The Economy Is Not A Factory - Nor Should We Try To Make It One

A common issue with economists and political economists from left to right is that they misunderstand the market economy as simply being a set of production processes. We see this in Lenin’s statement that the Soviet Union should be run like one big factory. We see it in market socialists from Frederic Taylor to Oskar Lange attempting to respond to (and resolve) Mises’s argument that socialist economic calculation is impossible. And we see the same thing in the efficiency (and market failure) nonsense of Chicago school economists. The misconception is the same: that a working (and progressing) economy is about the management of existing production.

To be fair, if the economy is truly a matter of simply maintaining production processes, then it is certainly possible to rationally plan the whole thing. It may take more computing power than was possible in the 1920s and 1930s, but the data are all there. The problem is here only of a practical nature: to collect the data and to make sure the algorithms run smoothly enough to not cause delays in adjusting the central plan.

This is very far from how the economy actually works, however. It is quite the opposite: what is important in the economy is what happens before there are production processes in place. All the production efforts we see in the present economy are only the tip of the iceberg if even that. The observable structure of production is but the result of the market process doing its work by consistently weeding out ineffective, improper, and unfit production.

It is thus a fundamental mistake to think that Misesian economic calculation is about the allocation of resources within and between production processes. The profit and loss system is not primarily about the adjustment of capital investment across industries and firms, but about the determination of which industries and types of production will exist—and who will be involved in this future production.

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