Intellectual Arrogance and a Managed Economy

Last time I told about Bessie, the pony who was smart enough to open gates and steal grain but not wise enough to know that such antics could get her in trouble. She died painfully by eating seed oats, treated to kill pests. Like Bessie, we humans can be too smart for our own good. While we should not shrink from difficult tasks, we should also realize that there are some things that remain beyond our ability. That is probably nowhere more apparent than when we try to manage things we cannot fully understand. One such area is the economy.

“But wait,” you say. “We have lots of economists in this country. Surely they understand the economy.”

No they don't, at least not in the detail necessary to manage everything for our benefit. Nobody does. There are just too many factors for any person or group of people to get a handle on all of it. That is one reason that managed economies like that in the Soviet Union were such failures. By trying to determine how much of each product would be produced they created shortages of every commodity except misery. The intent was good but the task was beyond human ability. The economy is just too complicated and interwoven to be managed efficiently.

Consider even a small segment of the economy, something like shoes. How would you manage the production of shoes for your country? Obviously you need to know how many are needed and in what sizes. You would look at numbers of children and adults, how many male and female and of what ages are in the populace. However that is only the start. People need different kinds of shoes, some for the office, some for construction work, some for farming etc. Children need shoes suitable for play and everybody should have some suitable for exercise.

What about preferences? Are you going to allow different styles? Will you provide for hikers, skiers, boaters and other special needs? If so how will you determine how many of each should be produced? Will the country's rulers get better shoes than the janitor in the school? There are probably hundreds of shoe types possible, each needed in twenty or more different sizes. Produce too many of a size or type and some go to waste, too few and someone goes without.

Even if you are able to determine how many shoes of each type and size to produce, your task has only begun. Where will you get the raw materials, the equipment, the facilities, and the workers to make those shoes? You need leather for the uppers so you need to be certain that enough cattle are slaughtered to provide that leather. In the process you may upset your co-worker who is trying to provide enough milk for the country. You may also upset another co-worker who manages meat and is already plagued with an excess. You need machinery for your shoe factories, but for that you compete with another co-worker who is trying to equip coat factories.

Those problems multiply for every component of your shoes. Shoe manufacturing draws on nearly component of the economy, mining, machinery, agriculture, transportation, etc. Furthermore, each component you need raises similar questions. The farmer cannot produce cows for your leather without feed and land for those cows. The land that provides his hay can also be used to produce carrots, potatoes, cabbage etc.

The result is that the entire economy is tied together by competing supply chains. A change in any demand can cause shortages or excesses in seeming unrelated commodities. An extra demand for ice cream can cause farmers to keep marginal dairy cows instead of sending them for slaughter. That can cause a shortage of leather which in turn causes a shortage of baseball gloves. Children with no baseball gloves may turn to other pursuits and cause shortages of other toys. Meanwhile manufactures of baseball bats may suddenly find that they have produced more than the market will consume.

That sort of thing spreads throughout the economy. Every item in the grocery store requires a myriad of inputs before you put it on your table, and every one of those inputs competes for resources with other things.

In theory all that is governed by mathematical rules called differential equations. However even the simplest differential equations require calculus and can be difficult to solve. The equations that govern the economy are not simple, they can involve hundreds of terms and many of those terms are not precisely known. Worse yet, because of the interdependence in the economy, all those equations are coupled together. You cannot solve just one, you have to solve nearly all of them at the same time. The math required would be horrendous, even if we knew enough to write the equations.

So do you think you could successfully manage shoe production for a country, or even a village? If not, think of the difficulty of managing an entire economy, all those complicated equations with terms not precisely known, all of them coupled together. No wonder managed economies don't work. In fact it doesn't work to manage even part of an economy. Because of the interconnectedness of the whole, you cannot change one part without causing changes throughout. Many of those changes will be unanticipated and often your best intentions will create problems.

Unfortunately that difficulty (impossibility really) does not prevent some from trying to impose a managed economy on their countries. There are people with enough intellectual arrogance that they think they can do it. I believe that arrogance comes from a combination of lack of understanding of the problem and what Sowell calls the unconstrained vision, or the vision of the anointed. Such people simply do not recognize their own limits and thus feel free to overstep their abilities at the expense of the citizens.

A market economy clearly has its problems but those are seldom as severe as what a group of smart but unwise people can do if they try to replace it with a managed economy.

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