Megan McArdle On Why Better Computers Won't Make Communism Work

See Yes, Computers Have Improved. No, Communism Hasn't. Excerpts:

"In retrospect, Communism seems wildly stupid, or at least, incredibly naive. Did the people who dreamed up this system not understand the enormous incentive problems they were creating?"

"But the idealists weren't entirely unaware that when monetary incentives disappeared, they would need to find other ways to get people to do things.

They were also aware, however, of a point that has eluded some of their cruder critics, which is that monetary incentives are far from the only reasons that people do things. People don't take care of their kids because they're getting paid for it. Nor were the millions of Americans who headed off to World War II mostly chasing those princely military paychecks. Most of the folks who volunteer to help the homeless, or just to make a casserole for the local potluck, are not thinking "There's a buck in it for me somewhere." The idealists behind Communism thought that using non-monetary incentives could compensate for the loss of the money motive -- and that there would also be great efficiency gains from eliminating wasteful competition and no longer goading consumers to generate superfluous consumer demand.

They were quite wrong. Competition turns out not to be so wasteful; it makes a system resilient. That misunderstanding was a symptom of a larger issue called the socialist calculation problem. We think of prices largely in reference to ourselves, or other individuals, which is to say that we mostly see them as the highest barrier to getting something we want. But as we pull back to look at society, or the globe, we see that they are in fact an incredibly elegant way to allocate scarce resources.

This was best explained by Friedrich Hayek in his essay "The Use of Knowledge in Society." Some good like tin becomes scarce, perhaps because a large tin mine has failed, or perhaps because there is a new and very profitable use for tin that is soaking up much of the supply. The price rises, and all over the world, people begin to economize on tin. Most of them have no idea why the price of tin is rising, and if they did, they wouldn't care; they just switch to another metal, or start recycling old tin, finding a way to bring global demand closer in line to global supply. A lot of that is possible only because of price competition.

You can think of this as something like a distributed computer network: You get millions of people devoting some portion of their effort to aligning consumption with production. This system is constantly churning, making billions of decisions a day. Communism tried to replace this with a bunch of guys sitting around in offices, who occasionally negotiated with guys sitting around in other offices. It was a doomed effort from the start. Don't get me wrong; the incentive problems were real and large. But even if they could have been solved, the calculation problem would have remained. And the more complex an economy you are trying to manage, the worse a job you will do.

The socialist calculation problem is not fundamentally an issue of calculating how to produce the most stuff, but of calculating what should be produced. Computers can't solve that"

"The most important piece of information that the price system provides is "How much do I want this, given that other people want it too?" That's the question that millions of people are answering, when they decide to use less tin, or pay more for tin and use less of something else. Computers are not good at answering this question.

How would a computer even get the information to make a good guess, in the absence of a price system? Please do not say surveys. You know what did really well on surveys? New Coke. Also, Donald Trump, who is not going to be president. We are, in fact, back to some version of the incentive problem, which is that when the stakes are low, people don't put too much thought into their answers."

"when it comes to unpleasant labor like slaughtering animals, mining ore and scrubbing floors, even an advanced society needs to figure out exactly how badly it wants those things done. And so far, nothing beats prices for eliciting that information."