Monday, January 23, 2006

Creative Destruction and Economic Calculation

Ludwig von Mises's debate against Socialism in the 1920's was an important step in the development of economics. He argued that economic calculation, and thus economic growth, is not possible when government owns the means of production. This point is well-accepted amongst Austrian, and many neoclassical, economists. This idea, however, is not accepted amongst most politicians.

Donald Williamson, mayor of Flint Michigan, has proposed that the city own and run an assembly plant. The article quotes Williamson:
"We will (build) our own manufacturing plants that the city funds" he said. "We are going to specialize in nothing but truck accessories."

There is plenty of factory space available and people who are used to working on the assembly line. And once the city proves the plants can make a profit, buyers are certain to come knocking, Williamson said.
Not everyone in Flint agrees with Williamson. Paul Keep, editor of the Flint Journal questions the mayor's plan: "It seems like the private sector ought to be the one developing plants and not the municipality."

I see two significant problems with this policy proposal. First, the unemployment caused by failing assembly plants is certainly difficult for those who lose their jobs, but it is this process of "creative destruction" that is the source of the economy's strength. This process forces resources into more productive pursuits. Second, the government is distorting the system of relative prices that is required for economic calculation. Admittedly, it is only an intervention and not total socialism, but it will distort the efficient flow of resources. Preventing these two forces will slow the economic growth that the people of Flint, Michigan so desperately desire.

While Mayor Williamson may be ideologically drawn to partial (whole?) state ownership of the means of production, his policy will do much to limit the economic prosperity that comes as the result of market prices and the perennial gale of creative destruction.

1 comment:

Nog said...

I love Mises. He did say something to the effect of "an economist who saw a successful socialist economy would be like a mathmatician who saw 2+2=5."