The Problem of Production
MARCH 01, 1963 by BETTINA BIEN GREAVES
Miss Bien is a member of the staff of the Foundation for Economic Education.
Again and again we hear it said: "The problem of production has been solved." Look at the stocks of wheat and bales of cotton going begging! Consider the giant steel mills and factories with unused capacity that could be brought into production! Many view this unused wealth, the surpluses and potential productive power, as a breakdown in distribution. There may be shortages and bottlenecks behind the Iron Curtain, so the argument goes, but in the "capitalist" nations more is produced than can be consumed; the problem in this country is not how to produce but how to distribute surpluses.
Obviously, there are surpluses as well as idle plants. Congress has passed many special laws trying to cope with the problems that result. Huge funds have been appropriated to store the increasingly unmanageable stocks of farm products that can’t be sold to consumers at the prices asked, to investigate potential new uses, to give them away or sell them cheap to persons without jobs and on relief, and to subsidize the export of larger quantities than could otherwise have been sold abroad. Certainly, at first glance, it would appear that the problem of production had been solved, at least in the
Although we have mastered the technology of producing as much of any particular good as we may want, we cannot at the same time produce an infinite quantity of everything. The economic problem of production is one of producing goods and services in their proper proportions. Buyers indicate how much of each good or service they want and in what quality by the prices they are willing to pay. And producers look to these prices as guideposts in the difficult task of trying to plan for the future production of goods when and where they are wanted, in the qualities and quantities desired. Thus, the problem of production remains.
Because prices fluctuate on a free market, there is a tendency, sooner or later, for everything produced to be used in one way or another. Would-be sellers adjust their asking prices in the hope of finding buyers, unless they decide it is wiser to keep their goods or services than to take what they might get in trade. In the same way, would-be buyers shift their sights when they discover the prices of what they want are more or less than expected. If potential buyers and sellers really want a deal, they juggle their asking prices and their offers when they bargain. Consequently, the supply available of any particular item tends eventually to equal the demand for it. With prices free to shift, all goods and services are inclined to clear the market. Moreover, the prices at which things actually change hands help guide producers to avoid serious malinvestments and over- or under-production in the future.
When something interferes, however, to prevent the free play of prices, to hamper bargaining among potential buyers and sellers, "surpluses" or "shortages" are bound to appear. Flexible prices will cause supply and demand to adjust on a free market; but interventions, no matter how well-meaning, introduce rigidities and knock prices askew. A price held artificially high scares off potential buyers while at the same time it encourages increased production. A price held artificially low has the opposite effect; it discourages production but encourages would-be buyers to seek such bargains.
It has been government policy for many years to encourage production of certain agricultural products by guaranteeing farmers a market at prices that are high relative to the prices of other goods and services. As a result, farmers have been encouraged to produce more of the price-supported commodities than they would have if they had been guided by their respective estimates of future demand by consumers. By the same token, consumers, repelled by the relatively high prices, have not been ready to buy the full production of farmers at the government-guaranteed prices. As few farmers, if any, have been willing to sell below the supported prices, "surpluses" of some of these commodities are produced by farmers over and above what the consumers were willing to purchase. The government "easy money" policy also has influenced plant expansions beyond what market expectations would have called for. These "surpluses," however, are not proof that "the problem of production has been solved." Rather, they are a sign that production has been interfered with. Government guarantees have prevented free market prices from equating supply and demand and thus have hindered solution of the real economic problem of production, the problem of producing what people want, when and where they want it, in the desired quality and proportion, at prices they will pay.
As a matter of fact, "surpluses" show that production has become a real problem. By distorting prices, the guideposts pointing to the relative demand for all the various things which may be produced are turned topsy-turvy. Prices, the data on which producers base production plans, give out false information. As a result, too much of some things are offered on the market and not enough of others. Labor and raw materials are literally wasted, used up in making goods and services consumers want less urgently, so that they are no longer available for producing things consumers would have preferred.