Emergency Central Planning

by jefftkjefftk1 min read28th Apr 202014 comments

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Covid-19World Optimization
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Central planning generally hasn't worked out very well for countries, and essentially the whole world has moved over to markets. So why are there strong calls for governments to run disaster response, instead of leaving that to markets? For example, governments directly:

  • distributing food and water after a hurricane or earthquake.

  • building out and running new covid-19 hospital facilities, instead of agreeing to fund treatment.

  • negotiating with foreign factories to produce more masks and arranging importation, instead of announcing they'll pay some elevated price to anyone who can supply them.

Normally, everyone is the best authority on what they need. We have a wide range of requirements and preferences, and competition means there are high rewards for resolving mismatches between what people want and what's available. People are also normally able to project their needs out into the future, because the world changes relatively slowly.

Once a disaster strikes, both of these invert. Basic needs become much more important, and these vary a lot less between people: we need food, water, shelter. In the current crisis we're very short on N95 masks, and while doctors probably do have opinions on Ambu vs Teleflex, mostly we just need a lot more of them, quickly. Additionally, people are dealing with something where they don't have much experience, and aren't going to be as good at planning around.

Then you can potentially get the upside of having professionals whose job it is to work full time on preparation, figuring out what disasters are likely and how we're going to want to respond. This is not something the US has been handling well, but perhaps when this is over it will be easier to communicate the need for funding this kind of "we probably don't need it, but if we do it's super important" work.

I don't think this is the only way to handle disasters: if law and custom allow prices to freely move in response to changes in what's available and what people are buying, then price signals are still a very strong tool. Both market and centralized approaches have downsides in crisis situations, with markets magnifying existing inequality, and centralization magnifying existing government incompetence. But people all suddenly wanting the same few things they didn't anticipate they would want dramatically levels the playing field between the two approaches.

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Normally, everyone is the best authority on what they need.

Everyone is the best expert on their wants, their desires, because wants are highly varied and individual and therefore hard to predict.

Needs, on the other hand, are objective and basic. People need food, shelter, etc.

then price signals are still a very strong tool.

The main objection to the free market approach is that allowing prices to rise prevents some people getting what they need.

The fact that someone is willing to buy something tells you some combination of: they need it, or they want it, and they can afford it. Price mechanisms don't rule out wealthy people from buying up things they don't need.

The fact that someone does not buy something tells you some combination of: they don't need it or they don't want it, or they can't afford it. The poor person who does not buy newly expensive supplies during an emergency might need them desperately.

But people all suddenly wanting the same few things they didn’t anticipate they would want dramatically levels the playing field between the two approaches.

Competent central provision outperforms both the options you have considered: the free market, and incompetent central provision.

Everyone is the best expert on their wants, their desires, because wants are highly varied and individual and therefore hard to predict. Needs, on the other hand, are objective and basic. People need food, shelter, etc.

I don't think there's such a clear division. Do I need my bed to be comfortable, and not to hear loud noises at night? Do I need my food to be tasty? What range of temperatures do I need?

If you restrict "need" to be something as limited as "2500 calories, 50g protein, sufficient garments/blankets/climate to keep the surface of the body to ~85F, ...", then I agree most people have similar enough needs that "everyone is the best authority on what they need" stops being true, but you don't have to expand very far beyond that before people start having wide and varied preferences.

You can think of people's preferences along a continuum, and my claim is that in a disaster we all shift along the continuum in the more "basic" direction: we start worrying more about access to food and shelter etc, things that most of us previously had our lives set up in a way where we didn't have to worry about. Since, as I think we agree, things on the more basic end of the spectrum are more shared between people, centralized provision gets relatively more efficient.

The main objection to the free market approach is that allowing prices to rise prevents some people getting what they need.

I agree that's the main objection, and that's why I wrote that taking a market approach magnifies existing inequality. This is true in normal times as well: global inequality is enormous, and even within countries it's still very large.

On the other hand, stores running out of products and hospitals being unable to fill their mask orders also prevents people from getting what they need, just in a way that's less correlated with existing resources. The correlation between "willingness to pay" and "utility" isn't perfect, but it's still positive: hospitals would pay more for masks than construction companies. And you don't have the extra funding from rich people/organizations paying elevated prices to ramp up production.

Competent central provision outperforms both the options you have considered: the free market, and incompetent central provision.

Competent centralized economic planning probably also outperforms markets in general. But this is hard, and there are organizational and incentive problems that mean we shouldn't generally expect governments to be capable of high quality centralized planning. Central provision at a level of competence that it strongly outperforms markets doesn't look like a practical option, or one that's likely to become practical anytime soon.

I agree that’s the main objection, and that’s why I wrote that taking a market approach magnifies existing inequality.

Which is true denotationally, but makes it sound like a dry, technocratic issue conotationally. In fact, the worst case scenario of such inequality is some people dying unnecessarily, while others profit from desperation.

hospitals would pay more for masks than construction companies.

Hospitals aren't profit-making free-market entities everywhere. In a public health system, the hospitals either can't up their bid due to limited funds, or they get extra funds, and the taxpayer has to the foot the bill for what is basically an inability of the market to allocate according to need.

Competent centralized economic planning probably also outperforms markets in general. But this is hard,

But competent emergency provision is a simpler problem, and a solved problem. It's been implemented multiple times.

makes it sound like a dry, technocratic issue conotationally. In fact, the worst case scenario of such inequality is some people dying unnecessarily

It seems to me like you're trying to bring emotional color to one side of this tradeoff, but not considering that it cuts both ways? The deaths of healthcare workers exposed to massive viral loads without sufficient PPE are also unnecessary. Each of these scenarios has deep tragedies.

the taxpayer has to the foot the bill for what is basically an inability of the market to allocate according to need

Higher taxes seems like a very reasonable way to handle this, and not an example of the market failing to function properly? The cost to society of the lockdowns alone is enormous, and hits poorer folks harder.

competent emergency provision is a simpler problem, and a solved problem

I agree that it's simpler -- that's the whole point of this post! But seeing so many countries do poorly here doesn't make me think it's been solved?

The deaths of healthcare workers exposed to massive viral loads without sufficient PPE are also unnecessarily.

So what's the fix?

Higher taxes seems like a very reasonable way to handle this,

They are not necessary, because the stuff you are short of did not suddenly become more expensive to produce. You are trying to use prices to allocate equipment to people who need it the most, and then spending money unnecessarily to fix the problem that that doesn't work.

The cost to society of the lockdowns alone is enormous, and hits poorer folks harder.

The cost in money or the cost in lives?

But seeing so many countries do poorly here doesn’t make me think it’s been solved?

Who's doing it poorly? The US is doing it less than most wealthy countries, and is doing worse than most.

the stuff you are short of did not suddenly become more expensive to produce

I think that's a major place we disagree? If producers know their products will sell for more, options to ramp up production start making more sense.

This would be different for a very short disaster, like a tornado, where all the supplies you will use are ones that have already been manufactured. But for something more sustained, like covid-19, we're still running production facilities, which can be scaled up in a range of ways. You can start running 24hr schedules, working weekends, bringing in extra people to run the line faster. You can pay people to work 12-hour shifts for a month straight without going home: https://www.washingtonpost.com/nation/2020/04/23/factory-masks-coronavirus-ppe/ More money can't solve everything, but it can solve a lot of things.

If producers know their products will sell for more, options to ramp up production start making more sense.

The consumer usually does not foot the cost of increased production. Why would they? In fact, the consumer can reasonably expect lower prices as a result of economies of scale.

The money has to come from somewhere. It usually comes from lenders. If producers can guarantee sales, lenders are happy.

If you build a bigger plant you generally spend more up front but less per unit, while if you take your existing plant and pay workers to go on 24hr shifts your costs may go up a lot. And if you pay for rush handling when things break (couriers for broken parts to minimize downtime) and rush shipping of incoming materials (since slow cheap shipping takes a long time to catch up with your increased production) that's another increase. When you push hard to maximum production you should expect diseconomies of scale.

But those costs still don't have to be passed on to consumers.

You're suggesting that the costs instead come from lenders?

But then production will be limited by the point where the marginal cost of a unit exceeds the price before the emergency (assuming financing is free), instead of the point where the marginal cost exceeds the value during the emergency. That is, you've unnecessarily limited production.

I appreciate the nuance (and variation of expression) these comments added to the post.

The fact that someone does not buy something tells you some combination of: they don't need it or they don't want it, or they can't afford it.

+1, further decomposition on 'don't want it' of don't understand need for it and/or 'outside of normal variance needs' aka insurance subsidies. This is a useful inroad for thinking about the way price signals collapse certain sorts of information and what sort of markets that capture that information (and sell it?) might look like. E.g. many humanities departments basically specialize in repackaging this sort of lost info as politically relevant narratives.

Because central planning is so out of fashion, we have mostly forgotten how to do it well. Yet there are little known historical methods that could be applicable in the current crisis, such as input-output analysis, as Steve Keen writes:

One key tool that has fallen out of use in economics is input-output analysis. First developed by the non-orthodox economist Wassily Leontief (Leontief 1949; Leontief 1974), it used matrix mathematics to quantify the dependence of the production of one commodity on inputs of other commodities. Given its superficial similarity to Walras’ model of tatonnement, it was rapidly adopted by Neoclassical economists, and it became an integral part of mainstream macroeconomics back when “general equilibrium” meant “equilibrium of all the markets in a multi-market economy at one point in time”. It was known as CGE: “Computable General Equilibrium”. When I did my PhD on modelling Minsky’s “Financial Instability Hypothesis” (Keen 1995), virtually every other Economics PhD student at the University of New South Wales was building a CGE model of his or her national economy.
If economists were still skilled today in CGE analysis, then they could easily have answered some vital questions for policymakers during the Coronavirus crisis. The most pressing economic is, “if we identify which products are critical, and the level of output needed to sustain the population during 4-8 weeks of lockdown, can you tell us which other products are critical to maintaining that output, and how many workers are needed?”

In context of COVID-19, one of the things governments can do and markets cannot, is to make wearing face masks mandatory. Spreading viruses around is a negative externality that has a potential to kill people, and yet is under normal circumstances perfectly legal. Government can make it illegal literally overnight.

With regard to resources, the advantage of the government is that it is generally insensitive to profit motive. They may say "in this disaster area, every person will get one liter of fresh water each day", and you don't have to worry about rich people (or people who panicked and decided to burn all their savings) buying all the water, because the government is not tempted to take their money.

Outside of disaster relief, the attitude "I don't really care if we make huge profit or huge loss here, and I wouldn't bother to pick up even the lowest-hanging fruit, because it's not my personal money anyway" can cause a lot of damage. But during the disaster, it increases trust in following the original plan, regardles of financial incentives.