At Econlog Richard Fulmer provides an explanation for why a planned economy is impractical. Here’s his peroration:
So, assuming a lower bound of 18 years to determine the relative prices of billions of products and services, even if we could accomplish the impossible tasks of:
- identifying all the world’s products and services,
- creating a supercomputer, or computer array, big enough to handle the calculations,
- creating a storage array big enough to handle the data, and
- instantaneously acquiring and uploading all the needed data to our computer
the uploaded information would be out of date and useless years before the computer finished its work.
Keeping in mind that I don’t care for the idea of a planned economy, IMO it’s completely possible for such an economy to “work” depending on your operative definition of work.
If, for example, by “work” you mean that those doing the planning gain enormous power and, coincidentally, wealth, it’s completely possible. It has happened many times. Indeed, it’s happening now, cf. Venezuela. Some would argue the United States is such a planned economy.
If you mean is it possible for a planned economy to produce an optimized equilibrium in the sense of producing the maximum outputs with the maximum utility, it cannot work. A little economic education should convince you of that.
If you mean is it possible for a planned economy to produce a high degree of equal utility (in the economic sense) without optimizing production or utility, it can. The worst case scenario does that. I should add that’s something a market economy would not produce and does not promise to produce.
To take another example of a planned economy, quite a few people think the Chinese economy is working and hold it up as an alternative to what is referred to as “free enterprise”. I would submit that whether it is working or not depends solely on your operative definition and beyond that there’s no way to tell. It could be claimed that the present Chinese economy would have been more successful and produced better outcomes for more people if it had not been a planned economy.
If it is not obvious, the point of this post is that the objectives, i.e. the definition of “working”, for those who favor a planned economy and those who oppose such a thing may be very different. Without both of them being open about their objectives, I doubt it is possible to make an assessment.
I don’t know why this is even debated anymore. Planned economies are always failures when compared to the alternative. Even the Chinese realized that.
It will continue to be debated as long as the outcome of an unplanned economy doesn’t match somebody’s preferences which they think they can achieve through centralized planning. At a first approximation that will be forever.
The most successful modern economies are mixed economies. While markets are essential, so are regulations and industrial policy.
I agree with that, Zachriel. Where we may differ is that I think that we are trending in the wrong direction—towards more centralized planning. As evidence for that I would submit the total number of regulations. Yes, the number has been higher in the past but it was lower during our periods of greater growth.
Zachriel,
Regulation and industrial policy are not central planning.
Andy: Regulation and industrial policy are not central planning.
Yes, they are a type of central planning. Social safety nets are also central planning, controlling large sectors of the economy. Most advanced economies have government sectors of 30-40% of economic output.
Dave Schuler: Where we may differ is that I think that we are trending in the wrong direction—towards more centralized planning.
When the government sector becomes too intrusive, it stifles innovation and growth. However, a complex technological economy will inevitably require complex regulations. When you hide electrical wires behind the walls of residences, someone has to check before the drywall goes up.
It’s not just that—it’s that every government regulation produces deadweight loss. And the very nature of a government bureaucracy is to issue new regulations. That’s why what we’ve been doing over the last half century or so has been an error.
Even Canada requires new regulations to be cost-effective.
IMO planned economies do work, but lacking any self correcting feature such as the market, when they are wrong, as planners often are, they just keep digging.
Even with 25 million slaves, North Korea can’t bring in a crop, and no one stands in the way of his crop and harvest planning, only reality itself intrudes.
“Yes, they are a type of central planning. Social safety nets are also central planning, controlling large sectors of the economy. Most advanced economies have government sectors of 30-40% of economic output.”
To me, that’s a strange definition of central planning. In my view, central planning is when government takes the place of a market for the production and distribution of goods and services. Central planning displaces markets, so I think it’s incorrect to suggest that normal market regulation is the same as central planning. In WWII, for example, we had central planning where the government displaced markets by dictating production, resource allocation, and imposing rationing. That isn’t mere regulation.
And our social safety nets don’t “control” large sectors of the economy. Most are simply redistributions that give people cash or equivalents, which they then spend on what they want within some loose guidelines. And these benefits are not exclusive – if you don’t like government health care, individuals can purchase their own. In short, the government providing benefits and allowing the market to manage the details is not a command economy.
“It’s not just that—it’s that every government regulation produces deadweight loss.”
Some save us lots of money and reduce externalities. The Mercator Institute (libertarians) did a study showing that overall they probably saved money. Other studies show that they cost money. My interpretation would be that the results are mixed.
Agree with Andy that we know true central planned economies fail. Almost everyone accepts that. Also agree that mixed economics seem to do best. I dont know where the mix should be. I am not even really sure that things are worse or getting worse than they were in the near past. Remember when major sectors of business were essentially controlled by the government, from transportation to beer? I think it was probably a net positive that Carter deregulated those. Reagan deregulated the finance sector and gave us the S&L crisis, reinforcing my belief that it may not be possible to regulate the finance sector too heavily.
Steve
I would just note that not all regulation is equal, which is why I think that new regulations ought to pass a cost-benefit analysis and then be evaluated based on their actual value and implementation instead of rosy assumptions informed by good intentions.
Andy-I can agree with that. The problem I have is that here all regulations are portrayed as bad due to deadweight loss. Some do save a lot of money/lives.
Steve
steve, what you don’t seem to get is that it is quite possible for a regulation to save money AND produce even greater deadweight loss. Consequently, what you’ve said is a non sequitur.
There is a legitimate argument in favor of regulations. You can argue that despite deadweight loss, the regulation is still necessary. However, that argument only applies as long as economic growth is robust. When economic growth is weak such regulations are a drag on the economy that cannot be afforded.
Furthermore, a very large number of things pointed to as market failures are in fact regulation failures.
I don’t honestly see how you can disaggregate the claim that regulations produce economic growth from an argument for central planning.
You can just look at any major construction or development project today for examples of what Dave is talking about. Huge sums of money and a huge amount of time are spent on various forms of regulatory compliance. One can argue that all of that is necessary, but one can’t ignore that the costs are real and significant.
Plus the scale and complexity of the regulations of themselves limit who can bid on the projects.
Weigh that against the regulations that require they have clean water and adequate sewage, having roofs built adequately for the environment, etc. They would do that anyway and not take any shortcuts if they were not required? Seriously? Part of the problem is that costs are very visible but benefits less so.
Steve