Ludwig von Mises: The Impossiblity of Economic Calculation Under Socialism

Excerpted from the great Austrian Economist Ludwig von Mises' magnum opus Human Action (source: Econolib) [bold added]

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

For more than a hundred years the substitution of socialist planning for private enterprise has been the main political issue. Thousands and thousands of books have been published for and against the communist plans. No other subject has been more eagerly discussed in private circles, in the press, in public gatherings, in the meetings of learned societies, in election campaigns, and in parliaments. Wars have been fought and rivers of blood have been shed for the cause of socialism. Yet in all these years the essential question has not been raised...

It is the two fundamental errors of mathematical economics that must be indicted.

The mathematical economists are almost exclusively intent upon the study of what they call economic equilibrium and the static state. Recourse to the imaginary construction of an evenly rotating economy is, as has been pointed out, an indispensable mental tool of economic reasoning. But it is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction, and to overlook the fact that it has not only no counterpart in reality, but cannot even be thought through consistently to its ultimate logical consequences. The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations. He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis. In the imaginary construction of the evenly rotating economy there is, of course, no room for the entrepreneurial function. Thus the mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary system from reaching the state of perfect equilibrium and static conditions. He hates the entrepreneur as a disturbing element. The prices of the factors of production, as the mathematical economist sees it, are determined by the intersection of two curves, not by human action.

Moreover, in drawing his cherished curves of cost and price, the mathematical economist fails to see that the reduction of costs and prices to homogeneous magnitudes implies the use of a common medium of exchange. Thus he creates the illusion that calculation of costs and prices could be resorted to even in the absence of a common denominator of the exchange ratios of the factors of production.

The result is that from the writings of the mathematical economists the imaginary construction of a socialist commonwealth emerges as a realizable system of cooperation under the division of labor, as a full-fledged alternative to the economic system based on private control of the means of production. The director of the socialist community will be in a position to allocate the various factors of production in a rational way, i.e., on the ground of calculation. Men can have both socialist cooperation under the division of labor and rational employment of the factors of production. They are free to adopt socialism without abandoning economy in the choice of means. Socialism does not enjoin the renunciation of rationality in the employment of the factors of production. It is a variety of rational social action.

An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People do not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of the prices established abroad. Without the aid of these prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.

Quote of the Day: Ludwig von Mises: The most important economist of the 20th century

Ludwig von Mises died 40 years ago today at the age of 92 in a hospital in New York.  To me, he was the most important economist of the 20th century because he addressed the most important economic issue of the century: capitalism versus socialism. His essay "Economic Calculation in the Socialist Commonwealth" (1920) and his book Socialism (1922) staked out a controversial position on the feasibility of complete central planning. Mises claimed that it was impossible for any society that wanted more than a primitive standard of living. The centrally planned economies that have existed have proved him right: they have had extensive but not complete central planning.  Complete central planning involves the abolition of money. The two countries that have tried it, the Soviet Union from 1920-1921 and Cambodia under the Khmer Rouge, found that the result was a rapid descent towards economic backwardness. Centrally planned economies therefore have grudgingly had to allow a sphere for individual initiative in exchange to correct in part the mistakes of the planners, and so they have had money, though it has been bad money. As the late Don Lavoie stressed in Rivalry and Central Planning (1984), a book that builds on Mises's ideas, "actually existing socialism" after the Soviet Union's attempted abolition of money marked a retreat from complete central planning. (Sorry, no link to Lavoie's book because it's out of print. You can find expensive used copies online, or go to the library.)

At the time of Mises's death, the reputation of capitalism was near its lowest ebb since the Great Depression. Inflation was starting to become a problem in the advanced capitalist countries. In the remainder of the 1970s, central planning  spread to South Vietnam, Cambodia, Laos, Ethiopia, Angola, Mozambique, Nicaragua, and Afghanistan. It looked as though the Third World countries were moving closer to the Second World than to the First World.

And yet, cracks were appearing in the socialist façade. The first volume of Aleksandr Solzhenitsyn's The Gulag Archipelago was published in 1973. In 1978, local government officials and 18 Chinese farmers made a secret agreement to spur individual initiative in production through a partial de faco privatization of communal farmland. The success of this and other such arrangements elsewhere became the foundation of China's momentous official turn toward (though not all the way to) capitalism under Deng Xiaoping. Poland's Solidarity movement formed in 1980. By 20 years after Mises's death, socialism had collapsed, retreating to small redoubts in in Cuba and North Korea.

The underlying lesson of Mises's thought on socialism has nonetheless failed to penetrate deeply into economic policy making. Few people regard the collapse of extensive central planning as an argument against piecemeal central planning in monetary policy, transportation, education, health care, and other areas (including toilet paper in one country).

This is from non-Austrian economist Kurt Schuler writing at the FreeBanking.org

Will Abenomics Lead to a Food Crisis in Japan?

I have been saying that inflationism/currency devaluation leads to economic calculation problems that yields the opposite effects from the intended.

We are getting reports on this.

From Reuters:

However, in Japan, something odd is happening as a result of Abenomics — a big shortage of squid.

Japan Squid Fisheries Association (JAFRA) decided to halt all fishing operations this Friday and Saturday because a weaker yen is pushing petrol prices higher, to the extent that going out to the sea will bring a guaranteed loss. The yen has lost more than 13 percent against the dollar since the start of the year.

Squid fishing is highly energy-intensive because fishers use light to lure squid at night. Fuel makes up around a third of the cost of fishing.

There is a government subsidy for fishermen when energy prices surge. But according to JAFRA, even with the subsidy, the average loss per boat can go up to as much as 200,000 yen ($2,009) per year at the current dollar/yen exchange level of around 100.

The temporary halt is only affecting squid fishing, but people are worried other fishermen may be forced to follow suit if the yen weakens further. The Federation of Japan Fisheries Cooperatives is planning an emergency meeting to ask the government for more financial help.

Supply side adjustments won’t be able to cope with demand side dynamics mainly due to asymmetric responses to the distortions brought by unstable price levels. 

The end result, shortages and higher prices from shrinking markets (due to supply side constraints and reduced demand from consumer), lesser investments, and social disorder.

Will a food crisis follow?

Bank of England: Rising Equity Markets Don’t Reflect the Underlying Economic Situation

The Bank of England (BoE) says what I have been saying all along: markets have functioned in departure from reality or what I call as "parallel universe".

From the Bloomberg

The Bank of England said rising equity markets don’t reflect the underlying economic situation and warned that investors may be underestimating risks in the financial system.

Gains by equities since mid-2012 “in part reflected exceptionally accommodative monetary policies by many central banks,” the BOE’s Financial Policy Committee said today in London in the minutes of its March 19 meeting. “It was also consistent with a perception among some contacts that the most significant downside risks had attenuated. But market sentiment may be taking too rosy a view of the underlying stresses.”

UK’s highly fragile banking system has been amplified by current yield chasing parallel universe. More from the same article:

At the meeting, the FPC recommended that U.K. lenders raise 25 billion pounds ($38 billion) of additional capital to cover bigger potential losses, possible fines for mis-selling and stricter risk models. While banks have strengthened their resilience in recent years, the FPC said today that not all of them may be able to withstand unexpected shocks and maintain lending to companies and households.

The FPC discussed potential threats from the crisis in Cyprus, which agreed on an international bailout last month. While at the time of the March 19 meeting there were “minimal signs” of spillovers to other financial systems, there was “a risk that this situation could change,” the committee said….

In their discussion, the FPC members noted the potential threats to the financial system from increased risk appetite among investors.

“This was evident in the re-emergence of some elements of behavior in financial markets not seen since before the financial crisis, including a relaxation in some U.S. credit markets of non-price terms and increased issuance of synthetic products,” the committee said. “At this stage, they did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely.”

The FPC also said that banks’ leverage ratios, a measure of their debt to equity level, would remain “very high” even after the new recommendations were met. It said there would be “little margin for error against a backdrop of low growth in the advanced economies.”

As noted in the above, central bank authorities either fail to comprehend on the distortive consequences of their inflationist policies or that they are in deep denial.

Because money is never neutral, central bank’s monetary expansion means “money from thin air” flows into the financial and economic system asymmetrically.

Such polices trigger what is called as the “business cycle”.

As the great dean of Austrian economics explained

The fundamental insight of the "Austrian," or Misesian, theory of the business cycle is that monetary inflation via loans to business causes over-investment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real-estate prices are titles to capital goods, there tends as well to be an excessive boom in the stock and real-estate markets.

(bold mine) 

So England’s property bubble and elevated equity prices signify as a classic example of the business cycle in motion.

And given the increasingly hostile environment where productive (commercial) activities are being punished via higher taxes, financial repression and by increased regulations and mandates, such string of political actions compounds on the skewing of people’s incentives towards yield chasing activities.

Add to this the distorting effects of inflationism on economic calculation, again professor Rothbard: (bold mine)

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

Besides, like Spain, central banks have supported asset markets in order to finance unwieldy government spending or their highly tenuous welfare state via Ponzi financing.

In short, lofty equity prices are symptoms of monetary disorder. Another reality is that such policies have been designed to preserve on the unsustainable incumbent political economic cartel of the debt and inflation based crony banking-welfare/warfare state-central banking system through asset bubbles.

Yet if central banks desist from pursuing further monetary expansion that blows today's asset bubbles, the system falls asunder. 

Eventually when a critical state have been reached from these cumulative unsustainable political actions, markets will also unravel.

Central bankers, in essence, have been caught between the proverbial devil and the deep blue sea.

The above also shows why conventional treatment of financial markets will be highly sensitive to significant analytical errors and losses. As hedge fund manager Kyle Bass recently noted, today's markets are largely Potemkin Villages.

Video: Robert Wenzel on the Collapse of the Soviet Union: Facts versus Myths

At the recent Austrian Economics Research Conference held in the Mises Institute, Economic Policy Journal's Robert Wenzel gives an excellent speech examining the real factors that led to the collapse of the Soviet Union.

Quote of the Day: The Virtue of Market Inefficiency

an inefficiency exists when, for a given person at a given time and place, the cost of an action outweighs the benefit.  We’ve seen that to rationally calculate costs and benefits you need money prices of inputs and outputs, of steel and bridges.  So when government erodes private property rights, interferes with trade, distorts prices, and manipulates money, it doesn’t just make it harder to be efficient; it also pulls the rug from under the very ability to spot inefficiencies at all.

Using the rules of arithmetic, for example, it’s easy to see that the statement 1 + 2 = 4 is wrong, but what about  _ + _ = _ ?  What’s the solution to this “problem”?  Is there even a problem here?  Money prices fill in the blanks; they “create errors”—i.e., reveal mistakes that no one could see without them—that alert entrepreneurs might then perceive and correct. If mistakes and inefficiencies remain invisible, the search for better ways of doing things could never get off the ground.

An economy without inefficiencies is either one where knowledge is so perfect that no one ever makes a mistake, or it’s one in which government policy has effectively foreclosed the very possibility of inefficiency.  In a world of surprise and discovery, of experiment and innovation, the former is impossible; the latter sort of economy, as Mises showed almost 100 years ago, is impossible as well as intolerable.

So a living economy needs to “create” inefficiencies, and lots of them, to set the stage for greater efficiency and ongoing innovation.

This excerpt is from Professor Sandy Ikeda at the Freeman talking about the essence and or the significance of the price mechanism.  (hat tip Prof. Don Boudreaux)

Quote of the Day: Economic Calculation

Without private ownership in the means of production, there will not be a market in the means of production. Without a market for the means of production, there will not be monetary prices established on the market (which reflect the exchange ratios, or relative trade-offs people are wiling to make). And, without monetary prices, reflecting the relative scarcities of different goods and services, there will be no way for economic decision-makers to engage in rational economic calculation. Rational economic calculation is impossible in a world without private-property rights and the monetary prices that emerge within the competitive market process. By definition, socialism eliminates the basis of the market economy, i.e., private property in the means of production; the system must find some other mechanism to serve the role that economic calculation plays in the market process. Without the ability to engage in rational economic calculation, economic decision-makers will be stumbling and bumbling in the dark. As Mises puts it, without economic calculation, "all production by lengthy and roundabout processes would be so many steps in the dark”

This is from Professor Peter Boettke’s wonderful book review of Professor Ludwig von Mises’ classic Socialism at the Laissez Faire Books

How Socialism Failed: The Soviet Union Experience

Paul Craig Roberts gives a good account of this. [source:American Conservative] (bold emphasis mine)

The Soviet economy failed because it used more valuable inputs to produce less valuable outputs. The outputs would be measured as statistical product, but the values of the outputs were less than the values of the inputs. In other words, instead of producing value, the Soviet system was destroying value.

This was the result of ideological aversion to using prices and profits to allocate resources and investments. Instead of profit serving as a manager’s success indicator, managers were judged according to whether they fulfilled a plan measured in gross physical output, such as weight, number, square meters.

For example, the success indicator for the construction industry was the number of projects under construction. Consequently, Moscow was littered with unfinished projects because all activity was concentrated in starting new ones. The plan produced a housing shortage because the incentive was to start new constructions not to complete ones already underway.

If a shoe factory’s gross output indicator was a specified number of pairs of shoes, there would be plenty of baby shoes, but none for large feet, because the same amount of material could be used to produce one large pair or several small pairs.

If nails were specified in number, there would be small nails but no large ones. If specified in terms of weight, there would be assortments weighted heavily with large sizes. A famous Soviet cartoon shows the manager of a nail factory being awarded Hero of the Soviet Union for over-fulfilling his quota. In the factory yard are two giant cranes holding one giant nail.

If light fixtures were specified in number, they would be small. If in weight, they would be heavy. Nikita Khrushchev complained of chandeliers so heavy that “they pull the ceilings down on our heads.”

An abundance of natural resources with low extraction costs and the minimal allocation of resources to consumer needs permitted the Soviet economy to continue despite its enormous waste of resources in terms of consumer satisfaction and economic efficiency. But it couldn’t go on forever.

I am reminded of the great Ludwig von Mises who presciently augured for the demise of the Soviet Union’s socialism/communism:

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

Prof von Mises actually predicated his forecast based on the lack of property rights which resulted to the economic calculation problem that has been visibly demonstrated by the above narrative from Mr. Roberts.

On North Korea's Brinkmanship

One of main "reasons" attributed to the recent turbulence in the markets have been due to the brinkmanship stance shown by North Korea's leadership.


This from the Economist,

``ONE of the odd features of the dispute between North and South Korea since the torpedoing of the Cheonan by North Korea in March, is that the non-military responses available to the South and its allies are rather puny. Only a few hawkish South Koreans think a military response is desirable. Hillary Clinton, America's secretary of state, said that “the international community has a responsibility and a duty to respond” when she arrived in Seoul at the end of her Asian tour. For the international community, read China, which is reluctant to censure Kim Jong Il. The North's shortfall in everything from food to energy has been met by a mixture of trade with its southern neighbour and presents from China. The suspension of inter-Korean trade now leaves the poor North more dependent than ever on Beijing." (emphasis added)

This leaves us the following question can a North Korea wage a war against South Korea?

The answer is yes, but this would be suicidal for the following reasons:

Because this would unlikely benefit the heir of President Kim to which allegedly was the reason for the bellicosity. A losing war won't be in their interest simply because North Korea is so poor and isolated as to win a full scale war.

Next, considering that North Korea is in "shortfall in everything" waging war means it can only happen with China's consent.

Considering that it would not appear to be in the interest of China to escalate the region's troubles which could only ruffle her "successful" economic and geopolitical momentum, North Korea could only be trying to extract some marginal concessions.

Unless of course, China could be using the North to divert possibly international attention (e.g. from pressure to appreciate the Yuan).

Third, like most of the past troubles, North Korea as said earlier, may be just using the incident to extract more deals. Considering the diminishing returns from recent actions (missile test and etc.), this seem like a new approach, but again would be subject to China's approval or rebuke.

In short, unless North Korea's leadership has gone berserk the odds for a Korean Peninsula military conflict seems remote.

However, the longevity of the incumbent regime in North Korea is almost totally dependent on China. This only means that once China decides for a change in North Korea's leadership, there is little the Kims can do, and maybe could also serve as reason for this unfortunate event.

Finally, North Korea's predicament only reveals how socialism is a very inferior way of distributing resources to a society as exhibited by the "shortage in everything" and near utter dependence on China for most of her needs.

The lack of pricing signals and economic calculation in determining profit and loss factors has led to massive misallocation of resources (mostly to military spending).

Of course, there is also the issue of the paucity of motivation or incentives for her people to work which has been subject to collective distribution.

As Ludwig von Mises explained, ``What must be realized is that within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers’ goods are faithfully and closely reflected in the prices of the various factors required for their production. Thus it becomes feasible to discover by means of a precise calculation which of the indefinite multitude of thinkable processes of production are more advantageous and which less. “More advantageous” means in this connection: an employment of these factors of production in such a way that the production of the consumers’ goods more urgently asked for by the consumers gets a priority over the production of commodities less urgently asked for by the consumers. Economic calculation makes it possible for business to adjust production to the demands of the consumers. On the other hand, under any variety of socialism, the central board of production management would not be in a position to engage in economic calculation. Where there are no markets and consequently no market prices for the factors of production, they cannot become elements of a calculation."

This is a real time experiment failing right before our very eyes and should serve as a lesson, especially to the mainstream who frequently romanticize the role of government.

In my view, the current North Korean regime (Kim and his heir) isn't likely to last in the next 3-5 years. Either hyperinflation will undo North Korea or China forces a change in leadership. But the regional political volatility will remain until such transition occurs.

The Myths Of Government’s Managing The Economy

`The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”- Ludwig von Mises Human Action

Overheard from a recent social gathering: “We need a president that can run the economy like a corporation!”

My impression is that the alluded corporation is one of a privately run enterprise.

Nevertheless this has been a popular myth advanced by government loving liberal experts, politicians and their media adherents which have likewise been widely espoused by the public.

We cite 5 reasons why this thinking is seriously flawed.

First, it misses the fundamental nuances in the contribution of private enterprises and government to society.

A private enterprise generates revenues by producing goods and services that consumers need or want with which they pay for. In other words, the success or the failure of a private enterprise is entirely dependent on consumers voting with their money, this is known as capitalism or an economic system that thrives on profit and loss.

On the other hand, government as an institution survives mainly by taxation. It coercively takes from the pocket of Juan and gives to Pedro and keeps a share of it to finance the bureaucracy.

Essentially the government does not produce anything but consumes the nation’s resources which are funded by such taxes.

At a certain point, after the provision of basic public goods, such as police and military services, the safeguarding property rights and enforcing the sanctity of contracts, government becomes a net consumer of capital. The rate of taxation (Laffer’s Curve) which finances such increased social consumption eventually squeezes out productivity and further exacts a toll on the nation’s resources.

So if a government does not produce, and is a drain on the resources of the economy and is net consumer of capital, how can it possibly contribute by “managing” the economy?

Second, it’s all about incentives.

A private enterprise is incentivized to generate wealth by efficiently allocating scarce resources or by economizing in order to profit.

On the other hand, the government’s incentive is to theoretically find “optimal” ways to redistribute wealth.

However, redistribution of wealth is a political issue, simply because it chooses which sectors or interests groups that would both benefit from such privilege.

Meanwhile on the opposite end, the government ascertains the interest groups and sectors that would pay for such task. In short, it plays the analogical role of God in determining who survives or not.

Say for example, because of the popularity of OFWs as our economic saviors, policymakers decide to tweak the Peso lower by printing money.

While the families of the OFWs will have additional spending power because of a lower Peso, which may also partly buttress the export sector, on the other hand the unseen costs from inflating the system is to lower the amount of goods and services (due to price increases) that could be acquired by a depreciated peso. In other words, the benefits will be temporary for a certain segment of the society but at a greater cost to the whole over the long term.

Moreover because governments are politically oriented they don’t normally operate under the economic pressures, hence the proclivity to overspend.

As the illustrious economist Milton Friedman once said, ``There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.”

Furthermore, when government decides to spend money say, for example on “stimulus” packages or the highly popular “pump priming”, not only does it spends on things that the market does not see viable or necessary, it risks spending on inefficient projects which again consumes capital.

Also such expenditure could compete with private sector for resources resulting to the crowding out effect and a loss of productivity.

Worst, government spending increases the risks of bureaucratic corruption.

So how does politicization of the allocation of resources, wastefulness, deadweight loss (inefficient allocation of resources), and corruption contribute to the meaningful managing of the economy?

Third it’s also about accountability.

A private enterprise that fails to please the consumers, because of fatally wrong decisions, ends up losing money, filing for bankruptcy and or closing shop.

Reckless policies pursued by a political leader could lead to economic devastation yet the perpetrator’s political career can remain unaffected, Robert Mugabe of Zimbabwe could serve as an example.

Moreover a political leader may keep a big segment of the voting population happy by mass redistribution of wealth (tyrannical socialism, fascism, dictatorship) by extorting the most productive sectors or by buying off voters by benefiting from crony capitalism or corruption and may yet retain his/her career on election day.

So how can a self serving politician be responsible for managing the economy when his/her interest is to remain in power by political maneuvering?

Fourth is the dearth of economic calculation.

A private enterprise is guided by market pricing signals which determines the relationship of price and costs expressed in money terms and the coordination and allocation of resources in accordance to profit and loss statements.

A government which is not a profit seeking enterprise cannot make use of any economic calculation wrote Mr. Ludwig von Mises.

For instance, to quote Ludwig von Mises anew, the ``success or failure of a police department's activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded. It is precisely when a manager is rewarded by a share of the profits that he becomes foolhardy because he does not share in the losses too”. (emphasis added)

In other words, the cost of delivering most public goods by the government cannot be accounted for in money terms.

So if government cannot account for its services then how can it ascertain how to manage the economy?

Fifth is the lack of local knowledge.

A private enterprise, operating under the market process and is directed by pricing signals, needs to acquire or get updated with the local knowledge of the market, one is serving or intends to cater to, for them to be able to operate profitably.

A central authority plagued with a lack of economic calculation is likewise handicapped by deficient local knowledge. The underlying response will be to rely on inaccurate statistics which may lead to inaccurate analysis and policy blunders.

As Friedrich A. Hayek described in "The Use of Knowledge in Society" ``The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot." (bold emphasis mine)

Since regulatory policies are always imposed based on “social” motives, the economic viability of such motive needs to be established. Otherwise, such policies may lead to serious distortions in the marketplace which may result to adverse unintended consequences.

As Professor Art Carden eloquently wrote, ``Any social policy must be economically possible before it can be considered morally desirable.”

So if central planners don’t have the right information to make the strategic decisions on important aspects of the “local” economy, how can they manage?

In the 80s, as Japan went into a bubble, I recalled the much ballyhooed Japan Inc...

It was a moniker describing the relationship of Japan’s public-private sector partnership that luxuriated in the glory of easy money policies.

In looking at Investopedia.com we saw a short narrative on its miserable ending as follows, ``The high degree of collusion between Japan's corporate and political sectors led to corruption throughout the system and contributed to the downfall of the overvalued Nikkei.”