The Economics Book

175

The totalitarian state of North Korea
suffers regular shortages and famine.
Economists of the Austrian School
claim that this is the inevitable result
of central planning that ignores markets.

communism. Since all planning
necessarily acts against the
“spontaneous order” of the market,
it can only occur with a degree of
force, or coercion. The more that
a government draws up plans and
imposes them, the more coercion
is needed. As governments are
poorly informed about the detailed
workings of the market, planning
is bound to steadily fail in its aims,
while becoming increasingly
coercive to compensate for those
failings. At that point a society
would lurch toward a totalitarian
state, in which all freedom was
extinguished, however moderate
the planners’ initial goals.
Economists of the Left had
argued that a centrally planned
economy was not only possible, but
more efficient than a free market.
Their first significant opponent, in
1920, was another member of the
Austrian School, Ludwig von Mises
(p.147). He argued that socialism—
here defined as central planning—
is not economically viable. It offers
no rational means of pricing
commodities since it relies on the
diktat (unquestionable command)
of one central planner or committee
to perform the allocation decisions
that in a free market are undertaken
by many hundreds of thousands of
individuals. The amount of
information needed to assess the
scarcities and surpluses of a market
and set prices correctly is so huge
that the attempt is doomed to
failure. Socialism, wrote von Mises,
is the “abolition of the rational

economy.” Only a free market

with private property can

provide the basis for the

decentralized pricing decisions

a complex economy requires.

Socialism defended

Polish economist Oskar Lange,

however, disagreed with von

Mises. He famously responded

to von Mises’ claims in a 1936

article, On the Economic Theory

of Socialism, using a development

of general equilibrium theory. This

theory, which was not perfected

until after World War II, is a

mathematical representation of

a market economy stripped to its

bare essentials. All imperfections

in markets have been removed, and

all participants in the market are

fully informed and concerned only

with their self-interest. On this basis,

Lange said, a central planning board

could fix the initial set of prices for

the economy, and then allow all

those in society to trade freely,

adjusting their demand and supply

around the prices given. The

planning board could then adjust

prices according to demand and

supply. The outcome, he argued,

would be efficient. A planner could

also reduce income inequalities and

constrain the market’s tendency to

short-term thinking.

Lange had taken the usual

assumptions of microeconomics

(that supply and demand ❯❯

See also: Property rights 20–21 ■ Economic man 52–53 ■ Economic equilibrium 118–23 ■ Central planning 142–47 ■
The Keynesian multiplier 164–65 ■ Shortages in planned economies 232–33

WAR AND DEPRESSIONS

The more the state

‘plans’, the more difficult

planning becomes for

the individual.

Friedrich Hayek