To understand why the Austrian logic relates equally well to national and domicile planning, it's best to first understand the problems implicit in the former approach to the economy. In a socialist approach to an entire society, rational calculations in economic matters are impossible. Critical comparative tools of scarcity, relative preference, and opportunity cost cannot guide the allocation of resources due to the lack of a common denominator. The central planning authority does not have the needed information nor can he process such information if made available to compare the costs and benefits of his decisions.
A laissez faire system, where individuals freely pursue their own interests, provides this calculating device in the form of market prices. As Mises writes, money prices alone make it possible to bring costs which originate through the expenditure of various goods and different qualities of labor to a common denominator so they may be compared with prices which were realized or which can be realized on the market. Consequently, we can use prices to gauge the probable effects of past and future actions. The lack of market prices engenders severe crises in economic allocation as the socialist planner cannot know in concentrated form the dispersed bits of incomplete and often contradictory knowledge of how to best use resources. Given the inherent diversity of knowledge spread across the range of circumstance, only a dynamic market system can convey to individuals knowledge that enables them to dovetail their plans with others and the perpetual changes in the incidences of time and place.
A similar calculation problem, although less daunting, plagues the attempt to centrally plan the allocation of resources within a collegiate residence, especially in regard to grocery purchases. For example, my roommates and I pooled our money and collectively bought food every two weeks for the first three months we lived together. It seemed like a terrific idea that would simplify our time at the supermarket and implicitly unite us as a household. Each individual would pay an equal amount and receive an equal return. At least this is how it was supposed to work in theory.
In three months of such practice, however, the three of us unwittingly experienced firsthand--a microcosm of the essentially similar experience of 20th Century USSR citizens--the chaos of socialism that FA Hayek dedicated ample scholarship to expose. Problems arose from the qualitative and quantitative divergence of our tastes for food consumption. I like to buy simple and cheap products that can be prepared quickly and consumed in high quantities. My roommate Jaime, on the other hand, enjoys cooking relatively more elaborate meals with a cornucopia of more expensive vegetables. My other roomate Brad hated the seafood products Jaime and I favored and liked to order food from restaurants more frequently than we desired (the end of the post explains why Brad's referred to in past tense) .
Thus, when we bought our stock of groceries for the next two weeks I wanted spend the money on tuna and peanut butter, Jaime wanted to spend it on fresh mushrooms and crawfish tails, and Brad wanted to spend the money on gatorade and potato chips. Obviously, tradeoffs that could have been made via our individual ordinal valuations and purchases could not be made as efficiently with a collective approach. Every dollar spent on one product desired by one individual caused one less dollar spent on another product desired by another individual. Uneccessary conflict and contempt arose as we all went to the grocery store and argued over what to purchase.
Moreover, the greatest amount of friction occurred when only one or two of us went to the supermarket to spend our pool of money. Without the input of all three, the smaller shopping contingent allocated far more funds to the products they preferred, being insulated from the actual costs and benefits derived from each individual valuation. For example, Jaime and I spent Brad's share of money on seafood items when he wasn't present, thereby, neglecting his interests. Our collective calcuations inevitably held flaws that precluded a rational allocation of groceries. When such calculations were limited to smaller groups, or in other words, when we centralized knowledge and power to make decisions, the outcome for all those outside of that central group deteriorated.
This deterioration is precisely what occurs on a grander scale of socialism. The central planners of nations and their favored interest groups sacrifice the interests of the body of consumers--those who the legislators are supposedly working on behalf of--to appease their own values. The socialist rulers use the economy not to create conditions of equality and optimal resource stewardship but to shift the bundle of consumption and production in the economy in their favor at the expense of everyone else. Every dollar taxed or inflated away from the citizens that is spent on career-prolonging pork by politicians is one less dollar that citizens could have put to their most highly valued use. This situation is fundamentally the same to my experience buying catfish with Brad's money when he wasn't there.
Consumption brought forth further complications. The communal ownership of the food created undesirable incentives that exemplified the tragedy of the commons. Although we were all good friends, the lack of property rights discriminating among due food consumption thwarted our intended benevolence. The tragedy of the commons struck hard as each of us had an incentive to eat as much and as quickly as possible or lose that food to the next person in the kitchen. The greater the share one consumed, the more bang they received for their buck. For poor college students, this incentive shouldn't be discounted. I vividly remember how angry I was at finding all of the deli meat gone after a week in which I ate only one sandwich. After the next shopping trip I made sure to eat as many sandwiches as possible, as did my roommates. Within 2 days we ate 2 weeks worth of sandwiches. This overconsumption and subsequent underconsumption was unfortunately not limited to sandwiches.
Not surprisingly, our collective approach to grocery shopping failed spectacularly. The system of central decision-making and communal ownership did not reflect our individual preferences and incentives. We needed to disperse the right to make decisions and bear responsibility for such actions. Otherwise, the wilderness of socialism would have further mired our household in chaos much like the woods of destitution and waste that plagues citizens in centrally planned economies.
As a side note, Brad ended up moving out of the house before the lease expired largely due to the enmity fomented by the treachery of our collective approach. This transfer of conflict from resource allocation to groups of people is also not exclusive to the roommate experience.
