In practice, the trouble of resolving supply and demand problems politically have been far more disastrous than the problem of planning supply and demand.

I find the Austrian-influenced critique of communism unconvincing. Many Communist countries chugged right along, growing their economies at a pace that alarmed Western observers, before they sagged and broke down under their increasingly cruel, incompetent, kleptomaniacal, bureaucratic government systems. But before this happened people were afraid Communism could actually win. When Khrushchev said "we will bury you" people took him seriously. But if von Mises was right they should never have gotten anywhere in the first place. Also consider that the internal economy of any real-world corporation is 'centrally planned' in a limited sense. When you call up the HR department or tech support, you don't have to pay them for their labor.

Hayek was the Austrian that got it right--it's not that central planning is inefficient, it's that efficient central planning for a broad market economy can only be accomplished when you begin to devalue the actions of the humans of the world that aren't in line with what the planners want. Eventually, what is lost is all incentives for planners to plan for anyone but themselves. This goes all the way back to Marx, who would talk about things like how capitalists as a social class do not really provide 'labor value'; that the capitalist even makes money at all is an accident of human organization and that they are not really valuable or needed in the world. To the hardcore Marxist, capitalists are not merely overpaid, they are in fact worthless by definition.

Hayek and Mises were in total alignment on this point: economic calculation under socialism is impossible. Without a working price system economic coordination is impossible to sustain. Those communist countries were not growing at all. If you look at actual output compared to capitalist nations at the same time there is no comparison. The case of East vs. West Germany is sufficient to demonstrate this case.

In fact the problem that subsidies create in society is a little window into the problem of socialism that exists on a larger scale.

Hayek would probably agree with the sentiment that you expressed though.

Hayek literally wrote the book on the "sentiment that I expressed", it's called The Road to Serfdom. Hayek's views on the "economic calculation problem" were more subtle than 'it doesn't work' and they needed to be because by the time he wrote the book, communism was a real economic power and it was getting more powerful. I'm not sure how you think Russia went from backwards feudalism to nuclear superpower by "not growing at all".

Hayek is an interesting character because "The Road to Serfdom" is not really his finest or clearest viewpoint on markets at all. I saw a video interview with him (you can find it on youtube if you want) where he just restates what I did that the economic calculation problem renders socialism unable to coordinate production effectively.

Russia as compared to the United States is still a backward country. Their wealth is nowhere near the United States and certainly didn't gain any ground during the Cold War period. It doesn't take much, if any, "growth" to force a nation as large as Russia to build a large military-particularly when you don't actually need to figure out the logistics of that army fighting an actual war (since Russia could never have done such a thing against the United States). Add to that forced labor and the basic confiscation of whatever you need to accomplish your goals and it all is pretty straightforward.

I agree, and you don't even need China in this analogy. Suppose that 5 of the best blacksmiths leave the blacksmith cooperative and start producing custom-made nails for less than the old blacksmith coop, which by the way is now missing their best people. What happens when they take over the market? Will the now-jobless blacksmiths be accepted as members of other cooperatives with full rights, or do they need to sell their labor in the market for whatever someone is willing to pay? The only way so far found to preserve socialist principles in this situation is with regulation which prevents free economic choice - the bootmakers don't get to choose whose nails they buy, you can't quit your job with five of your friends and start a competing concern, and you don't get control over who you let into your cooperative. But having removed this right to dispose of the results of one's own labor (I am not even talking about hired labor), we've created a state-run society in practice if not in theory.

The idea is to retain the good qualities of capitalism which is self-optimization and market-based decision making. The bootmaker and the nailmakers would be autonomous agents making decisions in their best interests. The bootmakers can buy nails from whoever they want, but if the market then rejects their boots because of shoddy nails, they will have to adapt.

Also worth pointing out that in a specialized economy, most companies cooperate instead of competing with each other. The bootmakers likely need nails specifically designed for their boots so buying generic ones from China isn't an option. Instead they need to source a local supplier and tell them how the nails for their boots models need to be made. They enter a symbiotic relationship in which both benefit.

Liberals like to see capitalism as a marathon where the runners compete with each other and the best ones win. But the system works more like the cells in a human body. Companies need to specialize and work together to be successful.

"Liberals like to see capitalism as a marathon where the runners compete with each other and the best ones win. But the system works more like the cells in a human body. Companies need to specialize and work together to be successful."

Be careful of painting with too broad a brush. Different industries operate in vastly different ways to very different outcomes in the long term.

Compare http://en.wikipedia.org/wiki/Natural_monopoly to http://en.wikipedia.org/wiki/Perfect_competition

"The bootmakers likely need nails specifically designed for their boots so buying generic ones from China isn't an option. Instead they need to source a local supplier and tell them how the nails for their boots models need to be made"

That's beautifully conceived, but you conveniently ruled out an option that sly bootmakers could get their hands on a Chinese dictionary and instruct these cheap Chinese suppliers (rather than the supplier next door) on what type of nails exactly they would like to have made for them ;)

Yes, sure. No one said that the nail makers would be guaranteed a market for their nails. However it might be better for the boot makers to renegotiate their contract? And what is the cost of screwing over your local supplier? Maybe local public services will prefer boots entirely made in $your-country? Economy is way more complicated than always chasing after the biggest short term profits.

Of course - maybe they will :) and maybe they won't. Which is way less certain than saying "they [the shoemakers] NEED to source a local supplier", as you wrote.

The key thing here is that if I buy boots cheaper by 1/4 (thanks to partial outsourcing), I will spend the 1/4 I saved by going to a barber. Or a local restaurant. Or by buying doughnuts at a local bakery. So - speaking of economy to which there's more than meets the eye - these are local suppliers too, indirectly benefiting from the fact that local shoemaker imported nails.

Wasn't the superior adaptability of those cheap Chinese suppliers a big part of why Apple moved there?

My understanding was that the supply chain and infrastructure to produce the smart phone simply wasn't available in the US. America had decimated its manufacturing capabilities to the point that there was no other option beside bankrolling an entire industry from scratch.