Dogma Premise # 9

Centrally planned economies are inefficient.

Markets are an ancient invention.  Their magic is solving an information problem: who wants what, and how much?  Creating a market that brings together buyers and sellers to exchange allows prices to emerge that help supply and demand reach equilibrium.

In the Agora of ancient Greece, there was no other way to solve such a complex problem, and so markets might reasonably have been looked upon as magic, like lodestone, music, or pi.

However, in the Information Age, when every living room has a computer or two, and computers are even embedded in children's toys and worn like clothing, markets are unnecessary to solve any information problem.

Take WalMart.  WalMart is a global distribution system that operates with such extraordinary precision that they can replace their inventory every day, in every store, around the world.  The engine that makes this happen is a legendary information machine, but it is not a market where buyers and sellers come together to negotiate prices.  Prices at WalMart do not vary based on aggregate demand, like a stock exchange.  Instead, prices are determined another way, and WalMart, like Costco and Sam's Club centrally plan what goods are to be made available to consumers and when, based on a variety of factors, and the rest is all distribution logistics.

Of course WalMart changes its inventory mix in part based on customer demand.  They meticulously measure sales, and will run experiments in individual stores before rolling out a product more broadly.  Supply is measured based on manufacturer negotiations, and demand is measured based on store sales.  But the final decision of what to sell, and at what price is determined centrally.

That free markets respond to supply and demand is undeniable.  However, there are all kinds of other ways to measure supply and demand, and markets are one of the most expensive, least precise, and least efficient ways of doing it.  Imagine if every person in WalMart had to dicker for each item at the cash register.  That would be a market.

In the Information Age, central planning will always beat markets at efficiently matching aggregate demand and supply.  That's one reason that American business uses markets so infrequently.  There are still livestock auctions, rare art auctions, stock markets that float prices, and of course currency markets.  But for producing and distributing consumer goods -- or for that matter, industrial goods like tractors and rockets -- we have entirely switched to a centrally planned economy.  Americans like to think that China is becoming more like them, but the reality is that the United States is becoming more like China.

There is a risk, of course, that central planners may be corrupt or incompetent, and get it wrong sometimes.  But this is not a different kind of risk than the risk that markets will be corrupt, secretly manipulated, monopolized, or transformed into bubble disasters.  In either case, controls may be put in place or not. In the United States, anyway, the central planning around allocation of consumer goods has been far more reliable than the free market mechanisms that resulted in a dot-com bubble, then manipulated energy markets, then a real estate bubble, and then massive financial fraud. The central planners at Walmart have been at least as effective at controlling and auditing their processes as have been the participants in market-based exchanges.

Centrally planned economies are the MOST efficient economies in the 21st century, especially if the central planners are democratically accountable, which was not the case in the former Soviet Union, and is not the case today in the centrally planned but privately managed United States economy.

Dogma Premise 10

All Dogma Premises