Economic planning, in which the government uses policies such as taxes, subsidies, spending or nationalization to direct economic outcomes, is back in vogue. Its proponents often compare economic planning to planning carried out by individuals in the economy. The difference, they argue, is that national economic planning can help achieve larger economic, national, or social goals that the individual could not achieve.
However, man is not infallible. Even the best laid plans of mice and men often go wrong. All plans, whether individually or centrally derived, can fail. Of course, economic planners recognize this fact. In the event of failure, they often argue, the economic planner can simply discard the current plan and adjust, just like the individual. On the face of it, this argument sounds reasonable enough. But this is a case where economic thinking shines: incentives matter.
Identifying a plan’s failure can sometimes be easy (although, as Donald Boudreaux notes, it is). not always obvious): if a goal is set and the goal is not achieved, we can say that the plan has failed. However, Why The plan failed is often a difficult question to answer: Did the plan fail because it is inherently a bad plan? Or did the plan fail because it was poorly executed?
Individual planners and economic planners face different incentives to understand why a plan fails. The individual planner, faced with most (if not all) of the costs and all of the benefits of his actions, faces strong incentives to find out why a plan failed and whether or not it should be abandoned. If my get-rich-quick plan is to sell tobacco-flavored toothpaste and no one buys it, then I am faced with the incentive to find out why. If I continue to invest my resources in tobacco-flavored toothpaste, I will certainly be worse off: those resources have alternative uses and the benefits of using those resources to make tobacco-flavored toothpaste outweigh the costs. In other words, I committed too many resources to develop this product. Given my goal (get rich quick) and the fact that I have to bear the full cost of using those resources, I have an incentive to consider the plan a failure and use my resources in some other way.
Economic planners do not face the same incentives. They face neither the full costs nor the full benefits of their plans. As a result, they face perverse incentives to find out why the plan failed. If some economic planner decided that selling tobacco-flavored toothpaste would be a national priority, how might they respond to the plan’s failure? Maybe, by some stroke of luck, they would realize that people don’t want tobacco-flavored toothpaste and abandon the plan altogether. However, it is more likely that the planner would conclude that too few Resources were spent on the production of tobacco flavored toothpaste rather than too many resources. The planner can spend more resources on advertising or other means to achieve his plan. This is especially true if their job, for example as director of the Federal Agency for the Promotion of Tobacco Flavored Toothpaste, depends on the success of the plan. In short, while the economic planner could If they realize their plan has failed and give up, the incentives are not aligned to make this outcome likely.
Tobacco flavored toothpaste is a crazy example, but we see this behavior all the time. One example in particular comes to mind: COVID-19 price controls. During COVID-19, the federal and many state governments imposed price controls on essential goods. The logic was that this would preserve the necessary equipment for hospitals and prevent price gouging. However, shortages of these goods predictably arose and hospitals struggled to acquire the products. Instead of recognizing that the plan had failed to increase available goods, governments doubled down, blamed corporations and began prosecuting “hoarders” and “price gougers,” exacerbating the problem. The shortages persisted and the policies that caused the failure persisted (in fact the policy actually worsened the pandemic). The planners didn’t see it Why their plan failed.
Bad policies persist in both the private and public sectors. Planners are unwilling or unable to admit that their plans have failed and adapt. Bad managers drive companies out of business, and the inability to adapt drives individuals out of business. However, when individual plans fail, these resources are freed up for other purposes. When economic plans fail, government planners often divert more resources, increasing waste.
In short: as long as it is that way possible that economic planning could work as a series of experiments, keeping the ‘good’ and throwing away the ‘bad’, we have little reason to think that such an outcome probably. The incentives to understand why a plan failed are simply not there.
Jon Murphy is an assistant professor of economics at Nicholls State University.