What If There Were No Prices? The Railroad Thought Experiment


To appreciate why market prices are essential to human well-being, consider what a fix we
would be in without them. Suppose you were the commissar of
railroads in the old Soviet Union. Markets and prices have been banished. You and your comrades. Passionate communists all. Now, directly plan how to
use available resources. You want a railroad from city A to city B,
but between the cities is a mountain range. Suppose somehow you know that
the railroad once built. Will serve the nation equally well. Whether it goes through the mountains or
around. If you build through the mountains,
you’ll use much less steel for the tracks. Because that route is shorter. But you’ll use a great deal of
engineering to design the trestles and tunnels needed to cross the rough terrain. That matters because engineering is also
needed to design irrigation systems, mines, harbor installations and
other structures. And you don’t want to tie up
engineering on your railroad if it would be more valuable designing
those other structures instead. You can save engineering for
other projects. If you build around
the mountains on level ground. But that way you’ll use much more steel
rail to go the longer distance and steel is also needed for other purposes. For vehicles, girders, ships, pots and
pans and thousands of other things. Which route should you choose for
the good of the nation? To answer, you would need to
determine which bundle of resources is less urgently needed for
other purposes. The large amount of engineering and
small amount of steel for the route through the mountains,
where the small amount of engineering and large amount of steel for
the roundabout route. But how could you find out the urgency
of need for engineering and steel in other uses? Just one way engineering is used
is to build irrigation systems. To assess the importance of a particular
irrigation system, you would need to know what the farmers know about how irrigation
would increase the yield of their fields. And to know the value of that increased
yield, you’d need to know what grocers know about their customers eagerness for
that produce. That in turn depends on what customers
know about the better meals they could fix with that produce. How would you find all this out? Just one way to use steel
is to build new trucks. To assess the importance of a particular
new truck, you would need to know what the trucker knows about the capacity
of his current truck, and how much more quickly he could make the deliveries his
customers want with a new bigger truck. To know the importance of those
deliveries, you would need to know what his customers know about the value
of getting goods delivered. That in turn depends on what still others
know about the uses of those goods at their destinations. To reason about where
to route the railroad, you need this kind of information for all
possible uses of engineering and steel. That’s a massive amount of knowledge, held
by millions of people throughout society. How might you get it? You might try surveys, but think how
many people you would need to survey. All those who prepare meals with produce,
and all those who take delivery by truck for
starters. The numbers would be staggering. And often people don’t even know what they
prefer until they face an actual choice. So they might not be able to answer
survey questions accurately. Even if they could,
by the time the surveys were returned and processed, much of the information
would be out of date. And even if you could get complete and
timely information about what everyone knows, that’s relevant
to every use of steel in engineering, you would still need to deduce from
it where to build the railroad. How would you begin to make
sense of that mountain of data? In the words of Ludwig von Mises,
you would be groping in the dark. You would face what is known as
the knowledge problem of central planning. The reason why comprehensive
socialism inevitably fails. Central planners cannot get the knowledge
they need in order to plan effectively. You, commissar, simply cannot know on what
projects scarce resources should be used for the good of the nation. But now change the thought experiment. Imagine that somewhere in the market
economy part of the world, you are the chief operating
officer of a railroad company. You work not for the good of the nation,
but to generate profits for your firm. You want to run a railroad
line from city C to city D. Again, there’s a mountain
range between them. Now, how do you decide on the route? You choose what’s cheapest. You would calculate the total
cost of each route for each one, multiplying the amount of engineering
required by the price of engineering, and adding that to the amount of steel
required times the price of steel. Then, you would choose whichever
cost your company less. You might give no thought at all to the
good of the nation or society as a whole. But, and here’s the marvel,
by choosing the route that is cheapest for your company you would thereby choose
the route that’s best for society. You would use the bundle of resources
that’s least urgently needed for other purposes. Why? Because those market prices you calculate
with reflects the urgency of need for engineering and
steel in all their alternative uses. For example, suppose customers wanting
to taste your meals, would buy better, more expensive produce, if it were
on the shelf of their local grocery. In effect,
they’re offering grocers more for produce. So the grocers will offer farmers more for
produce. So the farmers who feels would be
sufficiently improved by irrigation will offer more for irrigation systems. And those who build irrigation systems
will offer engineers more to design them. Now that designing irrigation
systems pays engineers better, people who want to hire engineers for
other projects, such as railroads, will have to offer them at least as
much to make it worth their while. The higher price tells everyone who
uses engineering that it’s become, for some reason, more valuable so
maybe they should use less. In this way, the market prices of
resources represent the particular knowledge and preferences of
millions of people who directly or indirectly use those resources. And the prices communicate
that knowledge and those preferences to everyone interested. Only with market prices to communicate
this vast amount of human knowledge to us. Can we calculate the least costly
ways of producing the things we want, coordinator activities with the activities
of others, use resources where society values the most, and thereby satisfy
as many human wants as possible?

100 thoughts on “What If There Were No Prices? The Railroad Thought Experiment”

  1. For those that think environmental problems can't be addressed: Negative Externalities and the Coase Theorem – Learn Liberty https://www.youtube.com/watch?v=zcPRmh5AIrI

  2. There was another video about why AI wouldn't help in a centrally planned economy and why we would still need prices.

  3. That has a solution. The vast complex array of interconnected computers that allow access to mind boggling amounts of information, knows as the internet, can give access to the amount of resources available, and how much demand and supply there is, without the use of pricing

  4. One thing wasn't calculated, but it doesn't really matter anyway: the shorter route means quicker transit, which can increase long term output, if the place where the transit goes worth it (industries there for example).

  5. If only the socialists could see this and really dwell on it and understand the underlying truths. This is the true nature of why free markets are the answer to complex economic questions.

  6. The consequence of abolition of price mechanisms and markets means
    that the level of coercion required to build a railroad in a planned economy
    rises to the genocidal scale of the Kotlas Vorkuta Northern railway where
    every rail sleeper to support the track was laid on the grave of a gulag prisoner
    in a stalinist forced labour economy with no regard for human wellbeing
    or the lives of those arbitrarily designated as Enemy of the People .

  7. Anne Appelbaum has a good book on how
    slave labour of Gulag prisoners is the means
    by which a marxist planned economy functions .

  8. The answer is simple build around the mountain because the train will replace the need for trucks transporting goods as the train can transport more goods and people then the trucks can this will allow the trucks that transport goods and people between city a and city b to be able to transport on different routes decreasing the need for trucks. If the train is built on level ground all away around the mountain. As said in the video. It will run at peak efficiency. While building a tunnel will more then likely take more resources and time by more resources I mean concrete, mchinary to dig said tunnel ,and manpower that can be used alsewear .the tunnel will also take more time to build.

  9. If only a) socialism was actually as you described, and b) the free market economy works as you described. Neither are true. Interesting semi-strawman of both sides.

  10. That works as long as the cost of products and services are based on only supply and demand. Any complication to this equation will fog the real benefit to society as a whole. A nice thought experiment that only works in theory

  11. This concept only applies if money is a finite resource. When an entity has the ability to print more money at will, the objectivity of pricing becomes an illusion.

  12. It's a shame that people still believe in the wasteful bureaucracy of communism/socialism (the only differences in their execution seems to be the number of executions), and are too close minded and programmed to realize capitalism isn't nearly as evil as advertised.

  13. How about if all public transportation were free? How about if all utilities were free? How about if food at a grocery store were free? We are already proposing free medical care. You pay 70% of your income in taxes, but you do not need to pay for transportation, utilities, food, Medicare care. The idea of artificial intelligence is that the AI will calculate the proper number of items to manufacture, the AI will know how much utility to provide, the AI will know how much crop to plant, the AI will set the price of the commodity.

  14. I like that this pretty much says that market price is always best and cheaper is better. Guys there are Monopolies, price fixing, and artificial scarcity. Back in the day, because we Didn't have a strong centralized government, the continental army was utterly broke more than once and stole from farmers.

  15. I'm actually going to call bullshit on the idea that prices reflect the urgency of use of scarce resources and that doing the cheapest thing is inherently the best thing for society. Price is a heuristic for economic decision making. It's an essential heuristic due to the problems highlighted in the first part of the video, but a heuristic nonetheless.

  16. This would be spot on if, there weren't so many people that didn't know the difference between cost and value, if there wasn't overly inflated costs assigned through propitiatory actions, if the general population possessed reasonable levels of truth from a lack of market manipulation, with larger levels of competition. This being said, it's still a far cry better then socialism.

  17. "You may not like it, but capitalism is the best way to allocate resources" I smugly think to myself as I step over the homeless man into my office where I make Youtube videos.

  18. Interesting topic. But the modern age, we have advertising making people spend big on goods they don't need. Creating an artificial price and market skewing the data.

  19. and all that goes to shit with price gouging and inflation when companies use the force of government to protect their interest.

  20. What will happen if there is a way to have multiple values to the same good. This theory exists, what is the name of that theory? And for extra points where in that theory they talk about centralized planing?

  21. A good example of how market forces and pricing help in decision making, albeit a little bit oversimplified. For example, as the owner of the railroad, I may not choose the least expensive route from city C to city D, at least in terms of up front cost. I need to consider not only cost of engineering and steel, but number of miles between cities via each route, and cost of fuel to run the train, both present and future. I need to look at time required to complete the project each way, and opportunity cost if I choose to take the route that costs less but perhaps takes longer to build. I need to look at the trip time between cities on each completed route, which will affect the number of trips per unit of time I can expect to run, and in turn affect the total profits I can earn. Through the mountain, while more expensive initially may pay off over time in fuel savings and shorter travel times. I also need to determine what my primary transport market is, whether freight or people, and if people, consider ergonomics and psychological factors as well. If half my passengers get ulcers from fear of derailing on a mountain pass even though they'd save 20 minutes of commute time each day, and consequently stop using the train, I may want to consider the longer route around the mountain. I also need to look at future maintenance cost of both the track and the trains and try to project total cost over expected service life, and indeed if one route will have a longer expected service life than the other. Many of these costs must be guessed at since future maintenance costs, fuel costs, even passenger reactions to the different routes can't be known in advance.
    Here's an idea. Let the capitalist abandon cost structure in determining something as complex as the example above. Instead, let him follow a more predictable model based on empirical and historical evidence. We know based on the fact that socialism has historically failed everywhere it's been tried, that socialist central planning will more often than not make the wrong choice. With that in mind, the capitalist need only find a socialist country wherein a similar project has already been done, determine what they chose to do, and do the opposite.

  22. it is the height of godless faithless man to presume to know all that is needed to know for central planning – all such endeavors are doomed to failure and vanity – America needs to turn to our roots, return to God
    and be a light to the world
    and show them the way
    as in days of old
    assets we were in the beginning

  23. great thought, but what about irresponsible consumption?
    What if the wildlife would be affected by going around?
    people do not pay attention to nature and other stuff, market price is still not the perfect measure of value…

  24. and yet almost every college kid today, that can't manage their own finances, thinks they can do exactly as described in the first half…

  25. Capabilities of AI and data science nowadays make the knowledge problem of central planning obsolete.
    Too bad that you did not mention the problems the system described in this video brings, such as:
    Inequality;
    Financial Instability/Cyclical economy;
    Tendency of Monopolization/Monopsonization;
    Immobilities;
    Environmental costs and externalities;
    Encorougement of greed.

  26. Suppose the government provided everything free, transportation, utilities, medical care, dental care, home insurance, food, clothing, drugs, education, and everybody had to pay a flat 80% of all their earnings, dividends, rents, royalties, etc. in tax. The 20% left over you could spend on enrichment activities such as health clubs, computers, movies, entertainment. Would this work? People would abuse it, waste food, discard clothing Willy-nilly, take trips they didn’t need to take, see the doctor more often than necessary, waste utilities.

  27. What's cheapest in the long run, including fuel and time consumed for future trains. But if u use socialist u won't have enough steel to do either, but everyone will be equal in their poverty.

  28. amazing how a video about capitalism and the free market gets lost on so many making stupid comments.

  29. In other words, communism is a good idea on paper, but not in practice.

    Well we knew that already.

  30. Mathematically it is possible to find solutions for multi-player systems that are better for everyone than what individual optimization for each player would yield. (look up Nash equilibrium). So what you are trying to argue is false, there are system-wide solutions that are better than individual solutions, and in some cases, by a larger margin. The problem is that individuals that do not understand that or do not care about it can still make choices to maximize their own local profit and if enough people do this the global good solution breaks down (in a lucky case to a less optimal commiseration, in the not so lucky case, worse). If only a few people break it, it can still work better than the individual system (see European healthcare vs US healthcare or European education vs US education). The question is finding and maintaining the globally good minimum, that indeed needs knowledge and a very strong sense of morality and adherence to the rules (this is why Soviet Russia is the worst possible example for this, as they just cut off their morality by going against the church and promoted atheism). The example you bring up with the Siberian railway and shipments is doubly wrong for a whole different reason: the Soviets kept Siberia fed and supplied even if it was not profitable or cost effective because of strategic reasons: they always wanted to have a core to fall back on in case of an invasion from mainland Europe. That is a matter of national security for them so they know they are running an unprofitable enterprise.

    3:39 the interesting thing is that with the internet and AI applied to big data you can do both today: immediate survey and data mining.
    that would mean that centralization today is a lot more possible than it was back in the day.

    Again, in the praise of capitalism: you can look at the US infrastructure. The highways were built by central planning that was not local, that was not for profit. The US mail is run by the government at a loss. Profit alone will drive down the quality of the food (roundup, corn syrup in everything, hydrogenated trans fats etc), doing things to crops/animals that cause bearable levels of illness, it will drive up the cost of education and healthcare to the point that is just bearable, housing will rise to the point of having a lot of homeless, and for profit companies offshore immediately as it becomes more profitable. You need some amount of central planning and some amount of local planning, you need to put the interest of the people in front of the large corporations and the government needs to intervene for the people against the companies regulating what can and cannot be done (health, food, education etc.). It's a delicate balance you cannot go full planned communism or full free market both end up in a very bad place.

  31. Excellent video.

    One thing: “resources” is supposed to be pronounced “re-Sor-sez”, not “re-Zor-sez”

  32. This is basic stuff, intro-economics 101… yet so far beyond the understanding of the typical liberal as to be written in Greek… assuming they are not themselves Greek eh?

  33. 3:01
    Short answer to get this "massive amount of information" is to look it up in The Plan.
    Seriously the planned economy has this this capacity to make large scale decisions together, and avoid a situation where everyone makes decisions in isolation inevitably bumping into each other and getting in each others way.

    Free market does avoid this need for planning 10 years ahead, but inevitably causes overheads because of lack of coordination.

  34. PS: oh… And just for the sake of completion. The real Soviet answer to this problem when it arouse in reality was to nuke the mountain…

  35. I don't know, but still, capitalism is not that great, and it's pinch better that the soviet system of economy. Far away from ideal.

  36. Solution: At this point, the commissar pandered a bit, and then exclaimed "No people, no problem!" and executed all the mofos lmao 😂😂😂😂😂 smh 🤦🤦🤦🤦 who's did this?? 👌👌👌👌👌

  37. it amazes me and shockes me how much time people waste trying to convince 30s and 40s or older people that socialism doesn't work and capitalism does, free market does, instead of "wasting" this energy and time in teaching children and teenagers, who can really make the difference, or are soon about to.

    i mean, if you're talking to a 30-something or older person, avoid doing that without others around, and use them to convince the others how his/her belief is dumb. if you happen to convince the person you are directly talking to, that's a bonus. the ones around, or in the group or thread, will side with the one that can make the other's arguments weak. understand, it's not about you "destroying" a person with your argument, or that only, but you making the person self-destroy. while making your arguments, use situations, things directly connected to the ones around, something that can arouse some emotion.

    now when it comes to youngsters and children, they are at the height of their thirst for knowledge, information, so it's ok if you spend more time having one-on-one conversations.

  38. The Soviet Union had money and markets. Literally google Soviet money it really existed. The reason the soviets made seemingly retarded decisions. Was because they were working with only in house resources for 80 years. When you have a large abundance of a few things, and severe shortages of nearly everything else. It can lead to some extremely bizarre and backward decisions from the outside. The Russian empire at times was similar in its decision making, so was any other economically isolated state.

  39. I hate to scare you all, but I fear that A.I. will be used to resolve the problem of the central planner. At least, they will attempt to use it because it promises to be able to make such decisions with huge amounts of data.

  40. I thought this was going to be a video about bartering not Soviet Russia. Here's what would happen, your workers would become lazy as shit and do minimal work as possible without getting shot by the authority. Since nobody can achieve more through more ambition they wouldn't care and hate the state you have imposed on them.

  41. You forgot to account for how much of the steel and engineering talent is needed for weapons production, above all else.

  42. Can you do this video again but with environmental issues, like waste management, as what's cheaper is still often producing more pollution, waste, or unsustainable production

  43. In generals, liberals do not have the intellectual capital to understand this – especially most university professors who have consistently shown themselves to have very little intellectual capital.

  44. Ha, that's dumb. We will just send 10000 gulag prisoners to dig straight through the mountain. There are many engineers among them, no need to hire new ones.

  45. It's actually easy to work around this issue. You just need a supercomputer and an AI for resource management.

  46. Holy cow!!…. Capitalism is good for all. It is the only way to have functionality for all. Yes some will be wealthier than others but by being so will benefit many. Closest thing to a natural way of order than any other system.. Now we see capitalism is best, why can we not see that the national debt is more important than bashing the president every day?

  47. Yep….capitalism always is honest and never inflates prices out of selfish reasons and for capricious desires

  48. A car built in capitalist amerikkka which has maybe $100 worth of steel in it is sold for $80,000.00 then factor in the $800,000.00 the banks will earn on the interest payments on the car note. PRAISE SELFISH CAPITALIST WHITE BLUE EYED BLOND MALE JESUS FOR THE VIRTUE OF SELFISHNESS

  49. It's time to use Bitcoin as money instead of FIAT currencies. Dollars, Euros and other FIAT currencies are flawed because the M1 money supply is artificially controlled by each country's central bank. As we know, central planning doesn't work because a bureaucrat can't know all of the information necessary to formulate monetary policy. Bitcoin, on the other hand, issues money supply based on a computer algorithm set in stone. The monetary policy is know to everybody and everybody can adjust their behavior according to market forces. In addition, Bitcoin transactions settle in 10 minutes or less unlike bank wire transfers that take days. Additionally, Bitcoin transactions take place 24 hours a day unlike banks that only operate 5 days a week on short hours.Other things in Bitcoin favor include the fact that it's borderless, it's inexpensive to transact, not subject to inflation (money supply is limited), transparent (all parties can see the transactions), easy to store (no need for expensive bank vaults). The Bitcoin network uses less power and resources than banks (banks use up 9% of GDP) because you aren't spending all the money to support the branches, employees, computers, buildings, gasoline for employees to commute to work, etc. that the banking system requires. In short, Bitcoin is the perfect money.

  50. I have a saying: when humans got here on earth everything needed was here nothing been added and there were no price tag, it's said Adam and eve were naked so no money. when and who put the price tags on water? electric? don"t be like my mom and tell me we have to pay to get it to our house. electric energy is in the sky more than anyone will ever need and free. I'm 55 now and realize our system is a trap. the elite are going to make you pay till you die. At some point you will not be able to work so be happy with your slavery.

  51. I stopped at 1:41.  While this video presented an interesting hypothetical, it ignored the truth about how communishm works.  "How do you decide which route to build?"  The answer is:  You build the route that best bolsters your personal power.  Give contracts to other lesser bureaucrats who will be beholding to you in the future.  Employ your cronies to do the work (and supply you with the appropriate kick back) and make sure to hamper your enemies at every possible opportunity.  What this costs is irrelevant, you hold power and you will assert it so as to gain more.  Those are the decision factors for the lib/soc/com/marx.

  52. Decent explanation, but a couple of the key statements relating to this system (self-interest motivated by profit) being THE most optimal are dependent on the assumption that the economy is efficient. There are pretty strong arguments against that level of perfection being realistic; whether this system even approximates optimality is open for debate.

    As a tool for managing other resources I appreciate its merits but I doubt that better (perhaps so far undiscovered) tools do not exist for this purpose. There is plenty of digital data regarding people's preferences and how they value things, and plenty of computing power (machine learning esp.) to analyze and draw meaningful conclusions that could help solve the central management problem.

    Lastly, IMO there should be a disclaimer that the free market, while having many merits, is far more messy than depicted here.

  53. This serves as a good illustration, but is too simplistic. Prices don't always accurately reflect how much something is valued.

  54. But, but what about all the worms displaced by the trench digging? We need ecological impact studies on every inch of soil moved. Then we'll build a beautiful bridge to nowhere.

  55. Why people still prescribe, until today, to -isms that are known time and time again to systematically curtail humanity, prosperity and freedom is beyond me.

  56. 1st Why can't u have the 1st Scenario with prices. What's good for a company 2nd what's good for the business is not always good for Societie. CEO are the worst governor

  57. The video clearly shows that Capitalism (free market) is a system of a past it works even if people have a little knowledge of economics and have weak computers. But communism is a system of the future it will work when we have more knowledge of economics, when we have fast Internet and extremely powerful computers.

  58. It is about profit and dictatorship. Without profit, you do not know what is the most effective use of resources, and with dictatorship, the use of resources is not based on effectiveness, but will of the people in command. As long as you have that, the mode of planing is irrelevant. After all, almost every company is centrally planned.

  59. Even at the height of it's power, the USSR always had a massive black market to satisfy the wants and needs of it's citizens. That is why it lasted as long as it did. The free market saved communism and demonstrated how normal human behavior always wins out over central planning and force. The only question is how many have to die before this becomes apparent to the planners.

  60. Bravo! This was an EXCELLENT description of market forces at work. Every wanna-be socialist needs to see this to set them straight.

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