Four Laws in Brief
on prices, administration, regulation, and reform
I maintain that there are Four Laws which demonstrate, with the help of "scientists say" that socialism and its kissing cousins, the administrative state and the regulatory state, cannot thrive.
Socialism cannot compute prices. It was shortly after the Bolshevik Revolution that the Austrian Jew Ludwig von Mises wrote a paper in which he stated that socialism cannot work because it cannot compute prices. This paper, "Die Wirtschaftrechnung im sozialistischen Gemeinwesen," in the Archiv für Sozialwissenschaft, was translated into English as "Economic Calculation in the Socialist Commonwealth" (1920) and published by Hayek in Collectivist Economic Planning in 1935.
In Socialism: an Economic and Sociological Analysis (1923) Mises reprises his argument. First he talks about marginal value and how money prices are, at best, a crude effort to tease out marginal value. And yet, money calculation is the only thing that works.
Only under very simple conditions is it possible to dispense with money calculations. In the narrow circle of a closed household, where the father is able to supervise everything, he may be able to evaluate alterations in methods of production without having recourse to money reckoning....
To suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an illusion...
It will have no means of ascertaining whether a given piece of work is really necessary, and whether labour and material are not being wasted in completing it.
Actually, the socialists are right in their critique of money pricing, reducing all human economic interaction to the reductive test of "does it pay?" Surely we humans are better than that! No doubt we are, but the problem is that we don't have a better way of interacting with each other, to signal to other actors in the economic commonwealth what their products and services are worth to us, and they to signal to us what our contributions are worth to them. There ought to be an absolute scale of value, but there isn't. Not yet.
The theory of marginal value, that was discovered by three or four economists in the same year of 1870 — the way that most discoveries are made — shows the shifting sands of economic value. It says that we can have no theory of use value or theory of exchange value — that prices reflect either an object's use value or its exchange value — as the classical economists had proposed. All we can say is that, when buying the next (or marginal) item of some product, an actor is willing to pay a certain price. Why he was willing to pay that price and no more, and the counterparty was willing to sell for a certain price, and no less? We Don't Know.
The Man in Whitehall cannot direct the economy. Friedrich von Hayek, a student of Mises, came up with another way of expressing the economic calculation issue. He said, starting in The Road to Serfdom, that the big problem about socialism is that, by subordinating the economy to an administrative governmental authority, it treats the economy like a war.
[W]hile the general who is put in charge of a campaign is given a single end to which, for the duration of the campaign, all the means under his control have to be exclusively devoted, there can be no such single role given to the economic planner, and no similar limitation of means imposed upon him. The general has not got to balance different independent aims against each other; there is for him only one supreme goal.
And yet every administrative hierarchy implies the war metaphor, that there is a single goal to which all must contribute as directed by authority. It does not work, as Lenin said as a result of the experiment of war communism during the Russian Civil War,
Let us frankly admit our complete inability to conduct affairs, to be organizers and administrators. . . . If we are to be absolutely definite, we must know exactly what we are going to do over the year ahead. Who knows that? No one.
Do you see the point? If you are fighting a war, then everything and everyone are to be sacrificed to winning the war. There is no competing goal, no alternative, to assembling all economic and human resources in the winning of the war. But an economy is different, for there the goal begins with the fact that there is not one goal, the survival of the nation, but a million goals, starting with the provisioning and survival of every single human in the nation. How in the world can "the Man in Whitehall" as they say in Britain, or the man in Washington, begin to have a clue about how to organize the economy to adjust it yearly, or monthly, or daily, to meet the needs of its millions of citizens?
And even suppose you have half a clue when you establish your budget at the beginning of the year, what about half way through the year when conditions have changed?
I have expressed this issue, in the past, as a bandwidth issue. The bandwidth of a centralized Department of Economic Planning is, at most, a thousand people (allowing that most of the bureaucrats will be filling out paper). But the economy is millions of people, as consumers and producers, making millions of decisions about what to buy and what to produce every day. And the price system adjusts the prices every day in response to changing conditions. In a way, it is a pitiless system, as businessmen that make the right decisions get rewarded with profits and people that make the wrong decisions get punished with losses. The successful businessman may be a monster that exploits his workers; the failed businessman may be a pillar of the community. But what else are we to do, other than reward correct decisions and and soften the blow of bad decisions with a law of bankruptcy?
Regulatory Capture. But at least we can tame the excesses of capitalism by regulation of the business sector, identifying hurtful and beneficial, and making sure that everyone earns a fair return on capital, whether human or physical. Right? Unfortunately, the economist George Stigler proposed that when you set out to make things fair and regulate an industry, the result is "regulatory capture," where the regulated businesses end up rewriting the regulations to favor established businesses and prevent competitors from disturbing the market. Even La Wik gets it.
Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
And in fact we see that all businesses that get tangled up with government start to "capture" the politicians and bureaucrats that regulate them. We see this with the green energy industry that has fattened on green subsidies. We see it with the health care industry that is probably the most credentialed industry in the country. It need be nothing more than the desire of the bureaucrats to live a quiet life, and reduce the complexities of regulation. They will find themselves the handmaidens of the special interests.
The truth is that there is no substitute for a free and open economy. Any kind of a short cut is going to favor the powerful and loot the powerless. Because that's the way that politics and power operates.
Government Can't Reform. But now we come to an even bigger problem, which I call Chantrill's Law. It is that, if you look at almost any government program you see that it is almost impossible to reform or change it. This is absurd. We know that every business and every consumer is making changes every day, based on perceived changing needs and market conditions. But government finds it almost impossible to change its programs. There are many reasons for this, including:
Government programs are, at bottom, loot and plunder, taking money from someone and giving it to someone else. People in receipt of government benefits will resist to the knife any attempt to reduce their benefits. The only way to reduce benefits is to introduce a moral factor, that the recipients are "welfare bums" or "greedy bankers" that deserve to lose their benefits because they are moral lepers.
The economy is too complicated for legislatures and bureaucracies to regulate. A legislature can only produce about three or four major bills a year. You think they have time to adjust and reform any of the dozens of programs the government runs? Especially as the committee chairmen and bureaucratic leaders resist the idea that there could be anything wrong in their feudal fief. Especially as there is an election coming up. The truth is that the only way a program gets reformed is when it is so screwed up that even a journalist can understand that something is wrong.
Really, the problem is not so hard to understand. We humans are biologically programmed to be a small hunter-gatherer band in which economic issues are resolved by reciprocal gift-giving and the charisma of the Big Man. But we have blundered into creating a society that has tribes and nations and empires, notions completely beyond the ken of our forebears of 100,000 years ago. The miracle is that, as we humans have clumped into larger communities, it turns out that we can adjust the reciprocal gift-giving through the price system, and the Big Man through presidents and legislatures, and that the price system works to coordinate all our different needs and abilities.
Who would have thunk it?