This morning on Wisconsin public radio, I had the odd experience of being lectured by a caller about the virtues of markets. By extolling the wisdom of the economics profession, I led a Ron Paul supporter to conclude that I favored central planning by a committee of economists. Yes – I’ve been targeted by the not-so-vast libertarian conspiracy.
The experience did drive home an interesting point, though. If economists were really just another special interest, we would be promoting central planning by “us experts.” The remarkable thing about the economic consensus is precisely that it highlights the social benefits of leaving the market alone. Central planning would give the economics profession vast wealth and power, yet we still say it’s a very bad idea.
In short, the Self-Interested Voter Hypothesis fails for economists, just as it does for the broader public.
Aug 15 2007 at 12:49am
I’m a Romanian political science student so allow me to tell you a thing or two about the reality – and not the theory – of central planning in ex-communist countries in general, Romania in particular : no such thing as planning was ever really done ! there were usually order from the politburo or the central dictator that had to be obey and if the ordered results didn’t show up the small party chiefs usually covered up the mess in order to not be ostracized or worse – in Stalin’s times – killed.
The whole idea that communist central planners actually worked with a detailed economy-wide model feeding billions of computations into it as reading the socialist side in the calculation debate might let you believe is overwhelmingly void of empirical content as far as I can tell.
P.S. How is that libertarian conspiracy doing by the way ? I hope it will take over the world.
Aug 15 2007 at 2:19am
Great comment Bogdan…I’m still chuckling…However, if there were a central planning bureau of economists there would be billions and billions of computations entered into a variety of complex models that went nowhere and were always wrong. There was a wonderful Nichols Cage movie a while back called The Weatherman, where the Cage character plays a weatherman and declares something like, you can’t predict the weather because there’s wind and it goes everywhere…Well if an economist said it, it might be, you can’t predict the economy because there are individuals and they go everywhere.
Aug 15 2007 at 6:32am
You don’t need central planning to give economists power. In many countries macroeconomists have got power by capturing central banks and microeconomists by capturing antitrust agencies/courts. Their behavior has not been different from other professions (in particular lawyers) that have been able to capture part of government (the judiciary).
Concerning central planning, remember Oskar Lange’s attempt in Poland.
Aug 15 2007 at 9:17am
I don’t know about Romania, Bogdan, but Russia certainly did just what you describe: they had great economists making 5-year plans for the entire economy, an they did so throughout the entire communist period.
Now this does not invalidate the rest of what you say! The fact that underlings do not always comply with The Plan is a significant part of why communism does not work.
Aug 15 2007 at 12:00pm
In the USSR and in all socialist countries, there were indeed medium-term (e.g. 5 year and/or 7 year) plans and short term (1 year and even 3 month) plans. Planners did indeed work with “a detailed economy-wide model feeding billions of computations into it”. They used “material balances” and input-output analysis, along with huge lists (like thousands of pages of prices!) Of course, the information that they had was inaccurate and incomplete, both about available resources and of course about demand. This doesn’t mean that they didn’t try.
And, as you point out, nobody told them the truth and nobody fulfilled his part of the plan as the planners would wish (whether they intended to or not). Still, they planned.
There are many books you can read on it – not socialist calculation theory, but actual methodology of planning. I have read a few in English, there are of course many more in native tongues.
Aug 15 2007 at 12:31pm
Where are all these free market economists and why can’t they ever get a job in Washington, D.C.?
Robert S. Porter
Aug 15 2007 at 12:41pm
As a person of Romanian background I find Bogdan’s comments laughable. Then again many Romanians (Russians too) pine for the days of Communism.
Aug 15 2007 at 2:07pm
I think I’m misunderstood. I do not claim there was no planning in the former communist countries, Romania included. We had of course the whole array of 5 years plans for each sector and the economy as a whole, a State planing board and so on – all the hallmarks that is of a communist economy.
What I wanted to emphasize is that in practice the communist planning was never really implemented based on models as those imagined by Barone or Bauer. There were indeed statistical calculations of input/out but they were rather engineering/technical computations of resources and production capacities that had almost no real economic significance : consumer preference, demand in general was virtually non existing in the mind of the planners; all investment and production was concentrated on what was considered a priori as ideologically good or strategically necessary and usually involved many ad-hoc rectifications of the plan.
It was a politically driven economy that doesn’t seem to have anything to do in my opinion with the substance of the elaborate models of people like Barone or Bauer; moreover in the beginning at least the communist elites, composed of mostly class sound half-illiterate workers, peasants or scums didn’t have the skilled labor or the institutional infrastructure to plan “rationally” the whole economy in the style of the abovementioned famous socialist economists.
Finally, production targets etc were never in practice achieved but party officials usually reported false figures and the like , the problem was so acute that order from the party leadership was issue to set up even more unrealistic targets in order to push the local official to achieve at least part of the plan.
Aug 15 2007 at 4:58pm
When greed is good, nothing is bad?
Robert S. Porter
Aug 15 2007 at 10:41pm
One other point. You’re one of my favorite writers but I found your answers to the call-in questions lacking. I understand that there is a time constraint and the phone is a poor medium for such a thing, but you had the opportunity to shoot down so many poor arguments, but you only gave short quips to many of them. What gives?
Aug 16 2007 at 1:43am
Bryan Caplan fails to understand that many of us concerned about illegal immigration are not anti-immigrant. No, we simply want our laws to be obeyed. When do we regain control of our borders? The recent proposals backed by the White House would not have halted a further flood of illegal immigrants. That’s all there is to it.
Robert S. Porter
Aug 16 2007 at 2:39am
David, but why do you want the law enforced? You are angry over illegal immigrants, not because they have violated your rights in any way, but merely because they disobeyed the (bad) law.
Laws for their own sake are meaningless. Worshipping the law rather than justice is useless.
Aug 16 2007 at 7:09am
Worshipping the law rather than justice is useless.
Bad argument. If you don’t like a law, the civilized thing to do is to work to have it changed, not just to ignore it. Until such time as it is changed, the law should be enforced. Laws that are not enforced should be abolished.
Anything else is just anarchy and breeds contempt for ALL laws. Soon after, you have David Dinkin’s New York City circa 1990.
Aug 16 2007 at 8:38am
“not-so-vast libertarian conspiracy”
Half-vast libertarian conspiracy?
Aug 16 2007 at 9:30am
I also have a hard time believing the differences between economists like Milton Friedman and Paul Krugman are minimal. At best, they may agree 80% of the time—but it’s the 20% that is giving me one hell of a headache! Krugman, for instance, wants to nationalize health care. A more conservative economist categorically rejects this approach.
Why is Kaplan saying things which are so patently absurd? Is it perhaps because he wants to find a reason to vote for Democratic party candidates? Are the cultural war issues of abortion and gay marriage deemed of far greater importance than purely economic ones?
Aug 16 2007 at 9:45am
Shayne’s First Law of Positivism …
“There is no problem so trivially small nor large and complex for which central planners [government, normatives, Pigou Club members, etc] cannot devise and implement a minimally efficient solution.”
Shayne’s First Corollary to the First Law of Positivism …
“Each newly induced inefficiency provides new opportunities for the market to turn an extra buck.”
Shayne’s Second Corollary …
“Once the market has restored some level of efficiency, central planners will devise new problems and implement new minimally efficient solutions.”
Every health care system on the planet, Ethanol, Global Warming carbon credits, the accounting industry, the legal profession …..
Aug 16 2007 at 10:02am
A commentary on the confluence of Libertarianism and the First Law of Positivism:
“Fear not the solutions devised by the central planners, fear the problems devised by the central planners.”
Aug 16 2007 at 10:30am
My “commentary on the confluence …” above follows from The First Law of Positivism and from
Shayne’s First Law of Libertarianism …
“You, irregardless of the magnitude of your accumulated academic, electoral or intellectual points, are unqualified to make my choices for me.”
As an aside, and just to quash any suspicion I might be a normative, I’ll add the same statement that I tell all of my students at the end of the semester;
Everything I’ve told you might be wrong.
Robert S. Porter
Aug 16 2007 at 1:29pm
No thanks Buzzcut. Basically you are saying that if the majority of the United States decided we should kill Jews/Blacks/whatever and made that a law I should follow it until it is changed. It might be “the civilized thing to do” but I prefer not to be a mindless zombie who does what the government tells me.
Aug 16 2007 at 7:58pm
Hah! Guess that Wisconsinite has revealed your true self!
One of the older Soviet jokes from the Brezhnev era has Castro (or whoever) visiting Brezhnev during the May Day parade and standing on top of Lenin’s tomb with him. Brezhnev has bragged about the USSR’s weapons of mass destruction. First great tanks roll by. Castro asks, “are these them?” Noooo. Then ramrod straight soldiers march by in smart uniforms goose-stepping. “Are these them?” Noooo. Huge missiles roll by. “Are these them?” Noooo. Finally, a group of men in suits with briefcases march by. Castro says, “who are these?” Brezhnev says, “they are our weapons of mass destruction, our economists from the GOSPLAN.”
BTW, in reality, Soviet-bloc central planning was much more of a year to year adjustment thing. One started with last year’s plan and then made adjustments up or down on quotas based on various pieces of information. As has been noted, of course, that information was not always of the best quality. Late in the Brezhnev era there was a cotton factory that had been supposedly built in Uzbekistan, except that finally the country’s own spy satellites reported that there was nothing there where it was supposed to be. WMD’s indeed…
Aug 16 2007 at 10:08pm
Given the reaction to central planning around here, can anyone tell me why a government centrally planning its next five years is generally considered a disaster in the making, but a mega-business (that may be economically larger than many countries) that *failed* to carefully plan for the long term future would be considered courting disaster?
Aug 17 2007 at 2:37am
Not I, Tom. Not I.
So long as government rstricts its economic involvement, by and large, to the production of public goods, short/mid/long-range planning are enormously valuable. Without them your bridge falls down, the flood demolishes your city, and your schools don’t work. Government should be very aware of the private sector and very pro-active in the public sector.
The use of econometric models to forecast need for infrastructure, plan for efficient and productive land use regulations, and guide building codes that will ensure high quality capital investment are among the things that government CAN do well if they plan. But, in general, local governments don’t. Instead they hand out subsidies that trickle back into campaign funds. And we call this “capitalism”.
Aug 17 2007 at 7:47am
The answer to your question lies in examining the cooperation-inducing mechanisms available to business versus government. Absent monopoly, business must rely on persuasive power alone to induce cooperation with its production planning. Government, on the other hand, is granted coercive power to induce cooperation with its plans. Incidentally, there is no “absent monopoly” consideration in government, although democracy mediates that factor to some degree.
Aug 17 2007 at 10:09am
I understand your point, but the analogy to a government’s 5-year plan would be the internal plans of the corporation (i.e. how much of each product to produce, how many to hire/fire, where to allocate R&D, marketing, etc.) For the internal plans, the company essentially has coercive power over its employees.
To make my point clearer, despite its reputation, I think central planning is generally a good thing. The most spectacular failures occur when when organizations (either governments or companies) are so large and diverse that the loss of pricing information is more costly than savings on transaction costs. Central governments, trying to encompass literally every part of its citizen’s life are, of course, going to be highly subject to having too diverse responsibilities (as El Presidente pointed out).
Aug 17 2007 at 10:23am
The remarkable thing about the economic consensus is precisely that it highlights the social benefits of leaving the market alone.
I’ll admit that statements like this tends to get my goat.
Because there’s economic consensus as to the economic benefits of leaving the market alone, there’s many economists who decides this automatically translates into a net social benefit.
While there’s no doubt about a serious correlation between economic and social benefit, many economists seem to be unable to distinguish between the two or understand that there can be serious trade-offs between the two.
If Bryan is right that “economists don’t get no respect”, perhaps this is part of the reason why.
Aug 17 2007 at 10:59am
“Given the reaction to central planning around here, can anyone tell me why a government centrally planning its next five years is generally considered a disaster in the making, but a mega-business (that may be economically larger than many countries) that *failed* to carefully plan for the long term future would be considered courting disaster?”
“The most spectacular failures occur when when organizations (either governments or companies) are so large and diverse that the loss of pricing information is more costly than savings on transaction costs.”- Tom
You answered your own question there. Companies generally don’t lose pricing information– even the largest multinational corporation, with a huge array of products and its own factories to produce inputs, still purchases many of its inputs and still exists within a market structure, setting its market prices and calculating its costs, based on non-monopoly prices and supply and demand information.
We know this because otherwise it wouldn’t be a private firm- and it will depend on this information in order to profit maximize.
To maximize profit, it will specializes and hence it will purchase inputs from other firms, not from within its own firm, so it will know its own costs. It will sell its products in an open market, so it will know demand.
A socialist government is not a single unit within a market, unless it is completely free to trade and foreign investment, which includes competition from foreign firms, use of world market prices, free sales of foreign goods in the domestic marketplace, etc. In that case it would quickly become a market economy (that is why the socialist countries have always cut themselves off from the world economy). Instead, in a closed socialist economy, prices must all be determined from within– where no information is learned in a market and hence all prices are arbitrary. True costs are not known, neither supply nor demand are known.
That is the difference between a corporation’s 5 year plan, and an economy’s 5 year plan. It has little to do with the size of the budget.
Aug 17 2007 at 12:30pm
We may not be in excessive disagreement here, although some clarification is wanted. First, I tend to reject notions of “good” or “bad” regards economics – instead preferring efficient or inefficient. Either corporate or governmental plans can fail, and both types of entities have an artifact of centralized planning. The difference begins to appear when the plans fail to deliver the projected benefit relative to cost – governments tend to adhere longer and more robustly to failed plans than can corporations/businesses, because they have coercive power. Bogdan’s and other’s experiences related on this link tend to provide evidence for that assertion. Businesses on the other hand, are more likely to and are freer to abandon failed plans in order to remain viable, in part due to not having coercive power over their markets.
Your example regarding business having coercive power over employees is interesting – I’ll have to give that some thought.
I had constituents/customers/investors in mind when I made my statement above. To give you an idea of my framework, I’ll provide an example as well. If the company I own stock in, or am a customer of, or even an employee of, decides (as a function of company central planning) to provide health insurance to its employees, I know that costs are going to increase. I can weigh the costs/benefits of such a company plan and choose to keep my position or opt out and the company only has persuasive powers available to it to induce my cooperation. Given the same health insurance proposal on the part of a government, I don’t have a choice to opt out – governmental coercive power precludes that choice.
As an aside, I’m not anti-government nor anti-central planning. I believe in both, to some degree.
Aug 18 2007 at 8:57am
I suspect this is being played out for more than my comment was worth. Really, I was just making a little fun of the fact that around here, a government doing something is likely to be criticized that a business will be praised for.
Personally, I’ve not found that government and business differ all that much given the tasks that they are given. Businesses have two advantages in that they have a single easily measured metric and there’s a limit to how badly they can go off track.
However, given that government’s mandates from the people is to be in areas that don’t have good metrics, I rarely see them do much worse jobs than business placed in the same constraints. No real wonder, both are filled with employees that generally are supportive of their employees goals, but not devoted to them, and have higher-ups who juggle their companies and their own human needs.
Anyway, for what it’s worth:
Companies generally don’t lose pricing information
Internally they do – part of the way they lower transaction costs is by *not* keeping pricing information. They may choose to mirror external prices, but in all the larger companies I’ve knowledge about, pricing between its own components is essentially arbitrary, decided for strategic reasons (where strategic sometimes meant financial, sometimes meant personal, and sometimes just the optics).
As far as business being coercive to employees, I was only implying that like a government, a company will remove employees that don’t follow the plan. It’s simply that removal is rather less drastic :-).
Aug 18 2007 at 12:39pm
I won’t press the point, but the fact that internally, the company also loses its pricing information is not relevant. You asked why central planning is seen as a disaster waiting to happen, while firm planning is not. The fact that the firm can get external prices, supply and demand, is exactly why. That was my point.
Aug 18 2007 at 7:24pm
I came here to your blog because I can’t “respond” to you at econtalk, but this seems to be closely related to the point I would have made there.
As I listen to your conversation, you indicate at the end that you aren’t an ideologue that believe that more markets are always good. Well, that, to some people makes you, if not a communist, at least a socialist.
I believe that many people have done what you suggest and have read econ 101, and like you idealize, they say, free markets absolutely the most rational solution. So, free markets are the only solution.
I started reading Friedman’s column in the 60s, and read the Monetary History, etc. and I was convinced. But he is one of the socialists, or maybe a dirty commie because he advocated a negative income tax.
The problem that I had almost from the beginning, but because I really liked uncle Milt, especially on his PBS Free to Chose and other times I saw him on TV, I figured was rational was the idea of externalities. But that has always been a problem for me. But then, I’m a scientist-engineer, and I am not allowed to think in terms of externalities. I can’t explain the the odd things in science or answer the origins of the universe with an externality: god or god’s. (I’m actually religious (Quaker) but not a deist like Jefferson or Einstein.)
But as a “rational” economist, you argue for government action and laws to “fix” externalities to deal with market failures. On the other hand, you call the people who call for the government to manage the economy to be illogical or ignorant of the benefits of the free market.
Well, I have looked for the rules/logic/reason/theory/rationale for knowing when to invoke the god of “externality”, no wait, the rule for when a god is needed, and then the rules for determining which god to call on. Is it the god of regulation, tax, privatizing the common (how do you sell of the air).
So while the populist rejects economics because it doesn’t to fit the real world, the absolute free market libertarians reject your view because you don’t rely totally on free market with zero government involvement.
Btw, I have figured out how to eliminate externality from economic theory, thanks to the first paragraph of Eco-economy by Lester Brown. Instead of taking the Ptolemy view of the environment revolving around the economy, let’s take the Copernican view that the economy revolves around the environment (which include the air, water, forests, animals, PEOPLE). It is still possible to hold to the view of some libertarians (unstated in most cases) that the solution to human poverty, disease, age, lack of skills is starvation and death. But at least the discussion is now about values instead of whether free markets some times fail.
and ps, a good friend of mine is a libertarian, both small and large el, and he described himself something like “I’m a moderate libertarian; I’m between anarchist and the communist libertarians.”
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