To produce brown rice, to take your example, several “factors fo production” are needed.All sort of machinery, conveyor belts, energy, labor you name it. Before you can start producing your brown rice you need to go to the market to buy all these things. On the market you compete with all other entrepreneurs who want to produce something and need those things you like to buy too. The combined market prices you will have to carry tells you if you can produce at a profitable margin. Or better, you believe you can.
Because factors of production are not specific to the brown rice market, Iron for your brown rice machinery can be used for other stuff as well, you actually bid against other products and their demand.

That way the market prices of the factors of production you need for your brown rice factory, reflect the preference of other uses compared to your product. If a huge desire for say cars is in the market, than the price for iron will rise maybe even to a range where you can not compete for it anymore. This way the market achieves to shift the factors of production to the place where they are valued most and therefor adjusts the production of any good to the demand.

There can never be a market price for factors of production in a socialst or planned economy, because there is only one owner. For a price to come into existens there must be a transaction between 2 parties. One that wants to sell and one that wants to buy. If both agree on a price, than the one that sold benefits and the one that bought benefited too, else, no transaction would have taken place.

The absence of a market of the factors of production and therefor the inability to distribute them according to the demand is why planned economies can not work.

People under the old Socialist economy of the Soviet Union
endured shortages of food supplies.
The central planners had the resources of the soviet state at their disposal yet they could not solve chronic shortages, for such a basic need. The ideology of an egalitarian society
was applied to the Soviet economy by it’s central planners with disastrous results.

But that’s because their economy does not have the profit-seeking( loss-avoiding) entrepreneurs utilizing private property to respond to demand– signaled by price.

The central planners had no market feedback mechanism to guide their production— Freely fluctuating market prices.

Prices aligns production with consumption in the market economy. So a rising price for a good, say brown rice, signals to entrepreneurs that profits are available in producing brown rice. Consumers let them know if their methods are sound if they’re making profits.
Profits attract new entrants into the market. To the extent that new entrants borrow from the limited pool of savings, their demand for the money will naturally raise the price of borrowing (rates).
Potential entrants to brown rice production will judge their chance for profit by comparing the now higher Price of money versus the anticipated price of brown rice in the market. As the new supply begins to fill the market demand, the Price for brown rice falls signaling lower profits and discouraging further production. The crucial economic calculations that entrepreneurs routinely perform functions as an efficient allocator of resources. Motivated by profit making (and loss avoiding) and guided by Price signals from the market.

A function that cannot be duplicated by central planners nor central bankers.

Never thought i get so much so well balanced comments so fast.

Regarding the headline, Dan mentions, this was an eye catcher to get people start reading.

I know that economists are not all, maybe not even in majority, a crowd of useless scholars in an ivory tower.

My idea of the series of articles I am planning is to give a congruent step by step introduction into economics to help evaluate current events from, agreed, one economic point of view. What I like to show is, that this view does not contradict itself and is deductable to the very basic axioms about human beings.

Ok, now I have outed myself for any other economist reading this

Thanks Stephan for the credits from a pro.

Dirk, you might want to reconsider your statement, that man act because he is certain about the future. I agree, that we have some good experience of what would happen if we would not eat, but we are at least a bit uncertain about what exactly will happen, so we take actions, compare the results with where we wanted to be, adjust and act again. This is basically what i meant. In that sense we can never be sure about (1) the outcome of our actions (2) the next step we will take.

In terms of the raw materials, I agree. A thing becomes a good when at least one human has a need for it. And, more important, goods are produced. Even raw materials have to be dug out, or extracted or grown, i.e. produced. I would think that in that sense we are not endangered to ran out of raw materials. We have a thread with the current goods we use to achieve things, like oil used to produce energy etc.

The challenge is not new and I am a positive thinking guy. So I would say we have to come up with something better suited with our goals. If we do not like to breath polluted air, than we better find a way to produce what we think we need by means that do not require to pollute.

I would also question if we can decide what others ought to have. But that is another issue even though it palys a significant role when it comes to your point 3, that is rationing and regulation.

One of my favorite intial arguments against rationing is that it might extend the time we can use a certain good, but it can not invent anything to replace the goods that become too scarce to be used efficiently.

Or in short Planning copes with what is, inventing with what is not…yet.

A couple thoughts came to mind reading your piece.

First, humans generally act because they are certain about the future. For example, if you don’t eat, you may lose weight and look better, but eventually you’ll starve. So most people eat- although there are a few who have warped body image that overwhelms their sense of self-preservation and develop eating disorders. And consider investors- the greater the uncertainty in a market, the greater the unwillingness of them to invest to enter it, wouldn’t you agree?

Second, there is a difference between what people desire and what they should have. For example, a big house is really nice, but on the other hand the cost to keep it heated, cooled, maintained (not to mention mortgage and taxes) is higher. So lots of people built big houses (and the ones I see currently being built are bigger than ever!), though many now regret it.

Third, your last point of substitutionary technology and choices is huge. Oil is a good example, but I think solar is perhaps better. Without humans, all you have is sand and sun, with them- solar panels that can create electricity for billions of years. But this change creates risk for investors.

What makes economics more complex than it should be, in my opinion, are, then, three factors-

1. The opinions of those who believe we are running out of raw materials- air, metals, clean air, land, oil, etc. and thus we need to constrain economic growth;

2. The opinions of those who believe that these shortages require rationing, and therefore, societal/governmental oversite of economic choices;

3. The combined effects of 1 and 2 on monetary policy and interest rates. In the old days, an inventor could ask the King for support, and if the King felt they were smart, he’d give them support with no interest and no concern about running out of goods. Yet, today, when an inventor looks for support he’s often asked to promise repayment of money, with interest, and personally guaranteeing repayment. This has the effect of holding down innovation and creativity, and providing advantage for government-sponsored inventors and entrenched technology.

I feel we fell into this latest economic crash for the same reason we have previous ones- Fed monetary constriction. Now, if we really are running out of scarce goods, then let’s put it on the table. If we really do need government to make our choices for us, let’s put it on the table. And if we don’t believe technology and human innovation can overcome the first two issues, then let’s put it on the table.

But I think that kind of Scarcity Paradigm, Government Rationing worldview is just as warped as those with severe eating disorders…

Just as mathematics is generally based on four basic functions (addition, multiplication, substraction, and division)-in order to truly understand economics at its basic level, one has to learn about scarcity and how that relates to concepts such as “supply and demand.”

After some thirty years of teaching the “dismal science” I am writing a book on economics geared to readers who want to know how it all works.

I discuss and illustrate the basic ideas without the math and graphs and charts yet make the subject as plain as day.

Supply and demand is key, of course, since it’s been proven so many times. Everything is limited! (Even air – have you ever been to Houston or L.A. or Shanghai or any of a thousand spots on the globe on a “bad air day?”)

So is the fact that mankind wants as much of anything as possible.

That leads to an assumption about human nature.

That, in turn, results in people having to make choices about everything, from tuna salad sandwiches to their form of government.

The book, “Economics Without Widgets”, is written in everyday English that anyone can understand. (With he right publisher it can be translated into a gillion different languages!)

It’s designed as a help to existing textbooks – not as a replacement. It’s just common sense.

I would assume that you realize that not all academic economists are stuck in model building. What you describe is the economics of Ludwig vom Mises in “Human Action” and the Austrian school of economics.

I heartily agree with you that most of contemporary economics is a pathetic mixture of mathematical games and political posturing. That is why modern economics is so dismal, rather than being the robust explanation of human phenomena that it should be.

I look forward to more of your common sense.