James d. Gwartney

Central Planning Has Never Worked
The man of system is apt to be very wise in his own conceit. He seems to
imagine that he can arrange the different members of a great society with as
much ease as the hand arranges the different pieces upon a chess-board; he
does not consider that the pieces upon the chess-board have no other principle
of motion besides that which the hand impresses upon them; but that, in the
great chess-board of human society, every single piece has a principle of motion
of its own, although different from that which the legislature might choose to
impress upon it. If those two principles coincide and act in the same direction,
the game of human society will go on easily and harmoniously, and is very
likely to be happy and successful. If they are opposite or different, the game will
go on miserably, and the society must be at all times in the highest degree of
disorder.
(77)
— Adam Smith (1759), The Theory of Moral Sentiments
As previously discussed, governments can often coordinate the provision of public goods—a
small class of goods for which it is difficult to limit consumption to paying customers—better
than markets. Many people also believed that government officials can manage all, or most, of
the economy better than markets. Since the Bolshevik revolution in 1917, numerous
proponents of central planning claimed that the general populace would be better off if
government officials used taxes, subsidies, mandates, directives, and regulations to centrally
plan and manage the key sectors of the economy. Under central planning, the market forces we
ELEMENT 3.9
The economy is far too complex to be centrally planned and efforts to do so will result in
inefficiency.

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discussed earlier are replaced by government diktat involving direct command and control, as
under the old Soviet system. To a lesser extent, such government control can occur in any
society where elected political officials substitute their verdicts for those of consumers,
investors, and entrepreneurs directed by market forces.
It is easy to see why central planning has a certain appeal to the novice. Surely it makes
sense to plan. Aren’t elected officials and government experts more likely to represent the
“general welfare” of the people than business entrepreneurs? Won’t government officials be
“less greedy” than private businesses? People who do not understand public choice economics
and the operation of the political process often find the argument for central planning
persuasive. Economics, however, indicates that central planning will be inefficient. There are
five major reasons why this will be the case.
First, central planning merely substitutes politics for market decisions. Real-world
central planners (and the legislators who direct them) are not a group of omniscient selfless
saints. Inevitably, the subsidies and investment funds allocated by planners will be influenced
by political considerations. Think how this process works even when decisions are made
democratically.
Expenditures will have to be approved by the legislature. Various business and
unionized labor interests will lobby for investment funds and subsidies. Legislators will be
particularly sensitive to those in a position to provide campaign contributions or to deliver key
voting blocs. Predictably, the political process will favor older firms with more lobbying
experience and political clout, even if they are economically weak, over newer growth-oriented
firms. In addition, the chairmen of key legislative committees will often block various
programs unless other legislators agree to support projects beneficial to their constituents and
favored interest groups (“pork-barrel” projects). Given this incentive structure, only a naïve
idealist would expect this politicized process to result in less waste, more wealth creation, and
a better allocation of investment funds than markets. It is not just managers who lack
incentives to achieve the greatest efficiency. Workers who are guaranteed jobs and are paid the
same regardless of how hard they work have an incentive to minimize their effort. The Soviet
reality was captured in the old phrase: “They pretend to pay us and we pretend to work.”
(Another well understood Soviet expression was: “Anyone who does not steal from the state

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steals from his family.”)
Second, the incentive of government enterprises
(?)
 and agencies to keep costs low, be
innovative, and efficiently supply goods is weak. Unlike private owners, the directors and
managers of public-sector enterprises have little to gain from improved efficiency and lower
costs. Rather than serving customers to build their agencies, they rely on a government budget.
Predictably, they will be motivated to pursue a larger budget. A larger budget will provide
funding for expansion, salary increases, additional spending on clients, and other factors that
will make life more comfortable for the managers. Managers of government enterprises and
agencies, almost without exception, will try to convince the planners that their activities are
producing goods or services that are enormously valuable to the general public and, if they
were just given more funds, they would do even more marvelous things for society. Moreover,
they will argue, if the funding is not forthcoming, people will suffer and the consequences will
likely be disastrous.
It will often be difficult for legislators and other government planners to evaluate such
claims, not only because there will be thousands of such claims, but also because there is
nothing comparable to private-sector profit that the planners can use to measure performance
of the enterprise managers. In the private sector, bankruptcy
(?)
eventually weeds out
inefficient producers, but in the public sector, there is no parallel mechanism for the
termination of unsuccessful programs. In fact, poor performance and failure to achieve
objectives is often used as an argument for increased government funding. For example, the
police department will use a rising crime rate to argue for additional law-enforcement funding.
Similarly, if the achievement scores of students are declining, public school administrators will
use this failure to argue for still more funds. Given the strong incentive of government
enterprise managers to expand their budgets, and the weak incentive to operate efficiently,
government enterprises can be expected to have higher per-unit costs than comparable private
firms.
Third, there is every reason to believe that investors risking their own money will make
better investment choices than central planners spending the money of taxpayers. Remember,
an investor who is going to profit must discover and invest in a project that increases the value
of resources. The investor who makes a mistake—that is, whose project results in losses—will

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bear the consequences directly. In contrast, the success or failure of government projects
seldom exerts much impact on the personal wealth of government planners. Even if a project is
productive, the planner’s personal gain is likely to be modest. Similarly, if the project is
wasteful—if it reduces the value of resources—this failure will exert little negative impact on
the income of planners. They may even be able to reap personal gain from wasteful projects
that channel subsidies and other benefits toward politically powerful groups who will then give
their agency or enterprise added political support. Given this incentive structure, there is no
reason to believe that government planners will be more likely than private investors to
discover and act on projects that increase society’s wealth.
Fourth, the efficiency of government spending will also be undermined because the
budget of an unconstrained government is something like a common pool resource. As we saw
in Part 2, Element 1, private ownership provides a strong motivation to take the future effects
of current decisions into consideration. But when money and resources are owned in common
there is little motivation to consider the future. For example, fish in the ocean are owned in
common until someone catches them and, as a result, many species are on the verge of
depletion because of overfishing. All fishermen would be better off if the fish were harvested
less rapidly so there would be more opportunity for their populations to reproduce. But,
because of the common ownership, each fisherman knows that fish he does not catch today will
be caught by someone else tomorrow. Thus, there is little incentive for anyone to reduce his or
her catch today so more fish will be available in the future.
Similarly, when interest groups are “fishing” for government spending (that is,
lobbying political planners), they have little incentive to consider the adverse consequences of
higher taxes and additional borrowing on future output. The proponents of each spending
project may recognize that future output would be greater if taxes were lower and private
investment higher. But they will also recognize that if they do not grab more of the government
budget, some other interest group will. Given these incentives, inefficient spending projects
and perpetual budget deficits are an expected result. See the discussion in Part 3, Element 6, on
the problem of chronic government budget deficits.
Fifth, there is no way that central planners can acquire enough information to create,
maintain, and constantly update a plan that makes sense. We live in a world of dynamic

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change. Technological advances, new products, political unrest, changing demand, and shifting
weather conditions are constantly altering the relative scarcity of both goods and resources. No
central authority will be able to keep up with these changes, politically assess them, and
provide enterprise managers with sensible instructions.