Over at RealClearMarkets economics prof Jeffrey Dorfman reminds us that not only do centralized planning schemes not work, they cannot work. No matter how much data you gather, how smart your planners are, or how much control you exert, it will never be enough.
That’s why market signals beat the Nazis. It wasn’t national mobilization and a centralized plan of attack.
Got it. You think that “national mobilization and a centralized plan of attack” can be maintained indefinitely to manage an economy. After all, it worked so well in the Soviet Union!
Dave, This is almost as strong as the Johnny Rivers’ post. Almost. Simple for me: two things – 1. If I put $$ (euros whatever) into an investment will I get it all of it back at some point. 2. Not doing anything is a decision. This is lost on alot of people.
Never been one to bet on political risk. It is state of play now.
Answer: N/A Put myself at enough risk already.
Dave Schuler: You think that “national mobilization and a centralized plan of attack†can be maintained indefinitely to manage an economy.
Absolutely not. However, your claim was that centralized planning schemes cannot work. Rather, for some things they are the appropriate choice. We picked an extreme example, but for day-to-day economics, mixed systems seem to have significant advantages.
Don’t be a pedant. The context was obvious.
Not doing anything is a decision.
You bet it is! And, you’re right, this simply is an enigma to so many people.
Since the NAZIs used centralized planning with the purpose of preparing and starting a war, arguably no centralized planning, no war. Moreover, the production problems facing the NAZIs as a result of their central planning ultimately necessitated absorption of countries in order to feed and clothe its own citizens. Centralized planning –) War –) Centralized planning –) War . . .
I think the purpose of an economy is to provide goods and services to its participants. I don’t think war socialism “works” in that sense.
Nice straw man, zach.
Dave Schuler: Don’t be a pedant.
It’s hardly pedantic, but the very essence of the question. For instance, roads and bridges are a typical government responsibility. It requires making decisions about the future needs of society, and because of that, it’s fraught with problems, but essential that some central decision-making occurs. Other areas include long-term scientific research and protection of the commons.
We dont really have much pure centralized planning in the US. The professor’s article is correct, but trite.
Steve
The article is a complete waste of time. Dorfman is a religious maniac worshipping at the alter of flexprice, when most changes in supply and demand result in changes to quantity and production, not price at all.
“Those who glibly speak of ‘market clearing prices’ tend to forget that over wide areas of modern markets it is not with this purpose in mind that prices are set. They seem unaware of the important insights into the process of price formation, an Austrian responsibility, of which they deprive themselves by clinging to a level of abstraction so high that on it most of what matters in the real world vanishes from sight.†(Lachmann 1986: 134).
“In different markets prices are formed in different ways. Not all pricefixing agents have the same interests. Here historical change plays its part. The decline of the wholesale merchant, whose dominating role Marshall took for granted, for instance in textile markets, and who naturally aimed at setting such prices as would permit him to maximize his turnover (a short-run consideration), reduced the range of markets with flexible prices. The rise of the industrial cost accountant as a pricefixer, with his interest in ‘orderly marketing’ (a long-run consideration) and his aversion to frequent price changes, has made most prices of industrial goods in our world Hicksian fixprices. In all markets dominated by speculation of course prices must be flexible. On the other hand, all bureaucracies, including those concerned with production planning in large industrial enterprises, naturally abhor flexible prices.†(Lachmann 1994: 166).
Zachriel,
Well, that’s not really what Dave was talking about. Obviously in any hierarchical organization there will be SOME centralized planning, but it should be at the big picture/strategic level. Roads and bridges may be a government responsibility, but the Department of Transportation doesn’t design all the bridges, hire the workers, run the crews, solve the problems that inevitably come up, etc.
Since you mention military matters, you should google up a term the Germans invented: Auftragstaktik. It’s a big part of what made the German military so effective, particularly in WWII – as long as the Fuhrer kept his nose out of the details. Hitler and Stalin attempted to run military campaigns at the operational and tactical levels which proved to be disastrous. Clearly there are pretty major limits to central planning.
Andy: Well, that’s not really what Dave was talking about. Obviously in any hierarchical organization there will be SOME centralized planning, but it should be at the big picture/strategic level. Roads and bridges may be a government responsibility, but the Department of Transportation doesn’t design all the bridges, hire the workers, run the crews, solve the problems that inevitably come up, etc.
Glad we’re in agreement. Modern democratic societies include mechanisms that operate at all levels of society; from the individual to corporations to government; from neighborhoods to political parties to separation of powers; from local to state to federal.
Markets are wonderful at some things, but completely ineffective at others. On the other hand, purely centralized power is as ineffective as purely decentralized power. If that was Dave Schuler’s point, then we are in agreement with him as well.
Andy: Well, that’s not really what Dave was talking about. Obviously in any hierarchical organization there will be SOME centralized planning, but it should be at the big picture/strategic level. Roads and bridges may be a government responsibility, but the Department of Transportation doesn’t design all the bridges, hire the workers, run the crews, solve the problems that inevitably come up, etc.
Glad we’re in agreement. Most modern societies include mechanisms that operate at all levels of society; from the individual to corporations to government; from neighborhoods to political parties to separation of powers; from local to state to federal. The better the integration, the more robust and fruitful the society.
Markets are wonderful at some things, but completely ineffective at others. Overall, purely decentralized power can be as ineffective as purely centralized power. If that was Dave Schuler’s point, then we are in agreement with him as well.
Yes, that was my point. I do think there are additional questions: as a method of organizing the economy will more centralized planning on net result in more or less production and more or less “utility”, as economists use the term?
I’m not attacking a strawman with those questions, first, because they’re questions (and I am, as always, open to persuasion) and second, because you can barely open the opinion pages without reading some columnist or other opinion writer calling out for more centralized planning. Tom Friedman immediately springs to mind but he’s hardly alone.
Dave Schuler: Yes, that was my point.
Thank you for clarifying. We were somewhat confused when you said, “centralized planning schemes not work”, when centralized planning is often essential.
Dave Schuler: as a method of organizing the economy will more centralized planning on net result in more or less production and more or less “utilityâ€, as economists use the term?
If history is a guide, government sectors larger than 50% of the economy tend to crowd markets, while government sectors smaller than 25% tend to leave too many people outside the productive sector, and the government too weak to respond to economic cycles.
Consider an example: social security income for the elderly. The negatives are that it removes money from the productive economy, and tends to suppress voluntary retirement saving. On the other hand, it provides some level of confidence in aging, even in times of economic turmoil; it balances the need for efficiency with the natural desire of people to help one another; and just as important, it frees the young to pursue their own economic futures knowing that their parents have a minimal basic income. How to quantitate the relative merits in economic terms is probably intractable, but nearly all successful economies have some sort of social security.
“but nearly all successful economies have some sort of social security.”
See, Schuler, “Why Social Security is Necessary”. Takeaway: “[W]ithout Social Security our economic growth and income growth for everybody at all levels would be a lot smaller.”
Not quite the question. At this point federal, state, and local spending amounts to about 40% of GDP. Will governments at all levels spending more hurt or help? If spending were done prudently, it might help but to my eyes the odds that will happen are quite slim.
I’m neither a minarchist nor a totalitarian and I’ve made arguments in favor of social insurance very much along the lines you’ve just made above.
Dave Schuler: At this point federal, state, and local spending amounts to about 40% of GDP.
A lot of the pressure on the budget is due to unrestrained health care costs. Solve that problem, and you solve much of the budget problem.
Dave Schuler: Will governments at all levels spending more hurt or help?
Depends on the spending, of course. Generally, more spending will tend to crowd out economic growth in the private sector. However, prudent investment, such as in new technologies, a better medical care delivery system, or infrastructure, will have long term economic benefits. The catch is that it takes a large government to deal with large problems, but it takes a nimble government to deal with the rapidly changing world. It’s a balancing act.
It’s reasonable to argue that there are downsides to an enlarged government, and that these downsides have to be balanced against any supposed benefit. It’s also reasonable to argue that there are usually unintended consequences to almost any action the government might make.
Sorry to be so general. Our original entry into the discussion was just to point out the problem of black-and-white thinking. As Andy pointed out, even the Nazi-governed German army in WWII devolved decision-making to subordinates.
Dave Schuler: If spending were done prudently, it might help but to my eyes the odds that will happen are quite slim.
Assume, as a rule of thumb, that any well-managed bureaucracy will waste half its resources.
The private sector is centrally planned by associations: industrial associations, homeowner’s associations, business owner associations, realty associations, private zoning associations, lobbyists. The idea of market planning of the economy is a farce.
The third principal obfuscation of neoclassical theory was its conception of the process by which competitive equilibrium prices were determined. In this theory, each consumer, each owner of a factor of production, and each entrepreneur were passive ‘price takers.’ All prices were determined by the competitive market completely independently of the actions taken by any individual or business firm.
Despite the considerable amount of attention that this problem received after the publication of Walras’s Elements, the neoclassical theorists did not substantially improve on Walras’s attempts to solve it. They could assert that these equilibrium prices were arrived at through a process of ‘groping,’ but they were never able to give any convincing empirical or theoretical argument to show that such groping would not take the economy farther away from equilibrium rather than closer to it. They could rely on Walras’s useful fiction of the crier, but such an obvious resort to a useful fiction as a deus ex machina designed simply to hold the theory together reduced the effectiveness of the theory’s ideological defense of free market capitalism.
In the more esoteric literature of professional journals, the neoclassicists demonstrated that the existence of such a set of equilibrium prices was not logically impossible, given their initial assumptions. This demonstration was taken as a reasonable justification for the textbook practice of simply assuming that this set of equilibrium prices existed and was known to ail individuals and business firms.
This was a particularly critical assumption because the three pillars of the neoclassical ideological defense of free market capitalism were the marginal productivity theory of distribution …, the invisible-hand argument, and the belief, held purely on faith, that the free market forces of supply and demand automatically and efficaciously take the economy to a full employment equilibrium … . None of these three ideological props for capitalism could be defended if the market did not automatically create equilibrium prices.(Hunt 2002: 374).
The funny thing is Ben, you don’t seem to realize what this implies for your own dear theory.
If equilibrium is not attained…those accounting identities you rely on…you got a problem.
The problem with guys like Hunt is it makes you look like a creationist to the rest of the economics profession. The issue of price being (or not being) the equilibrating mechanism is indeed a potential area of research. However, to merely complain about the issue and not do much beyond that is like a creationist complaining about evolution and evolutionary theory because it doesn’t explain where life came from (the issue of abiogenesis).
Try taking the notion that price is not the mechanism that equilibrates markets and postulate an alternative and derive results that people can then check empirically. What are the welfare implications and such.
Methodologically speaking I see alot of whine, but no cheese.