“If steel and iron works, copper mines, and sawmills cannot be operated to their full capacity, the reason can only be that there are not enough buyers on the market ready to purchase their whole output at prices which cover the costs” wrote Ludwig von Mises in Human Action.¹
Chairman Mao’s steel obsession
In his first Five Year Plan (1953–57) and the Great Leap Forward (1958–60), Chairman Mao steered communist China toward heavy industrial production. He was obsessed with steel production as a measure of a nation’s superiority, and so directed the population of China to produce as much steel as possible.
From 1952 to 1957, steel production tripled, but
this was regarded as inadequate, and during the GLF, the drive for steel turned into an all-consuming obsession, and the entire country was mobilized for this goal, despite the rhetoric of “simultaneous development of industry and agriculture.”²
During the Great Leap Forward, the Chinese resorted to backyard blast furnaces to further increase steel production, using any fuel they could get their hands on, including the wood from front doors, furniture, and coffins. They melted personal items like cookware and bicycles when they ran out of iron ore. The metals produced by such methods were weak and useless for construction; in some regions the metal content didn’t even qualify it as steel, but low quality pig iron.
The consequences for Mao’s steel obsession was more than just low-quality output: a death toll in the tens of millions as people starved due to the lack of food production or were killed or worked to death by the state.
Steel production and economic calculation
Such dire consequences are avoided in market economies because the production of goods, including capital goods, is strictly regulated by consumer demand. The production of one good is only profitable to the extent that the revenues exceed the costs of production, both of which depend on consumer demand.
Revenues are obviously dependent on what consumers are willing to pay for certain quantities of a good, but the costs of production are also totally dependent on consumer demand. The prices of factors of production are bid up to their anticipated discounted marginal revenue product (ADMRP). That is, the extra revenue the entrepreneur expects to be able to earn due to the employment of the factor, due allowance being made for time preference. And this extra revenue, of course, is dependent on the consumer.
To increase the production of a good, the specific factors of production must be bid away from other lines of production. The price offered must exceed what all other entrepreneurs think the factor’s ADMRP is.
Forcing an entire country to redirect almost all productive efforts and resources toward the production of steel means that the costs of production would rise to outrageous levels as factors are bid away from increasingly important uses. The forgone production of other goods is automatically taken into account in the market economy where entrepreneurs rely on economic calculation to make production decisions. Without market prices, like in Mao’s China, such economizing mechanisms are absent.
Trump takes a cue from Mao
The reason this is important today is because Trump has promised “bold action” against steel imports — steel imports from China, coincidentally — presumably to show off American “industrial might,” according to this article. Trump also believes action against imports will provide “a source of well-paying blue-collar jobs.” Mao would be proud.
In April, as a clever ruse to justify new protectionist measures, Trump instructed his administration to investigate the national security implications of importing steel. An announcement about the outcome of this charade is expected any day now.
Steel isn’t a great source of jobs
This comes at the same time economic commentators are fretting over workers being displaced by automation in many industries. Steel production is not immune; a certain plant in Austria needs “just 14 employees to make 500,000 tons of robust steel wire a year.” This, of course, does not include all of the labor required in earlier stages of production. The trend is magnificent all the same, even though the majority opinion is that it’s bad.
The lamenters don’t seem to understand that increased productivity in one industry frees up resources and laborers for other industries, and, since increased productivity means increased real wages, demand for goods and services will increase as well. They seem to have a nonsensical apocalyptic view of a fully automated future with piles and piles of valuable goods everywhere, but nobody can enjoy them because nobody has a job. I invite the worriers to check out simple supply and demand analysis and Say’s Law.
Technological innovations that displace workers are great because total production of all goods can increase, not just the goods in the newly advanced industry. Or, since we also enjoy leisure time, it means that our work weeks can get shorter without sacrificing our livelihoods. Of course, all changes in the economy require some reshuffling of resources, and in the case of temporarily displaced workers, that can be a difficult process (especially if those workers have to overcome and navigate through labor market interventions). But the positive effects of increased productivity undeniably rule out any proposal to stop or hinder such advancements through government force.
How much steel we produce should be determined by consumers
Even Mao would have invited technology to increase steel production, even if it meant that the backyard smelters were no longer needed to produce steel (assuming he could magically realize this without market prices). Those laborers could have been directed to agriculture and perhaps millions of people would have been saved from starvation. Technology, however, will never make socialism workable. Without market prices, even super-high-tech societies as seen in Star Trek or Star Wars can only work in fiction. Technology merely allows us to produce more. Deciding what to produce, in what quantities, using what resources, and all of the myriad production decisions requires market prices and economic calculation.
We have regressed to obsessing over domestic steel production, using industrial might, national security, and jobs as justification, but all three are flimsy when compared with what trade and market economies can accomplish. Neither Trump nor Mao can replace the sovereignty of the consumer over production.
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.³
1) P. 575.
2) Alfred L. Chan, Mao’s Crusade, p. 158.
3) Ludwig von Mises, Bureaucracy, pp. 20–21.