Saturday, June 07, 2008

For Lack of a Plan

Some say that a more complicated economic system needs more central control. They advocate that in certain industries people cannot possibly make their own decisions. I want you to read a short essay from 1958 entitled I, Pencil, which tells us how the simplest products required complex, innumerable interactions in the marketplace. If you don't read it, let me summarize. You need wood, graphite, rubber, metal, and other products to produce a pencil. In order to get these products you need saws, mines, transportation infrastructure, tools to fabricate metal, and so on. You also need the know how of countless people working on production lines and managing the businesses that these products move through. I would not ask to be a central planner.

Austrian economists predicted the economic troubles of the Soviet Union and the reason why communism would not work. Prices for economists are not just what is listed on the sticker. All prices are signals. How scarce is something and how much do people want it. Soviet prices did not reflect any underlying realities or signals. Under the Soviet system, some goods accumulated with few buyers while lines formed for other goods. Here is a line in Poland for a store that recently received some toliet paper. Hundreds of thousands of prices were set without much regard for efficiency, the scarcity of raw materials, or consumer desires. The Soviet economy could not even provide decent quality consumer durables like refrigerators, televisions, and washing machines. Even with a good plan that produced "enough" consumer goods, the plan would leave little room for the unexpected. I suspect that many innovations of the 1990s that we now take for granted would not have been part of the plan.