[link|http://www.sjsu.edu/faculty/watkins/german1.htm|Socialist is as socialist does]

Excerpt:

The Nazi economic system developed unintentionally. The initial objective in 1932-33 of its economic policy was just to reduce the high unemployment associated with the Great Depression. This involved public works, expansion of credit, easy monetary policy and manipulation of exchange rates. Generally Centrally Administered Economies (CAE's) have little trouble eliminating unemployment because they can create large public works projects and people are put to work regardless of whether or not their productivity exceeds their wage cost. Nazi Germany was successful in solving the unemployment problem, but after a few years the expansion of the money supply was threatening to create inflation.

The Nazi Government reacted to the threat of inflation by declaring a general price freeze in 1936. From that action the Nazi Government was driven to expand the role of the government in directing the economy and reducing the role played by market forces. Although private property was not nationalized, its use was more and more determined by the government rather than the owners.

Eucken uses the case of the leather industry. An individual leather factory produces at the direction of the Leather Control Office. This Control Office arranged for the factory to get the hides and other supplies it needed to produce leather. The output of leather was disposed of according to the dictates of the Leather Control Office. The Control Offices set their directives through a process involving four stages:

* 1. The collection of statistical information by a Statistical Section. The Statistical Section tried to assemble all the important data on past production, equipment, storage facilities and raw material requirements.
* 2. The planning of production taking into account the requirements of leather by other industries in their plans; e.g. the needs of the Shoe Control Office for supplies of leather. The available supply of hides limited the production of leather. There had to be a balancing of supply and demand. The result of the planning of all the control offices was a Balance Sheet. There was some effort at creating some system for solving the planning, such as production being limited by the narrowest bottleneck, but in practice the planning ended up being simply scaling up past production and planning figures.
* 3. The issuing of production orders to the individual factories.
* 4. Checking up on compliance with the planning orders.

In practice the authorities of the control offices often intervened and there was continual negotiation and political battles as the users of products tried to use political influence to improve their allocations. The prices of 1936 made little economic sense, particularly after Germany was at war. So there economic calculations using the official prices were meaningless. In particular, the profitability of a product was of no significance in determining whether it should be produced or not. Losses did not result in a factory ceasing production; the control offices made sure that it got the raw materials and that the workers got rations of necessities.

At the beginning of the war the Government established a priorities list for allocating scarse resources. Activities associated with the war got top priority and consumer goods production was near the bottom of the list. If two users wanted gasoline any available stocks went to the user with the highest priority. This seems reasonable but, in fact, it led to major problems. Suppose one use of gasoline is for trucks to haul raw materials to factories. If the Government always gives the available gasoline to the Army then the truckers cannot deliver supplies to the factories and they shut down and eventually other factories dependent upon them also shut down. At first the Government tried to handle the problem by revising the priorities list and moving up uses such as gasoline for trucks. But whatever uses got put at the bottom eventually created bottlenecks. In the middle of the war the Government abolished the priority list. It was an unworkable system.

The problem with making production decisions without reference to relevant prices is that the control offices may dictate the production of goods which are of less value to the economy than the opportunity costs of the resources that go into their production.

Because of the mistakes and failures of Centrally Administered Economies there are often black markets operating. Although the authorities typically persecute people for dealing in these markets the reality is that such markets are essential for preventing a collapse of the Centrally Administered Economy.

Production decisions may be made on political criteria that are economically foolish, such as locating a factory in a region to benefit the supporters of some political figure. Even aside from such corruption of the decision process the centrally administered economy suffers from major weaknesses. The centrally administered economy can mobilize resourts quickly for big investment projects but there is no guarantee that there will be a balance of investments. For example, there may be big programs to build railroads but not enough trains to make use of those railroads.

Although Centrally Administered Economies may appear to be efficient and effective initially their errors and inefficiencies accumulate and eventually result in stagnation if not collapse. Often the apparent successes of such economies are just illusions. Outsiders who do not know how such economies really work are often fooled by these illusions.