Free Societies

Why socialism's central planning inevitably fails

Palmer Mises

State socialism was one of the dominant government forces of the 20th century, and although the world is not completely rid of it yet, the late 1980s and early 1990s brought a dramatic and sudden change with the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991. Tom G. Palmer, Atlas Network’s executive vice president for international programs, talked about the history and ideology of socialism in his keynote address at the 2014 Ludwig von Mises 6th Annual Celebration Dinner, made available online this month.

In his remarks, Palmer delves into history, economics, and sociology, and brings to bear his own decades of experience spreading the ideas of liberty while he traveled both behind the Iron Curtain and within post-Soviet nations that had varying degrees of success moving forward from their centrally planned pasts.

“People forget how rapid the transformation was,” Palmer observes. “We talk about the fall of the Berlin Wall, and how surprised many people were by it, most notably the communists.”

Palmer notes that the socialist officials of East Germany were confident about the staying power of their regime right up to the point that it collapsed. In January 1989, Erich Honecker, who was general secretary of the Socialist Unity Party and led East Germany for 18 years before the Berlin Wall fell, declared that “The Wall will be standing in 50 and even in 100 years,” and in October 1989, only one month before the wall fell, said that “Neither an ox nor a donkey is able to stop the progress of socialism.”

Palmer explains how economist Ludwig von Mises identified the economic calculation problem inherent in socialism, and why the impossibility of determining prices without free markets leads to the inevitable failure of the centralized planning of an economy.

He also delves into a key disagreement between two other economists in the Austrian tradition. Joseph Schumpeter, although not a socialist himself, believed that a socialist society could possibly achieve economic growth through central planning as long as it devoted enough brilliant mathematicians and economists to figuring out accurate prices and production values.

Nobel laureate economist Friedrich A. Hayek, on the other hand, pointed out that Schumpeter was entirely incorrect. No amount of ingenuity at the center can calculate value for people throughout society — not even with all the computing power in the world devoted to the task.

“The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people,” Hayek wrote in his 1945 essay “The Use of Knowledge in Society.” Information about dispersed values can’t be obtained because it’s held inside the minds of millions of people, and not revealed until they make their competing preferences known through market transactions.

“The economic problem requires those prices,” Palmer explains in his lecture. “Prices that are established in the messy higgling and haggling of the market, of going in and offering less, and the merchant wants more, and you come to a price you can agree on.”

The entire presentation is well worth watching, and will provide viewers with a greater understanding of the crucial role of economic freedom in leading to a prosperous society.

Watch Tom G. Palmer’s address at the 2014 Ludwig von Mises 6th Annual Celebration Dinner.