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Central Planning by Business Is Not the Same as Central Planning by Government

Advocates of capitalism say: “CENTRAL PLANING DOESN’T WORK!”

Also advocates of capitalism: “CORPORATIONS DO WORK!”

Sensible socialist: “Uhhh … aren’t corporations all centrally planned?”

This is a relatively new, and even imaginative critique of markets which has recently been circulating the meme-o-sphere. It looks like a pretty clever point at first glance, but it completely misses the mark on how and why markets work and why we advocate for them. There are several key differences between a so-called central plan issued by the CEO of a company and those issued by a commissar, or even a democratically elected senate or parliament.

Do the people whom services are produced for actually like the product? How can we tell? Well, on the free market people have limited resources and they need to make choices on what to spend those on. There is a tendency for them to buy the things they value the most first, and to get the stuff they could make do without if they have enough left over. This means that businesses have the feedback mechanism of profit and loss to let them know if, when it comes to the crunch, people value what they are selling enough to buy it at the expense of everything else they could possibly buy instead. This lets them know if their “plan” is any good or not. The government has to tax people and then make a wild guess.

In addition to that, the “central plan” of the corporation is competing with the “central plans” of several competitors, who may be doing certain things better than them and certain things worse. They can look across to try and figure out what others are doing right and tweak their plans in light of the evidence of trial and error between several different service providers. If someone makes an innovation, they can copy or even improve upon that idea if it is suitable to their business also. There is a place for variation between products, as every consumer has slightly different preferences, but fundamentally, if they fail to keep up with the better “central plans” of their rivals, then their own, inferior plans will be eliminated from the market—they’ll either have to close up shop or try another product which they are better suited to producing. Since the commissar is delivering a monopoly service, he cannot compare the relative merits and success of alternative variations.

Also, companies can look at the accounting books of every single department and see exactly which ones are contributing to the bottom line of the company and which are simply wasting resources and fix problems this way. Sometimes they can even go down to the employee level and see who is contributing what to the ultimate benefit of the company, product, and consumer. If certain employees are not pulling their weight, they are harming the business and its customers and can either be trained or made redundant to find a job they are better suited to. Without the mechanism of profit and loss it would be impossible for a government agency to track down exactly which part of the process is causing a product or service to fail and fix that part of the process, because they have no accounting. They may have raw data on how many people are working, what resources are being used and how much of them, etc., but these are all meaningless facts without a way to measure which are contributing and which are being wastefully misused.

Business owners have a huge incentive to cater well to their customers so that those buyers come back time again and tell their friends. They don’t want to lose them to the “plans” of their competitors. There is also an incentive for corporations to save on unnecessary costs to keep prices down. This means they can invent innovations or find ways to make less scarce resources stretch further or find ways to recycle biproducts into useful goods instead of wasting them. Because the government is forever spending other people’s money on other people, they don’t need to economize, because the money does not belong to them. They also don’t worry too much about the quality of the product, because it’s not going to be used for them, and the consumer has already been forced to paid for it, whether they like it or not, through the tax system. They can’t “take their business elsewhere,” so to speak.

Even with all the incentives and data which the feedback mechanism of profit and loss provides to corporations, mistakes are routinely made in the “central plans” of businesses. Often, they completely misjudge what the customer is going to want, and they can lose millions in sunk costs, which they invested in research, machines, or the production of products that end up in the bargain bin, sold for less than it cost to make them. But while all this is taking place, the consumer has always had the alternative of buying something better from a rival business. They are not going to go hungry because a new strain of corn is tasteless and dull. Someone else has produced something delicious and inexpensive for them to eat instead. Even if mistakes bankrupt an entire company, the negative effects of that—however regrettable—will still only be limited to a relatively small number of people. The owners, staff, suppliers, and loyal customers of that particular organization. On the other hand, if the central planners of an entire economy make a mistake, which they are only bound to do given the scale of the decisions on their hands—not to mention the impossibility of acquiring all the requisite information to make good decisions at that scale—that mistake is liable to harm millions and millions of people. It could harm everyone in the country, or even in the world!

These are some of the reasons why, no, corporations are not really “centrally planned,” and certainly not planned in the way a planned economy is planned. Millions of people, from “high-flying” owners, CEOs, and board members to assembly-line workers and line managers who observe the production process and write reports to people who have to read them and make judgments, to the very consumer on the street who has to decide between parting with their limited cash for the wonderful blue widget or the sensational red doohickey, or the tremendous purple whatchamacallit which combines some of the features of both, all contribute feedback to the plan. The plan is eternally optimized in light of the feedback mechanism of profit and loss, which allows the producer to meet the needs of the consumers in a mutually beneficial fashion, and on a basis of voluntary adoption of services. No such optimization is available to government officials, who do not acquire the funds directly, through meeting people’s needs, but through the tax system, independently of the performance of their plans. They have to “best guess” how to allocate precious resources, without access to any objective data on what works and what doesn’t work when tested against other potential solutions.

This is a good objection, though, because it is clever, and allows us to shine a light upon why exactly markets work, and why centrally planning services has always—and will always—fail. It’s not because we just didn’t elect good enough planners in the past; it’s because planning without the feedback mechanisms of the market is an impossible task.