I go over why centrally planned economies always turn to poverty.

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Transcript

Why Centrally Planned Economies Always Turn to Poverty

Centrally planned economies always turn to poverty because it is impossible to escape basic economic scarcity laws and the principles of human action.

To help you understand this premise, often encapsulated as the economic calculation problem, I am going to walk you through the ground level issues so you can relate to them from your own perspective and life choices.

The world is made up of billions of people who each have their own unique interests, needs, and talents.

Think of your own self and what is special about you.

The clothing you prefer.

The food you prefer.

The living environment you prefer.

The music and entertainment you prefer.

The kinds of work you prefer to engage in.

The unique circumstances of your body, whether it’s allergy sensitivities, various medical conditions, or desired physique for function.

Everything about you is special and unique, and you, as an individual, know your own attributes best.

And not only is this knowledge special, but everything about you is subject to change in time.

For example, your favorite food might be pizza, but if you had to eat pizza every day, and only pizza for every meal, you’d likely get sick of it and be malnourished.

And even if you love eating pizza all the time, it’s possible that, one day, you could suddenly develop an allergy to cheese or have a sickness where eating pizza doesn’t sit well with you.

These shifting interests can only be timely metered if you are in direct control of your economic issues.

If you don’t like eating pizza, you could purchase another food item in a free market.

If you are feeling queasy, you can choose to take medicine to help you overcome that sickness and choose a different food item that better suits your temperament.

State central planning misses these nuances because central planners cannot account for all wants and needs in a changing environment.

If the state were to centrally plan food production, you would not be able to change your preferences on a whim because the government could not instantaneously account for all fluctuations of all people at any given moment.

For another food example, imagine you are hungry for a burrito and start driving down the road toward your favorite burrito place.

On the way, you see an advertisement for a steakhouse you love, with a special deal on a steak meal that piques your interest.

Now, instead of getting a burrito, you turn into the steakhouse because you prefer the steak special compared to the burrito, and that happened instantaneously based on changing conditions of observation and thought.

The state cannot account for these minor nuances if the state must collect all changing conditions at any given moment.

In order to do so, the government would have to not only monitor all people at all times, but they would have to be able to immediately account for new information from each person and be able to immediately identify and produce all desired changes based on fluctuations in preferences.

Even in a dystopian movie plot, it would not be possible for the government to make all of these accommodations in production instantaneously even if people’s minds could be read by some futuristic device.

The reason why is that resources are scarce, and metering which resources go to who requires managing competing interests.

Without a mechanism for managing what resources are valued, like with private property and price signals, the government would be subject to sudden changes in demand without a means to decide who and what should be prioritized.

This is why you’ll often see centrally planned economies move toward limited options with limited delivery.

Where once there were abundant grocery stores with tons of options to pick from, central planning comes in to supplant these stores with state-approved limited options that those in control can somewhat manage to produce.

These options end up being rather unsatisfactory as it’s not possible for the state to meaningfully account for all wants and needs in fluctuation.

Shortages over limited options, like bread and potatoes, become the norm, as people are forced to face a bureaucracy that cannot handle the diversity and complexity of all people.

As individuals cannot seek to provide value to others in centrally planned economies, massive losses occur in efficiency and innovation because the government creates a one-size-fits-all solution.

This is why a free market is so critical.

When people are free to choose, their economic choices instantaneously communicate their subjective values based on what is available in the market.

They can make decisions for themselves based on their unique situation and reward those who provide useful solutions quickly.

Failure is a part of the market, but in a much smaller, and necessary way.

Businesses fail in a free market by not providing what people want and need.

Businesses that don’t offer what people want and need must fail so that it is clear what is being sufficiently demanded.

Without this failure, such as when the government bails out companies that people do not want to support, then more is produced of what people do not wish to have.

A truly free market enables many to test out different ideas and for people to quickly determine the value of these ideas.

Even niche projects can find support in a free market so long as enough people value the project.

Under state central planning, there isn’t room for that level of specialization because the government would have to have bureaucrats analyzing and deciding every possible niche demand, and then approving that demand in comparison to other alternatives, whether it’s a niche horror movie or it’s a niche medical procedure.

This inability of central planners to calculate the total factors, due to lack of price signals, is the economic calculation problem, and it’s why central planning ALWAYS turns to poverty.

The inevitable result, like took place in the U.S.S.R., is that options and opportunities start to decrease to the point that the only way people get their needs met is by either attaining items in the black market, or by being a part of the declining political elite who get the first picks of plunder by the state.

This is why state central planning is dangerous to both liberty and prosperity.

If we want a free and abundant future, we must reject state central planning and embrace free markets.

Sources:

Economic Calculation in the Socialist Commonwealth
https://cdn.mises.org/Economic%20Calculation%20in%20the%20Socialist%20Commonwealth_Vol_2_3.pdf

Economic Calculation
https://mises.org/mises-wire/economic-calculation

The End of Socialism and the Calculation Debate Revisited
https://mises.org/review-austrian-economics/end-socialism-and-calculation-debate-revisited

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