Central Planning Doomed for Lack of Price Intelligence

Written By: The WealthCycles Staff

Ludwig Von Mises teaches us the path to light, by explaining why, logically, centrally planned economies throughout history have invariably failed: In short, all have an unsolvable economic calculation problem. In other words, no human planners can possibly attain the information and understanding that is contained in the most elemental aspect of the marketplace: price

But before we dive into the infinite depths of the problem inherent to central planning, let us look to the solution—the dissemination of truth via the Internet and decentralized nodes of information sharing.

Ideas are more powerful than force, the pen mightier than the sword, and as Thomas Paine could tell you, only one-third of colonists supported freedom from Britain before he wrote his revolutionary manifesto, Common Sense. Paine, the most influential writer in modern human history had a few other basic observations that would only be later explained by logic. Observation of history and the outcomes of human experiences is valuable:

As to the romantic, if not hypocritical, tale that a virtuous people need no gold and silver, and that paper will do as well, it requires no other contradiction than the experience we have seen… If anything had or could have a value equal to gold and silver, it would require no tender law.

Absolutely. Bring on competing currencies, Internet video verification of physical money and its transfer, and we shall see how long constantly devaluing fiat currencies are preferred over innovative new ways of transacting in real money.

Mises tells us, “everything that happens in the social world in our time is the result of ideas… Ideas and only ideas can light the darkness.”

Paraphrasing Mises, we continue: Ideas are not phantoms, they are real things, and although ideas are not tangible themselves, they are of the highest value because they are the means by which change is brought about in the world of the tangible.

Dr. Paul, Wayne Gretzky, WB7, WilliamBanzai7

Mises continued:

These ideas must be brought to the public in such a way that they persuade people… Our civilization will and must survive. And it will survive through better ideas than those which now govern most of the world today, and these better ideas will be developed by the rising generation… I myself have full confidence in the future of freedom, both political and economic.

Mises’ profound respect for the importance of the dissemination of ideas is evident. Mises called New York Times writer Henry Hazlitt “our leader,” in that he continued to explain the classical economic position to the public, even as the “new economics” invented recently in 1936 and ushered in by John Maynard Keynes became increasingly popular.

We can see that Mises, like Warren Buffett’s father, the businessman and legislator Howard Buffett, viewed classical economics as critical to the survival of civilization. Buffett’s father wrote that Human Freedom Rests on Gold Redeemable Money:

Unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.

If a man smart enough to raise Warren Buffett, who is now widely regarded as the best investor alive, was this passionate about sound money, perhaps one should dig deeper to find out why and learn of the mechanisms at play, for the threat of global slavery and the “survival of our civilization” are not trivial matters.

But those are exactly what is at stake, and what is to be gained by those closest to the throne of power. For ages men have bowed to kings, dictators and cabals, only to see the power of a monopoly over money transcend all other powers, both subverting wealth to those holding the monopoly, and destroying the price system that allows economic calculation and the efficient allocation of resources.

We may not be very far from the establishment of a sole global currency in the west, and with it the control over western labor by the few who own the currency cabal. These same few, as in history past, plan the economy, by setting the price of loaning money, by setting prices of goods and services, by granting taxpayer-supplied cash to favored enterprise, and by enacting regulations that steer capital and labor to favored enterprise, to name a few modern tactics.

We humbly ask, what articles will the planners plan to create, to be developed and produced in controlled sectors of the economy: automobile manufacturing, power generation, finance, healthcare, real estate, and education. In what quantities, of what quality, and with what materials and labor will the planners select?

How will the planners guide and channel the factors of production so as to correctly apportion the output of thousands of goods in accordance with demand?

This is the economic calculation problem Mises pointed out. The immensity of the challenge ensures that no bureaucrat, no matter how brilliant, no matter how many Ph.D. staffers and supercomputers are purchased, the calculations are impossible to make.

First, the planner must take stock of what factors of production there are to work with: labor, raw materials and capital. What quantity of iron is available, how many tons, where are the stocks located, and in what grades? Without private market participants bidding on iron, based on supply and demand, how can planners ration and direct iron as needed to various enterprises? Furthermore, after the materials arrive, and labor is placed, how many cars should the planners make to meet demand?

Hazlitt explains the alternative to central planning:

In a free economy, in which wages, costs, and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.

In short, resources within society can be arranged using the price system, as Hazlitt described, or by the use of force, with planners directing the use of capital, labor and raw materials. Notice the last part of the quote above, in which Hazlitt shows us that it is the entrepreneur’s profit or loss that signals whether the consumer, and society in general, is better off for the way in which the entrepreneur chooses to combine and use resources.

We often hear the question: “Why is a dollar spent by the government less effective, or any different, than a dollar spent in the private sector?”

The success and veracity of the entrepreneur’s calculation, the profit-and-loss calculation, relies on the ability to determine market prices for all goods, including the price for capital (interest rate). When these prices are distorted by interference with the function of the market, inefficiency and misallocation occur.

The planners need not take over an entire sector of industry in order to sabotage the price mechanism: Where government-owned enterprises make up a large part of a sector, in supply or demand, the market prices set by those sensitive to profit and loss are rendered useless. Mises:

Where there is no free market, there is no pricing mechanism: without a pricing mechanism, there is no economic calculation.

Today, sectors of the global economy are partially planned, and partially capitalistic, just as the economies of the Soviet Union and Eastern European were not fully socialist because they were  essentially “islands” within a capitalist world market. The planners were therefore able, albeit clumsily and imperfectly, to use prices set by world markets as indispensable guidelines for the pricing and allocation of capital resources. We know about the collapsing standards of living for the more heavily planned economies—North Korea, the U.S.S.R., Eastern Germany; hunger, war and death mar the track records of the planners.

The hot idea, being learned today first-hand in China, and being bleached-away at this point within the U.S. evolution, is the foundation of Deng Xiaoping’s catch-phrase: “To get rich is glorious”

We find the concept of profit to be far from evil, as it is often portrayed. Rather, profit embodies the preferences of consumers and results from the relationships of costs to prices, not only instructing us in which goods are most economical to make, but the most economical ways to make them—benefiting everyone’s well being.

Lastly, the profit test is the best way to align incentives in a free society: If somebody wastes resources, combining them in a way consumers do not care for, he or she will incur losses and be forced to change or discontinue plans.

Now, with a better understanding of the rational allocation of resources provided by free prices, consider how difficult it would be for an individual or group of planners to figure out all of the aspects of value for each factor of production that exists in an economy. Then consider the possible innovations and inventions not yet in existence that “should be” developed and planned for. Is it possible that entrepreneurs in a free market, incentivized by profit, might seek to innovate and improve at a more rabid pace than the smartest, best intentioned of government workers?

We are getting closer to understanding WHY it is that millions upon millions have starved until death throughout history with every fully developed attempt at a planned economy. It was the ignoring of the price system; it was hubris of man and the pretense of knowledge that presupposed the impossible.

It is not only the problem of hunger that free prices and free trade (tariffs alter price) could solve. It is human freedom versus human slavery that hangs in the balance, for if the price of labor, your labor, can be covertly reduced, an ever-increasing portion siphoned away without consent, you are a slave to the owners.

The owners are the owners of the currency you are paid in. Those with the Congressionally mandated monopoly on creating cash steal wealth from their slaves when they print new cash. Storing wealth outside of this system maintains purchasing power and mitigates the weight of your yoke.

Mises praised Hazlitt as he “indefatigably fought against the step-by-step advance of the powers anxious to destroy everything that human civilization has created over a long period of centuries.” We at WealthCycles seek your help in achieving the spread of light: Spread the message of non-intervention, of allowing the bankrupt to go into bankruptcy, and of the irrationality of planners seeking to solve their economic calculation problem. After Mises laid out the explanation as to HOW and WHY socialism failed in 1920, Friedrich Hayek built on the idea that each price contains an immense quantity of information.

David Gordon summarizes Hayek’s contribution to the case for free market prices below. This may be the only paragraph needed to fully explain why rational economic activity is impossible in a planned society.

Without a market, the socialist planning board has no means of knowing the value-scales of the consumers, or the supply of resources or available technologies. The capitalist economy is, for Hayek, a valuable means of disseminating knowledge from one individual to another through the pricing "signals" of the free market… the ever-changing, uncertain data of the real world prevents the socialist planning board from acquiring such knowledge. The knowledge which is yielded by market-pricing cannot be collected by a central authority or programmed into a mechanical device, not just because it is too complex, but rather because it is knowledge given only in use. Unhampered markets transmit this knowledge, which is otherwise irretrievable, dispersed in millions of people.

If one can see the critical nature of unhampered prices in maximizing the future prosperity of all, then one can see the case for silver and gold as Buffet’s father made it—essential to prevent hunger, war, and slavery. Only silver and gold money are not under the control of the planners, and therefore would not be a means to alter prices by either fixing interest rates (what should be a market price to loan funds), or the value of money itself by altering its supply whenever desired. To us, it is special that Thomas Paine came to the same conclusion more than one and a quarter centuries prior to Mises’ analysis and Buffett’s plea.

Classical economic ideas that may have inspired Paine’s thinking were published by Adam Smith only a decade before Paine’s time, in 1776. Had the two lived today, it’s unlikely it would take Paine 10 years to internalize and develop Smith’s ideas. Today, ideas fly far faster and further, permanently recorded, like arrows never to be removed from the continuously inflated body of lies that holds humanity in thrall to the almighty, doomed fiat currency system.

testiomials For ages men have bowed to kings, dictators and cabals, only to see the power of a monopoly over money transcend all other powers, both subverting wealth to those holding the monopoly, and destroying the price system that allows economic calculation and the efficient allocation of resources.”

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