December 27th, 2005


Centrally planned economies

One of the tenets of capitalism is that an unseen hand (according to Adam Smith) guides the working of free markers. He might have meant the hand of god (cause he wrote in an era where the supernatural was commonly believed), but these days it's taken to mean that the actions of lots of individuals in their economic decisions make the best decisions overall. For example, if we need more farm production, we'll have incentive to convert acreage to farmland, because demand (and therefore prices) will create an opportunity to make more money farmer. Economy will create an incentive to do the right thing. I think it's somewhat of a circular argument as used by most right-wingers and many economists that I've read. The diretion is reversed in their words. If more of something is happening, it's because the public wants it and therefore it must be the best decision. But I digress.

I was reading a review of a book about Wal-mart, and the blurb claimed that Wal-mart is one of the 20 largest economies of the world. Which is a bit weird to me because no economy can be separated from any other economy. In other words, the Wal-mart economy is not separable from the economies of all the countries in which it operates. And neither is the U.S. economy wholly separate from the economy of Mexico, when goods are partially produced in both countries. So it seems like an odd claim. ButI digress.

Bringing me to my point. The tenet is that markets work best. And it's proven by the failure of the centrally planned economies of the former Eastern Bloc as well as that of China and India and other highly socialist economies. I don't completely disagree. I think markets work well in terms of allocating money or resources if all one evaluates is money or resources. So why do centrally planned economies not work for countries, but they do work for businesses?

Wal-mart internally does not allocate resources according to a market. The C.E.O. and management centrally plan the allocation of resources within a company. So how does that work when we know that centrally planned economies do not work? Is this something the economists have studied?