Ordered Liberty (Capitalism) Versus Chaotic Tyranny (Socialism)

Capitalism,Economy,Free Markets,Government,Socialism


Thanks, George, for sending this magnificent essay. It’s a privilege to help popularize it.

By George Reisman, Ph.D.

Most of this essay has been extracted from portions of the author’s Capitalism: A Treatise on Economics, specifically pp. 137-139 and 269-273.

Economic planning is almost always thought to be an activity performed by governments. In contrast, the activities of private individuals and business firms under capitalism, each of whom acts separately and independently, for his own self-interest, are assumed to be described by the epithet “anarchy of production.” According to the prevailing view, which derives from Marxism, governments rationally plan, while private individuals and business firms run around like chickens without heads, each vainly seeking to benefit himself without regard for the consequences of his actions on others, and thus to the detriment of others.

In contrast, socialism is usually thought to be a system of rational, central economic planning, in which the government operates each part of the economic system with an eye to the effect on all the other parts, and thereby is able to replace the allegedly planless, mutually destructive chaos of capitalism with a rationally planned system that controls and coordinates the actions of each for the benefit of all. In this way, the overthrow of capitalism, and its replacement by socialism, was long thought to be essential to the furtherance of the values of reason and rationality in economic life.
The prevalence of such views is a leading testimony to the ability of wrong ideas sometimes to cause blindness to the most obvious facts of reality.

Capitalism Has All-Pervasive But Unrecognized Economic Planning
The truth is that under capitalism the economic system already has economic planning. Economic planning is omnipresent under capitalism. And this economic planning is overwhelmingly rational, with the separate, self-interested plans of each individual and business firm harmoniously coordinated and integrated with the separate, self-interested plans of all other individuals and business firms.
Yet the fact that capitalism has economic planning is almost completely unknown. Practically everyone under capitalism has been in the position of Molière’s M. Jourdan, who spoke prose all his life without ever knowing it, prose being the somewhat fancy technical term that stands for ordinary, everyday speech. The overwhelming majority of people have not realized that all the thinking and planning about their personal and business economic activities that they perform in their daily lives actually is economic planning.

The truth is that each individual under capitalism is engaged in economic planning almost continuously. We are all engaged in economic planning under capitalism practically every day, but hardly any of us realize it—least of all, today’s intellectuals. The following extensive list of examples will make it clear in just what ways we practice economic planning.

An individual is engaged in economic planning when he plans how much of his wealth and income to save and invest and how much of it to consume; when he plans where to invest it and in what ways to consume it. He is engaged in economic planning, for example, when he plans to put his money in a bank or in the stock market, and in which specific shares in the stock market; when he plans to buy more clothes or a new stereo; even when he plans to drive to work or take the train, instead.

Every businessman under capitalism is engaged in economic planning when he plans to expand or contract the production of any item; when he plans to introduce a new product or discontinue an existing product; when he plans to change his methods of production or retain his existing methods; when he plans to build a new factory or not to replace an existing one; when he plans to change the location of his business or let it remain where it is; when he plans to open new branches or close existing branches; when he plans to buy new machinery or not; to add to his inventories or not; to hire additional workers or let some of his present workers go.

Every wage earner under capitalism is engaged in economic planning in all of the thinking he does about how to perform his job, which is what enables him to do his job and earn his wage. He is engaged in economic planning when he plans to seek new employment or to retain his present employment; when he plans to improve his skills or rest content with the ones he has; when he plans to do his job in one particular area of the country, or in one particular industry, rather than in another.
In short, every one of us under capitalism is engaged in economic planning every time he plans any aspect of his personal finances or business affairs. We are engaged in economic planning every time we think about a course of action that would benefit us in our capacity as a buyer or seller. We are engaged in economic planning even in an activity as small and mundane as that of preparing a shopping list.
It is simply amazing that all of this planning could be overlooked, and that the socialists have been able to proceed as though capitalism lacked planning. Capitalism has planning—the planning of each and every person who participates in the economic system.

Capitalism not only has all-pervasive economic planning carried out by all of the tens of millions—indeed, with the globalization of the economic system, by all of the hundreds of millions and billions—of individuals and business firms that participate in the economic system across the world. But, in addition, all this planning is harmonized, coordinated, and integrated into a comprehensive rational planning of the entire economic system. What accomplishes this is the existence of the price system, a vital social institution that can exist and function only under capitalism.

The Economic Planning of Capitalism Rests on the Price System
Under capitalism each individual and business firm plans his own particular sphere of economic activity. But he plans on the basis of a consideration of prices—the prices he will receive as a seller and must pay as a buyer.

The consideration of prices is what harmonizes, coordinates, and integrates the plans of each individual and business firm with the plans of all other individuals and business firms and produces a fully and rationally planned economic system under capitalism. For example, a student changes his career plan from actor to accountant when he contemplates the vast difference in income he can expect to earn in the one profession compared with the other. A prospective home buyer changes his plan concerning which neighborhood to live in when he compares house prices in the different neighborhoods. And businesses change their plans concerning product lines, methods and locations of production, and every other aspect of their activities, in response to profit-and-loss calculations.

All of these changes represent the adjustment of the plans of particular individuals and businesses to the plans of others in the economic system. For it is the plans of others to purchase accounting services rather than acting services that cause the higher income our student can expect to earn as an accountant rather than as an actor. It is the plans of others willing and able to pay more to live in certain neighborhoods, and less to live in others that determine the relative house prices confronting our home buyer. It is the plans of its prospective customers, of all competing sellers of its goods, and of all other buyers of the means of production it uses or otherwise depends on, that enter into the formation of the prices determining the revenues and costs of any business firm and thus what it finds profitable or unprofitable to produce.

Thus, prices have a twofold function in the planning of capitalism. First, they enable the individual planner of capitalism to perform economic calculations. That is, they enable him to compute the money cost and/or money revenue of various modes of conduct. If the planner is a businessman, he weighs a money cost against a money revenue. If he is a consumer, he weighs a money cost against a personal satisfaction. If he is a wage earner, he weighs a money revenue against his personal efforts.

These economic calculations provide a standard of action for the planner under capitalism. They tell businessmen to produce the products and use the methods of production that are anticipated to be the most profitable. They tell consumers to consume in the ways that, other things being equal, occasion the lowest cost. And they tell wage earners to work at the jobs that, other things being equal, pay the highest wages. Thus, prices are an indispensable guide both to the planning of production and to the living of one’s personal life under capitalism.

The Coordinating Function of Prices
As indicated, the second, corollary function of prices is that they coordinate the plans of each individual and business firm under capitalism with the plans of all other individuals and business firms. That is, prices serve to make each individual and business firm adjust his own plans to the relevant plans of all other individuals and business firms in the economic system. In this way, capitalism and the price system bring about a harmoniously integrated planning of the entire economic system. Concern with money revenue makes one adjust to the plans of the prospective buyers of one’s goods or services and to the plans of all competing—and even potentially competing—sellers of those goods or services. For example, if customers decide that they want more of some item, that will tend to raise its price and the profitability of producing it. Sellers will thus be induced to change their plans and produce more of it. If the sellers produce too much more of the item, its price and profitability will fall, and some of the sellers will be induced to change their plans once again, and produce less of it. The mere anticipation by some sellers of other sellers planning to produce and sell more can be sufficient to lead them to plan to produce and sell less.

Concern with money costs makes one adjust to the plans not only of all other buyers seeking the particular thing or things one wants to buy, as in the case of the house that is too expensive. It also makes one adjust one’s plans to harmonize with the plans of all those who seek to employ the factors of production from which that good is made, or alternative products of those factors of production. For example, the prices of raw copper, copper cookware, copper cable, copper pipe, copper wire, and all other copper products are all related. A rise in the demand for any copper product tends to bring about a rise not only in its own price, but also in the price of raw copper and all other copper products, whose cost of production is increased by the rise in the price of raw copper.

Thus a buyer who decides he must limit his purchases of copper cookware because of its cost is implicitly adjusting his plan for copper cookware purchases to the plans of buyers of raw copper and alternative copper products throughout the economic system. And, of course, buyers, must adjust their plans to the plans of sellers in their capacity as individuals having definite personal values and preferences.

Thus, the desire to earn a money revenue leads one to produce things that the buyers want and that are not being produced excessively by other sellers. The desire to limit costs leads one to economize on things to the degree that other buyers value them, or value the factors of production on which they depend, or the alternative products of those factors of production; and also to economize to the degree that the goods or services in question can be provided only at some special inconvenience to the sellers engaged in producing them.

The Price System Depends on Private Ownership of the Means of Production, i.e., on Capitalism
The price system rests on the profit motive and the freedom of competition. Operating in conjunction with one another, these are the elements that drive and regulate the price system—that determine the formation of all individual prices and their integration into a system. The profit motive and the freedom of competition, in turn, vitally depend on the institution of private ownership of the means of production, which is the most fundamental institution of capitalism.

It is necessary to explain here the nature of both of these sets of dependencies: that of the price system on the profit motive and the freedom of competition and, in turn, that of the profit motive and the freedom of competition on private ownership of the means of production.
The profit motive—financial self-interest—makes everyone be concerned with the revenue or income he earns and the costs or expenses he incurs. Precisely this, of course, is what harmonizes and integrates the economic plans and the economic activities of all the separate businesses and individuals who make up the economic system. While the principles describing just how this occurs are the subject matter of price theory and are explained at length in my Capitalism: A Treatise on Economics, this much can be stated now, as a brief, advance indication: Namely, the profit motive provides powerful incentives for the steady expansion and improvement of production and, at the same time, operates to keep the relative size of all the various industries and occupations in proper balance. It makes production accord with the will of the ultimate buyers—the consumers—and ensures that the production of each individual good takes place in a way that is maximally conducive to production in the rest of the economic system. The profit motive is what balances the demand and supply of each product and ensures the most rational and efficient distribution of each product over space and time—among all the markets that compete for it—and its delivery into the hands of those individuals who, within the limits of their wealth and income, need or desire it the most. The profit motive ensures the most rational and efficient allocation of capital and of every type of labor and material among its possible alternative uses, and makes the economic system respond to changes in economic conditions in the most rational and efficient manner possible.

Thus, the profit motive is what prevents any sort of “anarchy of production” and, instead, creates economic order and harmony out of the activities of all the different individuals who comprise the economic system. It is what enables capitalism to be an economic system that is rationally and cohesively planned by each and every individual who participates in it.

If the profit motive is the engine which drives the price system, competition and the freedom of competition are the built-in regulator which provide the essential context in which that engine operates. What this means is that in seeking to serve his financial self-interest, every seller under capitalism must be aware that there are other sellers or potential sellers who might sell to his customers and thus that he must accordingly limit the prices he asks. By the same token, every buyer under capitalism must be aware that there are other buyers or potential buyers who might buy from his suppliers and thus that he must set the prices he offers accordingly.

Now while the profit motive and the freedom of competition are the elements that drive and regulate the price system, as stated, they themselves in turn rest on the foundation of private ownership of the means of production.

Private ownership of the means of production is what makes the profit motive operative in the formation of prices, the prices both of means of production and of products. Furthermore, private ownership of the means of production underlies the very existence of the incentives of profit and loss, in that it is private property, above all in the form of private ownership of the means of production, that is the substance of what is gained or lost by producers. Without the ability to accumulate holdings of private property, there would be nothing for producers to gain except the ability to enlarge their immediate consumption, and nothing at all for them to lose, because losses can be losses only of preexisting property. With private ownership of the means of production there is not only the incentive of profit and loss to use the means of production profitably but also the vitally important fact that an individual’s control over the means of production is increased or decreased to the extent that he uses them profitably or unprofitably.

This last results from the fact that those owners who use the means of production profitably are in a position to save and reinvest, in proportion to the extent of their profits. To the extent that their sales proceeds exceed their costs, they obtain the funds not only to replace the means of production with which they began but to more than replace. They are thus enabled to enlarge their control over the means of production. By the same token, those owners of the means of production who suffer losses correspondingly lose control over the means of production. Their losses mean that their sales proceeds are less than their initial outlays and thus that they lack the funds to replace the means of production with which they began.

Thus private ownership of the means of production is what gives the profit motive virtually all of its economic influence: it enables the profit motive both to be operative in the formation of the prices of means of production and products and to direct the use of the means of production. At the same time, it enables success or failure in earning profits to determine the extent of one’s control over means of production in the future. And, of course, it is what gives the profit motive its strength.

As to economic competition: private ownership of the means of production underlies economic competition, in that economic competition presupposes separate, independent producers, who, in order to be separate and independent, must hold the wealth they use in production separately and independently from one another. Thus competition among producers presupposes private ownership of the means of production. Furthermore, the freedom of competition, like virtually all other freedoms, is an aspect of property rights: it is the freedom of owners of means of production to employ their means of production in any branch of industry they choose.

Socialism Destroys the Foundations of Economic Planning
Now socialism, in destroying private ownership of the means of production destroys the foundation both of the profit motive and competition, which in turn are the foundations of the price system, which is destroyed along with its foundations. In destroying the price system, socialism destroys the possibility of economic calculation and the coordination of the activities of separate, independent planners. It therefore makes rational economic planning impossible and creates chaos.

As an illustration of the consequences, consider the problems confronting a socialist government in trying to plan the production of a simple item, such as shoes. Shoes can be produced in varying quantities, in various styles or combinations of styles, and by various methods or combinations of methods, such as by machine or by hand, including the choice between using various proportions of machine or hand production in different parts of the overall process. They can be produced from different materials or combinations of materials, such as leather, rubber, and canvas, and in different geographical locations, again, in both instances, in varying proportions. Under capitalism, all of these choices are determined on the basis of economic calculations. Thus, shoe production as a whole tends to be carried to the point where further production would make the shoe industry relatively unprofitable in comparison with other industries; the styles are those which the consumers are willing to make profitable; the methods of production, the materials used, the geographic locations are all the lowest cost except insofar as they provide special advantages for which the consumers are willing to bear the extra cost.

Under socialism, the lack of economic calculation makes it impossible to make any of these choices on a rational basis. The extent of attempted shoe production is determined arbitrarily—most likely on the basis of some official’s judgment about how many pairs of shoes are “necessary” per thousand inhabitants, or some such criterion. Style is determined arbitrarily—according to what suits the tastes of those in charge. The methods, materials, and locations planned must be selected arbitrarily. And then—for reasons that will soon become clearer—the actual carrying out of production, as opposed to what is called for in the plans, may very well have to be undertaken on the accidental basis of the means of production that happen to be available.

Now it must be stressed that the decisions about all of these choices—quantity, styles, methods, and so on—are important not only from the standpoint of the consumers of shoes, but, no less, from the standpoint of the production of all other goods. It must be borne in mind that shoe production, or the production of any good whatever, requires factors of production which are thereby made unavailable for other purposes. Shoe production requires labor that could be employed elsewhere. It requires leather or other material that either might be employed elsewhere or which is produced by labor that could certainly be employed elsewhere. In the same way, the tools or machines required, or the labor and the materials used to make them, have alternative employments. Moreover, each of the different choices respecting shoe production makes a different combination of factors of production unavailable for alternative employments. For example, shoes produced by hand reduce the number of handicraft workers available for other purposes. Those produced by machine reduce the number of machine makers and the amount of fuel available for other purposes. Shoes produced in Minsk leave less labor available for other purposes in Minsk than if they were produced in Pinsk, and so on.

It is, therefore, clearly not enough, as most socialists appear to believe, for a socialist government—having inherited or stolen the technology of shoe production—to simply decide how many shoes to produce, determine on a style, quality, method, and locations for production, and then give the orders to produce them. In planning the production of shoes, or any other individual item, a socialist government is logically obliged to consider its effect on the production of all other items in the economic system. It is logically obliged to try to plan the production of shoes, or any other good, in a way that least impairs the production of other goods. In drafting its plans for shoe production, a socialist government is obliged to consider the extent of shoe production in relation to the production of all other goods using the same factors of production. It is obliged to consider such questions as whether shoe production might be expanded with factors of production drawn from the production of some other good, and whether the production of that other good might be maintained by drawing factors of production from a third good, and so on.

For example, it must consider whether it would be advisable to use more labor in Minsk for shoes and less for making clothing, say, and perhaps to expand clothing production in Pinsk, at the expense of some third good. It must consider all of the industries using any of the factors of production used in the shoe industry. It must consider what depends on the output of those industries and what alternative factors of production are available to those industries. Indeed, it must go even further. It must consider all of the industries using the alternative factors of production. It must consider what depends on their products, and what further alternative factors of production may be available to them. And so on. And at each step, it must consider the possibility of expanding the overall supply of the factor of production in question, and, if so, by what means, where, and at the expense of what.

To make these problems real, let us continue with the example of shoes. In order to plan shoe production rationally, it would be necessary for a socialist government to consider all of the alternative employments of each of the factors of production used to produce shoes. Let us start just with leather. A socialist government would have to consider the alternative employments of leather, such as upholstering furniture and providing belting for machinery. It would have to consider the consequences of having more or less furniture and machinery versus more or less shoes. It would have to consider alternatives to the use of leather in upholstering furniture and making belting for machinery—for example, various fabrics, and plastic and steel. It would have to consider the alternative uses for the various fabrics and for the plastic and steel, or for the factors of production used to produce them. It would have to consider what depended on those alternative uses, and what substitutes were available for them. It would have to consider whether the total supply of leather, its substitutes, or the substitutes for its substitutes, should be expanded, and, if so, by what means, where, and at the expense of what. Then, of course, the socialist government would be obliged to repeat the same procedure for all of the other factors of production employed to produce shoes, or which potentially could be employed to produce shoes.

Because of Its Destruction of the Price System, Economic Planning under Socialism Would Require the Existence of an Omniscient Deity
All of this raises the insuperable difficulty of socialist planning: Namely, under socialism, it is necessary to plan the production of the entire economic system as an indivisible whole. That would be the only rational procedure.
But the planning of the economic system as an indivisible whole is simply impossible.

It would require a superhuman intellect to be able to grasp the physical connections among all the various industries and to be able to trace the consequences of alterations in any one industry on all the others. What would be required for the rational planning of a socialist economy would be the existence of an omniscient deity willing to descend from heaven and assume the management of the socialist economy.

This deity would have to be able to hold in mind at one time a precise inventory of the quantities and qualities of all the different factors of production in the entire economic system, together with their exact geographical locations and a full knowledge of the various technological possibilities open to them. That is to say, it would have to be able to hold in mind at one time all of the millions of separate farms, factories, mines, warehouses, and so forth, down to the last repair shop, together with a knowledge of the quantity and quality of all the machines, tools, materials, and partly-finished goods that they contained, and exactly what they were potentially capable of accomplishing and when.

It would then have to be able to project forward in time all of the different new combinations of factors of production that might be produced out of the existing factors, together with where and precisely when they would come into existence and the technological possibilities that would then be open to them. It would have to be able to make this projection for an extended period of time—say, a generation or more—in order to avoid the possibly wasteful production of machines and buildings lasting that long.

And then, out of all the virtually infinite number of different possible permutations and combinations of what might be produced, it would have to pick one that on some undefined and undefinable basis it considered “best,” and then order it to be undertaken. That would be its economic plan. That is what would be required even to begin to duplicate what capitalism accomplishes through the price system.

For observe. Under capitalism, different individuals in combination—that is, when their knowledge is added together—do know the precise quantities, qualities, locations, and technological possibilities open to all the various factors of production in the economic system. And everybody’s production is based on the sum of all of this knowledge, because the knowledge is reflected in the prices of all the various factors of production and products. For example, the price of wheat at any given time reflects the knowledge of each owner of wheat concerning the amount, quality, and location of the wheat he owns; it also reflects the knowledge of each user of wheat about the technological possibilities open to wheat. All of this knowledge enters into the supply and demand and hence the price of wheat. It is the same with every other good: its price reflects the sum of existing knowledge about the amount of it available, the technological possibilities open to it in production, and every other relevant consideration. And the future supply, locations, and production possibilities of factors of production are taken into account in the anticipation of their future prices.
The Economic System Requires Continuous Replanning, Which Is Impossible under Socialism but Routine under Capitalism

The deity needed for the planning of socialism would require intellectual powers even surpassing those I have described. For under socialism any unanticipated event, such as a train wreck, an early snowstorm, a warehouse fire, an unexpectedly bad harvest—even unanticipated favorable events, such as the opposite of all of these—is a calamity, for it requires the replanning of the entire economic system. For example, if a tank train carrying a shipment of oil is destroyed, how is the socialist economy to decide where to take out the loss? It would have to look at all of the different uses for oil, all the possible remote consequences of its withdrawal from this or that area of production, and it would have to look at all of the alternative employments of factors of production that might be used to replace the lost oil, and all the permutations and combinations entailed in that, and then decide. By the same token, if, as a result of good fortune, a socialist economy had fewer wrecks of tank trains than anticipated, it would have to replan the entire economic system to find the right use for the extra supply of oil.

Capitalism, on the other hand, responds easily and smoothly to unforeseen changes in economic conditions. Such changes simply bring about a change in the structure of prices and thus generate the most efficient response on the part of all concerned. Thus, the wreck of a tank train—to continue with that example—acts to raise the price of oil a little. The rise in price diminishes the consumption of oil in its marginal employments and simultaneously encourages its production—and, of course, at the least possible expense to other productive activities. The reason capitalism responds so smoothly and efficiently is that every individual in the economic system is involved in planning the response. Each individual acts on the basis of his knowledge of his own personal or business context, and the actions of all the individuals are harmoniously integrated through the price system.

The Problem of Socialism Is that It Requires the Planning of the Economic System without Benefit of a Division of Labor in the Planning Process, Which Is Impossible
The essential problem of socialism is that it requires economic planning to take place without benefit of a division of labor in the planning process. It requires that one man (the Supreme Director), or each of several men (the Supreme Board of Directors), hold in his head and utilize the knowledge that can be held and utilized only by millions of separate individuals freely cooperating with one another on the basis of private ownership of the means of production and its offshoots the profit motive and the price system. The essential economic flaw of socialism is that in destroying these basic institutions of capitalism, it destroys the foundations of the intellectual division of labor that is indispensable to rational economic planning.

As I say, therefore, the planning of the economic system as an indivisible whole—by single individuals—let alone its continuous replanning in response to every unforeseen change, is simply impossible. The ruler of socialism, after all, is simply not an omniscient deity.
The Actual Planning of Socialism Is Not Rational Central Planning but Chaotic, Decentralized Partial Planning

As a result, although it is called “central planning,” socialism can never have anything even approaching a rationally integrated plan for the entire economic system. In reality, the actual planning of socialist countries is undertaken by separate government ministries, each responsible for different industries or regions. Even the individual factories undertake part of the planning process. The plans of these separate ministries and individual factories are only superficially integrated into an economy-wide plan. In this sense, the actual planning of socialism must be called “decentralized planning.” There is no alternative to decentralized planning, because it is simply impossible for any one individual to try to plan everything. Decentralized planning exists as soon as two or more people assume separate responsibilities in the planning process.

However, the decentralized planning of socialism necessarily causes chaos. Because without a price system—without the foundation and mainspring of the price system, i.e., private ownership of the means of production and the profit motive—the individual planners must operate at cross purposes. First of all, there is nothing to stop their various discoordinated plans from presupposing the availability of the same factors of production. In such conditions, the execution of any plan necessarily absorbs factors of production whose absence then makes the execution of other plans impossible. For example, if the shoe industry is planned by one ministry, the clothing industry by a second ministry, the steel industry by a third ministry, and so on, there is nothing to prevent all of these industries from drafting mutually contradictory plans. There is nothing to prevent them from basing their plans on the availability of the same labor, or the same material, fuel, transport facilities, or whatever. In such a case, to whatever extent one industry succeeds in obtaining the factors of production necessary to execute its plan, it simultaneously wrecks the plans of other industries.

Observe what is involved here. Because planning under socialism is necessarily both decentralized and lacks coordination, the production of each of the various goods can be expanded more or less randomly at the expense of destroying the production of other, more important goods. This is exactly the same chaos that prevails under universal price controls and universal shortages. (For a discussion of the essential similarities between socialism and universal price controls and their accompanying controls on the allocation of factors of production, see Chapters 7 and 8 of the author’s Capitalism: A Treatise on Economics. See also his essay “Why Nazism Was Socialism and Why Socialism is Totalitarian.)

Compounding Chaos under Socialism: Disinterested Suppliers and Customers
Furthermore, to whatever extent individual industries or factories are given discretion in the plans, the products that are produced can very well be unsuited to the needs of other industries that depend on them, and in that way wreck the plans of these other industries. For example, the plan for agriculture can be wrecked by the poor quality of tractors that break down too often or aren’t suited for the terrain. Under socialism, suppliers do not have any incentive of profit and loss in meeting the requirements of their customers. Nor are they subject to any form of competition. Each branch of industry under socialism is a protected legal monopoly that is totally disinterested in the requirements of its customers. This, too, is exactly the same situation as exists in the case of price controls and shortages. And it applies, as I say, not only at the consumer level, but at the producer level as well.

Under socialism, each industry, as well as each consumer, is at the mercy of disinterested monopoly suppliers. To understand what this is like, first recall our discussion of the problems at service stations and in the relations between tenants and landlords resulting from price controls on gasoline and from rent controls. (See ibid., pp. 239–40.) Now observe that similar or even worse problems exist around us in the present-day United States in practically every case in which the government is the supplier. For example, think of the services provided by municipal bus lines and subway systems, the public schools, the motor vehicle bureau, and the Post Office. All of these operations are notorious in the utter indifference and contempt they display toward customers and in the low quality and lack of dependability of their services. These characteristics are the result of the fact that these operations are government owned and therefore operate without the incentives of profit and loss; in addition, they are generally immune from the threat of competition. Because of the lack of profit and loss incentives, it doesn’t matter to them whether they gain customers or lose customers—whether they perform fast and efficient service or slow and inadequate service.

Now imagine the steel industry being owned by the government and run in the same way, and the customers of the steel industry having to contend with its performance. The industries needing steel would not be able to make their plans with very great confidence. Moreover, since they too would be owned by the government, they would not particularly care about not receiving the quality and service or even the kind of products they were supposed to. The effects on their customers, in turn, and on the plans of their customers, would be compounded.

For example, an industry waiting for a new factory, say, called for by its plan, would have to contend with the indifference and bad service of a construction industry suffering from the indifference and bad service of the steel industry. And so it would go, with the plans of each industry wrecked by the lack of incentives and poor performance of every other industry further back in the chain of supply. It is for these very reasons, which are tantamount to the conditions of chronic shortages, that suppliers in the Soviet Union were so unreliable that each factory there strove as far as possible to be self-sufficient and thus independent of suppliers. (See ibid., pp. 136-137.)

Socialism Represents the Prohibition of Economic Planning by Everyone except a Handful of Government Officials Who Make Planning their Monopoly and then Are Incapable of Planning
To think of socialism as a “planned economy” is absurd. It is, in fact, an “anarchy of production”—a true anarchy of production. What socialism represents is so far from rational economic planning that it is actually the prohibition of rational economic planning. In the first instance, by its very nature, it is a prohibition of economic planning by everyone except the dictator and the other members of the central planning board.

They are to enjoy a monopoly privilege on planning, in the absurd, virtually insane belief that their brains can achieve the all-seeing, all-knowing capabilities of omniscient deities. They cannot. Thus, what socialism actually represents is the attempt to substitute the thinking and planning of one man, or at most of a mere handful of men, for the thinking and planning of tens and hundreds of millions, indeed, of billions of men. By its nature, this attempt to make the brains of so few meet the needs of so many has no more prospect of success than would an attempt to make the legs of so few the vehicle for carrying the weight of so many.

To have rational economic planning, the independent thinking and planning of all are required, operating in an environment of private ownership of the means of production and the price system, i.e., capitalism.

Anyone who has read and understood this essay should now realize what an enormous combination of ignorance and arrogance is present in the belief that capitalism is a planless chaos and that, as socialism requires, the economic system could be comprehended and planned in all the necessary detail by the mind of just one man or a handful of men.

Dear Reader,
If you liked this essay, please be sure to see Reisman’s other Kindle books at http://www.amazon.com/-/e/B001KCWY0Q. In particular, you should be sure to see his Capitalism: A Treatise on Economics, from which the content of this essay was drawn. This book provides not only a thoroughgoing demonstration both of the economic planning and order that prevail under capitalism and of the chaos and tyranny that prevail under socialism. It also deals equally effectively with all the other leading areas of economic theory and economic policy.

Aimed at both the intelligent layman and the professional economist, and written in language that both can understand, it is the most comprehensive and intellectually powerful explanation of the nature and value of laissez-faire capitalism that has ever been written. It represents a twofold major integration of truths previously discovered by other writers, combined with numerous original contributions made by the author himself. Within economic theory, it integrates leading ideas of the Austrian school with needlessly abandoned doctrines of the British classical school. It further integrates such reconstituted economic theory with essential elements of Ayn Rand’s philosophy of Objectivism. (The Austrian school has been the main school of procapitalist economic thought since 1871; von Mises is its most important member, followed by Böhm-Bawerk. The British classical school was the main school of procapitalist economic thought prior to 1871; Adam Smith and David Ricardo are its most important members.)

On the foundation of these integrations, Dr. Reisman is able to develop the numerous major original contributions that the book presents on the subjects of profits, wages, saving, capital accumulation, aggregate economic accounting, monopoly, and natural resources, among other vital subjects. Based on the same foundation, the book presents the most powerful critiques of Marx, Keynes, the pure-and-perfect competition doctrine, and environmentalism to be found anywhere.

A leading part of its trenchant economic analysis is a consistent demonstration of the natural harmony of the rational self-interests of all men under capitalism—of businessmen and wage earners, of consumers and producers, of men of all races and nationalities, including immigrants and the native born, and of competitors of all levels of ability—consonances most will find astonishing, given the prevailing misunderstandings of capitalism in the present day.

The arguments advanced in this essay rest almost entirely on the work of my great mentor Ludwig von Mises, who was the first to demonstrate the impossibility of economic calculation under socialism as far back as 1922, in the first German edition of his great classic Socialism (die Gemeinwirtschaft in German.)

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition , 2012), The Government Against the Economy, and other titles. See his Amazon.com author’s page. His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com. Follow him on Twitter @GGReisman.