(POST 2 OF 2) The Structure of Production Under Central Planning: Skousen’s Contribution to the Socialist Calculation Debate

Let us use the example of shoe production to demonstrate the inherent problems with central planning [and specifically under the “random pricing” scenario]. Suppose a price is set too low for the production of cowhide, causing inventories to decline and a shortage to arise. As the incentive to produce cattle declines, cattlemen fail to build up their herds for future slaughter. The central board realizes its mistake and raises the price for cowhide. This is the right decision, but it takes time for cattle producers to rebuild their herds. Meanwhile, there is a current shortage of cowhides, even at the higher price. The next level of production, leather making, is severely restricted in its output because of the cowhide shortage. It must look for substitutes, or expensive foreign imports, but the search may not be entirely successful, especially in the short run. It also takes considerable time to find synthetic leather or other substitutes. 

Now we come to the final stage of shoe production. Suppose a shoe factory has been given a quota (demand) to produce ten thousand shoes in a given time period to satisfy consumer demand. The factory possesses all the tools, labor, and materials necessary to achieve its quota except the shoe manufacturer has only enough leather to produce five thousand shoes due to the shortage of leather. 

How many shoes will be produced? Only five thousand. Half the consumer demand will be met. Output is always limited to the availability of each complementary capital good. As Menger puts it, “With respect to given future time periods, our effective requirements for particular goods of higher order are dependent upon the availability of complementary quantities of the corresponding goods of higher order.”

In sum, the shortage of cowhide leads to a shortage of leather and eventually to a shortage of shoes. In addition, those capital goods and labor associated with the shoe industry will be underemployed because of the shortage. Thus, delays, shortages and underemployment of labor and resources are inevitable under such a random pricing system. The shortage problem is intensified even more when the process of transformation involves a wide variety of complementary factors. Thus a shortage of a widely demanded complementary factor can create more havoc as the production process moves toward final consumption.

—Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), 173-174.