Soviet Planning Fails… Even in America

In 1920, Austrian economist Ludwig von Mises predicted that the Soviet socialist system would fail. “Imagine the plight of a [Soviet] director when faced with a project,” he wrote later in Human Action. “What he needs to know is whether or not the execution of the project will increase well-being, that is, add something to the wealth available without impairing the satisfaction of wants which he considers more urgent. But none of the reports he receives give him any clue to the solution of this problem… Eliminate economic calculation and you have no means of making a rational choice between the various alternatives.”

After he retired, former U.S. Department of Commerce’s Economic Development Administration Director Orson Swindle admitted that Mises was right. “The minute politics enters the equation,” he said, “rational financial management and economic decision making goes out the window.” While a project may seem perfectly good to a Soviet director or EDA bureaucrat, they have no means to judge between multiple projects that seem equally good. In the market, prices, profits, and losses guide producers only to projects that create wealth and away from ones that destroy wealth. This is the most important market process. It assures that resources are not wasted and used most productively.

In our op-ed in The American Spectator, Iain Murray and I describe how bureaucratic pseudo-measures that attempt to quantify economic growth fail in the Economic Development Administration in more detail:

Consider the primary goal of the U.S. Department of Commerce’s Economic Development Administration (EDA), which was established in 1965 as a “Great Society” project explicitly tasked with job creation and economic development. The trouble is that creating jobs does not measure economic development — in fact, it turns economic development on its head. If increasing the number of jobs were the only thing that mattered, a hotel that needed 1,000 workers to build would be twice as valuable as the same hotel built with only 500 workers.

In the real economy, the opposite is true. As economist Frederic Bastiat long ago noted, economic development “lessens the effort needed to have a given result.” When technology reduces the labor required to travel, make a meal, or build a hotel, that’s progress. But by the EDA’s criteria, such savings in labor are an ill to be tamed.

The EDA’s jobs measure leads them to push big-ticket projects that employ more workers, even while losing money. The EDA’s recent$35 million grant for a new convention center in Cedar Rapids, Iowa, will create, the EDA claims, “hundreds of jobs.” Yet by the town’s own estimate, it will lose $1.3 million annually.

As the number of people employed by EDA projects increases, the number of EDA beneficiaries also increases, and more beneficiaries mean more people to defend the agency’s spending.

The agency also lists as one of its goals “to stimulate industrial and commercial growth,” something government has never been able to accomplish. So what to do? Measure the investment EDA projects attract. More investment, like more jobs, means more defenders of public spending. To qualify for a grant, the EDA requires recipients to match it, which can inflate investment numbers. This incentivizes local and state planners to raise taxes and funnel public dollars into projects selected by the EDA’s jobs criterion.

Consider the agency’s recent $2 million grant to build a wine tasting room, gift shop, and banquet hall at the Walter Clore Wine and Culinary Center in Richland, Washington. The Center asked Washington’s state government to supply the matching funds the EDA requires. The state supplied the center with $1.5 million. Still short $500,000, the center now demands $100,000 more from Benton County, where it is located. By the EDA’s reckoning, this whole exercise yielded $3.6 million of value in new “investment,” when in fact it is a huge misallocation of resources…

As the great Austrian economist Ludwig von Mises predicted, socialism was doomed to fail by its attempt to replace price signals with “scientific” measurements and edicts made by state officials. He said, “Because of the absence of economic calculation, what is called a planned economy is no economy at all. It is just a system of groping about in the dark.”

While the EDA stumbles ahead blindly, Americans become poorer.