Something widely debated in the economics literature over 70 years is the equivalent of a flat-earth theory? OK, then.
(I do wonder whether we’re at cross purposes somehow, though—whether one of us has misunderstood what specific claim(s) the other is making. My reply to economy elsewhere in this thread may clarify.)
The first one is theoretical. The advantages and disadvantages of central planning have been argued about in the literature for many decades. That was driven mainly by two factors: ideology and the paucity of empirical data.
XX century was, generally speaking, the time of human hubris in the social sphere. Reason and skill would rearrange the society and create a perfect one, not this messy outgrowth of chaotic history and suspect human motivations. The left, in particular, ran with this idea very far, paving its way with corpses for much of the way. Central planning is a necessary component of this grand plan to arrange the society properly and as such it was massively promoted by the left, with some success.
On the other hand, in early XX century central planning was mostly untested, and by the middle of the century there wasn’t much data (and that was skewed by ideology) plus there were exciting developments in the area of linear programming and so there was hope that maths would provide that perfect solution to the allocation problem. In the 50s and the 60s that wasn’t an outrageous claim—maybe yes, maybe no, let’s see how it works out.
But nowadays the bastions of the left have collapsed and we DO know how it works out. The debate is basically over and central planning has lost quite thoroughly. I doubt there’s anyone other than committed marxists who still sing its praises.
The other line of argument, the one I actually had in mind, is purely empirical and does not rely on the opinions of economists.
We had a bunch of countries attempt central planning. It turned out to work really badly. We had another bunch of countries go with the markets. They turned out to work really well. There are no cases of central planning being noticeably successful. There are many cases of market-driven economies being noticeably successful. At the moment all the rich and free countries have market economies. Countries which stick with central planning are countries like Cuba and North Korea.
How much empirical evidence do you need? Please update already.
As I have already said (more than once, I think) in this discussion: I already agree that the available evidence and theoretical analysis give good reason to think that markets beat large-scale central planning. And if Jiro had been proposing large-scale central planning, my only problem with your response would have been its needlessly contemptuous tone.
What s/he was actually proposing was interference with prices in a small number of rather unusual cases, the goal not being to maximize overall economic growth but to prevent what (I take it, with confidence but not certainty) s/he sees as exploitation.
For “Sigh. Why do you think central planning failed” to be an appropriate response to that, it is (it seems to me) not sufficient that the evidence, on the whole, points to markets doing better than large-scale central planning. What would make it an appropriate response? Perhaps if the communist countries had failed so spectacularly, and so obviously because of their different approach to price-setting and resource allocation, that any fool could see at a glance that any interference with the price-setting of the free market is bound to lead to disaster.
It doesn’t appear to me that the state of the evidence is anywhere near to that.
How much empirical evidence do you need?
To agree that it looks like markets are better than large-scale central planning? I have enough, thanks. To say that it’s a completely settled question empirically, and that the difference is so big that anyone suggesting a departure from perfectly free markets should be dismissed with a sigh? A lot more.
How large is our sample here? The number of countries that had centrally-planned economies is fairly large but they’re far from independent (i.e., in many cases their outcomes were closely intertwined on account of common relationships with the USA and USSR). Perhaps something like the equivalent of n=10 independent experiments? (This feels like it’s distinctly on the generous side.) They were mostly pretty poor to begin with, the US and its economic allies were trying pretty hard to make them fail, and their governments were messed up in ways largely unrelated to centralized economic planning. Plenty of economies do really badly without central planning, even without the world’s richest countries actively trying to harm them. So, I dunno, in the total absence of harmful effects from central planning I’d give any given one of those (fictitious) 10 independent communist countries a 3⁄4 chance of doing badly economically, which means Pr(all do badly) comes out at about 1⁄18. So (given the laughably handwavy assumptions of this paragraph) this is the equivalent of a scientific experiment that falls just a little bit short of significance at the 5% level.
Maybe I should say a thing or two about empirical evidence versus theoretical arguments, because for sure there are good theoretical arguments for free markets. The trouble with these is that the lovely theorems the economists prove tend to say things along these lines: “Subject to such-and-such simplifying assumptions, every Pareto-optimal outcome can be had by making cash transfers and then letting a free market operate” and the transfers required to get the right Pareto-optimal outcome (note: there may be lots of Pareto-optimal outcomes and some may be terrible by any reasonable criteria) may be politically infeasible. They might amount to large-scale expropriation, for instance.
If you’re hoping that the market will produce anything like a utility-maximizing outcome without large-scale interference (e.g., massive expropriatory wealth transfers), then the obstacle is that the market can’t see utility except via the proxy of willingness to pay. And maximizing total utility-as-measured-by-willingness-to-pay is very much like maximizing total utility weighted by wealth (if marginal utility of money is inversely proportional to current wealth, which seems like a reasonable approximation, then the market is indifferent to a change that gives me 1 unit of utility at the cost of 1 unit of utility for each of 10 people with 1⁄10 my wealth). I don’t know about you, but I don’t find “max utility weighted by wealth” a very satisfactory figure of merit for optimization.
And, lo, empirically it does look rather as if markets look after the interests of the rich better than those of the poor (though of course this is hard to be sure about since other more reasonable effects can look similar). Does this mean that central planning is better? Heck no. Does it suggest that there might be a case for government intervention, perhaps including some diddling with prices in unusual cases, in order to come closer to maximizing total utility or (unweighted) average utility or something else we prefer to wealth-weighted utility, even at the cost of some reduction in total wealth? To me, yes.
That doesn’t mean Jiro’s suggestion is a good one. Maybe it’s a terrible one. But considerations like the above are why I don’t find “central planning failed and Economics 101 says free markets are optimal, duh” a satisfactory response.
I already agree that the available evidence and theoretical analysis give good reason to think that markets beat large-scale central planning.
That certainly wasn’t evident from this comment of yours.
If you’re hoping that the market will produce anything like a utility-maximizing outcome
The critical issue is the time horizon. In the short term the utility-maximizing move is to divide all the wealth equally. In the long term I would argue that we have evidence showing that markets do maximize utility, compared to the available alternatives.
Does it suggest that there might be a case for government intervention, perhaps including some diddling with prices in unusual cases, in order to come closer to maximizing total utility
First, governments just love diddling with prices. Google up why sugar is so expensive in the US. Or what happens to you if you produce raisins 8-/
Second, I am deeply suspicious of the claim that diddling with the prices is done in order to maximize total utility (of some sort). Based on historical experience, I expect that diddling with the prices aims to transfer wealth from some less politically powerful group to some more politically powerful group. Crony capitalism is a very popular thing nowadays.
That doesn’t mean Jiro’s suggestion is a good one.
Jiro is basically taking the paternalistic stance: “these people don’t know what’s good for them and I’m not going to allow them to do what I don’t like”. That’s not a economic argument, it’s a moral one and picking appropriate moral criteria you can justify any economic practice whatsoever (recall Proudhon’s “Property is theft”, for example).
That certainly wasn’t evident from this comment of yours.
How fortunate, then, that I made other comments as well.
governments just love diddling with prices
I know. And they do diddle with prices. And so all the empirical evidence we have that free markets work well is really evidence that free markets with a whole lot of assorted government intervention work well.
I am deeply suspicious of the claim that diddling with the prices is done in order to maximize total utility
I wasn’t claiming (or at least wasn’t intending to claim) that it generally is. Only that it could be. An argument of the form “we could improve what markets do by doing X” is not invalidated by the fact that governments often do X for bad reasons.
picking appropriate moral criteria you can justify any economic practice whatsoever
No doubt. But if we’re going to argue about what should be done, that’s inevitably partly an argument about values. We can pretend it isn’t, e.g. by settling on some not-explicitly-value-laden thing to maximize—say, total wealth after 100 years—but that really just amounts to choosing values that only care about total wealth after 100 years.
~50 years, from the publishing of Mises’ Socialism until...whenever people just gave up in 70s....
Yes, flat earth comparison too strong. Many brilliant economists of the 20th century made great strides in economics working on this question. And frankly is much easier to prove earth round than markets > central planning.
Something widely debated in the economics literature over 70 years is the equivalent of a flat-earth theory? OK, then.
(I do wonder whether we’re at cross purposes somehow, though—whether one of us has misunderstood what specific claim(s) the other is making. My reply to economy elsewhere in this thread may clarify.)
There are two lines of argument here.
The first one is theoretical. The advantages and disadvantages of central planning have been argued about in the literature for many decades. That was driven mainly by two factors: ideology and the paucity of empirical data.
XX century was, generally speaking, the time of human hubris in the social sphere. Reason and skill would rearrange the society and create a perfect one, not this messy outgrowth of chaotic history and suspect human motivations. The left, in particular, ran with this idea very far, paving its way with corpses for much of the way. Central planning is a necessary component of this grand plan to arrange the society properly and as such it was massively promoted by the left, with some success.
On the other hand, in early XX century central planning was mostly untested, and by the middle of the century there wasn’t much data (and that was skewed by ideology) plus there were exciting developments in the area of linear programming and so there was hope that maths would provide that perfect solution to the allocation problem. In the 50s and the 60s that wasn’t an outrageous claim—maybe yes, maybe no, let’s see how it works out.
But nowadays the bastions of the left have collapsed and we DO know how it works out. The debate is basically over and central planning has lost quite thoroughly. I doubt there’s anyone other than committed marxists who still sing its praises.
The other line of argument, the one I actually had in mind, is purely empirical and does not rely on the opinions of economists.
We had a bunch of countries attempt central planning. It turned out to work really badly. We had another bunch of countries go with the markets. They turned out to work really well. There are no cases of central planning being noticeably successful. There are many cases of market-driven economies being noticeably successful. At the moment all the rich and free countries have market economies. Countries which stick with central planning are countries like Cuba and North Korea.
How much empirical evidence do you need? Please update already.
Update how, exactly?
As I have already said (more than once, I think) in this discussion: I already agree that the available evidence and theoretical analysis give good reason to think that markets beat large-scale central planning. And if Jiro had been proposing large-scale central planning, my only problem with your response would have been its needlessly contemptuous tone.
What s/he was actually proposing was interference with prices in a small number of rather unusual cases, the goal not being to maximize overall economic growth but to prevent what (I take it, with confidence but not certainty) s/he sees as exploitation.
For “Sigh. Why do you think central planning failed” to be an appropriate response to that, it is (it seems to me) not sufficient that the evidence, on the whole, points to markets doing better than large-scale central planning. What would make it an appropriate response? Perhaps if the communist countries had failed so spectacularly, and so obviously because of their different approach to price-setting and resource allocation, that any fool could see at a glance that any interference with the price-setting of the free market is bound to lead to disaster.
It doesn’t appear to me that the state of the evidence is anywhere near to that.
To agree that it looks like markets are better than large-scale central planning? I have enough, thanks. To say that it’s a completely settled question empirically, and that the difference is so big that anyone suggesting a departure from perfectly free markets should be dismissed with a sigh? A lot more.
How large is our sample here? The number of countries that had centrally-planned economies is fairly large but they’re far from independent (i.e., in many cases their outcomes were closely intertwined on account of common relationships with the USA and USSR). Perhaps something like the equivalent of n=10 independent experiments? (This feels like it’s distinctly on the generous side.) They were mostly pretty poor to begin with, the US and its economic allies were trying pretty hard to make them fail, and their governments were messed up in ways largely unrelated to centralized economic planning. Plenty of economies do really badly without central planning, even without the world’s richest countries actively trying to harm them. So, I dunno, in the total absence of harmful effects from central planning I’d give any given one of those (fictitious) 10 independent communist countries a 3⁄4 chance of doing badly economically, which means Pr(all do badly) comes out at about 1⁄18. So (given the laughably handwavy assumptions of this paragraph) this is the equivalent of a scientific experiment that falls just a little bit short of significance at the 5% level.
Maybe I should say a thing or two about empirical evidence versus theoretical arguments, because for sure there are good theoretical arguments for free markets. The trouble with these is that the lovely theorems the economists prove tend to say things along these lines: “Subject to such-and-such simplifying assumptions, every Pareto-optimal outcome can be had by making cash transfers and then letting a free market operate” and the transfers required to get the right Pareto-optimal outcome (note: there may be lots of Pareto-optimal outcomes and some may be terrible by any reasonable criteria) may be politically infeasible. They might amount to large-scale expropriation, for instance.
If you’re hoping that the market will produce anything like a utility-maximizing outcome without large-scale interference (e.g., massive expropriatory wealth transfers), then the obstacle is that the market can’t see utility except via the proxy of willingness to pay. And maximizing total utility-as-measured-by-willingness-to-pay is very much like maximizing total utility weighted by wealth (if marginal utility of money is inversely proportional to current wealth, which seems like a reasonable approximation, then the market is indifferent to a change that gives me 1 unit of utility at the cost of 1 unit of utility for each of 10 people with 1⁄10 my wealth). I don’t know about you, but I don’t find “max utility weighted by wealth” a very satisfactory figure of merit for optimization.
And, lo, empirically it does look rather as if markets look after the interests of the rich better than those of the poor (though of course this is hard to be sure about since other more reasonable effects can look similar). Does this mean that central planning is better? Heck no. Does it suggest that there might be a case for government intervention, perhaps including some diddling with prices in unusual cases, in order to come closer to maximizing total utility or (unweighted) average utility or something else we prefer to wealth-weighted utility, even at the cost of some reduction in total wealth? To me, yes.
That doesn’t mean Jiro’s suggestion is a good one. Maybe it’s a terrible one. But considerations like the above are why I don’t find “central planning failed and Economics 101 says free markets are optimal, duh” a satisfactory response.
That certainly wasn’t evident from this comment of yours.
The critical issue is the time horizon. In the short term the utility-maximizing move is to divide all the wealth equally. In the long term I would argue that we have evidence showing that markets do maximize utility, compared to the available alternatives.
First, governments just love diddling with prices. Google up why sugar is so expensive in the US. Or what happens to you if you produce raisins 8-/
Second, I am deeply suspicious of the claim that diddling with the prices is done in order to maximize total utility (of some sort). Based on historical experience, I expect that diddling with the prices aims to transfer wealth from some less politically powerful group to some more politically powerful group. Crony capitalism is a very popular thing nowadays.
Jiro is basically taking the paternalistic stance: “these people don’t know what’s good for them and I’m not going to allow them to do what I don’t like”. That’s not a economic argument, it’s a moral one and picking appropriate moral criteria you can justify any economic practice whatsoever (recall Proudhon’s “Property is theft”, for example).
How fortunate, then, that I made other comments as well.
I know. And they do diddle with prices. And so all the empirical evidence we have that free markets work well is really evidence that free markets with a whole lot of assorted government intervention work well.
I wasn’t claiming (or at least wasn’t intending to claim) that it generally is. Only that it could be. An argument of the form “we could improve what markets do by doing X” is not invalidated by the fact that governments often do X for bad reasons.
No doubt. But if we’re going to argue about what should be done, that’s inevitably partly an argument about values. We can pretend it isn’t, e.g. by settling on some not-explicitly-value-laden thing to maximize—say, total wealth after 100 years—but that really just amounts to choosing values that only care about total wealth after 100 years.
~50 years, from the publishing of Mises’ Socialism until...whenever people just gave up in 70s....
Yes, flat earth comparison too strong. Many brilliant economists of the 20th century made great strides in economics working on this question. And frankly is much easier to prove earth round than markets > central planning.