From the White-PillBox: Part 44
Another logically inconsistent position of statism: humans cannot do the impossible; people in government can manage an impossibly complex economy.
This installment of the White Pill series offers another example of the internal contradictions of statism. As explained in essay 36, one of statism’s fundamental weaknesses (and thus a major White Pill) is how so many of its positions lead to logical inconsistencies.
In this essay we examine one of the less obvious logical failures in statist thinking:
Humans have limits - they cannot do the impossible. But even though managing a complex economy is itself impossible, the humans in government can do that.
The essential fallacy
The explanation for why this is a logical inconsistency requires some explanation. So first, here is a summary:
Human management of an economy is impossible
A complex economy can only function best in a purely free market, most particularly because it allows prices to fluctuate freely. Prices allow all resources (physical material, human labor, money) to find their most efficient use, and meet human beings’ most important needs.
The proper allocation of resources among society’s innumerable competing needs presents a nearly infinite and ever-changing combination of variables.
Managing this is not only an insurmountable problem for humans…it is impossible. But the price mechanism manages this problem.
The statist’s contradiction
Statists correctly understand that humans cannot do the impossible. Yet they believe the humans in government are capable of the impossible, in managing a mind-numbingly complex economy.
So people cannot do the impossible, though as State agents, they can.
…
A more detailed examination of the economy and the importance of prices
The economy - what is it?
The “economy” comprises any and all transactions among humans that involve trade. It is the exchange of goods and services…essentially any exchange of any object or service, whether for money, barter, for profit or as a gift.
The economy exists to satisfy wants and needs.
The things we want must get produced
Those wants and needs are not satisfied by wishes. They need to be produced. To do that, resources need to be coordinated: materials, labor, transportation, money, etc.
All such resources are limited. We don’t have an infinite supply of land, iron, gas, wood, water, even labor. There’s only so much to go around.
So the things we want must get prioritized
Somehow the limited resources that are needed to produce stuff must get allocated. Some mechanism must organize this so the most urgent needs are met (a problem, incidentally, that must be solved no matter what social system exists.)
We can look at typical resources as examples: should steel be allocated to cars, trains, and/or buildings? How much to each? How much land should be used for farming, versus industry? How many people should drive trucks, versus teach?
Impossible to manage
Let’s imagine a single dictator who commands the entire economy. This person simply cannot allocate resources efficiently. He would need god-like powers to know how best to balance billions of competing needs.
But the same problem exists if the economy is run by committees or bureaus; their collective knowledge is woefully inadequate; they would need the same god-like powers. Even the most powerful computer would not have the capacity, let alone be able to handle it all in real-time.
There is simply too much information changing too fast: the needs and tastes of people; the number of people; the changes in human knowledge and skills; the changes in technology; the changes in the amounts and availability of resources. All these variables, and more, effectively amount to infinite combinations.
It is beyond the ability of humans or machines to consciously, intentionally manage all this effectively.
But prices solves the problem
Prices are far more than the posted numbers telling us what items costs. In an economy, prices perform a remarkable function.
It turns out that the price of things (yes, everything) is the primary tool that allows an economy to most efficiently allocate resources.
Prices are signals
Prices provide information about the importance of goods and services. For example, when prices of certain things are unusually high or low, this captures the attention of producers.
A high price for steel signals its producers that there are higher profits in producing more. It also attracts potential steel producers into the field. So more steel gets produced, satisfying the demand that those high prices signaled.
Once the greater steel supply exceeds the demand for it, prices fall. The now-lower price acts as a signal of the reduced need; it warns of lower profits ahead. Producers make less of it; the least efficient producers discontinue production altogether. Thus production drops to reflect this lower demand.
Moreover, with the now-lower production, the resources that went into the greater steel production find other purposes. Purposes more in demand - purposes that carry greater profit potential (evident from their price signals).
Prices are signals that reflect the totality of demand for all resources, and they adjust in real-time as the complexity of needs change 1.
In a totally free market
With no government interference in the economy, prices help the economy self-govern, with no person or group of people in charge of it.
Resources naturally tend to shift toward the production of the most urgent needs:
High demand —> high prices —> attracts more producers seeking profit —> resources are correctly steered toward the need that is in demand
Resources shift away from the less urgent needs:
Low demand —> lower prices —> curtailed profits discourage production —> resources are not wasted on the low-demand need
In a fully totalitarian economy
Imagine an economy so controlled by the State, that there is not even communication or trade with other countries. They have no knowledge of how other countries allocate resources…they do not know the prices in other countries.
Their central planners must decide how resources are allocated without the benefit of price signals.
Their task is impossible. Not just difficult. Impossible. As explained above, the complexity of needs is beyond comprehension. And there are no meaningful prices with which to look back and gauge success (profit/loss), in order to course-correct.
A truly 100% government-controlled economy, starting from scratch, would never get off the ground. The simple reason is because price signals would be absent. Indeed, with everything controlled, no markets would exist to even establish prices.
A partially controlled economy
This brings us to the real world. Today there is no fully free market economy, nor is there a fully totalitarian economy. All countries are mixed: some degree of trade hampered by various degrees of government control2.
The statist contradiction emerges: in all cases, governments cheat
They may hate the free market, but they like it enough to take advantage of its price signals.
They permit some market activity, from which they get some price information 3. And even if they fully restrict certain market activity, they simply look to other countries (with fewer controls) to obtain their price information.
The State makes production allocation decisions with price information they would not otherwise have 4.
Hypocrites
The planners in all States (along with their statist supporters) are hypocritical on top of being logically inconsistent. They claim to do a better job than markets at meeting human needs. But they rely on prices - the most useful market information possible - to allocate resources.
That price information is helpful, to say the least: it spares them inevitable and utter failure.
Conclusion
Statism once again reveals its weak house-of-cards logic, topped off with a healthy serving of hypocrisy.
And our White Pill once again reveals the State as a weak adversary.
And they have a bonus advantage. They permit us to look back and evaluate the success of ventures. Profit or loss helps guide our future plans.
To the extent that the State permits prices and markets to operate freely, there is relative prosperity. To the extent the State interferes with prices and markets, there is relative stagnation or even poverty.
The real world evidence for this is abundant. Those countries that are most controlled by the State (North Korea, Cuba) have the worst standard of living. Those that are least controlled do better (Singapore, Hong Kong, South Korea, The United States).
Information which, by the way, is itself distorted. When government interferes with the economy in any way, it necessarily distorts human behavior. This alters conditions from what they would have been, absent the interference. And this necessarily distorts prices. Which means the very signals (prices) that would otherwise provide the best guide to efficient and useful resource use, is undermined. The State necessarily makes an economy worse.
And this doesn’t even take into account the non-price factors that are present with State interference in the economy. State agents are driven by political motivations, personal greed, pressure groups, lobbyists, graft, etc. These factors disrupt efficient production further.