I hear a lot that the market is more responsive to demands than a socialist system because of the wonders of the price mechanism, economic calculation problem etc.
But the way i see it, a producer will know whether his product is successful or not by the quantity of the good sold. If he sells 0, then there is no demand for it, if he sells all of his products, then there is greater demand. The price of the good can fluctuate accordingly based on this. But, surely this can happen in a socialist system too? the government can gauge whether their product is needed or not simply by the number sold. If consumers demand a product, the government will then provide it.
Perhaps i am missing something here, but what is it about the market which enables it to be more efficient in distributing said resources than a central planning authority? If anything, a central authority will be able to provide goods much quicker than the market because it has less obstacles in its way than a profit maximising firm.
If the producer is selling at a loss, each additional good sold represents an additional loss. It is the relative prices of the input goods to the output good that determines whether each unit sold is a profit or a loss.
Fluctuations in the market price for a good indicate an unmet demand or an unsold glut. If the price of apples doubles overn\ight, there must be some unmet demand that is causing this. The entrepreneur responds by scouring his sources from other locations for apples of higher and higher price to be shipped in to satisfy the unmet demand. Or, if the price of apples halves over night, this is indicative of an unsold glut. The entrepreneur can buy the cheap apples and ship them somewhere else where apples are still selling at the regular price.
You’re forgetting that there are two sides to any transaction, the producer and the consumer. The “units sold” provides no negative feedback to consumers. High prices tell consumers “Stop buying this! Conserve!” and low prices tell producers “Stop producing this! Make something more profitable!”. With “units sold”, consumers will only want the most valuable goods and those will never be available because they will already have been taken by somebody else. That is because the most valuable goods have the highest exchange rate (purchasing power) in the black market. This is why the central authority must lobotomize the ability of consumers to choose in the absence of price… there are 10 cans of caviar on the shelf but you are only permitted to have one per your quota. All of a sudden, there’s no feedback to the central planner on the true demand for caviar. Similarly for production, if there’s so many pencils that people are not even taking their quota home because they already have plenty and pencils are otherwise simply worthless, the central planner doesn’t necessarily see any feedback since people can fail to fill their quota this month then have an excess of demand the following month and the central planner can’t tell the difference between monthly fluctuations in demand and a permanent shift in the demand schedule.
I think the long history of human slavery overwhelmingly proves that sugar is better than vinegar in regards to human productivity. Ordering slaves around is not nearly as effective at getting things done as letting free people figure out what to do for themselves and reap the rewards when they get it right (or bear the consequences when they get it wrong). This is because there is a steady feedback onto the decision-making process.
Edited to add: I forgot to mention that production quantity and price tag often vary inversely. Consider the number of diamonds sold to the number of bottles of water sold. The demand for a diamond is much higher than the demand for a bottle of water even though there are many more “units sold” of water. This is why it is rational for the market to devote such huge resources to the mining and production of diamonds even though only a small quantity of them are sold and to devote so few resources (by comparison) to the production of bottles of water even the number of “units sold” is much higher.
And this is leaving aside the far larger moral problem with economic central planning.
thanks for the reply, but perhaps you could answer my follow up too.
i dont really understand why there were shortages of products in communist countries. the planners, much like businessmen, would surely have gauged the demand for their products by the number of units they sold? if they sold lots, they would produce more or increase the price, if they sold few, they would produce less or decrease the price. how does this system differ from that of a free market, and why is a market more efficient in providing the goods than a planning body therefore?
Let’s consider the case of over-production, which was actually very common in Soviet Russia and other communist countries. You can have a situation where there is actually a lot of food available, it’s just that people are sick of it. How does this happen?
Economist Thomas Sowell brilliantly and clearly explains all the coordination problems in centrally planned economies in his excellent book Basic Economics and I highly recommend you pick up a copy (Sowell is not Austrian which should lend some credibility to what he has to say for someone such as yourself who is skeptical of the Austrian approach) - I bought mine for just $15 and I’m sure the price has gone down since three years ago.
Anyway, Sowell points out that during the gas shortages of the 70’s it was the shortages that made the headlines but there were equally notable gluts of unsold gasoline around the country. How can it be that in Philadelphia you can’t buy a gallon of gas to save your life but just two counties over not only is there plenty of gas, the gas station owner is worried about going out of business due to purchasing too much gas that he’s suddenly unable to sell? The reason is simple - price controls swamp out the price signals that would ordinarily make it worthwhile to move valuable goods from the places where they have gone down in price (say, a rural area) to where they have gone up in price. So, nobody bothers moving the gasoline from where it’s not needed (surplus) to where it is needed (shortage). Shortages and surpluses invariably occur simultaneously.
Of course, price controls in the 1970’s USA are relatively negligible central-planning measures compared to those in Soviet Russia. So, why might overproduction of a particular good occur? Let’s say political hotshot Yuri - rising star in the Soviet Party - is assigned to oversee the production of pencils. Now, let’s say Sergey - just another Soviet bureaucrat - is assigned to the production of wooden spoons. A new shipment of wood is available and both men would like to use the shipment in the production of their product. Absolute production numbers are a sign of productivity and efficiency by superiors. Both men claim there is a shortage of pencils and wooden spoons. In fact, shelves are overflowing with pencils and wooden spoons are nowhere to be found. Nevertheless, Yuri gets the shipment of wood on the basis of his superstar status and production of pencils continues unabated, suprluses be damned. Within a few months - long before the oversupply of pencils will be noticed by anyone - Yuri is promoted to oversee production of all wood products and Sergey now reports to him and so the cycle continues.
The point is that decision-makers (Yuri) feel different costs and benefits from their decisions than consumers feel. Yuri is promoted for making what is ultimately a bad decision from the point of view of consumers but is a good decision based on whatever metrics the central-planning bureaucracy is using (say, absolute levels of unit production).
Here’s an interesting non-anecdotal story from a Russian friend of mine. He says that when you went down to get a new refrigerator you had to check the day of the month on which the refrigerator was manufactured. If it was manufactured mid-month, it was probably a good refrigerator. However, if it was manufactured near the end of the month, you didn’t want it because it would probably break down. Why? Because refrigerator production had a specific quota and this quota must be met (the consequences of slipping production quotas could be very dire in Soviet Russia). Throughout the month, workers took their time and put the refrigerators together well. Invariably, however, they would be behind by month’s end and would “make up” the quota by slapping the parts together as fast as possible. Unlike Kenmore - which has to worry about going out of business if its refrigerators are known for breaking down and consumers stop buying them - the producers were measured on quota (units produced) not longevity of the product. You might say, “Well, that can be fixed, then, we just merely need to add longevity to the measure” but that’s a failure to see the real, underlying problem. The producers are producing to a “dead metric”, that is, they will adapt their behavior to whatever rules are in place so as to avoid disciplinary action while also maximizing their own leisure. It doesn’t matter how much you refine the rules, you can never change this unalterable fact of human nature.
To illustrate the difficulty of designing incentive systems, economist Steven Levitt tells a story of his 3-year old daughter. His wife was having trouble getting her potty-trained - she had been fully potty trained then decided she didn’t want to be anymore. So, he said to his wife, “let the economist try it.” He made an agreement with his daughter that he would give her a bag of candy each time she went to the bathroom. Within a day, she was regularly using the toilet and he said to his wife “see, I know what I’m doing.” But after a couple days of this, his daughter realized she could manipulate the system. She went on the toilet, then collected her bag of candy. A few minutes later, she went on the toilet again and collected another bag of candy. And so on until he realized that this wasn’t working. He points out that within a few days his 3-year-old daughter had not only gotten potty-trained but developed extraordinary control in order to go to the bathroom just a little, repeatedly, so that she could get more candy. She had figured out how to manipulate and broken his system of incentives. Levitt says that if a trained economist can’t fool a 3-year old for more than three days, it’s hopeless to fool millions of adults, no matter how clever your system of incentives and controls may be.
"I hear a lot that the market is more responsive to demands than a socialist system because of the wonders of the price mechanism, economic calculation problem etc.
But the way i see it, a producer will know whether his product is successful or not by the quantity of the good sold. If he sells 0, then there is no demand for it, if he sells all of his products, then there is greater demand. The price of the good can fluctuate accordingly based on this. But, surely this can happen in a socialist system too? the government can gauge whether their product is needed or not simply by the number sold. If consumers demand a product, the government will then provide it.
Perhaps i am missing something here, but what is it about the market which enables it to be more efficient in distributing said resources than a central planning authority? If anything, a central authority will be able to provide goods much quicker than the market because it has less obstacles in its way than a profit maximising firm."
The short and easy to understand answer is everything is relative. They sold out of many things in socialist countries, hence the shortages. Why didn’t they just make more? Because you need real resources to make things, and if you don’t have prices you’ll never know how more or less anything is in demand relative to anything else. So you’ll never have enough toilet paper if the people who need to make it can’t bid away the resources they need to do it from other people who need to use those same resources to produce some other good. What you’ll end up with is over use of those resources and shortages and surpluses at all levels because no one ever has to conserve, so they’ll splurge on some production and not have enough for other production. Prices are a method of implicit cooperation; as they go up people voluntarily tend to buy less, leaving more for those who are willing to pay higher prices. They are a form of cooperation because they require input and agreement on both sides of the exchange at all levels of the production process.
The economic calculation problem is not about how much to charge the consumer. The problem is about throwing resources down the drain.
If the govt owns all the means of production, how does it know how to allocate the resources? How much steel should go into making luxiury cars, how much into cheap quality cars, how much into ipods, how much into new factories, how much into space exploration etc.? There are thousands of uses for steel.
So what are you going to do? Send out a shopping list to all consumers in the country.
"Please fill out from the thousands and thousands of consumer goods that use steel which ones you want, in order of preference. Don’t worry about the price we’ll figure that out later.
“Don’t forget to fill out the accompanying few hundred papers featuring the possible uses for wood, rubber, lead, gold, tungsten, nickel, electrical energy, and so forth.”
When the reports all come in [a practical impossiblity in itself, for 350 million people to fill out hundreds of pages of forms], expect the follwoing dialogue:
“Well, Comrade Serf, have you collated all the ingredients and figured out what we should be producing?”
“Yes, Comrade Obama, we need 350 million personal helicopters, and equal amount of yachts, spaceships, luxury cars, 50 room mansions with solid gold roofs, and so forth.”
“There is not enough raw material on the face of the Earth to meet these ridiculous demands, Comrade Serf.”
“I will send out new lists with a price for each item, and a maximum amount each comrade can spend.”
“And how will you know what price to attach to things?”
“Based on the cost of production, of course.”
“What cost of production? We do not pay anything to produce them, Comrade Serf. We own everything in the country. We get it all for free. Our production cost is zero.”
No, it is not a matter of how much of it is sold it is a matter of how much money it makes.
For a radicle example if I put a thousand cars and a thousand grains of cooked rice in front of a man, and he decides he has no use for more than ten cars but a need for a few hundred grains of rice to eat then does this mean he wants the rice more than he does the cars?
The amount that something sells is no judge of how valued it is by society, each unit of something has a different value applied to it, if a man takes two of something and two of another then does this mean that he values the two equally? Not necessarily. However, each time a man makes a transaction with money this means that he is more willing to spend that amount of money than any and all alternatives available to him in society, out of anything he could buy he bought that good.
No one will pay more money for a good than the satisfaction that they think the money spent will give them if used in any other available way, so everything derives value when compared to everything else, there is a great connection of values with money as the common denominator, and it is because of the fact that there is this common denominator, this medium through which value is transmitted that economic calculation.
Assume that there is no money, you know every use to which everything in the economy could be put to, you know how everything can be used, now what do you do with it? When you allocate however many tons of copper you are giving up a large number of other uses to which it could be used, but you do not know how valuable these uses are, you have no way to express how valuable each operation is, and so you fall into calculational chaos. This is the eternal crux of true central planning.
Now add money into the picture, everything is valued on how much the consumers value the eventual produced good, well now you can calculate with perfect efficiency. If that however many tons of copper cost more than you could make for selling it in whatever form then you would know that this is because people in society value the use with which you are using copper (one of societie’s scarce resources) on something less valuable than what it could otherwise be spent on, you are waisting materials and so you will lose money, not make it. If you gained money then this means people are more willing to spend money on what you produced than what you used.
If we simply go by how much something sells then there is no real allocation, and you fall into chaos, especially as practically nothing is valued exactly the same. 1 house does not equal one car, one computer does not equal one desk.