Mises Wire

Why the Economy Isn't Controlled by One Big Corporation

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More than a century of failure, mass murder, and ruined economies has not been sufficient to dissuade socialists from the idea that socialism—by which I mean Soviet-style socialism, not social democracy—can bring astounding prosperity once the planners work out the kinks.

Sure, the Soviet Union failed, North Korea is a basket case, and socialist countries routinely drive down local standards of living in pursuit of utopia. But success will be achieved just as soon as socialists can find the right way to combine new technologies like “big data” with the right public administration techniques. Then, at last, a functional and efficient socialist state will be at hand.

One of the latest schemes for finding the right “techniques and technologies” that will allow us to crack the socialist nut could recently be found at the avowedly socialist magazine Jacobin in May of this year.

The author, Paul S. Adler, is in search of a model that can allow current “capitalist” economies (which are really just third-way interventionist economies) to transition to a socialist model. He thinks he may have found it.

“We have something like a working model of such a system right under our noses,” Adler concludes, “in many of our largest corporations.”

And what is this model?

According to Adler, large private sector firms have shown that it is possible for one large organization to efficiently produce products and services based on a single internally created central plan. In other words, capitalists have shown that societies can be run using “strategic management,” which sidesteps capitalist competition and decentralization.

Large firms consolidate resources, monopolize whole industries, and then introduce a central plan to grow the firm and increase profits. In Adler’s mind, these firms are essentially self-governing bodies that can act in accordance with internal plans. That is, they may be prototypes for constructing successful socialist states.

Unfortunately for Adler, large firms—even very, very large ones—are not comparable to socialist states, and Adler’s strategy of modeling a socialist state on large capitalist firms is doomed to failure.

Here’s why.

Do Corporations Act like Socialist States?

Adler makes the case for looking at large firms as organizations that successfully implement central plans akin to those employed by socialist planners:

Many of our CEOs behave like closet socialists. Most large firms are divided into more or less self-sufficient “strategic business units” charged with developing new products and assuring their production, sale, and profitability. In public, their CEOs defend the superiority of markets and competition over coordination and planning, but inside their own corporations, where they could leave these business units to compete with each other, they rely instead on comprehensive strategic management.

Such strategic management aims to ensure that the various business units that make up the corporation coordinate their production, investment, and other plans to achieve the best outcomes for the corporation as a whole. Yes, there are some corporations that try to emulate the market in their internal operations, but that approach is relatively rare. In most firms, the activity of business units is coordinated by a strategic vision and plan — much like the activity of enterprises across the country would be coordinated under democratic socialism….

Moreover, in this internal strategic management process, corporations confront in miniature — in the microcosm of the firm — the same challenges as those that bedeviled economic planning on the wider scale in the USSR. The four biggest of these challenges are how to assure democracy, innovation, efficiency, and motivation.

If socialists can employ similar corporate strategies, Adler appears to believe, then a functioning and efficient socialist state might be made to work after all.

It's All about Prices

Socialist economies, however, don’t fail because they haven’t yet found out the right management or planning scheme. They don’t fail because workers in socialist states are unmotivated. They don’t fail because they are insufficiently democratic.

Socialist economies fail because they lack a functioning price system.

To some outsiders looking in, it may seem like huge capitalist firms have worked around the price system. It might seem like they make all their planning decisions internally and that through “vertical integration” these firms have sidestepped the need of an external marketplace.

But things are not what they seem. Large firms with large amounts of vertical integration are nonetheless quite reliant on a functioning price system outside the firm for purposes of economic calculation and planning. Without other firms and without an economy external to the firm, corporate planners have no way to even guess if current strategic plans and production methods are efficient. 

For this reason, if a capitalist firm were ever to grow so large that it subsumed all markets—leaving no external functioning price system—it would fail just as a socialist state fails. Without prices, a firm’s managers—just like socialist planners—can’t calculate or estimate what ought to be bought or produced and in what amounts.

Murray Rothbard addressed this in Man, Economy, and State when he wrote:

paradoxically, the reason why a socialist economy cannot calculate is not specifically because it is socialist! Socialism is that system in which the State forcibly seizes control of all the means of production in the economy. The reason for the impossibility of calculation under socialism is that one agent owns or directs the use of all the resources in the economy. It should be clear that it does not make any difference whether that one agent is the State or one private individual or private cartel. Whichever occurs, there is no possibility of calculation anywhere in the production structure, since production processes would be only internal and without markets. There could be no calculation, and therefore complete economic irrationality and chaos would prevail, whether the single owner is the State or private persons.

The difference between the State and the private case is that our economic law debars people from ever establishing such a system in a free-market society. Far lesser evils prevent entrepreneurs from establishing even islands of incalculability, let alone infinitely compounding such errors by eliminating calculability altogether. But the State does not and cannot follow such guides of profit and loss; its officials are not held back by fear of losses from setting up all-embracing cartels for one or more vertically integrated products. The State is free to embark upon socialism without considering such matters. While there is therefore no possibility of a one-firm economy or even a one-firm vertically integrated product, there is much danger in an attempt at socialism by the State

In the real world, an unhampered or even mostly free economy does not allow for a single firm to become so large that it can take over the entire economy. So long as other firms are able to enter the scene, markets will arise, and a price system will exist.1

It's Not Always Profitable to Do Everything Yourself

The reasons for this are complex, as Rothbard explains, but in a competitive marketplace firms must constantly reevaluate if they are employing their resources in the most profitable way. So long as it is legal for new firms and entrepreneurs to enter the marketplace (as is the case in a nonsocialist economy) managers must ask themselves: is my auto-producing firm more efficient when producing its own steel, or would it be better to lease that land and equipment to some other other producer? Is it most efficient for our home-building firm to own its own forests and cut its own lumber? Or should the firm acquire the lumber from someone else?

It is often assumed by socialists—including, apparently, Adler—that firms always benefit when they own their own factors of production. It is assumed that a firm could force down lumber prices, for example, if that firm owned all the forests and employed all the lumberjacks. But it is not at all necessarily the case. In many cases, a firm might become more profitable if it acquires its factors of production from the outside.

One reason for this is that entrepreneurship often creates new and more economical ways to produce and deliver goods and services. And this is often done outside the large, inflexible organizations that may already be heavily invested in a certain way of doing things. As Per Bylund has noted:

Entrepreneurial production is often — and should be — done small-scale using highly flexible and adjustable production processes using technology that is effective at that scale but hopelessly costly at larger scale. Economies of scale come into play after the market value of a good has been discovered and consumer demand appears to be way beyond what existing firms are able to satisfy.

At this point, these firms can invest in increasing output. But they would typically do so while at the same time shedding stages of production that are no longer necessary to carry out internally — they thus “shrink” in terms of vertical integration while expanding production volume. This is a race to the bottom as competitors attempt to undercut each other by offering ever lower prices, eventually reaching the minimum production cost. This process can at any time be disrupted by new innovation.

Thus, it's easy to imagine a case in which a firm voluntarily makes itself smaller so as become more profitable and more efficient. 

To many socialists, this does not compute. It is often assumed that capitalists think bigger is better and that larger organizations are more profitable. 

This, of course, is far removed from how states—and especially socialist states—function. For a state, it is always better to become larger and more monopolistic while exercising more control over the means of production. But this process also has the effect of destroying the price system, and thus destroying the possibility of economic calculation. The end result is economic chaos and ruin. 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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