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Suppressing Market Information
Just as the role of prices as a rationing system is best
seen when it is suppressed, the role that price plays as a
communication network is also best seen when it is
suppressed. When the Bolsheviks triumphed in the Russian
Revolution of 1917, they proceeded to destroy the old
system, which was partially a market system. Because Karl
Marx had studied only capitalism, trying to explain why it
would collapse, the new rulers of Russia could not look to
him for an analysis of how socialism would work, but had to
learn for themselves. They quickly discovered that if
decisions were not made using prices and profit, another
method had to be used. They developed a system of central
planning.
With a system of central planning, the government decides
what the priorities of the society will be and implements
these priorities through a central planning agency. However,
central planners cannot simply issue orders and expect them
to be obeyed. They must first obtain information about what
the factories, mines, and farms in the nation are capable of
producing. The central planning agency could send out
questionnaires, but there is no assurance that the answers
that would come back would be truthful because, despite the
socialist dream that men should act in total
selflessness--for the good of the society as a whole, this
does not seem to be the way that people actually act in the
real world. It certainly has not been the way that men have
acted in nations that adopted socialism.
The central planning agency wants the factories, mines,
and farms to produce as much as possible. It must reward
those who produce up to their potential and penalize those
who do not. Rewards and penalties introduce an incentive to
lie when the central planning agency tries to determine
potential. If the plant, mine, or farm manager
underestimates potential and the central planners believe
this estimate, the chances that the production unit will
appear to be a good performer are enhanced. Instead of using
profit to judge performance (it seemed too capitalistic),
the central planning system in the Soviet Union judged
performance on how well the productive unit met a set of
goals specified in terms of quantities. Managers had an
incentive to withhold information about potential and to
overestimate the supplies needed to produce their
output.
Once the central planners had information about what
factories are capable of producing, they tried to coordinate
production decisions. One factory's output is often another
factory's input. In planning for truck output, did the
planners plan for enough steel? To get the steel, did they
plan for enough machines to mine the coal and enough trucks
to transport it? In a modern economy, there are a tremendous
number of linkages and interdependencies. Thus, any change
in production of one product sets off a cascade of other
changes needed to support the first change. Although the
Soviet Union demonstrated that a country could centrally
plan its economy, its experience also showed that such a
system tends to be rigid and resistant to change.
Between 1920 and 1940 a number of economists debated
whether a centrally planned economy could match the
performance of a decentralized market economy. One of the
most insightful of these economists was Friedrich Hayek, who
argued that information is widely scattered in society and
cannot be effectively collected for use by a central
authority making production decisions for the entire
economy. Rather, the existence of market-determined prices
communicates vital information that encourages individuals
not only to use whatever information they have about
production of goods, availability of resources, and how to
satisfy consumers' desires, but also to actively search for
more information. The market, said Hayek, was a way a
society minimized the effort needed to discover and
communicate information. The unimpressive performances of
centrally planned economies in providing for the average
consumer's material well-being seems to be mostly
explainable in terms of problems of information and
incentive.
Next we see how consumers vote
for goods and services.
Copyright
Robert Schenk
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