Three Economic Arguments Against Centrally-Planned Economies

Soviet economy, human scale

One argument against communism is the incentive problem: if people receive only according to their need, why work hard or do unpleasant jobs when they can do less and still receive the same benefits? Who will collect the garbage, and who will suffer through medical school? This argument certainly has merit, because in our everyday experience with other people (not to mention ourselves), we see that larger rewards motivate stronger effort.

The communist rejoinder was that the old, selfish man of the past would be replaced by the new, socialist man of the future. The new, socialist man would not be motivated by filthy lucre but by a desire to serve the community. As it turned out, and as modern research on human nature shows, the profit motive is not so easy to eradicate. Communists thought people were infinitely malleable—and were not afraid to try reshaping them—with brute force if necessary. Markets were banned by communist regimes, but instead of disappearing, they merely moved underground. The underground market for rock & roll records, for example, was spread across the Soviet Union and its European satellites by a variety of clever clandestine methods. Initiatives were constantly launched by communist authorities, the building of factories here, the harvesting of record amounts of grain there, as an attempt to whip up unenthusiastic laborers. Intellectuals and bureaucrats, who had easy jobs, were directed in their efforts but were not ordered to work harder! In Steven Pinker's The Blank Slate, he writes that during the many utopian commune attempts of the 19th and early 20th centuries, the ones based on socialist ideals lasted an average of two years before breaking up. The enthusiasm of selfless labor among the most devoted could still only last a short time. Paraphrasing biologist E.O. Wilson, the world's leading authority on ants: it is the right theory, but for the wrong species.

Another argument against communism is Friedrich Hayek's knowledge problem. He argued that a socialist economy could not function properly because it lacked a price system for consumption goods. Prices are a way of coordinating knowledge— knowledge that is dispersed among market participants making it impossible to centralize. Because central planners could not know all the relevant information about what things should cost, they set prices arbitrarily, with no reference to reality of economic circumstances. An economy with a free-market price system lets individual buyers and sellers experiment with supply and demand and coordinate prices in accordance with reality a little at a time. How valuable is some item really, and where is it most demanded, and when, and in what quantity? A market economy lets dispersed actors—even with their necessarily limited knowledge of the whole—use their local knowledge to coordinate the economy. A state-run economy cannot answer these questions and cannot allow for them to be answered by other means, and so its endeavors are wracked by inefficiency. And because the decisions are not based on economic reality, historically they were determined by government officials in accordance with their own personal goals, consumers be damned. And they usually were.

The power of this argument was acknowledged by Soviet economist Nikolai Fedorenko, who once said that with the aid of computers, a complete economic plan for the next year would be ready in 30,000 years.

A third argument against communism is the one advanced by Ludwig von Mises. He argued that economic calculation in a socialist economy is literally impossible. There is by definition no private property in the means of production. Hence, there will be no market in same and no prices can be established. Without prices, economic decisions will be made by planners on bases other than the supply and demand for capital goods. There is no way to know if production processes are efficient at all, or if it is suspected that they are not, how they could be made better. There is no calculation, there is only continuous shooting in the dark at every step of production from raw resources to finished goods. Thus, a purely socialist economy could never exist. The attempts by various communist regimes at perfect socialism necessarily could never reach their aim, and historically never did. But it did not stop them from steamrolling their own populations trying.

At the twilight of the USSR, Mikhail Gorbachev's spokesman Gennady Gerasimov joked about the takeover of the entire world by the USSR, except for New Zealand, which they would leave unconquered as a source market prices. After almost 70 years, Mises' idea had gone from obscurity to acknowledgement by the spokesman of its principal enemy.

Hayek's idea and Mises’ are similar: Hayek looks to consumer goods while Mises looks to capital goods. Even in an idealistic world in which men are selfless saints, economic plans are centrally made with the best intentions, and the most honest judgments of economic conditions are rendered, central planners simply cannot know what should be done, and cannot convince everyone to go along with the plans anyway. And in the real world, the incentive problem provides a further obstacle for socialist economies. Communist governments the world over have tried to make their economies work. As they should have known, they were doomed to failure.

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The problem with communism

The problem with communism was that it wasn’t a good joint equilibrium. Most of all, it was viewed (rightfully) by most participants as being fundamentally unfair that those that goofed off got the same as those that worked hard.

But is that actually true? I was under the impression that under most totalitarian systems, those perceived to be slacking off were treated quite harshly. But it's not something I've researched a great deal.

IMO, the "incentive" argument is one of the weakest arguments against socialism. It is a valid argument, and it has a lot of intuitive appeal, but I believe that the greatest strength of the market economy is its feedback mechanisms, as illustrated in the knowledge and calculation problems.

Another important feedback mechanism--one that I hear discussed with surprising infrequency--is that the market tends to give control over resources to those who have shown themselves to be capable of using them efficiently in the past. The phenomenon of the rich getting richer, so often derided by the left as a sign of the inequities of capitalism, is in fact one of the keys to its incredible creative power.

You're right that "the

You're right that "the profit motive is not so easy to eradicate", but that's only part of it. It's not just that people are far more selfish than was expected. There are plenty of examples of people accepting a cooperative equilibrium that was not "individually rational" but was truly better for society - i.e. in the prisoner's dilemma, there are societies that get to the optimal joint solution even though it doesn't seem to be individually rational.

The problem with communism was that it wasn't a good joint equilibrium. Most of all, it was viewed (rightfully) by most participants as being fundamentally unfair that those that goofed off got the same as those that worked hard. A great book on this is Hungry Ghosts, by Jasper Becker. He documents, among other things, the reaction of the peasants to collectivization. The problem with the Chinese (and Russian) peasants was not that they didn't understand what a great system communism was, it was that they did understand it - they quickly figured out the system and thus didn't like it.

Regarding the NZ joke, I

Regarding the NZ joke, I have read (but can't quickly find a good reference) that Soviet planners relied on price information from market economies, prices in the Sears catalog in particular.

I wonder how much worse the USSR economy would have fared without access to market pricing information?

I wonder to what extent North Korea uses market prices for planning?

I don't know myself, but

I don't know myself, but this is an excerpt from an essay of our guestblogger, Dr. Caplan.

The history of Communism suggests that the incentive problem is actually the most severe of all. Forced collectivization - the expropriation and enserfment of peasant farmers - repeatedly triggered deadly famines. These resulted in five million deaths under Lenin, at least 7 million under Stalin, and a staggering 30 million under Mao. See my Museum of Communism FAQ: Moreover, the millions of slave laborers found in Communist regimes were typically unproductive; see Mises' discussion of the inefficiency of slave labor in his Liberalism (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), pp.20-23.

I'm surprized that no one

I'm surprized that no one has mentioned the starkest contrast within the USSR, collective farms vs the small private family plots. The small plots were producing half of some crops within the USSR.

And when Red China privitized their agriculture, the output increased about ten-fold.