Kevin Duffy on economic calculation

There are two ways to deal with wants, needs, problems, and emergencies – coercively or voluntarily. The coercive sector (government) is top down and centrally planned, substituting the plans of a few state officials with none of their resources at stake for the plans of hundreds of millions of individuals with their own property and livelihoods at stake. The voluntary sector (charity plus free markets) is bottoms up, decentralized, and guided by the “invisible hand”, individuals with their own limited resources at stake. This sector has a secret weapon – the price system – which allows everyone to make everyday decisions about what they want and are willing to give up. The Austrian economists call this “economic calculation”.

Let’s say your dream is to own a house on a lake. If there were no scarcity there would be no problem – we’d all own lake houses. Instead, that house has a price based on the supply of similar homes and vacation alternatives (like taking a cruise) and the demand for various leisure activities. You have a plethora of ways to occupy your free time, and the only way to compare the cost of these (what you have to give up in terms of accumulated property and your labor) is with prices. Without a price system there would be no way to allocate resources efficiently, no way to perform economic calculation, no way to plan. Trade would be reduced to barter. Our lives would be chaotic and primitive.

This is the central problem with central planning – no price system. It is no wonder the coercive sector is slow, inept, and wasteful when it comes to providing services, building infrastructure, or responding to emergencies. Bureaucrats do not act like property owners who instinctively protect what they worked so hard to create. Any property they have was stolen from the taxpayer and can be replaced with more taxes. Bureaucrats also do not act like businessmen, whose existence is based on serving the consumer better than the competition. Government has no competition – it is a monopoly on force. There is no feedback system, no accountability, and no way to remove waste. Business has such a feedback system – the profit and loss system. Businesses are accountable to their customers, employees, and shareholders every day. If they fail to deliver, these constituents vote with their feet. Losses send a message to the company execs to get their act together or go work for someone who does.

Kevin Duffy, Bearing Asset Management, September 14, 2005