Ludwig von Mises on the paradox of "planning"

We may admit that in its initial period a socialist regime could to some extent rely upon the experience of the preceding age of capitalism.  But what is to be done later, as conditions change more and more?  Of what use could the prices of 1900 be for the director in 1949?  And what use can the director in 1980 derive from the knowledge of the prices of 1949?

The paradox of "planning" is that is cannot plan, because of the absence of economic calculation.  What is called a planned economy is no economy at all.  It is just a system of groping about in the dark.  There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought.  What is called conscious planning is precisely the elimination of conscious purposive action.

~ Ludwig von Mises, Human Action, pp. 700-701

Jonathan Newman on how Ludwig von Mises debunked socialism

Mises destroyed socialism this way: Without ownership, there is no exchange.  Without exchange, there are no prices.  Without prices, there is no economic calculation.  Without economic calculation, production decisions are made in the dark.  When that happens, basic needs go unmet.

~ Jonathan Newman, tweet, July 6, 2021

L. Q. Cincinnatus on how Ludwig von Mises used deduction and economic calculation to critique socialism

I would argue that Ludwig von Mises’ 1920 analysis of economic calculation is one of the great, unsung thought experiments in modern science, but because it was conducted as an exercise in deductive, as opposed to inductive, reasoning that it is either wholly ignored or, more likely, not understood. 

Through a series of strict deductive inferences anchored in the primary “given” of socialism—the absence of private property—Mises demonstrated that a functioning price system would never emerge, and, as a result, no method of rationally calculating the relative scarcity or necessity for higher order goods of any kind could be used to sustain an economy. Mises stated flatly that a socialist economy was was not merely a contradiction in terms, but impossible (unmöglich). 

His analysis was immediately seized upon by socialist theoreticians and planners and the history of its reception, both in the free world and in the countries behind the former Iron Curtain, makes for fascinating reading. In the final analysis, of course, Mises was proven right. Resoundingly so. Because in 1920, before Lenin had even consolidated power, Mises had already foretold the fate of the Soviet Union. And it would take another seventy years and scores of millions of human corpses for him to finally be vindicated.

~ L. Q. Cincinnatus, "How is an American Left Still Possible? Four Theses," LewRockwell.com, November 28, 2020

Thomas Sowell on the price system

Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated. 

~ Thomas Sowell

Neel Kashkari on calculating the cost of the TARP bailout

We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number.

Seven hundred billion was a number out of the air. It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’ We didn’t know if it would work. We had to project confidence, hold up the world. We couldn’t admit how scared we were, or how uncertain.

~Neel Kashkari, former Interim U.S. Assistant Secretary of the Treasury for Financial Stability, ex-Goldman Sachs banker, "Neel Kashkari's Fuzzy TARP Math," WSJ.com, December 7th, 2009

Wilhelm Röpke on the profit and loss guide to a "rational economy"

The individual is forced by competition to seek his own success in serving the market, that is, the consumer. Obedience to the market ruled by free prices is rewarded by profit, just as disobedience is punished by loss and eventual bankruptcy. The profits and losses of economic activity, calculated as precisely and correctly as possible by the methods of business economics, are thus at the same time the indispensable guide to a rational economy as a whole. Collectivist economies, of whatever degree of collectivism, try in vain to replace this guidance by planning.

~ Wilhelm Röpke, from a section titled "The Spiritual and Moral Setting," A Humane Economy

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