China Persists in the Myth of Planning

As the plan goes down from high to low,
The government’s experience continues to grow.
They have to work hard and deliberate
Because a billion lives are all at stake!

It must be smart: note the picture of Einstein along with Chinese leaders such as Mao Zedong (around 0:50).

Of course, this "planning process" doesn't work. In the best of circumstances, it's no match for a billion producers and consumers making decisions every day about what actions are likely to better their own condition. It's characterized by bureaucracy, backward-looking decisions, and cronyism. In less-than-ideal circumstances, when the planners are armed with total power and inspired by an ideological belief that they can actually direct the activities of millions of people, as in China from 1949 to 1979, the results are disastrous: poverty, starvation, and even cannibalism. Fortunately, after 1979, the planners led by Deng Xiaoping began to dismantle the system of collective farming and to allow Chinese farmers to make many of their own decisions, and growth took off. Plans work better when they allow individuals to plan.

I wrote about planning in The Libertarian Mind:

It is the absence of market prices that makes socialism unworkable, as Ludwig von Mises pointed out in the 1920s. Socialists have often considered the question of production an engineering question: Just do some calculations to figure out what would be most efficient. It’s true that an engineer can answer a specific question about the production process, such as, What’s the most efficient way to use tin to make a 10-ounce soup can, that is, what shape of can would contain 10 ounces with the smallest surface area? But the economic question—the efficient use of all relevant resources—can’t be answered by the engineer. Should the can be made of aluminum, or of platinum? Everyone knows that a platinum soup can would be ridiculous, but we know it because the price system tells us so. An engineer would tell you that silver wire would conduct electricity better than copper. Why do we use copper? Because it delivers the best results for the cost. That’s an economic problem, not an engineering problem.

Without prices, how would the socialist planner know what to produce? He could take a poll and find that people want bread, meat, shoes, refrigerators, televisions. But how much bread and how many shoes? And what resources should be used to make which goods? “Enough,” one might answer. But, beyond absolute subsistence, how much bread is enough? At what point would people prefer a new pair of shoes to more food? If there’s a limited amount of steel available, how much of it should be used for cars and how much for ovens? What about new goods, which consumers don’t yet know they’d like? And most important, what combination of resources is the least expensive way to produce each good? The problem is impossible to solve in a theoretical model; without the information conveyed by prices, planners are “planning” blind.

In practice, Soviet factory managers had to establish markets illegally among themselves. They were not allowed to use money prices, so marvelously complex systems of indirect exchange—or barter—emerged. Soviet economists identified at least eighty different media of exchange, from vodka to ball bearings to motor oil to tractor tires. The closest analogy to such a clumsy market that Americans have ever encountered was probably the bargaining skill of Radar O’Reilly on the television show M*A*S*H. Radar was also operating in a centrally planned economy—the U.S. Army—and his unit had no money with which to purchase supplies, so he would get on the phone, call other M*A*S*H units, and arrange elaborate trades of surgical gloves for C rations for penicillin for bourbon, each unit trading something it had been overallocated for what it had been underallocated. Imagine running an entire economy like that.

Despite the total failure of total planning, I wrote,

the Holy Grail of planning dies hard among intellectuals. What is President Obama’s health care plan but a central plan for one-seventh of the American economy? [And see also his promise of “strategic decisions about strategic industries."] President Bill Clinton had offered an even more breathtaking view of the ability and obligation of government to plan the economy:

We ought to say right now, we ought to have a national inventory of the capacity of every… manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.

We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next 20 years and then we have to decide how to get from here to there. From what we have to what we need to do.

After the election, a White House aide named Ira Magaziner fleshed out this sweeping vision: Defense conversion would require a twenty-year plan developed by government committees, “a detailed organizational plan… to lay out how, in specific, a proposal like this could be implemented.” Five-year plans, you see, had failed in the Soviet Union; maybe a twenty-year plan would be sufficient to the task.

China's catchy jingle can't obscure the fact that central economic planning is a misguided holdover from the era of centralized industries and centralized governments. It's increasingly backward in a dynamic world of instant communication, global markets, and unprecedented access to information.