Does Complexity Necessitate Central Planning?

Study Questions for George Reisman's
Capitalism: A Treatise on Economics

CHAPTER 5. DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM

PART A. THE NATURE OF THE DEPENDENCIES

1. Explain why, by the very nature of the leading benefits it provides, namely, the multiplication of knowledge and the gains from the existence of geniuses, a division-of-labor society depends on the institution of private ownership of the means of production. (Hint: the connecting links are separate, independent knowledge and the consequent need for separate independent action and production.)

2. Explain the fundamental incompatibility of socialism and collectivism with a division-of-labor society. In your answer, bear in mind the socialist prescription of "central planning," viz., the whole of society functioning as one, indivisible unit in the conduct of the economic system.

3. Explain why socialism in fact always represents contradictory, partial planning, not any form of coordinated central planning.

4. Describe how capitalism is characterized by economic planning on the part of all of the individual participants in the economic system -- businessmen, wage earners, and consumers.

5. Explain how the virtually omnipresent private economic planning that goes on under capitalism could have been overlooked by the great majority of today's intellectuals and media and the significance of this fact.

6. Explain the error underlying the use of the expression "economic planning" as a synonym for government planning.

7. Describe how the economic planning of individuals under capitalism is based on prices and how the resulting economic calculations provide a standard of action for the planner under capitalism.

8. Explain why the standard of action that the consideration of prices and costs provides to the planner under capitalism, is objective in the light of his desire to obtain more wealth.

9. Explain and illustrate how prices serve to coordinate and harmonize the plans of each individual under capitalism with the plans of all other individuals in the economic system.

10. Explain the dependence of the price system on the profit motive and the freedom of competition.

11. Explain the dependence of the profit motive and the freedom of competition in turn on private ownership of the means of production.

12. Explain why in a division-of-labor society exchange must exist on a massive scale and be a central feature of economic life.

13. Explain the dependence of a division-of-labor society specifically on monetary exchange and how the absence of money would make impossible the existence of any substantial degree of division of labor. In your answer, be sure to explain the dependence on money with respect both to the problem of the double coincidence of wants and the matter of economic calculation.

14. In the light of its essential role in the division of labor, appraise the truth of the frequent contention that "money is the root of all evil."

Answers to these questions may be found on the author's website, www.capitalism.net.

In this book, he illustrates in depth the superiority of the market to various forms of collective decision making, and shows the manner in which the collective idea has gained in the U.S., tracing trends in economics, law and politics which are moving us away from freedom.

In modern society, he notes, the number of separate individual decisions required to do something so apparently simple as bringing a slice of bread and pat of butter to the table—-let alone something so complex as exploring space—is staggering to the mind. Yet processes involving a multitude of such decisions are undertaken every minute of the day by untold millions of people.

Dr. Sowell portrays society as a collection of interconnected and overlapping decision- making units ranging from “a married couple to a police department to a national government.” They all operate under the inherent constraint of scarcity, and thus face the necessity of engaging in “trade-offs.” Parents deciding how much time and energy to devote to the care of each of their children or a police department determining which laws it will enforce most vigorously both must forgo some desirable options in order to pursue others. The weighing of costs and benefits that characterizes the economic sphere can be seen at work throughout the whole range of human choice: “Social values in general are incrementally variable: neither safety, diversity, rational articulation, nor morality is categorically a ‘good thing’ to have more of, without limits. All are subject to diminishing returns, and ultimately negative returns.”

There is a radical difference between the kind of knowledge possessed by producers of goods and intellectuals or bureaucrats. “To say that a farm boy knows how to milk a cow,” the author writes, “is to say that we can send him out to the barn with an empty pail and expect him to return with milk. To say that a criminologist understands crime is not to say that we can send him out with a grant or a law and expect him to return with a lower crime rate. He is more likely to return with a report on why he has not succeeded yet, and including the inevitable need for more money, a larger staff, more sweeping powers, etc. In short, the degree of authentication of knowledge may be lower in the ‘higher’ intellectual levels and much higher in those areas which intellectuals choose to regard as ‘lower.’”

Incentives Differ

When any area of concern becomes the province of government officials, a different structure of incentives exists than when free market incentives were working. Government decision makers, for example, may act rationally within the context of their own personal and bureaucratic incentives and constraints—such as the desire for re-election or promotion, or for increasing the power of their agency—but this may produce a socially harmful result.

Thus, Dr. Sowell argues, “Much criticism of ‘incompetent bureaucrats’ implicitly assumes that those in the bureaucracy are pursuing the assigned goal but failing to achieve it due to lack of ability. In fact, they may be responding very rationally and ably to the set of incentives facing them. For example, government regulatory agencies are often very ineffective in controlling the industry or sector which they have a legal mandate to regulate. But it is a common pattern in such agencies for those in decision- making positions to (1) earn far less money than comparable individuals earn in the regulated sector, and (2) after a few years’ experience to move on to jobs in the regulated sector. In short, they are regulating their future em ployers. Under such a set of incentives, it is hardly surprising that decision makers . . . approach those whom they are assigned to regulate with an attitude that is sympathetic, cooperative, and even protective.”

The examples of such an incentive structure at work, Dr. Sowell shows, are numerous, among them, the Interstate Commerce Commission and the trucking industry, and the Civil Aeronautics Board and the airline industry. He declares that, “Much discussion of the pros and cons of various ‘issues’ overlooks the crucial fact that the most basic decision is who makes the decision, under what constraints, and subject to what feedback mechanisms.”

Numerous Options

When government decides something—it decides it for everyone, often wrongly. “The advantages of market institutions,” Dr. Sowell states, “over government institutions are . . . that people can usually make a better choice out of numerous options than by following a single prescribed process. The diversity of personal tastes insures that no given institution will become the answer to a human problem in the market. The need for food, housing, or other desiderata can be met in a sweeping range of ways. Some of the methods most preferred by some will be the most abhorred by others. Responsiveness to individual diversity means that market processes necessarily produce ‘chaotic’ results from the point of view of any single given scale of values. No matter which particular way you think people should be housed or fed (or their other needs met) the market will not do it just that way, because the market is not a particular set of institutions. People who are convinced that their values are best—not only for themselves but for others—must necessarily be offended by many things that happen in a market economy . . . . The diversity of tastes satisfied by a market may be its greatest economic achievement, but it is also its greatest political vulnerability.”

Since an economy functions with scarce resources which have alternative uses, there must be some method of coordinating the rationing process and getting the most output from the available input. Discussing the manner in which the market proves itself the best source of such coordination, Dr. Sowell writes: “Price movements economize on the knowledge needed for given decisions. Where such prices are artificially maintained by force, rather than through voluntary transactions, they convey misinformation as to relative scarcities, and therefore lead the economy away from the optimal use of resources. Accurate prices resulting from voluntary exchange permit the economy to achieve optimal performance in terms of satisfying each individual as much as he can be satisfied, by his own standards, without sacrificing others by their own respective standards. The results must, however, appear ‘chaotic’ to any observer judging by any given set of standards applied to all . . . . The most basic question is not what is best but who shall decide what is best . . . . Figures of speech about ‘society’ as decision maker ignore the diversity of individual preferences which are responsible for many of the very phenomena in question—whether economic, social, or political.”

Timed for Short Run

Political decision making also has a time horizon which is confined to the very short run. “The time horizon of the constituent,” the author points out, “may be his lifetime, and perhaps that of his children, or even the longer range interest of the whole society as an on-going enterprise. The inherent incentive structure facing a political surrogate emphasizes the time remaining between a given decision and the next election. The opportunity for policies with immediate benefits and longer run negative consequences are obvious, not only in theory but in practice.”

Government agencies also have no interest in solving the “problems” they were created to deal with. If they succeeded, their jobs would end. The result: “. . . the agency must then apply more activity per residual unit of evil, just in order to maintain its current employment and appropriations level. If the agency is supposed to fight discrimination against minorities, it must successively expand its concept of what constitutes ‘discrimination’ and what constitutes a ‘minority.’ Urgent tasks such as securing basic civil rights for blacks ultimately give way to activities designed to get equal numbers of cheerleaders for girls’ high school athletic teams. A nongovernmental organization, such as the March of Dimes, could—as it did, after conquering polio—turn its attention to other serious diseases, but if it had a government mandate strictly limited to polio, it would have little choice but to continue into such activities as writing the history of polio, collecting old polio posters, etc., while children were still dying of birth defects and other maladies . . . a nongovernmental organization subject to feedback from donors or customers has incentives and constraints that lead to institutional decisions more attuned to rational social trade-offs.”

The question, therefore, is not the nature of the men and women in charge of government programs, but the nature of bureaucracy itself: “Bureaucracies, by definition, are controlled by administrative or political decisions, not by incentives and constraints communicated through market price fluctuations. . . . The rank and pay of a bureaucrat is determined by his degree of ‘responsibility’—in categories documentable to third parties judging a process rather than a result. He is paid by how many people he manages and how much money he administers. Overstaffing, ‘needless’ paperwork, and ‘unnecessary’ delays may be such only relative to social purposes—not relative to the incentives established. Every ‘needless’ employee is a reason for his superior to get a higher salary . . .”

Government Is Not Society

One key myth which Thomas Sowell wants to dispel is that, somehow, government is the equivalent of “society.” It is not. Instead, he writes, “it is often not a consolidated decision-making unit, but an overlapping montage of autonomous branches, agencies, and power cliques—each of these responsive to different outside coalitions of interest groups or ideologists . . . . A bureaucracy which can envelop its processes in intricate and unintelligible regulations and bury its performance under mountains of tangential statistics has achieved the security of insulation from feedback. Knowledge costs—whether inherent or contrived—are institutional insulations.”

Trends today, both in the U.S. and elsewhere in the Western world, are clearly away from freedom. Democracy, Dr. Sowell reminds us, is a process, not a value. People can give their freedom away through the democratic process, as many have done. Hitler, after all, came to power in Germany through that very democratic process.

Dr. Sowell discusses the role of intellectuals in eroding freedom, a role played by intellectuals in other societies as well, for freedom denies them the power to inflict their ideas upon others. He chronicles the increasingly legislative role played by the courts and the non-elected bureaucracy and laments that, “Over the years, but especially in the twentieth century, the constitutional division of powers has been eroded or destroyed . . . the sheer growth in size of the federal government has given it new powers derived neither from the Constitution nor from any statutes, but inherent in the disposition of vast sums of money, many important jobs, and great discretionary powers of enforcing a massive and ever growing amount of laws and regulations . . . . The size of government affects the ability of the citizens to monitor what it does—or even the ability of their elected political surrogates to monitor the activities of a far-flung administrative empire . . . . None of this is historically unique. In the late stages of the Roman Empire its civil servants ‘felt able to exhibit a serene defiance of the Emperor.’ . . . The same was later true of Czarist Russia, for John Stuart Mill declared, ‘The Czar himself is powerless against the bureaucratic body; he can send any one of them to Siberia, but he cannot govern with out them, or against their will.’ The experience of Imperial China was very much the same.”

The free enterprise system is, Dr. Sowell believes, worthy of support not only because it is the most efficient but, far more important, because it is the only economic system consistent with other freedoms. Those who oppose the free market, whatever their rhetoric, are really opposed to freedom, for which they would like to substitute their own ideological notions.

Although he understands the negative trends, Thomas Sowell is not a pessimist. If he were, he would not have produced this thoughtful and incisive defense of freedom. He concludes: “Historically, freedom is a rare and fragile thing. It has emerged out of the stalemates of would-be oppressors. Freedom has cost the blood of millions in obscure places and in historic sites ranging from Gettysburg to the Gulag Archipelago. A frontal assault on freedom is still impossible in America and in most of Western civilization. Perhaps nowhere in the world is anyone frankly against it, though everywhere there are those prepared to scrap it for other things that shine more brightly for the moment. That something that costs so much in human lives should be surrendered piecemeal in exchange for visions or rhetoric seems grotesque. Freedom is not simply the right of intellectuals to circulate their merchandise. It is, above all, the right of ordinary people to find elbow room for themselves and a refuge from the rampaging presumptions of their ‘betters.’”

 Mr. Brownfeld, of Alexendria, Virginia, Is a free-lance author, editor and lecturer especially interested In political science.