Lesson 3: Pathologies of Privilege

Introduction

The inability of the various Socialist experiments to overcome the problems of control, knowledge and incentives invariably led to what many economists refer to as “Pathologies of Privilege”.  This lesson illustrates how difficult it is for central planners to successfully plan and direct the economy, as it requires control of not only what was produced and how production took place, but also control of the citizens, their wants and desires as well as their actions in and out of the economy.

Key Terms

Black Market
The exchange of goods and services in an illegal, uncontrolled and unregulated manner.

Bureaucracy
A system of government wherein power is divided among different departments and officials.

Control Problem
The difficulty central planners have in controlling human wants and desires.

Incentive Problem
The problem that occurs with central planning when individuals and central planners are not incentivized to serve the general interest.

Knowledge Problem
The idea that the information for economic planning is distributed across individual members of society and cannot be known by central planners.

Pathologies of Privilege
The problem that occurs in central planning when bureaucrats gain power, and they are privileged over others. 

Shortage
The situation that arises when the quantity demanded of a good or service exceeds the quantity supplied.

Surplus
The situation that arises when quantity supplied of a good or service exceeds the quantity demanded.

Objectives

Students will be able to 

• Define socialism.
• Identify the goals of socialism.
• Explain the problems of knowledge, incentives and control that are present in centrally planned economies.

Voluntary National Content Standards in Economics

CONTENT STANDARD 4: Incentives

People usually respond predictably to positive and negative incentives. 

Benchmark 1: Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide them the highest possible net benefits

CONTENT STANDARD 8: Role of Prices

Students will understand that prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives. 

• Benchmark 4: Scarce goods and services are allocated in a market economy through the influence of prices on production and consumption decisions.

CONTENT STANDARD 9: Competition and Market Structure

Students will understand that Competition among sellers usually lowers costs and prices, and encourages producers to produce what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. 

• Benchmark 1: The pursuit of self-interest in competitive markets usually leads to choices and behavior that also promote the national level of well-being.

Time Required

45 minutes