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“We all know what to do, we just don't know how to get re-elected after we have done it.”

— Jean-Claude Junker

November’s guaranteed winner: Economic illiteracy 

In the 1980s, the Soviet Union was the world’s largest producer of shoes, churning out an estimated 800 million pairs a year — more than three for every Soviet citizen. 

But those same citizens often found themselves waiting in line for hours on end just for a chance at finding a pair that might fit.

When they did, it tended to be a pair imported from abroad. 

Scott Shane, the author of Dismantling Utopia, attributed this seeming conundrum to the Soviet state’s control of information: “When the state controlled prices, it deprived producers of information about demand.”

Without the information about demand embedded in prices set by a free market, it was impossible to say what types and sizes of footwear people wanted.

So state planners simply told the shoe factories what to make based on their best guess of what people might want, though they often used prices in Western countries as a guide, according to one of those planners.

The result was mountains of shoes people didn’t want and massive shortages of the ones they did. 

It wasn’t just shoes, of course — Soviet planners were given the impossible task of setting prices for an estimated 12 million different products (the Sisyphean futility of which somehow makes for an excellent novel).

They did not have much success, which should have been predictable.

But as late as 1989, just two years before the collapse of the Soviet Union, it took a visit to a Texas grocery store for someone as highly placed as Boris Yeltsin to realize that central planning doesn’t work: “When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair.”

The cause of his despair was the realization that the central planning of Soviet bureaucrats could not possibly compete with the decentralized non-planning of markets. 

In the Soviet Union, “prices functioned as propaganda,” as Shane described it, “and therefore malfunctioned as economic indicators.”

When economic indicators malfunction, the result is empty shelves at the grocery store.  

I’m hopeful it won’t ever come to that in the US, but we seem to have forgotten some of these more basic lessons of economics (if we ever knew them). 

We’re being asked to believe, for example, that tariffs are taxes on foreigners and that the solution to high housing prices is to subsidize demand.

Both presidential candidates tell us that income received as tips should not be taxed and one says that income received as social security shouldn’t, either — implicitly suggesting that bigger budget deficits will somehow offset the effects of inflation. 

Even the shibboleth of Fed independence is now up for debate. 

These all seem like self-evidently bad ideas to me, for all sorts of reasons. But a common thread runs through them: a distrust of prices.

Politicians will have you believe prices are a problem they can fix with a grab bag of populist proposals.   

The truth is that prices are only symptoms of problems they don’t know how to fix — at least not while also getting re-elected.

It’s a story as old as time. 

“The record of price controls goes as far back as human history,” the great financial journalist Henry Hazlitt noted. “They were imposed by the pharaohs of ancient Egypt. They were decreed by Hammurambi, king of Babylon, in the eighteenth century BC. They were tried in ancient Athens.”

It never worked.

In all that time, governments fiddling with prices — be it with price controls, tariffs or subsidies — has always ended badly for pretty much everyone other than the politicians seeking election. 

Setting the price of money

So bad ideas about economics are a guaranteed winner this November. 

Another, I think, is bitcoin.

I sometimes think bitcoin is also a bad economic idea: Its fixed coin supply seems ill-suited to meet the financing needs of modern, ever-growing economies.

But the 21 million cap is not what makes bitcoin useful — bitcoin would be at least as useful (and probably more so) if the supply was set to grow, say, 1% per annum in perpetuity.

The real benefit of the fixed supply (to my mind, at least) is that it makes bitcoin’s true utility immediately apparent: bitcoin is money without centralized control.

As politicians take a populist turn by proposing more ways to undermine the informational value of prices, the value of money free from centralized control should become more obvious. 

We haven’t had to think about that much in the US. 

In recent decades, the US dollar itself has provided a monetary escape hatch to the people of countries like Argentina, where dollars are widely used by the economic dissidents who have opted out of the local currency regime.

This election season has been a reminder that we might someday need a way to opt out of the dollar, too.

Possibly as soon as November.

— Byron Gilliam

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