Why Central Planning Cannot Work

A nice summary of the Austrian analysis, from Brian Doherty's superb new book, Radicals for Capitalism:

"Choosing among different production methods was more than just a technological problem, Mises insisted, despite claims by some socialists. It was an economic problem of figuring out in what proportions and to what extent certain things are valued in order to use them most economically. And without private property and prices to reduce comparisons between different and incommensurable objects to a common denominator - a money price - that economic calculation problem was insoluble.

For example, you may have steel at your disposal, but you need food. In a market economy, the money price becomes the great equalizer that tells you what everything is worth in terms of everything else. If steel is, say, selling for $40 a pound, and apples for $1 a pound, you know that steel is worth forty times what an apple is. And you can trust that prices approximate, as closely as anything could, a correct estimate of the entire society's valuation of things, because if apples were "really" worth $2 a pound (if people were willing to pay that much), you can be sure that in a market economy where people own property and can keep what they get from selling it intelligently, someone will realize this and begin raising the price, which, if he keeps selling them at the higher price, signals other private property owners seeking profit to raise their price, and so on...

Without a world of people able to bid and compete for the use of resources, bringing their own subjective valuations to bear and able to profit from their choices, there is no way to make an intelligent choice about what to do with any given resource, since there would be no way to actually know what people want most out of that resource. Thus, with one set of planners owning everything and making all allocation decisions without market prices, economic inefficiency will ensue that will come nowhere near actually reflecting people's desires. Without the money prices and incentives of private property, an advanced industrial economy would never know what things were actually valued at, and the waste of resources to meet political needs, not consumer needs, would be inevitable.

What free markets do, in the Austrian theory, is spread information about every person's subjective valuations of needs and desires for goods; and they do so by depending, as Hayek has emphasized, on local, individual knowledge of specific circumstances that no central planner could ever gather through any means other than the very system of free market prices that planners think they can replace."