I have written many times about the absurd claim offered by many academics, especially those of an interventionist or socialist bent, that the free market has inherent "waste" which can be "corrected" by government intervention. ("Bad Economics Part 10", "Pro Hoc, Ergo Propter Hoc", "Cutting "Costs"", "Misunderstanding Profits",  "Two Examples of "Inefficiency" in Capitalism", "The Threat of Perfection") In most of my posts, I dealt with the obvious absurdities, such as the fact that support elements for capitalism, eg. advertising, are criticized for not producing profits, which is akin to blaming the quartermaster's office for not inflicting casualties. Advertising may not produce profits itself, but without it the mechanism of capitalism, which as a whole produces far more profit than it eats up in costs, will not function. In other posts I also dealt with some lesser issues, including the one I am going to discuss here, but, for the most part, the current issue is a new one. I have mentioned it, but not in any detail.

And so, what is it I plan to discuss tonight? And how does it relate to the supposed "waste" of capitalism?

Well, one of the objections often offered, beyond the many non-productive costs, is that capitalism leads to pointless reduplication of efforts. Rather than having one factory of the optimal size, producing goods using the optimal method, we have multiple factories, of various sizes, using various methods, producing goods that differ form one another, sometimes in trivial ways, often, as a whole, producing more than the public wants. In the eyes of these interventionist theories, this is a sign of waste, a sign the free market could be streamlined, and a command economy could work much more efficiently.

But there are many reasons this is nonsense.

First, and most significantly, the interventionist theory requires perfect knowledge to function. Not only perfect knowledge, but knowledge that is impossible to obtain. ("The Limits of "Scientific" Management", ""The Limits of Technocracy",  "The Limits of Econometrics", "Knowing Our Limits", "Bad Economics Part 4", "Bad Economics Part 16")

For example, there is no way to easily determine what would be the optimal size of a factory to produce a given good. Thanks to those pretty charts in ECON 101, many have been misled into thinking determining the best site of a factory is a technical question, but it is not. There are technical questions, but that is only part. As the inputs are not measured in terms of quantities, but of price, the optimal size is not only a function of technical issues, but of future costs of all the inputs, and all possible substitutes, and there is simply no way to know this in advance. Which is why even the most knowledgeable managers can differ over the question, and there can be many successful factories of differing sizes. Some work well under specific conditions, some have a good average, though optimal under no specific condition, and so on. However, even then, what was optimal may later prove to be less than ideal, and may even go under due to an inability to adapt.

And that is a second problem with the interventionist ideal. With a competitive system, with many factories, it is possible to use a competitor, or even another factory of the same firm, as a baseline against which to measure one's performance. It will allow a given firm to see how it is performing in the current market conditions, what configuration and selection of inputs works best, which is proving more productive and which less, and so on. With a government setting a single size, a single method and a single set of inputs, there is no way to tell whether the current choice is good or bad, whether the market is changing to make the current choices more or less efficient and so on. There is simply the current set of decisions, and nothing else. Nothing exists to indicate whether it works well or poorly.

And then we have the goods produced. The assumption in this criticism is largely based on the authoritarian belief that there is a single "best" product, which all should be forced to choose. I have criticized this enough that I shall not say much. ("The Inevitability of Bureaucratic Management in Government Enterprises", "Bureaucracy Revisited", "Bureaucratic Management and Self-Policing", "In Praise of Contracts ", "How the Government Corrupts Relationships", "The Inherent Disappointment of Authoritarianism",  "The Right Way", "The Most Misleading Word", "Luxury and Necessity") However, there is one aspect we need to mention. That is the fact that manufacturers do not simply vary products for fun. They offer variety in an attempt to better please a consumer, and, in doing so, may often uncover a want or preference that no one realized existed. For example, until diet sodas were created, there was no demand for them, and yet they clearly fulfill a desire. Similarly, no one imagined, say, a soda flavored like Dr. Pepper would be popular until it was created. But without the random variation of the competitive market, without the small and large differences, and periodic absolute novelties, no one would know whether or not there was a consumer desire for such goods, and the public would be less pleased by the total economic system.

Or to put it more simply, name a consumer sensation that originated in a communist nation. (And t-shirts bearing the face of Che do not count.)

There is a similar issue with the factories themselves. As I suggested above when conditions change, what was once an efficient method or an optimal blend of goods may no longer be such. I mentioned this above in terms of lack of ability to adapt, but it goes farther than that. Not only cannot firms following a single pattern adapt, or even know they need to adapt, at some point, those firms become untenable, and fail. And when they do so, there is no replacement available, and everything must be started again, once more creating a single configuration from scratch, drawing on some technical data, some assumptions about the future, and a large number of mostly arbitrary assumptions. In a competitive market, things are much different. As things change, some firms suffer, some thrive, and, as the trends continue, all begin to adjust to follow the patterns which prove successful. As a result, it is almost impossible to imagine a change which would wipe out the entire industry.

And it works from the other side too. With only a single good offered, without variation, or with only a set of accepted variations, a change in consumer desires could easily wipe out the market. In fact, it is more likely in a monolithic market than a varied one for a single, simple reason. Barring those good which are absolutely essential and without substitute (if such even exist), any good is only worth the satisfaction it brings. If there are many variations on the market, it is likely, as taste and wants change, that some will remain popular, others will not. But with only a single variation, or a small range of variations, it is far more likely at some point the good will become unpopular enough that sale will no longer support the costs of production. Of course, if the entire market is run in such a manner, eg as in the old USSR, it is possible goods will still be purchased, as the dearth of goods makes it necessary to buy whatever one can for future barter, but the underlying reality is that the consumers are receiving ever diminishing satisfaction from the industrial output of the nation.
 
If all of this sounds a bit familiar, it may be because the same arguments have been offered before, notably in my argument for federalism. ("Consolidation and Diffusion",  "Man's Nature and Government", "Prelude", "Negative and Positive Rights", "Symmetry and Asymmetry in Government", "Planning For Imperfection", "Why I Am Not A Libertarian", "The Benefits of Federalism", "Culture and Government") Of course, that only makes sense. The primary argument for federalism is that it prevents the imposition of a single mistake upon everyone, while also creating multiple alternatives, allowing one to compare the choices to select the best, to determine the direction of current trends, and to adjust to changes quickly. There is even an analogy in the variety of consumer wants to my argument that federalism benefits form allowing decisions tailored to local needs or preferences.

Nor is federalism the only analogy. For example, when discussing regulation (), I also argued that one weakness of regulatory bodies is that they impose a singular orthodoxy, which may result in either the enforcement of an incorrect set of beliefs, or else may simply exclude an idea because it is too peculiar, even though it is correct. Or, in a more general sense, it is the pattern of big government in general ("The Inevitability of Bureaucratic Management in Government Enterprises", "Bureaucracy Revisited", "Bureaucratic Management and Self-Policing", "The Inherent Disappointment of Authoritarianism", "Zero Tolerance and Big Government") Big government is entirely directed to imposing a single "right" answer, ("Liberalism, Its Origins and Consequences", "The Right Way"), be it economic ("In Praise of Contracts", "Greed Versus Evil") or restraints on expression ("The Danger Inherent in Banning "Bad Ideas""), big government is always a centralizing influence which has all the same weaknesses discussed here.

Before I wrap up, there is one issue specific to this case I failed to discuss. And it is important, as it is one of those points on which many concede victory to the proponents of socialism's efficiency. The free market does contain what some would consider "waste", at least those who believe they can somehow create a command economy which produces only what is needed, and nothing more (though that definition is, in itself, somewhat meaningless -- see "The Most Misleading Word" and "Luxury and Necessity"). The free market does, on a regular basis, both start ventures which fail to return a profit and later fail, and also produces goods which either are not wanted, or wanted less than other goods.

For many, these bankruptcies, unsold goods, failed products and the rest represent a waste of resources and a sign that socialism would be superior to "chaotic" capitalism. But that is the wrong perspective. These are not waste., they are one of the costs of capitalism, . And as capitalism's benefits are so great, the benefit far outweighs the cost. ("Two Perspectives", "Bad Economics Part 11", "Environmentalism For The Economy?", "Why"Negative" Economic Indicators Are A Good Thing", "An Analogy") Yes, goods and labor are spent on firms which fail, and producing goods which are less urgently desired, but it is only by trying multiple possibilities that we can discover the best solution. In other words, were we to limit the use of goods and labor, we would lose the many benefits and improvements gained by competition.

On the other hand, while socialism only produces goods that it deems necessary, there is no way in which it can truly know what the consumers desire, and so even though they do not "waste" resources on excess goods, they are almost certain to produce either goods wanted less than the alternatives, or more of a given good than the true demand requires. However, as socialist, interventionist and other economies either have no or distorted market indicators, they have no way of knowing this, and so claim they produce only what is needed, while the free market produces waste. It is a false argument, and a self-serving one, but even if ti were entirely true, the free market's "waste" still buys such huge benefit, it would be worth every wasted product. When we consider that the other systems produce waste of their own, just hide it better, then there is simply no argument left against the free market.

And that is why I claim there simply is no possible reason to centralize all production, which means there is no reason to allow government control of any sector of the economy. There simply is little or no gain from such a practice, while the costs are quite high.

POSTSCRIPT

A similar phenomenon can also be seen in my writing on public education. See "Reforming Education", "You Don't Drown in a Glass of Water - Vouchers Revisited", "Why Vouchers are not the Answer" and "Never Ascribe To Evil, A Discussion of Education".

POSTSCRIPT II

I noticed while writing this essay that I was linking to the same articles several times. Again and again I considered deleting these multiple links, so as not to appear redundant. However, after a little more thought, I decided to keep them. After all, the links were relevant each place they were included, and since people usually only follow links when placed near a topic in which they are interested, it seemed safest to leave the links attached to each subject, so that the reader who was curious could easily find the essay relating to his interests.

Finally, as I am mentioning links and old articles, I would like to mention here one article that I think is quite a brilliant one, and yet one which I cite all too infrequently and whose topic I have not revisited anywhere near often enough. That is my post "An Analogy", which is probably the best, and shortest, refutation I have ever offered to those who complain of the anarchic conditions of a true free market.