I can’t find a case where the country as a whole benefited from seizing production. The Soviets tried it with the Kulaks, and crashed their agricultural output. Venezuela tried it with their oil and gas industry, and destroyed it. Once one of the world’s largest oil exporters, they can’t even produce enough for their own population any more.
There’s a good reason why this never works. Ask yourself, “What is the means of production?” Is it just a bunch of buildings with machines in them? Or some fields of wheat? Nope. The means of production is a combination of physical structures and equipment, and the knowledge inside the heads of all the people who work in that production. When you confiscate a factory, you get the machinery, but you don’t get the knowledge of how to use it effectively. You lose the relationships, the supply chains, the deep knowledge of the workers who learned how to work around issues, where to find the best supplies, and so forth.
Take the Kulaks. They didn’t just own the farms, they were part of a system that had evolved to efficiently extract food from them. They knew how to repair their rickety machines. They knew what to avoid and what to embrace. They knew which problems could be ignored and which ones needed to be addressed immediately.
Hang them all, and put political functionaries and favored constituents in their place. What happens? All that knowledge is gone. Productivity collapses. Couple that with the fact that people work a lot smarter and harder when it’s in their self interest than they will at the point of a gun, and you see how output could collapse when an industry is taken over by force.
If you work now, think about all the things you know about your job. Think of the times you’ve questioned your boss about a plan, or explained why it has to be modified a bit. Think about all the activities you do that required experience on the job or other local knowledge not taught in books. Think of the decisions you’ve made that require knowledge of the local economy, or the skills of your co-workers, or the availability of some resource in your region, or whatever. Now ask yourself if that job would be done as efficiently if someone across the country decided how you should do it, and you were powerless to give any feedback. Do you think they would make better or worse decisions than you do?
Nationalization is a little different than expropriation. Often, nationalization is done with an eye towards minimal change, so that everyone stays on the job and continues to be rewarded as they were before. But then you run into other problems of central planning - the utter inability of central planners to collect the information necessary to plan. In complex systems, the vast amount of information the system needs is contained in the lowest levels. Healthy systems require that as much control as possible is pushed down to where the information is, and that information generated at the bottom be allowed to travel back through the system as feedback. Command economies generally do not allow for this, and therefore start to stagnate.
I spent most of my career doing things like gathering requirements for factory automation projects, and I can tell you that the biggest problem we always faced was that no one really knew what was going on. Processes were not followed as written, but modified by workers to remove the stuff that doesn’t work. A lot of factories had a couple of old grizzled foremen who seemed to be able to work magic to keep things running smoothly and who were utterly indispensable.
I just got early retirement because the company I worked for came up with the big idea of consolidating management into ‘centers of excellence’, far away from the customers and the engineers building what the customers wanted. They hired very smart people away from places like Google and Microsoft to run their ‘centers of excellence’.
The result was a disaster, and the company was decimated. All our local engineering teams were eventually laid off as our stock collapsed and customers abandoned us. The error the company made was in assuming that you could replace an organically grown system with a planned one, and that a planned system could be run by very smart people in a distant location. It didn’t work. My favorite failure was a design review for a specialized control system UI that one of the ‘excellent’ head office UI people failed because “It didn’t have enough clicks”. See, this guy came from a web company where clicks are revenue, and couldn’t get his head around the idea that a guy working fast in a factory doesn’t give a shit about ‘engagement’ and just wants to get the job done quickly. Our company essentially let go all the control engineers and software engineers with decades of factory experience, and replaced them with very smart, very young silicon valley coders who didn’t know a damned thing about manufacturing.
This is what happens when you believe that central planning can do as well as distributed decision-making done close to the customer. Central planners just don’t have the information available to make good decisions, no matter how smart they are.
As for subsidies and tariffs to push production in the ‘right’ direction, you run into the same problem: The central planner has no way of knowing what the right direction is, or what unintended consequences will arise from his intervention. We used subsidies to push people into biofuels, and that looks like a mistake we will have to live with for a long time. Governments should never pick winners and losers, because they have no way of knowing if they are right. After all, if the answer was clear, the market would have already done it. More often, the decision to subsidize or punish an industry is made for political reasons and not because it’s unambiguously the right thing to do.
Here’s a couple of relevant quotes for you:
Hayek is talking about the coordination problem mentioned above. Trying to control a complex system from the top down never works. Look at nature - if central authority was efficient, it should have evolved in social animals. There should be super smart queen ants telling the others what to do, or councils of the smartest monkeys leading all the tribes, or whatever. But what you see instead is essentially what we do in capitalism - the creatures in a social organization follow simple rules for their own behavior, which leads to complex, emergent, efficient behavior at the colony level. It’s bottom-up decision-making leading to emergent high level group behavior.
Look at a flock of birds and the intricate formations and manoevers the flock makes. No bird or council of birds is controlling that. There’s no hierarchy of decision-making. The birds just follow simple rules, out of which flock behavior emerges. Or in other words, “He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” That’s Adam Smith, describing the Invisible Hand. It works for birds and ants just as it does for people.
Rose Wilder Lane was the daughter of Laura Ingalls Wilder. She started out as a Communist, and traveled to Russia after the revolution to see the result. She was so shocked and disappointed by the reality of it that she became one of the founders of the Libertarian movement back in the U.S.
Here she is, writing about her conversation with a Russian worker:
That worker basically said the same thing Hayek was saying in the first quote. And now we have complexity science to formalize this and show that complex systems can not be controlled efficiently from the top down.
If you have not read this, I highly recommend this Hayek paper, one of the most influential he ever wrote. The Use of Knowledge in Society
From the paper:
Let’s say you are in charge of central hammer production. How many hammers should you make this year? How can you possibly tell? After all, the materials and effort that goes into hammer production could also be used for other things people need, so you need to get it right if you want to be efficient.
Well, you could simply ask everyone, “Do you need a hammer?” But if the hammer is free, guess what? Everyone needs a hammer. Hey, free hammer, amirite?
But let’s say everyone is a good Soviet, and they all diligently reply with their best guess at their hammer needs. Again, how can they possibly know? My hammer has a chipped handle, so I need one. But what if my neighbor doesn’t have one at all? How do I establish that my need is greater than his? What if both of us sort of need hammers, but he’s twice as productive as I am with his? How could I ever make the determination that my hammer should go to him?
The answer is that you can’t. And not because it’s hard, but because it’s impossible. It’s impossible because the question, “who should get the hammers?” is UNKNOWABLE because the information required to know it does not even exist. No poll, no survey, no compulsion of anyone can ever extract that information.
So in a capitalist system, how do we allocate hammers? Well, we make some, set a price, and people bid for them. If our price is too low, we raise it until we can no longer sell out our production. If it’s too high, no one will buy a hammer, and we’ll have to lower it. If I sell out my hammers at a profitable price, I’ll raise the level of production.
Now imagine there is a shock to the system. Let’s say a main steel factory blows up. In a planned system, someone has to figure out how this effects the production of everything, and adjust accordingly. But again, you have no way of knowing how the change in steel availability affects everything because it is just too complex.
Now imagine the market sees that shock. What happens? The price of steel goes up. Products that use steel go up in price, which reduces the demand for them,easing the shortfall. Products that were profitable with steel before but not at the new price shift to an alternative like fiberglass. In the meantime, the high price of steel incentivizes recycling, more mining, etc. Eventually, prices settle down at new levels and the distribution of goods across the economy changes to reflect this. Everyone looking out for themselves and making decisions leads to emergent re-organization at a macro level. Information about relative supply and demand flows to everyone who needs to know through the price system.
This process of communal bargaining causes prices to emerge, and the prices represent our collective valuation of hammers as compared to everything else we want. The price fluctuates according to the complex emergent new information about supply and demand. It is the market system and the free movement of prices across all goods in the economy that tells producers how much stuff to make, and consumers which items they should buy with their wages, and which allows them all to smoothly modify their choices when conditions in the world change.
This is the information that is utterly unavailable to central planners. In the case of nationalization, those goods are still bought and sold in a market, so the problem is not so severe - until political considerations come into play and there is the temptation to overrule the market. For example, Hugo Chavez decided that everyone in the country deserved a flat-screen TV, so his government fixed the price of them at some absurdly low value ‘for justice’. The result? No more flatscreen TV’s at all, because no one is going to make them and sell them at a loss. So next he just declared the TV sellers to be hoarding and denying the people, and took over their stores. And because his people didn’t know what they were doing, the stores soon had empty shelves. A few more rounds of nationalizations, price controls and central edicts, and Venezuela, which was one of the richest countries in South America, cannot even feed its own people and is teetering on the precipice of a failed state and humanitarian disaster. As it is, over a million people have fled that country, thanks to ‘scientific socialism’.
To varying degrees, based on how light a footprint the state puts on the existing business. China has some very profitable companies, but they exist largely in the Shenzou ‘free’ zone where they are largely left alone by the government. But it should be telling that a lot of countries in the west went through a spasm of nationalization after WWII, and today it’s almost all gone. Canada had nationalized banks, railroads, gas stations, liquor stores, energy facilities, you name it. Most of it has been re-privatized, and we ever went farther and privatized traditional government functions like air traffic control. It’s worked out fine. The U.S. also went on a spree of deregulation of trucking, rail, airlines and other infrastructure and the results have been pretty much universally positive.
Not a single one I know of. Most of the ‘nationalized’ oil fields that work do so with the help of private companies. When Venezuela nationalized its oil production, output collapsed dramatically.
How many cities have transit systems that operate without heavy subsidy? How many of them bring their transportation projects in on time and on budget? But in any event, the thing about a city running public transit is that the decision-makers are still very close to the people affected by those decisions, and because there are many cities, and therefore we can learn from one city’s mistake and correct it when we try again. Try to imagine what your city’s transportation would look like if it was designed by someone in Washington instead of by local transportation officials. Imagine if that had been done first, before we learned which transit systems are effective in the real world and which aren’t. Imagine how responsive they’d be to change if you didn’t like it. Local politicians are at least answerable to local voters. If the feds screw up your city’s transportation, good luck getting them to fix it.
The lesson there is that if you are going to have government planning, do it at the lowest levels that are possible. Sometimes you need national government decisions, but they should be the last resort when the issue simply isn’t addressable by state or local governments, and they shouldn’t be invoked if the problem can be solved by the market.
I’ll let Hayek have the last word, from his Nobel Prize acceptance lecture: The Pretence of Knowledge