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Capitalist Planning and Socialist Chaos Part 2

Capitalist Planning and Socialist Chaos Part 2
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painting (1)Most of this essay has been extracted from portions of the author’s Capitalism: A Treatise on Economics, specifically pp. 137-139 and 269-273.


Because of Its Destruction of the Price System, Economic Planning under Socialism Would Require the Existence of an Omniscient Deity

All of this raises the insuperable difficulty of socialist planning: Namely, under socialism, it is necessary to plan the production of the entire economic system as an indivisible whole. That would be the only rational procedure.

But the planning of the economic system as an indivisible whole is simply impossible.

It would require a superhuman intellect to be able to grasp the physical connections among all the various industries and to be able to trace the consequences of alterations in any one industry on all the others. What would be required for the rational planning of a socialist economy would be the existence of an omniscient deity willing to descend from heaven and assume the management of the socialist economy.

This deity would have to be able to hold in mind at one time a precise inventory of the quantities and qualities of all the different factors of production in the entire economic system, together with their exact geographical locations and a full knowledge of the various technological possibilities open to them. That is to say, it would have to be able to hold in mind at one time all of the millions of separate farms, factories, mines, warehouses, and so forth, down to the last repair shop, together with a knowledge of the quantity and quality of all the machines, tools, materials, and partly-finished goods that they contained, and exactly what they were potentially capable of accomplishing and when.

It would then have to be able to project forward in time all of the different new combinations of factors of production that might be produced out of the existing factors, together with where and precisely when they would come into existence and the technological possibilities that would then be open to them. It would have to be able to make this projection for an extended period of time—say, a generation or more—in order to avoid the possibly wasteful production of machines and buildings lasting that long.

And then, out of all the virtually infinite number of different possible permutations and combinations of what might be produced, it would have to pick one that on some undefined and undefinable basis it considered “best,” and then order it to be undertaken. That would be its economic plan. That is what would be required even to begin to duplicate what capitalism accomplishes through the price system.

For observe. Under capitalism, different individuals in combination—that is, when their knowledge is added together—do know the precise quantities, qualities, locations, and technological possibilities open to all the various factors of production in the economic system. And everybody’s production is based on the sum of all of this knowledge, because the knowledge is reflected in the prices of all the various factors of production and products. For example, the price of wheat at any given time reflects the knowledge of each owner of wheat concerning the amount, quality, and location of the wheat he owns; it also reflects the knowledge of each user of wheat about the technological possibilities open to wheat. All of this knowledge enters into the supply and demand and hence the price of wheat. It is the same with every other good: its price reflects the sum of existing knowledge about the amount of it available, the technological possibilities open to it in production, and every other relevant consideration. And the future supply, locations, and production possibilities of factors of production are taken into account in the anticipation of their future prices.

The Economic System Requires Continuous Replanning, Which Is Impossible under Socialism but Routine under Capitalism

The deity needed for the planning of socialism would require intellectual powers even surpassing those I have described. For under socialism any unanticipated event, such as a train wreck, an early snowstorm, a warehouse fire, an unexpectedly bad harvest—even unanticipated favorable events, such as the opposite of all of these—is a calamity, for it requires the replanning of the entire economic system. For example, if a tank train carrying a shipment of oil is destroyed, how is the socialist economy to decide where to take out the loss? It would have to look at all of the different uses for oil, all the possible remote consequences of its withdrawal from this or that area of production, and it would have to look at all of the alternative employments of factors of production that might be used to replace the lost oil, and all the permutations and combinations entailed in that, and then decide. By the same token, if, as a result of good fortune, a socialist economy had fewer wrecks of tank trains than anticipated, it would have to replan the entire economic system to find the right use for the extra supply of oil.

Capitalism, on the other hand, responds easily and smoothly to unforeseen changes in economic conditions. Such changes simply bring about a change in the structure of prices and thus generate the most efficient response on the part of all concerned. Thus, the wreck of a tank train—to continue with that example—acts to raise the price of oil a little. The rise in price diminishes the consumption of oil in its marginal employments and simultaneously encourages its production—and, of course, at the least possible expense to other productive activities. The reason capitalism responds so smoothly and efficiently is that every individual in the economic system is involved in planning the response. Each individual acts on the basis of his knowledge of his own personal or business context, and the actions of all the individuals are harmoniously integrated through the price system.

The Problem of Socialism Is that It Requires the Planning of the Economic System without Benefit of a Division of Labor in the Planning Process, Which Is Impossible

The essential problem of socialism is that it requires economic planning to take place without benefit of a division of labor in the planning process. It requires that one man (the Supreme Director), or each of several men (the Supreme Board of Directors), hold in his head and utilize the knowledge that can be held and utilized only by millions of separate individuals freely cooperating with one another on the basis of private ownership of the means of production and its offshoots the profit motive and the price system. The essential economic flaw of socialism is that in destroying these basic institutions of capitalism, it destroys the foundations of the intellectual division of labor that is indispensable to rational economic planning.

As I say, therefore, the planning of the economic system as an indivisible whole—by single individuals—let alone its continuous replanning in response to every unforeseen change, is simply impossible. The ruler of socialism, after all, is simply not an omniscient deity.

The Actual Planning of Socialism Is Not Rational Central Planning but Chaotic, Decentralized Partial Planning

As a result, although it is called “central planning,” socialism can never have anything even approaching a rationally integrated plan for the entire economic system. In reality, the actual planning of socialist countries is undertaken by separate government ministries, each responsible for different industries or regions. Even the individual factories undertake part of the planning process. The plans of these separate ministries and individual factories are only superficially integrated into an economy-wide plan. In this sense, the actual planning of socialism must be called “decentralized planning.” There is no alternative to decentralized planning, because it is simply impossible for any one individual to try to plan everything. Decentralized planning exists as soon as two or more people assume separate responsibilities in the planning process.

However, the decentralized planning of socialism necessarily causes chaos. Because without a price system—without the foundation and mainspring of the price system, i.e., private ownership of the means of production and the profit motive—the individual planners must operate at cross purposes. First of all, there is nothing to stop their various discoordinated plans from presupposing the availability of the same factors of production. In such conditions, the execution of any plan necessarily absorbs factors of production whose absence then makes the execution of other plans impossible. For example, if the shoe industry is planned by one ministry, the clothing industry by a second ministry, the steel industry by a third ministry, and so on, there is nothing to prevent all of these industries from drafting mutually contradictory plans. There is nothing to prevent them from basing their plans on the availability of the same labor, or the same material, fuel, transport facilities, or whatever. In such a case, to whatever extent one industry succeeds in obtaining the factors of production necessary to execute its plan, it simultaneously wrecks the plans of other industries.

Observe what is involved here. Because planning under socialism is necessarily both decentralized and lacks coordination, the production of each of the various goods can be expanded more or less randomly at the expense of destroying the production of other, more important goods. This is exactly the same chaos that prevails under universal price controls and universal shortages. (For a discussion of the essential similarities between socialism and universal price controls and their accompanying controls on the allocation of factors of production, see Chapters 7 and 8 of the author’s Capitalism: A Treatise on Economics. See also his essay “Why Nazism Was Socialism and Why Socialism is Totalitarian.)

Compounding Chaos under Socialism: Disinterested Suppliers and Customers

Furthermore, to whatever extent individual industries or factories are given discretion in the plans, the products that are produced can very well be unsuited to the needs of other industries that depend on them, and in that way wreck the plans of these other industries. For example, the plan for agriculture can be wrecked by the poor quality of tractors that break down too often or aren’t suited for the terrain. Under socialism, suppliers do not have any incentive of profit and loss in meeting the requirements of their customers. Nor are they subject to any form of competition. Each branch of industry under socialism is a protected legal monopoly that is totally disinterested in the requirements of its customers. This, too, is exactly the same situation as exists in the case of price controls and shortages. And it applies, as I say, not only at the consumer level, but at the producer level as well.

Under socialism, each industry, as well as each consumer, is at the mercy of disinterested monopoly suppliers. To understand what this is like, first recall our discussion of the problems at service stations and in the relations between tenants and landlords resulting from price controls on gasoline and from rent controls. (See ibid., pp. 239–40.) Now observe that similar or even worse problems exist around us in the present-day United States in practically every case in which the government is the supplier. For example, think of the services provided by municipal bus lines and subway systems, the public schools, the motor vehicle bureau, and the Post Office. All of these operations are notorious in the utter indifference and contempt they display toward customers and in the low quality and lack of dependability of their services. These characteristics are the result of the fact that these operations are government owned and therefore operate without the incentives of profit and loss; in addition, they are generally immune from the threat of competition. Because of the lack of profit and loss incentives, it doesn’t matter to them whether they gain customers or lose customers—whether they perform fast and efficient service or slow and inadequate service.

Now imagine the steel industry being owned by the government and run in the same way, and the customers of the steel industry having to contend with its performance. The industries needing steel would not be able to make their plans with very great confidence. Moreover, since they too would be owned by the government, they would not particularly care about not receiving the quality and service or even the kind of products they were supposed to. The effects on their customers, in turn, and on the plans of their customers, would be compounded.

For example, an industry waiting for a new factory, say, called for by its plan, would have to contend with the indifference and bad service of a construction industry suffering from the indifference and bad service of the steel industry. And so it would go, with the plans of each industry wrecked by the lack of incentives and poor performance of every other industry further back in the chain of supply. It is for these very reasons, which are tantamount to the conditions of chronic shortages, that suppliers in the Soviet Union were so unreliable that each factory there strove as far as possible to be self-sufficient and thus independent of suppliers. (See ibid., pp. 136-137.)

Socialism Represents the Prohibition of Economic Planning by Everyone except a Handful of Government Officials Who Make Planning their Monopoly and then Are Incapable of Planning

To think of socialism as a “planned economy” is absurd. It is, in fact, an “anarchy of production”—a true anarchy of production. What socialism represents is so far from rational economic planning that it is actually the prohibition of rational economic planning. In the first instance, by its very nature, it is a prohibition of economic planning by everyone except the dictator and the other members of the central planning board. They are to enjoy a monopoly privilege on planning, in the absurd, virtually insane belief that their brains can achieve the all-seeing, all-knowing capabilities of omniscient deities. They cannot. Thus, what socialism actually represents is the attempt to substitute the thinking and planning of one man, or at most of a mere handful of men, for the thinking and planning of tens and hundreds of millions, indeed, of billions of men. By its nature, this attempt to make the brains of so few meet the needs of so many has no more prospect of success than would an attempt to make the legs of so few the vehicle for carrying the weight of so many.

To have rational economic planning, the independent thinking and planning of all are required, operating in an environment of private ownership of the means of production and the price system, i.e., capitalism.

Anyone who has read and understood this essay should now realize what an enormous combination of ignorance and arrogance is present in the belief that capitalism is a planless chaos and that, as socialism requires, the economic system could be comprehended and planned in all the necessary detail by the mind of just one man or a handful of men.

Postscript

Dear Reader,

If you liked this essay, please be sure to see Reisman’s other Kindle books at http://www.amazon.com/-/e/B001KCWY0Q. In particular, you should be sure to see his Capitalism: A Treatise on Economics, from which the content of this essay was drawn. This book provides not only a thoroughgoing demonstration both of the economic planning and order that prevail under capitalism and of the chaos and tyranny that prevail under socialism. It also deals equally effectively with all the other leading areas of economic theory and economic policy.

Aimed at both the intelligent layman and the professional economist, and written in language that both can understand, it is the most comprehensive and intellectually powerful explanation of the nature and value of laissez-faire capitalism that has ever been written. It represents a twofold major integration of truths previously discovered by other writers, combined with numerous original contributions made by the author himself. Within economic theory, it integrates leading ideas of the Austrian school with needlessly abandoned doctrines of the British classical school. It further integrates such reconstituted economic theory with essential elements of Ayn Rand’s philosophy of Objectivism. (The Austrian school has been the main school of procapitalist economic thought since 1871; von Mises is its most important member, followed by Böhm-Bawerk. The British classical school was the main school of procapitalist economic thought prior to 1871; Adam Smith and David Ricardo are its most important members.)

On the foundation of these integrations, Dr. Reisman is able to develop the numerous major original contributions that the book presents on the subjects of profits, wages, saving, capital accumulation, aggregate economic accounting, monopoly, and natural resources, among other vital subjects. Based on the same foundation, the book presents the most powerful critiques of Marx, Keynes, the pure-and-perfect competition doctrine, and environmentalism to be found anywhere.

A leading part of its trenchant economic analysis is a consistent demonstration of the natural harmony of the rational self-interests of all men under capitalism—of businessmen and wage earners, of consumers and producers, of men of all races and nationalities, including immigrants and the native born, and of competitors of all levels of ability—consonances most will find astonishing, given the prevailing misunderstandings of capitalism in the present day.

Acknowledgment

The arguments advanced in this essay rest almost entirely on the work of my great mentor Ludwig von Mises, who was the first to demonstrate the impossibility of economic calculation under socialism as far back as 1922, in the first German edition of his great classic Socialism (die Gemeinwirtschaft in German.)

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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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