Planned Economy and Economic Planning: What The People’s Republic of Walmart Got Wrong about the Nature of Economic Planning
Abstract: Leigh Phillips and Michal Rozworski’s The People’s Republic of Walmart entered the scene in 2019 with the remarkable idea that mammoth firms such as Walmart and Amazon, by being able to direct huge volumes of resources—sometimes with the capacity of entire countries—without an inner market to signal prices, are living evidence of the viability of a collectively planned economy. Moreover, they argue that the nondemocratic command system that often accompanies the structure of firms is due to their operation in a profit-seeking market system. Using the Austrian arguments propounded during the economic calculation debate, this essay shows that not only are firms, like other organizations, unable to substitute the market in coordinating their economic plans, but that their nondemocratic elements arise precisely from their function as “miniature planned economies,” demonstrating that the authors have misunderstood the nature of economic planning in a market economy. It is further argued that the problems that a planned economy would face without market signals would no less obstruct the efficient and successful operation of private firms if they ever tried to eliminate the market creating them.
JEL Classification: P21
Márton Kónya ([email protected]) is a BA student of applied economics at the Corvinus University of Budapest.
I would like to thank everyone who aided me in writing this paper, especially Dr. Karl-Friedrich Israel of the University of Leipzig and my good friend Bálint Madlovics.
The People’s Republic of Walmart contains many ideas that are truly provocative to someone with Austrian views. In some everyday political circles, the book is cited as exposing how many neoclassical scholars’ objections to the high ideas of socialism are in fact unsubstantiated. It would seem that this book has become one of the fundamental “weapons” of today’s socialists. While reading it, the possible sources of its ideas became ever more apparent and its errors in economic theory showed themselves, which with a more careful study of Mises’s works would not have occurred.
The book’s argument, grossly simplified, is the following: socialist governments of the past failed to produce an efficient planned economy that could rival the market system, but this failure is almost entirely due to technological constraints that have since disappeared. Not only is a modern planned economy not impossible, but capitalism is partially operating it right before our very eyes. Megacorporations, such as Amazon and Walmart, are working at an economic capacity far greater than that of most of the former socialist countries. They are not only afloat, but can supply millions upon millions of consumers and arrange their production processes without having an inner market, which would need a price system based on private property to operate. These companies are the living evidence that the fears and objections of Austrian thinkers such as Ludwig von Mises and F. A. Hayek are wrong and that we have a system that can coordinate human efforts without a market.
This critique revives, in their accurate forms, the thoughts of Austrian school thinkers, mainly Ludwig von Mises, for he refuted the errors in the book long ago. Although this might be true for other arguments in the book as well, those elements which are not strictly connected to economic calculation will be avoided. Some of the book’s other fundamental ideas often appear in socialist works: for example, the exploitation theory of capital, the robber baron myth, the denial of the tragedy of the commons, the linking together of anarchism and the command economy, the idea that overproduction causes depressions, etc. These questions have been dealt with in countless books and essays. Instead, this essay’s purpose is to show that Mises and Hayek’s writings, if read correctly, already refute Phillips and Rozworski’s arguments and that Austrian economics provides more insight into the workings of large corporations than the book’s authors claim to.
This essay will first consider the book’s main terminological confusion, followed by a short restatement of the basic problem of economic planning. The second section applies these findings of the Austrian thinkers to the cases of large corporations. The final chapter briefly discusses the relation between planning as it occurs in a market economy, and in a collectivist economy.
I. PLANNED ECONOMY AND ECONOMIC PLANNING
The central error of the book is that it uses two fundamentally different terms synonymously, economic planning and planned economy, and views both as incompatible with the market. But one of them is not only compatible with market economies, but is one of their foundational tools: economic planning. In order to make a clearer distinction between the two phrases, they need to be defined first. Simply put, economic planning is the process by which the various participants in the economy make calculations about the economic steps they must take in the future. In contrast, a planned economy is an entirely centralized system in which the allocation of everything from raw materials to capital goods, to consumer goods is implemented by a central authority, without the market mechanism.
To a naïve reader the only difference may be the scale of the planning operation, but the distinction is much more fundamental. To briefly summarize and illustrate the problem1 that Mises originally pointed out in Economic Calculation in the Socialist Commonwealth ( 1990) and later elaborated in Socialism ( 1981) and Human Action (1949), let us take a planned economy. There are no profit-oriented firms or capitalists, and all means of production (including labor) are under central control. Let us suppose that the board of directors is tasked with building a railroad connecting two cities between which there is a high mountain. Let us suppose further that somehow the board of directors knows that the routes going through and around the mountain would increase social welfare to the same degree, and that their goal is to use the society’s resources in the most economical way (meaning that they must only use up resources that are not needed by an enterprise that promises a higher increase in social welfare). In short, we have simplified the scenario so that the directors only have to wrestle with the problem of finding the lowest cost possible. For the sake of simplicity, let us say that only two means of production are necessary to build a railroad, engineering and steel, and let us establish that the route through the mountain requires a lot of engineering work but less steel, and that the route around it takes more steel and less engineering. The problem, then, is to determine whether the society needs steel or engineering more. How can this be discovered? The other uses of the two factors must be known.
Consider engineering. It is the foundation of modern industry. There are immeasurable known uses for it (and even more that are unknown!). What if, it might be asked, more tractors are made instead of the railroad, as they might be more beneficial? How can this be known? With more tractors, there could be a larger output of goods that require the use of tractors. But these are usually not final goods, but various crops in their raw forms, so it is not known how much these would increase the utility of people. We have to go further down the chain of production: it must be known how much the increased crop yield would benefit the industries that use them (such as livestock farms, canning factories, restaurants, mills, etc.). It needs to be realized that an increase in the quantity of tractors affects a huge number of processing industries that serve the consumer in a wide variety of ways. In the end, what the consumers think about these alternative uses of more tractors, manifested as final products, would need to be known. The citizens would presumably have to be asked for their preference between the railroad route and every existing and potential food and drink item whose production at some point involves a tractor. But in this case, the same process would have to occur with every existing and potential use of engineering as a means of production, not just tractors, since engineering can also has many other applications. (Of course, this assumes that collecting the data of people’s preferences is technically feasible, despite the known fact that there are various obstacles that prevent the acquisition of some basic information. It would be wrong to assume that a person expresses the same pattern of preferences under surveying conditions as he would when acting under real circumstances. He might answer carelessly, just to get the survey over with. It may even be in his interest to falsify a survey.)
The same exercise can be done with steel. Social welfare might be increased in millions of ways using steel, not just by laying down rails. For example, frying pans might be made out of it. But how important are frying pans? In order to know this, we would have to know how much every consumer (and potential consumer) of frying pans would value more pans. If, for example, the people have various kinds of frying pans, they might want the railway between the two cities more than an additional pan. But if they have nothing to cook scrambled eggs in but would happily go from city A to city B on foot, they would probably want the pans more. And we must consider not only consumer goods, but the staggering multitude of production goods made of steel (machinery, for example), not to mention those consumer goods that can be created with production goods made of steel.
Add technology to this problem, which, although in a free market society is a blessing, in this case appears to be a great problem. In Human Action, Mises writes: “It is permissible to say that the present state of technological knowledge makes it possible to produce almost anything out of almost everything” (p. 695). A couple of lines later he gives the example of tap water: in modern society, we gain drinkable water by cleaning local water deposits or by using expensive aqueducts to transport spring water to the cities. But with modern technology it is equally possible to produce drinkable water synthetically. Today, of course, people smile at such a suggestion, but only because they cannot even imagine a world without sensible e
Article from Mises Wire