Market Prices vs. Communist Commands
FEBRUARY 01, 1983 by HENRY HAZLITT
Henry Hazlitt, a frequent contributor to The Freeman, has a long and distinguished career as an economist, journalist, editor, and literary critic. Best known of his numerous books is Economics in One Lesson, originally published in 1946 and since translated into eight languages with sales of more than 700,000 copies. The recently revised edition is once more available in inexpensive paperback.
A correspondent recently asked me why it was that Soviet Russia seemed to be suffering in recent years from chronic “crop failures,” and found itself forced to import increased quan tities of foodstuffs from the United States and other capitalistic countries. She understood, she wrote, that the most frequent explanation offered for this was that Russia operated under “communism” and that the countries exporting food to her were “capitalistic.” But she wanted to know more in detail just why these different results came about.
I started to answer on the assumption that my explanation would be simple and brief, but soon found myself getting into complications.
In its simplest form, of course, the explanation can be brief. Under “capitalism” (Karl Marx’s vocabulary)—that is to say, under a free market system—the individual farmer is rewarded by earning a profit if he grows the right things in the right amounts, and is penalized by a loss if he grows the wrong things. He is daily guided in his plans and operations by the prices of farm commodities in the “market.” (Sometimes this may mean the national speculative markets on the commodity exchanges, where prices change from minute to minute, and sometimes it may mean merely the local market in his own district.)
The average farmer, of course, has little conception of how many prices of how many commodities, and grades of commodities, this involves. We could begin by citing such leading U.S. crops as corn, oats, barley, sorghum, wheat, rye, flaxseed, cotton, cottonseed, tobacco, hay, beans, peas, peanuts, soybeans, potatoes, seed crops, sugar cane, sugar beets, pecans, almonds, walnuts, filberts, oranges, tangerines, grapefruits—but the list goes on and on.
We can get an inkling of the number of commodities from the daily newspapers. The Wall Street Journal, for example, daily lists “Cash Prices” of more than 90 commodities, of which the majority are farm commodities. In that paper’s long list of “Futures Prices” on the commodity exchanges, there are some 350 prices listed of a single grade of about 45 different commodities with six to ten different delivery dates.
If we add to these “national” prices the prices in local markets, we get a total that can run into the millions.
How Many Prices?
How many prices of all different commodities and services are there, in fact, at any given moment in an economy like the United States? Nobody knows. But in 1943 Chester Bowles, then head of the Office of Price Administration (OPA), was asked this question by a Congressional committee. He came up with an estimate of 8 million. A few days later this answer was withdrawn as much too low. It depended on how you defined a “commodity” and how you defined a “price.” No definite answer was ever substituted.
But if, for the sake of argument, the figure were only 8 million prices, how could any bureaucracy, without previous actual market prices to guide it, go about safely fixing even one of them? For such prices, and their interrelationships—which would reach 8 million times 8 million, or 64 trillion—would reflect the past production and demand, absolute and proportional, for the 8 million commodities and services; they would embody everybody’s expectations at the moment based on individual scraps of knowledge; and would largely determine the future absolute and relative supply and demand. No computer could solve this problem. Without a set of previous real and recent market prices, without informed expectations, the bureaucracy would have to make 64 trillion blind guesses.
Each farmer in planning his next year’s acreage of each of the crops he plans to raise, is guided by the current or expected market price of each commodity. So thousands of different commodities and grades of commodities are planted in the proportions decided upon by each farmer on his assumptions regarding which will bring him the maximum profit (or, it may be, the minimum loss). In each case, to repeat, he is rewarded by the success of his estimates or penalized for his mistakes. He can change his plans any day, up to the actual day of plowing or planting.
We have been talking about the workings of an ideal free market system. This unfortunately does not exist in the United States. For many years, for example, the federal government has been subsidizing the production of milk by guaranteeing minimum prices, and thereby bringing about huge wasteful surpluses paid for by the taxpayers . . . But that is another story.
Working in the Dark
Let us turn now to the problem confronting a communist nation. Such a nation, in the present world, is not totally without price guides. It is parasitic on capitalism, because it knows the prices being quoted for various commodities in capitalist countries. It can make plausible guesses (by figuring presumptive transportation costs in the same way) concerning how to convert these into equivalent prices in its own country. (Much depends on whether it allows a free exchange rate for its currency in the foreign exchange market.)
Apart from this, a communist bureaucracy is working in the dark. It must make blind guesses concerning the size and proportions it wants of the thousands of commodities to which it assigns production quotas for individual farmers. If by oversight or intention it omits some commodities from its production schedules, those commodities will not be produced at all.
The situation is slightly alleviated when the bureaucracy allows individual farmers to devote a certain proportion of their acreage to raising crops for their own consumption. But from the bureaucracy’s standpoint, this has a disadvantage. It allows cheating on the part of individual farmers who try to get as much “free” acreage as they can in the hope of having some surplus foodstuffs to sell off on a black market. These farmers, of course, are forced to guess how much they can successfully cheat, and just what surplus production of each commodity would pay the maximum return.
But as the farmers under communism, by and large, do not individually profit from raising the “right” amount of a given crop, and are not proportionately penalized for raising the “wrong” amount, both bureaucrats and farmers are working in the dark. The individual farmers are deprived of the incentives and deterrents that would guide them in a market economy. The bureaucrats’ overall plan must chronically go wrong. They do not know the absolute amount of each commodity that it would be most productive to raise nor the relative size of each crop. Any relative surplus in the size of one crop must—with a given working force, acreage and capital—force a corresponding shortage in the production of another.
The communists, in short, cannot engage in what the late Ludwig von Mises labeled “economic calculation.” Their production plans, therefore, must be unbalanced, haphazard, and wasteful. If they put their emphasis on producing “enough” of commodities A, B, and C, for example, they will almost certainly do so only at the expense of a corresponding shortage of commodities D, E, F, and G.
The Inevitable Frrors
The inevitable errors in the communists’ overall plans of production must occur as well in their methods of production. In a country operating with a free-market system, of course, individually mistaken and costly methods of production can also be pursued, but through the play of individual profit or loss the more efficient producers will be constantly increasing their share in production and the inefficient will be forced out of the field. Every year something new will be learned. In a non-inflationary free economy there will be a tendency for production methods to be constantly improved and costs to be cut.
So when we examine closely how the two systems, communism and free market economy, work in detail—the one controlled by bureaucrats imposing by fiat a single overall production plan from the top, the other operating through the free and flexible production and consumption choices of millions of individuals, with their individual decisions constantly modified and coordinated by a system of free market prices—we can see why the capitalistic system is so enormously productive, and why the overall production plans of the communist bureaucrats must go wrong chronically and necessarily, and not merely because of bad luck or bad weather.
It remains to ask why the communist bureaucracies have not recognized this, or even, apparently, acknowledged it to themselves. The most obvious answer is that they have a vested interest in not acknowledging it: they would be overthrown. But a full answer goes much deeper. They did not originally adopt their doctrines through mere analysis and reason, but through an appeal to hatred, envy, vindictiveness, and cupidity: To quote the conclusion of the Communist Manifesto, (1848): “The workers have nothing to lose but their chains. They have a world to win. Workers of the world, unite!”
Wrong Theories by Marx
Das Kapital, which purports to give the economic reasoning which led to the Manifesto’s conclusion, did not begin to appear until a quarter century later—1873 for the first volume, 1885 for the second, and 1894 (eleven years after Marx’s death) for the third and final volume.
Kapital is obscurely written and nearly unreadable. It is built on a distortion of the errors of Ricardo. It ascribes the creation of all economic goods solely to “labor,” overlooking or explaining away the contribution of nature, land, capital, human intelligence, or any other factor. It tries to ignore, also, the thousands of different degrees of specialized labor skills by reducing them all to a single homogenized goo called “the [average?] socially necessary working time” required to produce different commodities and services.
It is only, Marx tells us, the number of hours of this “socially necessary working time” that has gone into a commodity that determines its comparative value in the market. Any profit that goes to an employer above his payroll is in effect stolen from his “exploited” workers.
I shall not go on to explain or expose all the fallacies and contradictions embodied in Marx’s theories. That was magnificently done by Eu-gen von Bohm-Bawerk in his book Karl Marx and the Close of His System, originally published in 1896. Only the emergence of “Austrian economics” (beginning about 1870) made such a conclusive refutation of Marx possible. If my reader has not yet read Bohm-Bawerk’s book, I recommend that he make up his loss without socially or personally unnecessary delay.