Government's central economic plan collapses after consumers demonstrate an alarming tendency to want different shoes, meals, cars and refrigerators
LONDON - The National Economic Planning Committee has hit an unexpected snag after discovering that Britain's population does not share a single shopping list. Officials had assumed that the public's needs could be worked out in advance through one comprehensive five-year economic plan. Citizens, rudely, kept expressing different preferences about clothing, food, housing, transport, technology and household appliances.
Some wanted black shoes. Others wanted brown. A significant number wanted trainers. One man in Brighton asked for purple cowboy boots, which triggered an emergency meeting of the Ministry of Standardised Footwear and, according to witnesses, a lie-down.
The committee concluded that consumer preferences were becoming dangerously individualistic. An imaginary planning director, Professor Harold Spreadsheet, called the situation intolerable. "We have forty million consumers demanding different products. How can any government plan an economy under these circumstances?"
An economist at the back suggested letting producers and consumers coordinate through prices and competition. Professor Spreadsheet accused him of undermining the national shoe strategy and had him moved to a seat nearer the door.
Central Economic Planning in Practice: The Government Decides Everybody Needs Green Shoes
The committee began sensibly enough by setting an annual footwear target. The nation, it decided, required twenty million pairs of shoes, and factories were told to make them. Officials chose green, on the grounds that green suggested environmental responsibility and nobody on the committee actively disliked it. Nobody on the committee had been asked about their feet, either.
Production began. Factories hit their targets. The ministry threw a small party with a green cake. Then the consumers turned up, wanting other colours and designs. Warehouses filled with green shoes while shops ran out of black ones, and the government told citizens to adjust their expectations.
A customer asked a shopkeeper whether she could buy black shoes. The shopkeeper explained that black shoes were not part of the current production plan.
"When will they be available?"
"After the next planning cycle."
"How long is that?"
"Five years."
"My daughter's wedding is next Saturday."
"Then perhaps she should consider postponing the wedding."
Hayek's Knowledge Problem: Why No Planner Can Know What Forty Million People Want
The committee's difficulty was identified long ago. In 1945 the economist Friedrich Hayek published The Use of Knowledge in Society, one of the most influential studies of how economic information is scattered across a whole society. The original essay, published in the American Economic Review, argues that economic planning is mainly a problem of using knowledge that no single person holds in its totality. Hayek later shared the 1974 economics prize, and the Nobel Prize page for Friedrich Hayek records the citation.
Why Prices Carry Information
Local knowledge, changing conditions, personal preferences and opportunity costs sit in the heads of countless individuals. Prices, Hayek argued, help communicate relative scarcity and demand without anybody needing the whole picture. A tin merchant in Cornwall does not have to know why tin has become scarce. He only has to notice that it costs more and adjust.
Theoretical socialism finds this inconvenient. It would much rather everyone filled in a government questionnaire declaring what they plan to buy over the next five years. Unfortunately, consumers do not always know what they will want next Thursday. A new product appears. A family has a baby. A worker changes jobs. A restaurant closes. A technology halves the cost of something. A shortage hits somewhere you have never heard of. People adapt, and the committee reconvenes, and by the time it approves its first adjustment everybody wants something else.
Mises and the Economic Calculation Problem
Hayek was building on an earlier challenge from Ludwig von Mises, whose 1920 essay Economic Calculation in the Socialist Commonwealth argued that without market prices a planner has no reliable way to compare the value of alternative uses of resources. The Econlib entry on socialism sets out the debate that followed, including the replies from defenders of planning, and is worth reading before anyone announces a Ministry of Everything.
Leonard Read made the same point with something rather smaller than a refrigerator. His essay I, Pencil traces the cedar, the graphite, the brass and the rubber through thousands of hands, not one of which could make the pencil alone and none of which took instructions from a committee. The Planning Committee read it with interest and immediately set up a Pencil Directorate. It expects to deliver the first unit, in green, during the next cycle.
Planned Economy Refrigerators: The Ministry Produces an Excellent Fridge Nobody Wants
The next challenge was household appliances. The committee ordered one million refrigerators and the factories complied. The resulting fridges were large, expensive to run and fitted with compartments that consumers found baffling. Manufacturers had hit their quota, so the committee congratulated itself.
A consumer asked why the fridge had not been designed around what households actually wanted. Professor Spreadsheet explained that the public had been represented by a government committee.
"Did the committee ask anyone what they wanted?"
"Of course. We surveyed six officials."
"Did they all want the same refrigerator?"
"No. That's why we held a vote."
The winning refrigerator was unpopular. The ministry responded by increasing the advertising. When that failed, officials launched a public education campaign explaining why citizens should appreciate the refrigerator they had been allocated, with a leaflet, a jingle and a man in a costume. Meanwhile a private appliance maker quietly designed something people actually wanted and sold it. The ministry accused the company of exploiting consumer dissatisfaction, which is a remarkable way to describe a customer being satisfied.
Soviet Production Targets and Perverse Incentives: Quantity Over Quality
Central planning can also warp incentives. A factory rewarded for the number of items it produces will tend to prefer quantity over quality. Measure output by weight and managers drift towards heavier products. Fix the assortment in advance and factories struggle when demand moves. The Econlib entry mentioned above notes how Soviet planners' physical output targets pushed managers to maximise volume over quality.
An imaginary Soviet-era factory manager explained the problem.
"We were told to produce ten thousand metal containers."
"Did consumers need ten thousand metal containers?"
"That wasn't the target."
"What did they need?"
"Smaller containers."
"Then why did you make large ones?"
"Because large ones satisfied the weight requirement."
The manager received an award. Consumers carried on looking for smaller containers. The government announced another triumphant year of industrial production, and somewhere a warehouse door creaked under the weight of success.
The Soft Budget Constraint
The Hungarian economist János Kornai spent a career documenting how this played out in real socialist economies. As the CEPR's profile of János Kornai's life and work explains, his 1980 book Economics of Shortage described the soft budget constraint: state firms that made losses were not allowed to fail, so their appetite for inputs kept growing and they barely responded to price signals. The result was chronic shortage. The workers were not lazy. The system simply rewarded the wrong things.
None of this is new to anyone who lived through it. Michael Ellman's survey of János Kornai's work in the Cambridge Journal of Economics describes how shortage became the normal condition of the planned economy, and how planners' own decisions kept it that way. The Committee disputes the word shortage. It prefers surplus of wanting, and notes that on this measure the plan has overfulfilled every year.
Consumer Preferences Are Not an Administrative Error
Eventually Professor Spreadsheet invited an ordinary family in to explain its buying decisions. The father wanted a reliable car. The mother wanted a larger refrigerator. Their daughter wanted a bicycle, their son a computer, and their grandmother comfortable shoes. The committee asked why they could not simply agree on a uniform set of national priorities.
The father explained that people have different needs. The mother explained that preferences change. The daughter explained that she did not want her father's car. The son asked whether the committee understood computers. The grandmother asked where she could buy black shoes.
Anybody curious about how varied household spending really is can browse the Office for National Statistics data on household expenditure, which breaks down what British families spend by region, age, income and housing tenure. It makes the case against a single national shopping list more eloquently than any satirist could.
The professor was exhausted. Planning an economy was proving a good deal harder than planning a committee meeting, and the committee meetings were not going well. He finally conceded that millions of consumers might know more about their own needs than officials could ever learn from central reports. The committee regarded this as a shocking revelation and set up a working group to examine its implications. After two years the working group recommended further research. The grandmother bought her shoes elsewhere.
Theoretical socialism had finally found the economic problem: forty million people kept behaving as though they knew what they wanted.
Humorous Observations on Central Planning and Consumer Choice
- A five-year plan for shoes assumes the nation's feet will hold still for five years. Feet, like consumers, have never signed up to this.
- Surveying six officials and calling it "consultation" is just a dinner party with a budget.
- The man in Brighton with the purple cowboy boots has done more to expose the limits of central planning than most economics departments.
- If a ministry can't tell you what colour shoe you want, it certainly can't tell you what interest rate you need, and yet.
- Green was chosen because nobody disliked it. This is also how most committee logos, and several Prime Ministers, were selected.
- "After the next planning cycle" is Latin for "never, but politely."
- Every warehouse full of unwanted fridges is a monument to a meeting that ran long.
- The refrigerator jingle remains the only product of the programme anyone can still sing.
- Private companies are accused of "exploiting dissatisfaction" whenever they cure it.
- Hayek spent decades explaining that nobody knows enough to run an economy, which, in fairness, is also the first rule of every family WhatsApp group.
- A working group that recommends more research is the bureaucratic equivalent of a cat looking at the door and not going out.
- The grandmother, a free-market pragmatist in sensible shoes, ended the whole debate by going to the shop.
- A "surplus of wanting" is the one thing the plan has ever produced more of than forecast.
- The Pencil Directorate has forty staff and no pencil. Minutes are taken in biro, bought from a shop.
- The first pencil will be green. So was the last idea.
Satirical Disclaimer
This satire concerns the information and incentive problems of rigid central economic planning. Governments and private markets both face limitations, and real economies use many forms of coordination. All committee members and conversations are comic illustrations. The story is entirely a human collaboration between two sentient beings: the world's oldest tenured professor and a philosophy major turned dairy farmer, both of whom know that a cow has never consulted a five-year plan before deciding when to eat.
SOURCE:https://www.econlib.org/library/Essays/hykKnw.html
Research: Friedrich Hayek, The Use of Knowledge in Society (1945); Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (1920); János Kornai, Economics of Shortage (1980).
Auf Wiedersehen, amigo!
- prat.UK https://prat.uk/?p=51423
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