All Commentary
Friday, March 1, 1963

The Problem of Production

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 United States. But has it really?

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.

Because U. S. consumers today are paying prices higher in many cases than they would have paid in the absence of government in­terventions, plus higher taxes to cover the programs, they cannot buy other goods and services they see and would like to have. Still other things they would have wanted are not produced at all and don’t even appear in the stores. Productive efforts have been channeled into agriculture and into building plants that are not used, at the expense of other branches of production so that the whole pattern of production has been shifted. Instead of satis­fying more of the various wants and needs of people as effectively as they might if all prices had been permitted to fluctuate freely, producers have been led to chan­nel production toward the manu­facture of comparatively less de­sired things. Thus, rather than having solved the problem of pro­duction in this country, govern­ment policy has further confused and confounded producers by vari­ous attempts to manipulate prices. And so long as the prices are in­terfered with, “surpluses” and “shortages” will appear and the problem of producing to equalize supply and demand will continue to defy solution.

  • Contributing editor Bettina Bien Greaves was a longtime FEE staff member, resident scholar, and trustee. She attended Ludwig von Mises’s New York University seminar for many years and is a translator, editor, and bibliographer of his works.