Chapter 04 · Why does the system fail?

Mises saw it coming

7 min

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This chapter builds on the ones before it. You can read it now, but it will not count towards your progress until the earlier chapters are done.

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Picture this. You've just been asked, right now, to decide how much steel France should produce next year. Not a range. An exact number. You have every technical figure you could want: stockpiles, production capacity, industry forecasts. But one piece of information is missing - and without it, your number means nothing. That piece of information is what socialism quietly removed. And that's what dooms it, not tomorrow, not maybe: structurally.

In the previous chapter, we saw how warps the signals and ends in crashes. But what happens if, one fine morning, the State decides to scrap those signals altogether? Well, socialism gave it a shot.

We're going to push the logic all the way down, to zero prices. Not because any real economy is fully there, but because the extreme case makes the mechanics visible. Reality comes back right after in this chapter, in quieter form."

In his 1920 essay "Economic Calculation in the Socialist Commonwealth", Ludwig von Mises⁠(opens in a new tab) showed why this model runs into a logical wall.

Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.
—Ludwig Von Mises

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The Grand Planner's challenge: steel or concrete?

To unpack that slightly grand-sounding quote, I'm appointing you head of the Central Planning Committee. Congratulations on the promotion, sincerely!

Your first mission: build a bridge to connect two regions. Simple, right?

Your engineers lay out two technical options:

Steel: extremely strong, but it takes a huge amount of energy to produce.
Concrete: simpler to make, but you need an awful lot of it.

The catch? You have no prices. The State owns everything, so nothing is bought or sold. All you've got is technical reports on tonnes of ore or sand.

Quiz

So, which material will you use?

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Without prices, you're comparing apples and oranges. How many tonnes of steel 'are worth' how many tonnes of concrete, plus how much energy, plus how many work hours? You're missing a common unit to compare things that have nothing in common. The price is that unit. Take it away, and the question has no answer at all.

As Mises put it, the planner is like a ship's captain who has the maps, the sails, and the crew - but no compass and no stars. He can sail. He just can't tell if he's heading for dry land or a reef. A bit like the Titanic, and we all know how that one ended.

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Capitalism faces exactly the same problem. Except it figured out a way around it. Not a genius coordinator. People placing bets.

When an entrepreneur builds a bridge, they put their fortune on the line. They say \"I bet steel is worth more here than somewhere else.\" If they're right, they win. If they're wrong, they go bust. That skin in the game is what creates a new piece of information: the right price.

Because price isn't magic. It's accumulated knowledge. The visible result of thousands of bets like theirs. When steel is ridiculously expensive, it's because plenty of other people need it at the same time, for rockets, rails, buildings. The price carries that to you without you needing to know.

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Careful, though: that doesn't mean the market is always right. An entrepreneur who cuts corners on quality can poison their customer. Asbestos was sold for decades before being banned. The market gets it wrong, and sometimes badly.

The difference lies elsewhere. The market has a way of noticing it messed up: loss, bankruptcy, lawsuits, customers walking out. Asbestos ended up banned, and the firms ruined. The planner has none of these signals. He never goes bust. His mistake never comes back to him. It piles up in silence, until the day it all breaks at once.

That's what prices give you, and the planner has nothing like it. Not a perfect outcome. A way to correct mistakes.

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And that's still assuming the planner can at least gather all the info. Second problem, even worse: the info isn't anywhere in one piece. It's scattered across thousands of heads. Take something mundane, a beer. Behind it, thousands of decisions nobody orchestrates. Click on each card:

0/3 explored

01🌾Grow

Grow

On what land?What climate?What hop variety?

02🏗️Build

Build

With what materials?What brewery size?What location?

03⚙️Manufacture

Manufacture

Copper, steel, or stainless?What capacity?Which supplier?

04🍶Bottle

Bottle

What type of glass?Can or bottle?What labeling?

05🚛Transport

Transport

Road, rail, or ship?What distance?Refrigerated or not?

06🏪Distribute

Distribute

Which stores?What selling price?What margin for the distributor?

Every step involves thousands of decisions. One entrepreneur on glass reads the prices ahead. Another on hops does the same. It's a distributed intelligence no central brain will ever match.

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You might be thinking: "but we still have prices." Right. Except we never abolish all prices at once. We kill one, here or there. The number stays on the label, but it's been hollowed out. It's the planner's problem, locally.

The case of China and its water

Mises's theory plays out, unfortunately, in China. For decades, the government has kept the price of water at a token level to favour industry⁠(opens in a new tab).

Water-hungry industries have settled in the north, in a semi-arid region.
Factories waste water (why be careful when it's basically free?).
Farmers stick with inefficient methods.

The result? The groundwater is now bone dry. Domino effect: electricity runs short during droughts, factories shut down, raw material costs shoot up. A full-blown mess, basically.

All of this, because the price of that resource had been hollowed out. It existed on paper, sure - but it no longer said anything real.

The case of France and its healthcare

In France, it's quieter. The State sets the price of a consultation and caps doctors' earnings. Result: the price no longer says where care is missing or where there's too much of it. Impossible to tell where more doctors are needed, or what to fund first. So we ration with rules instead of prices. Bureaucracy grows to manage what prices no longer manage. And a rising share of the budget goes to paperwork rather than care.

The problem with socialism isn't the malice or incompetence of planners. It's structural.

Without prices, you can't calculate. Without calculation, you can't allocate. And without allocation, you waste.

Faking the money: the compass lies.
Blocking one price: the compass lies in one place.
Abolishing all prices: the compass is gone.

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So how do we get out of this dead end? That's where comes in. It doesn't just criticise: it offers a way of understanding the world built on human action.

And the worst part is, you already know a price that gets faked all the time. The most important one of all. The price of time: the interest rate. The one a central bank sets by hand, for the whole economy, all at once. The compass of every long-term project, faked by decree. You're starting to see where we're heading.

Ready to swap your glasses?