The reason socialism inevitably wastes resources is rooted in the fact that, under such a regime, the state owns all means of production (or what Mises called “goods of higher order”). Without private ownership of the means of production, there is no genuine exchange of the means of production. There is no transfer of ownership of plots of land, of factories, of commercial lathes, or of stockpiles of iron ore and bauxite. With no exchange of the means of production, there are no prices of the means of production. (Each price, after all, is among the terms on which one thing is exchanged for another.) And with no prices of the means of production, the manager of a factory that produces, say, lawn mower blades can’t possibly know whether the lowest-cost method of producing these blades involves the use of steel or of aluminum or of carbon fiber.
Without prices in the means of production, this factory manager must fly blind. Her decision on which material to use is a wild guess. Suppose she decides to produce blades using steel. She requisitions some quantity of steel from the central planning bureau, and the bureau complies. A few hours later, however, the bureau receives another requisition for steel, this time from a comrade charged with the responsibility for manufacturing automobile engines. But because the bureau already shipped steel to the blade factory, there’s not enough steel now to ship to the engine factory.
How is anyone to know if this quantity of steel is better used to produce blades or engines? Without market-determined prices, such knowledge is impossible.
In a market economy, blade producers and engine producers compete against each other for steel. The factory owner who offers the highest price for some amount of steel is the one who gets that steel. And the factory owner who offers the highest price for that steel is the one who expects to use that steel in the highest-valued manner – that is, to produce outputs for which consumers are willing to pay higher prices. Also in a market economy, producers of other outputs – outputs from bird feeders to I-beams – observe the price of steel as it compares to the prices of aluminum, carbon fiber, and other materials. These other producers make their own production plans based on these prices. Producers for whom the price of steel is attractive buy steel for use; producers for whom the price of steel is unattractive buy aluminum or some substitute input for use.
Socialism, however – by eliminating prices of each of the countless different means of production – eliminates this method of determining the allocation of steel and other inputs. Steel and other inputs, not being priced, are allocated without any knowledge of which particular outputs are produced at lowest cost using steel and which outputs are produced at lowest cost using some other material.
The result is a massive waste of resources. Many outputs are produced using inputs that would have produced more output – measured in terms of economic value – had those inputs been used otherwise. The result is a systemwide, gargantuan failure to get as much output as possible from available inputs.
As Mises summarized the fate of a fully socialized economy, “As soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible.”