Market Prices vs. Communist Commands

Henry Hazlitt Market Prices VS. Communist Commands A CORRESPONDENT recently asked me why it was that Soviet Russia seemed to be suffering in recent years from chronic "crop failures," and found it self forced to import increased quan tities of foodstuffs from the United States and other capitalistic coun tries. She understood, she wrote, that the most frequent explanation of fered for this was that Russia oper ated under "communism" and that the countries exporting food to her were "capitalistic." But she wanted to know more in detail just why these different results came about. I started to answer on the asHenry Hazlitt, a frequent contributor to The Freeman, has a long and distinguished career as an economist, journalist, editor, and literary critic. Best known of his numerous books is Economics in One Lesson, originally pUblished in 1946 and since translated into eight languages with sales of more than 700,000cop ies. The recently revised edition is once more avail able in inexpensive paperback.

sumption that my explanation would be simple and brief, but soon found myself getting into complications. In its simplest form, of course, the explanation can be brief. Under "capitalism" (Karl Marx's vocabu lary)-that is to say, under a free market system-the individual farmer is rewarded by earning a profit if he grows the right things in the right amounts, and is penalized by a loss if he grows the wrong things. He is daily guided in his plans and operations by the prices of farm commodities in the "market." (Sometimes this may mean the na tional speculative markets on the commodity exchanges, where prices change from minute to minute, and sometimes it may mean merely the local market in his own district.) The average farmer, of course, has little conception of how many prices 93 94 THE FREEMAN February of how many commodities, and grades of commodities, this in volves. We could begin by citing such leading U.S. crops as corn, oats, bar ley, sorghum, wheat, rye, flaxseed, cotton, cottonseed, tobacco, hay, beans, peas, peanuts, soybeans, po tatoes, seed crops, sugar cane, sugar beets, pecans, almonds, walnuts, fil berts, oranges, tangerines, grape fruits-but the list goes on and on.

We can get an inkling of the num ber of commodities from the daily newspapers. The Wall Street Jour nal, for example, daily lists "Cash Prices" of more than 90 commodi ties, of which the majority are farm commodities. In that paper's long list of "Futures Prices" on the commod ity exchanges, there are some 350 prices listed of a single grade of about 45 different commodities with six to ten different delivery dates. If we add to these "national" prices the prices in local markets, we get a total that can run into the millions. How Many Prices? How many prices of all different commodities and services are there, in fact, at any given moment in an economy like the United States? No body knows. But in 1943 Chester Bowles, then head of the Office of Price Administration (OPA), was asked this question by a Congressio nal committee. He came up with an estimate of 8 million. A few days later this answer was withdrawn as much too low. It depended on how you defined a "commodity" and how you defined a "price." No definite answer was ever substituted.

But if, for the sake of argument, the figure were only 8 million prices, how could any bureaucracy, without previous actual market prices to guide it, go about safely fixing even one of them? For such prices, and their interrelationships-which would reach 8 million times 8 mil lion, or 64 trillion-would reflect the past production and demand, abso lute and proportional, for the 8 mil lion commodities and services; they would embody everybody's expecta tions at the moment based on indi vidual scraps of knowledge; and would largely determine the future absolute and relative supply and de mand. No computer could solve this problem. Without a set of previous real and recent market prices, with out informed expectations, the bu reaucracy would have to make 64 trillion blind guesses. Each farmer in planning his next year's acreage of each of the crops he plans to raise, is guided by the current or expected market price of each commodity. So thousands of different commodities and grades of commodities are planted in the pro portions decided upon by each farmer on his assumptions regarding which will bring him the maximum profit (or, it may be, the minimum loss). In each case, to repeat, he is rewarded 1983 MARKET PRICES VS. COMMUNIST COMMANDS 95 by the success of his estimates or pe nalized for his mistakes. He can change his plans any day, up to the actual day of plowing or planting.

We have been talking about the workings of an ideal free market system ..This unfortunately does not exist in the United States. For many years, for example, the federal gov ernment has been subsidizing the production of milk by guaranteeing minimum prices, and thereby bring ing about huge wasteful surpluses paid for by the taxpayers ... But that is another story. Working in the Dark Let us turn now to the problem confronting a communist nation. Such a nation, in the present world, is not totally without price guides. It is parasitic on capitalism, because it knows the prices being quoted for various commodities in capitalist countries. It can make plausible guesses (by figuring presumpti ve transportation costs in the same way) concerning how to convert these into equivalent prices in its own country. (Much depends on whether it allows a free exchange rate for its currency in the foreign exchange market.) Apart from this, a communist bu reaucracy is working in the dark. It must make blind guesses concern ing the size and proportions it wants of the thousands of commodities to which it assigns production quotas for individual farmers. If by oversight or intention it omits some commodities from its production schedules, those commodities will not be produced at all.

The situation is slightly alle viated when the bureaucracy allows individual farmers 'to devote a cer tain proportion of their acreage to raising crops for their own consump tion. But from the bureaucracy's standpoint, this has a disadvantage. It allows cheating on the part of in dividual farmers who try to get as much "free" acreage as they can in the hope of having some surplus foodstuffs to sell off on a black mar ket. These farmers, of course, are forced to guess how much they can successfully cheat, and just what surplus production of each commod ity would pay the maximum return. But as the farmers under commu nism, by and large, do not individu ally profit from raising the "right" amount of a given crop, and are not proportionately penalized for rais ing the "wrong" amount, both bu reaucrats and farmers are working in the dark. The individual farmers are deprived of the incentives and deterrents that would guide them in a market economy. The bureaucrats' overall plan must chronically go wrong. They do not know the abso lute amount of each commodity that it would be most productive to raise nor the relative size of each crop. Any relative surplus in the size of one crop must-with a given working 96 THE FREEMAN February force, acreage and capital-force a corresponding shortage in the pro duction of another.

The communists, in short, cannot engage in what the late Ludwig von Mises labeled "economic calcula tion." Their production plans, there fore, must be unbalanced, haphaz ard, and wasteful. If they put their emphasis on producing "enough" of commodit~es A, B, and C, for exam ple, they will almost certainly do so only at the expense of a correspond ing shortage of commodities D, E, F, andG. The InevitableErrors The inevitable errors in the com munists' overall plans of production must occur as well in their methods of production. In a country operat ing with a free-market system, of course, indi vidually mistaken and costly methods of production can also be pursued, but through the play of individual profit or loss the more ef ficient producers will be constantly increasing their share in production and the inefficient will be forced out of the field. Every year something new will be learned. In a non-infla tionary free economy there will be a tendency for production methods to be constantly improved and costs to be cut.

So when we examine closely how the two systems, communism and free market economy, work in de tail-the one controlled by bureaucrats imposing by fiat a single over all production plan from the top, the other operating through the free and flexible production and consumption choices of millions of individuals, with their individual decisions con stantly modified and coordinated by a system of free market prices-we can see why the capitalistic system is so enormously productive, and why the overall production plans of the communist bureaucrats must go wrong chronically and necessarily, and not merely because of bad luck or bad weather. It remains to ask why the com munist bureaucracies have not rec ognized this, or even, apparently, acknowledged it to themselves. The most obvious answer is that they have a vested interest in not ack nowledging it: they would be over thrown. But· a full answer goes much deeper. They did not originally adopt their doctrines through mere analy sis and reason, but through an ap peal to hatred, envy, vindictiveness, and cupidity: To quote the conclu sion of the Communist Manifesto, (1848): "The workers have nothing to lose but their chains. They have a world to win. Workers of the world, unite!"