The Abject Failure of Central Planning During COVID

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The Abject Failure of Central Planning During COVID

In the first half of the 20th century, two Austrian economists, Ludwig von Mises and his most famous student, Friedrich Hayek, argued that central planning under socialism could not work. Their argument had to do with the inability of central planners to set prices in the absence of information about demands and supplies that only free markets could reveal.

Although their argument was airtight, it is not the only sound argument against central planning. The case against central planning is also more general. Not only do central planners lack the information needed to set rational prices, but also they lack the information needed to decide which industries and markets should be shut down and which regulations should be imposed on various industries during a pandemic. Just as with central planning of the socialist variety, central planning to deal with COVID-19 caused many misallocations. All of these problems became apparent, to those who were paying attention, in the way that the vast majority of governments around the world have dealt with COVID-19 from about February 2020 until the present day. Just as we have learned that central planning of prices under socialism does not work, so we should realize that central planning of markets, jobs, industries, and human interactions during a pandemic does not work.

It’s even worse. Central planners also lack the incentive to get good information. They have very little “skin in the game.” Incentives in government are very different from incentives in the for-profit private sector. When owners of businesses make good decisions, they benefit and when they make bad decisions, they lose. But the central planners are government employees. When they make good decisions, their pay does not increase and even if it did, the increase, unlike in the for-profit private sector, would have no relation to the benefit generated by their good decisions. When government employees make bad decisions, their income will not fall by even a penny. So they can advocate locking down, or order the locking down, of large parts of the economy without having to worry about how bad the results of their actions are. For that reason, they often don’t bother to get good information and often simply ignore important information that’s staring them in the face.

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