The Fundamental Rules of Economics

[Sam_Stone]

@k9bfriender

Goods don’t just appear, and at just the right time and in the right quantities, contrary to the magical properties ascribed to almighty capitalism. And, once again, contrary to the claims of capitalism’s telepathic powers to tell what everyone wants and needs, the way that the shelves get stocked is exactly by central planning. That it’s a bunch of managers at Kroger’s headquarters rather than bureaucrats in a government office doesn’t change the fact that it’s not decisions being made at the local level that determine price and availability of products.

Have YOU ever worked in a supermarket? The one I worked at had a manager who made purchasing decisions. We counted inventory constantly (pre-bar code days), and there were formula for how much stock to order based on how,quickly it was depleted. Sometimes the manager would go with his gut based on experience and local knowledge central planners don’t have.

Inventory management is complex. Sometimes corporate buyers make decisions from head office, sometimes local buyers do. But even when the company is ‘centrally planned’ and send the same product to every store, they will have their decisions informed by local conditions. No buyer worth his salt is going to keep sending Kosher fish to a store that never sells any. The data on demand comes back quickly, and plans are modified.

But as I said earlier, companies are not immune to the fallacy that central planning is ‘efficient’. Companies that centralize decision making wind up at a competitive disadvantage. I mentioned Boeing. I could also mention GE Digital’s failure with their move to a ‘center of excellence’ rather than letting decision-making happen by engineers in the field. Being a corporation doesn’t stop you from being stupid. Luckily the market does. Boeing is losing market to SpaceX and others. GE Digital went downhill after their attempt to centralize, and competitors like Siemens and Allen Bradley and smaller software players grew.

@k9bfriender

I also don’t see how the “free market” works better for the car example given above. The claim is that if there is an increase in demand for cars, then a centrally planned economy would not be able to cope, because there would also be increased demand for tires and other components that go into the car, and the “central planners” wouldn’t be able to figure this out. But the free market doesn’t address this. A car manufacturer increases its production, and calls up its tire supplier for more tires. The tire supplier tells them that they are out, since all the car manufacturers are ordering more tires, and it will take them a while to ramp up their production, especially since their rubber distributor can’t handle the increased demand they they and other tire manufacturers are asking for, what with the sudden increase in demand for materials that go into making rubber.

That’s just wrong. See my supply chain chart above. Modern supply chains evolve redundancies in part to handle surges in demand. But the important point is the coordination mechanism. Here’s what happens:

A surge in demand for tires occurs. If tires are in short supply, the price goes up. This reduces demand for tires in other areas where demand has not increased, while stimulating production of tires where there is excess demand.

If the tire manufacturing industry is short of rubber, the price of rubber rises. This stimulates production of rubber, while also signalling to,other users of rubber to conserve or move to alternatives.

This force propagates through the economy. An increase in car demand can, through the rippling of prices through the economy, change demand for elastic bands, which can stimulate the use of alternatives, which leads to more zip-loc bags, or whatever. Demand is increased or decreased in industries no planner ever could have thought of, while production, mining and all other aspects of production change to match the new reality.

This is because prices are the information bus of capitalism. Prices are a miracle - they distill everything you need to know about supply and demand for your specific thing into one number, constantly changing, affecting behaviour of millions of people in a gigantic, complex computing system called the economy. The emergence of a price is the result of millions of calculations by individual free agents with their own cost functions. Almost like a neural network.

This is also why one of the worst interventions a government can make is to fix prices. Price fixing destroys the information needed to make economic calculations.

@k9bfriender

At least in a command economy, there actually would be someone whose job it is to communicate with the entire supply chain and get it to ramp up production, rather than every step waiting for its supplier to be able to increase supply when asked. I mean, there’s a lot to criticize about China, but they seem to be growing their economy pretty well with it mostly centralized.

That’s what Gosplan tried to,do. They had thousands and thousands of such people trying to determine the right amount of production for everything. Theynwere dedicated professionals trying to,make it work, and they utterly failed. Central planners in China are failing hard. There are entire enpty cities as monuments to the failure of Chinese central planning.

And again, try to imagine the complexity. That one single factory I mentioned has 50,000 suppliers. Each one of those suppliers has its own supply chain. Do you really think a person can go through that and assign production numbers to every,one of those in a coherent fashion that won’t lead to shortages and gluts of material? And then somehow make sure they all get the raw material they need to mke those quotas - and also manage the changes to other industries caused by the re-allocation of materials?

Now do it for the thousands of other factories and every company in their supply chain. And re-do it constantly, because demand is fluidmand ever-changing.

Oh, and since you’ve done away with prices and competition, forget about efficiency improvements, because no one will have a vested interest in putting in the work.

@k9bfriender

I’m not saying that a pure command economy is superior, but I am saying that a pure capitalist system isn’t either. Some places and times a bit more from column A is appropriate, and in some places and times a bit more from column B is.

We need government. We need rational, stable rules. Complex systems only function against a bedrock of universal, simple rules. We need someone to watch for predatory monopolies, for externalities like pollution, and for national security. We need a civil society, and a social safety net. We need law courts to settle torts and police to prosecute fraud and other economic crimes.

But their activities should always be for the purpose of improving the functioning of the market, not to replace it. Industrial policy is a big NO. Nationalization is terrible. Central planning by coercive government is the last thing we should want.