Could a Planned Economy Ever Succeed?

Could a Planned Economy Ever Succeed? by Charles Scaliger.

Could a planned economy, where the government determines who has how much wealth and what wages and prices ought to be, ever succeed?

The answer hinges on value — what determines value?

It has been claimed that value is somehow inherent and therefore measurable by some impartial and independent standard, in the same way that we might measure a distance, a weight, or a temperature.

One approach to “measuring” value is the “labor theory of value,” … that the more labor is required to produce something, the more it will be worth. … If this were true, it is at least imaginable that a sufficiently well-informed board of economic planners could calculate the values of all goods and services in production and decide how much of each should be produced and at what cost.

The Soviet economy measured value using the labor theory of value. Their economy only lasted as long as it did because the Soviet planners gave up on that theory and used western prices to value items!

It is impossible to measure value. As a little careful thought will reveal, valuation is subjective; like beauty, it is entirely in the eye of the beholder. One man’s treasure is another man’s trifle. … One person desires this type of car, or house, or job, and another person something entirely different. And this applies as well to life’s most essential things — food, clothing, shelter, and the like.

There is, as it has often been said, no accounting for taste. … Values of things can no more be tabulated than can emotions.

Yet economic exchange still takes place. … people make exchanges based on the relative value of things as they perceive them individually.

Suppose, for example, that I possess a car that I wish to sell for $5,000, and I find someone who is willing to pay that price. Does this mean that my car is “worth” $5,000? No. It means that I value the $5,000 more than the car, and the person who buys the car values it more than the $5,000. Otherwise, why would I be willing to sell the car for $5,000, and why would the buyer be willing to pay that amount? In actuality, unless both the buyer and seller believe they are benefiting from the deal, no exchange would take place. …

Which is why we have markets. But central banks and governments systematically undermine and manipulate many markets nowadays, so the economic information embodied in prices is increasingly being falsified. (Not sure manipulation exists? Interest rates are explicitly set by a bunch of bureaucrats at central banks — it’s on the news every month or so. While the market does play role in setting interest rates,  interest rates would be very different if not for the central bank price setting — the markets are merely betting on what the bureaucrats will do next.)

Thus there is in reality only one type of economy, in any rational sense of the word: A free market, in which buyers and sellers are free to haggle and create value in acts of voluntary exchange, is the only way that an economy can function.

“Planned economies” only work to the degree that market exchange is allowed to operate despite the efforts of the government to interfere.

Planned economies also usually involve abuse of property rights. If property rights are not secure then people don’t strive, productivity is minimal, and everyone is poor. Private property and free markets seems to make for wealthier and happier societies every time. The correlation between economic freedom and societal wealth in today’s world is strong.

hat-tip Barry Corke