The Chicken, the Egg, and the Socialist
Why no supercomputer will ever be able to plan the economy
Every once in a while, you’ll hear someone argue that certain sectors are too important to be trusted to the market. The government must nationalize for the sake of the public interest. It’s simply too risky to have profit-seeking firms supply us with water, healthcare, or other essential goods.
In the same “once in a while” scenario, you’re likely to have someone who's right-leaning argue that government officials are also self-interested and prone to corruption. Then the argument devolves into a debate on whether public sector corruption is worse than private sector corruption.
Unfortunately, both these sides miss the fundamental issue of central planning: the knowledge problem. The basic argument is the following: central planning (especially on a large scale like in the USSR) will fail even if the planners are extremely good people. It doesn’t matter who they are. It doesn’t matter what their goals are. They will always fail because of one simple reason: they don’t know the two ways in which you can make a chicken lay more eggs.1
Err, let me back up. Let’s start by assuming that we’ve appointed you the king of the economy. You get to decide…everything. Seriously. And you, being the good person you are, decide to make the economy work for everyone. None of that billionaire nonsense. You soon find yourself facing three questions that you can’t answer.
Question 1: what should we produce?
The first problem you discover is that you have no idea what people want. How many sticks of butter? How many eggs? How many jeans? How many black jeans? Oh god. You decide to take a public survey. Everyone will write down what they want and you’ll make it for them.
One week and 331.9 million Google Form responses later you discover that people…want a lot of things. More specifically, you now find yourself forced to produce 200 million yachts and 400 million copies of Scott Sumner’s Money Illusion (no one really wanted it, but a few monetarist teens ordered extra copies). Remembering that scarcity exists, you decide that 200 million yachts is a bit much. So you decide to place some type of limit on what people can ask for. Perhaps you assign everyone some amount of points that they can spend on different goods (...we could call them dollars). In any case, you revamp the Google Forms experience.
Wait, now you realize that there’s more than one response for each person. Oh damn, people are changing their minds. This guy doesn’t want a red hoodie anymore because everyone else was getting blue hoodies. And this girl decided she doesn’t want any more burgers since she’s going vegetarian. Damn it.
Question 2: who should produce things?
After pondering question 1 for a while you decide that it’s better to pretend you’ve solved it. You then discover a new problem: you know you have to produce 50 million pairs of jeans, but you don’t know who should produce them. Presumably, it should be people who are good at it. At this point you realize that some people are good at producing high-quality jeans while others are good at low-quality jeans. You also realize that your Google Form didn’t include a question on whether people wanted slim fit or regular fit. Ugh. Whatever. That’s a question 1 problem so we’ll ignore it.
OK so, back to making the jeans. What if you asked people “who’s good at making jeans”? What if picked the best jeans-producers? Hmm. That sounds like a good bet! But…what if those people would be better off doing other things? Like I’m sure Captain America could’ve been one of the best seamstresses in the world, but then he wouldn’t have time to save the world. OK, we can’t just grab whoever is good at something.
Oh, how about this. Remember those “points” people could spend on different goods in the Google Form? What if we paid people points. We would hold an auction and hire whoever required the least “points” to make jeans (hope you see where this is going).
Question 3: who should get things?
OK. We’ve made stuff! It’s time to distribute. Uh. How do we do that? You go back to your list of things people want and find that you have a factory and a chicken farm each asking for 100 watts of energy. In the past you notice that they’ve both received 100 watts, but now you just don’t have enough to do that. Well, since they both asked for 100 and both received equal amounts in the past, you reckon it’s fine to do a 50/50 split. A week later the factory shuts down.
As it turns out, there are two ways to make a chicken lay more eggs3 - you can heat them (with, you know, watts) or feed them more food. On the other hand, the factory needed all 100 watts to keep functioning. Had you known this, you’d have given the 100 watts to the factory. The chicken farmers could get food instead. You now realize that this was also a question 2 problem, the energy was needed for *farming* and for the factory. And then you’ll face the same issue again when distributing the chicken! Ugh. It’s hard to be king of the economy. Screw it. Next time around, you’ll sell them watts. Yeah. If the factory really needed them, they would pay with the points they got from question 2! And the chicken farmers wouldn’t think it’s worth it since they could always substitute energy with food.
You’ve reinvented the market economy. People get paid to make things. People pay to buy things. We decide what to make based on what people want to pay for.
This example is stolen from Steve Landsburg’s “Can you outsmart an economist?”
Meme by fellow lib https://twitter.com/weatherdai
This example is, again, blatantly stolen from Steven Landsburg.