitalism is engaged in economic planning almost continuously. We are all engaged in economic planning under capitalism practically every day, but hardly any of us realize it—least of all, today’s intellectuals. The following extensive list of examples will make it clear in just what ways we practice economic planning.

An individual is engaged in economic planning when he plans how much of his wealth and income to save and invest and how much of it to consume; when he plans where to invest it and in what ways to consume it. He is engaged in economic planning, for example, when he plans to put his money in a bank or in the stock market, and in which specific shares in the stock market; when he plans to buy more clothes or a new stereo; even when he plans to drive to work or take the train, instead.

Every businessman under capitalism is engaged in economic planning when he plans to expand or contract the production of any item; when he plans to introduce a new product or discontinue an existing product; when he plans to change his methods of production or retain his existing methods; when he plans to build a new factory or not to replace an existing one; when he plans to change the location of his business or let it remain where it is; when he plans to open new branches or close existing branches; when he plans to buy new machinery or not; to add to his inventories or not; to hire additional workers or let some of his present workers go.

Every wage earner under capitalism is engaged in economic planning in all of the thinking he does about how to perform his job, which is what enables him to do his job and earn his wage. He is engaged in economic planning when he plans to seek new employment or to retain his present employment; when he plans to improve his skills or rest content with the ones he has; when he plans to do his job in one particular area of the country, or in one particular industry, rather than in another.

In short, every one of us under capitalism is engaged in economic planning every time he plans any aspect of his personal finances or business affairs. We are engaged in economic planning every time we think about a course of action that would benefit us in our capacity as a buyer or seller. We are engaged in economic planning even in an activity as small and mundane as that of preparing a shopping list.

It is simply amazing that all of this planning could be overlooked, and that the socialists have been able to proceed as though capitalism lacked planning. Capitalism has planning—the planning of each and every person who participates in the economic system.

Capitalism not only has all-pervasive economic planning carried out by all of the tens of millions—indeed, with the globalization of the economic system, by all of the hundreds of millions and billions—of individuals and business firms that participate in the economic system across the world. But, in addition, all this planning is harmonized, coordinated, and integrated into a comprehensive rational planning of the entire economic system. What accomplishes this is the existence of the price system, a vital social institution that can exist and function only under capitalism.

The Economic Planning of Capitalism Rests on the Price System

Under capitalism each individual and business firm plans his own particular sphere of economic activity. But he plans on the basis of a consideration of prices—the prices he will receive as a seller and must pay as a buyer.

The consideration of prices is what harmonizes, coordinates, and integrates the plans of each individual and business firm with the plans of all other individuals and business firms and produces a fully and rationally planned economic system under capitalism. For example, a student changes his career plan from actor to accountant when he contemplates the vast difference in income he can expect to earn in the one profession compared with the other. A prospective home buyer changes his plan concerning which neighborhood to live in when he compares house prices in the different neighborhoods. And businesses change their plans concerning product lines, methods and locations of production, and every other aspect of their activities, in response to profit-and-loss calculations.

All of these changes represent the adjustment of the plans of particular individuals and businesses to the plans of others in the economic system. For it is the plans of others to purchase accounting services rather than acting services that cause the higher income our student can expect to earn as an accountant rather than as an actor. It is the plans of others willing and able to pay more to live in certain neighborhoods, and less to live in others that determine the relative house prices confronting our home buyer. It is the plans of its prospective customers, of all competing sellers of its goods, and of all other buyers of the means of production it uses or otherwise depends on, that enter into the formation of the prices determining the revenues and costs of any business firm and thus what it finds profitable or unprofitable to produce.

Thus, prices have a twofold function in the planning of capitalism. First, they enable the individual planner of capitalism to perform economic calculations. That is, they enable him to compute the money cost and/or money revenue of various modes of conduct. If the planner is a businessman, he weighs a money cost against a money revenue. If he is a consumer, he weighs a money cost against a personal satisfaction. If he is a wage earner, he weighs a money revenue against his personal efforts.

These economic calculations provide a standard of action for the planner under capitalism. They tell businessmen to produce the products and use the methods of production that are anticipated to be the most profitable. They tell consumers to consume in the ways that, other things being equal, occasion the lowest cost. And they tell wage earners to work at the jobs that, other things being equal, pay the highest wages. Thus, prices are an indispensable guide both to the planning of production and to the living of one’s personal life under capitalism.

The Coordinating Function of Prices

As indicated, the second, corollary function of prices is that they coordinate the plans of each individual and business firm under capitalism with the plans of all other individuals and business firms. That is, prices serve to make each individual and business firm adjust his own plans to the relevant plans of all other individuals and business firms in the economic system. In this way, capitalism and the price system bring about a harmoniously integrated planning of the entire economic system. Concern with money revenue makes one adjust to the plans of the prospective buyers of one’s goods or services and to the plans of all competing—and even potentially competing—sellers of those goods or services. For

example, if customers decide that they want more of some item, that will tend to raise its price and the profitability of producing it. Sellers will thus be induced to change their plans and produce more of it. If the sellers produce too much more of the item, its price and profitability will fall, and some of the sellers will be induced to change their plans once again, and produce less of it. The mere anticipation by some sellers of other sellers planning to produce and sell more can be sufficient to lead them to plan to produce and sell less.

Concern with money costs makes one adjust to the plans not only of all other buyers seeking the particular thing or things one wants to buy, as in the case of the house that is too expensive. It also makes one adjust one’s plans to harmonize with the plans of all those who seek to employ the factors of production from which that good is made, or alternative products of those factors of production. For example, the prices of raw copper, copper cookware, copper cable, copper pipe, copper wire, and all other copper products are all related. A rise in the demand for any copper product tends to bring about a rise not only in its own price, but also in the price of raw copper and all other copper products, whose cost of production is increased by the rise in the price of raw copper. Thus a buyer who decides he must limit his purchases of copper cookware because of its cost is implicitly adjusting his plan for copper cookware purchases to the plans of buyers of raw copper and alternative copper products throughout the economic system. And, of course, buyers, must adjust their plans to the plans of sellers in their capacity as individuals having definite personal values and preferences.

Thus, the desire to earn a money revenue leads one to produce things that the buyers want and that are not being produced excessively by other sellers. The desire to limit costs leads one to economize on things to the degree that other buyers value them, or value the factors of production on which they depend, or the alternative products of those factors of production; and also to economize to the degree that the goods or services in question can be provided only at some special inconvenience to the sellers engaged in producing them.

The Price System Depends on Private Ownership of the Means of Production, i.e., on Capitalism

The price system rests on the profit motive and the freedom of competition. Operating in conjunction with one another, these are the elements that drive and regulate the price system—that determine the formation of all individual prices and their integration into a system. The profit motive and the freedom of competition, in turn, vitally depend on the institution of private ownership of the means of production, which is the most fundamental institution of capitalism.

It is necessary to explain here the nature of both of these sets of dependencies: that of the price system on the profit motive and the freedom of competition and, in turn, that of the profit motive and the freedom of competition on private ownership of the means of production.

The profit motive—financial self-interest—makes everyone be concerned with the revenue or income he earns and the costs or expenses he incurs. Precisely this, of course, is what harmonizes and integrates the economic plans and the economic activities of all the separate businesses and individuals who make up the economic system. While the principles describing just how this occurs are the subject matter of price theory and are explained at length in my Capitalism: A Treatise on Economics, this much can be stated now, as a brief, advance indication: Namely, the profit motive provides powerful incentives for the steady expansion and improvement of production and, at the same time, operates to keep the relative size of all the various industries and occupations in proper balance. It makes production accord with the will of the ultimate buyers—the consumers—and ensures that the production of each individual good takes place in a way that is maximally conducive to production in the rest of the economic system. The profit motive is what balances the demand and supply of each product and ensures the most rational and efficient distribution of each product over space and time—among all the markets that compete for it—and its delivery into the hands of those individuals who, within the limits of their wealth and income, need or desire it the most. The profit motive ensures the most rational and efficient allocation of capital and of every type of labor and material among its possible alternative uses, and makes the economic system respond to changes in economic conditions in the most rational and efficient manner possible.

Thus, the profit motive is what prevents any sort of “anarchy of production” and, instead, creates economic order and harmony out of the activities of all the different individuals who comprise the economic system. It is what enables capitalism to be an economic system that is rationally and cohesively planned by each and every individual who participates in it.

If the profit motive is the engine which drives the price system, competition and the freedom of competition are the built-in regulator which provide the essential context in which that engine operates. What this means is that in seeking to serve his financial self-interest, every seller under capitalism must be aware that there are other sellers or potential sellers who might sell to his customers and thus that he must accordingly limit the prices he asks. By the same token, every buyer under capitalism must be aware that there are other buyers or potential buyers who might buy from his suppliers and thus that he must set the prices he offers accordingly.

Now while the profit motive and the freedom of competition are the elements that drive and regulate the price system, as stated, they themselves in turn rest on the foundation of private ownership of the means of production.

Private ownership of the means of production is what makes the profit motive operative in the formation of prices, the prices both of means of production and of products. Furthermore, private ownership of the means of production underlies the very existence of the incentives of profit and loss, in that it is private property, above all in the form of private ownership of the means of production, that is the substance of what is gained or lost by producers. Without the ability to accumulate holdings of private property, there would be nothing for producers to gain except the ability to enlarge their immediate consumption, and nothing at all for them to lose, because losses can be losses only of preexisting property. With private ownership of the means of production there is not only the incentive of profit and loss to use the means of production profitably but also the vitally important fact that an individual’s control over the means of production is increased or decreased to the extent that he uses them profitably or unprofitably.

This last results from the fact that those owners who use the means of production profitably are in a position to save and reinvest, in proportion to the extent of their profits. To the extent that their sales proceeds exceed their costs, they obtain the funds not only to replace the means of production with which they began but to more than replace. They are thus enabled to enlarge their control over the means of production. By the same token, those owners of the means of production who suffer losses correspondingly lose control over the means of production. Their losses mean that their sales proceeds are less than their initial outlays and thus that they lack the funds to replace the means of production with which they began.

Thus private ownership of the means of production is what gives the profit motive virtually all of its economic influence: it enables the profit motive both to be operative in the formation of the prices of means of production and products and to direct the use of the means of production. At the same time, it enables success or failure in earning profits to determine the extent of one’s control over means of production in the future. And, of course, it is what gives the profit motive its strength.

As to economic competition: private ownership of the means of production underlies economic competition, in that economic competition presupposes separate, independent producers, who, in order to be separate and independent, must hold the wealth they use in production separately and independently from one another. Thus competition among producers presupposes private ownership of the means of production. Furthermore, the freedom of competition, like virtually all other freedoms, is an aspect of property rights: it is the freedom of owners of means of production to employ their means of production in any branch of industry they choose.

Socialism Destroys the Foundations of Economic Planning

Now socialism, in destroying private ownership of the means of production destroys the foundation both of the profit motive and competition, which in turn are the foundations of the price system, which is destroyed along with its foundations. In destroying the price system, socialism destroys the possibility of economic calculation and the coordination of the activities of separate, independent planners. It therefore makes rational economic planning impossible and creates chaos.

As an illustration of the consequences, consider the problems confronting a socialist government in trying to plan the production of a simple item, such as shoes. Shoes can be produced in varying quantities, in various styles or combinations of styles, and by various methods or combinations of methods, such as by machine or by hand, including the choice between using various proportions of machine or hand production in different parts of the overall process. They can be produced from different materials or combinations of materials, such as leather, rubber, and canvas, and in different geographical locations, again, in both instances, in varying proportions. Under capitalism, all of these choices are determined on the basis of economic calculations. Thus, shoe production as a whole tends to be carried to the point where further production would make the shoe industry relatively unprofitable in comparison with other industries; the styles are those which the consumers are willing to make profitable; the methods of production, the materials used, the geographic locations are all the lowest cost except insofar as they provide special advantages for which the consumers are willing to bear the extra cost.

Under socialism, the lack of economic calculation makes it impossible to make any of these choices on a rational basis. The extent of attempted shoe production is determined arbitrarily—most likely on the basis of some official’s judgment about how many pairs of shoes are “necessary” per thousand inhabitants, or some such criterion. Style is determined arbitrarily—according to what suits the tastes of those in charge. The methods, materials, and locations planned must be selected arbitrarily. And then—for reasons that will soon become clearer—the actual carrying out of production, as opposed to what is called for in the plans, may very well have to be undertaken on the accidental basis of the means of production that happen to be available.

Now it must be stressed that the decisions about all of these choices—quantity, styles, methods, and so on—are important not only from the standpoint of the consumers of shoes, but, no less, from the standpoint of the production of all other goods. It must be borne in mind that shoe production, or the production of any good whatever, requires factors of production which are thereby made unavailable for other purposes. Shoe production requires labor that could be employed elsewhere. It requires leather or other material that either might be employed elsewhere or which is produced by labor that could certainly be employed elsewhere. In the same way, the tools or machines required, or the labor and the materials used to make them, have alternative employments. Moreover, each of the different choices respecting shoe production makes a different combination of factors of production unavailable for alternative employments. For example, shoes produced by hand reduce the number of handicraft workers available for other purposes. Those produced by machine reduce the number of machine makers and the amount of fuel available for other purposes. Shoes produced in Minsk leave less labor available for other purposes in Minsk than if they were produced in Pinsk, and so on.

It is, therefore, clearly not enough, as most socialists appear to believe, for a socialist government—having inherited or stolen the technology of shoe production—to simply decide how many shoes to produce, determine on a style, quality, method, and locations for production, and then give the orders to produce them. In planning the production of shoes, or any other individual item, a socialist government is logically obliged to consider its effect on the production of all other items in the economic system. It is logically obliged to try to plan the production of shoes, or any other good, in a way that least impairs the production of other goods. In drafting its plans for shoe production, a socialist government is obliged to consider the extent of shoe production in relation to the production of all other goods using the same factors of production. It is obliged to consider such questions as whether shoe production might be expanded with factors of production drawn from the production of some other good, and whether the production of that other good might be maintained by drawing factors of production from a third good, and so on.

For example, it must consider whether it would be advisable to use more labor in Minsk for shoes and less for making clothing, say, and perhaps to expand clothing production in Pinsk, at the expense of some third good. It must consider all of the industries using any of the factors of production used in the shoe industry. It must consider what depends on the output of those industries and what alternative factors of production are available to those industries. Indeed, it must go even further. It must consider all of the industries using the alternative factors of production. It must consider what depends on their products, and what further alternative factors of production may be available to them. And so on. And at each step, it must consider the possibility of expanding the overall supply of the factor of production in question, and, if so, by what means, where, and at the expense of what.

To make these problems real, let us continue with the example of shoes. In order to plan shoe production rationally, it would be necessary for a socialist government to consider all of the alternative employments of each of the factors of production used to produce shoes. Let us start just with leather. A socialist government would have to consider the alternative employments of leather, such as upholstering furniture and providing belting for machinery. It would have to consider the consequences of having more or less furniture and machinery versus more or less shoes. It would have to consider alternatives to the use of leather in upholstering furniture and making belting for machinery—for example, various fabrics, and plastic and steel. It would have to consider the alternative uses for the various fabrics and for the plastic and steel, or for the factors of production used to produce them. It would have to consider what depended on those alternative uses, and what substitutes were available for them. It would have to consider whether the total supply of leather, its substitutes, or the substitutes for its substitutes, should be expanded, and, if so, by what means, where, and at the expense of what. Then, of course, the socialist government would be obliged to repeat the same procedure for all of the other factors of production employed to produce shoes, or which potentially could be employed to produce shoes.

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George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics. He is Pepperdine University Professor Emeritus of Economics. His web site is www.capitalism.net. His blog is at www.georgereismansblog.blogspot.com. Follow him on Twitter @GGReisman and see his Amazon.com author

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