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Saturday, July 16, 2011

Has A Command Economy Ever Worked?

  definition - An economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed.

Jerry Pournelle says no
command economies distort realities and so badly misallocate resources that the economy dwindles. Recessions become permanent. Recession becomes depression. Economic miracles never happen with command economies. Some economists like to prove they can’t, using information theory; but prove it or not. we don’t see instances of economic miracles under command economies. Yes, there are economic miracles under authoritarian regimes. Franco’s Spain at one time had the highest economic growth in the world. Pinochet’s Chile came back from near economic death under socialism to become a roaring tiger. Both had economic freedom and stability of property. They were politically authoritarian governments, but they were not dedicated to ever-rising state budgets.
Command economies never work. That includes ideologies that transfer ever larger amounts from the productive to the needy. As Margaret Thatcher observed, eventually you run out of other people’s money to give away. And the gods of the copybook headings limp up to explain it again.
And
There’s a famous story about a time when, back in the days of the Soviet planned economy, someone got to Stalin at a social function, and when Stalin asked how things were going, he told the Great Father that all was well except that it was hard to get copper tubing. Stalin told an underling “Let there be copper tubing!” And Lo! There was copper tubing. There were shortages of other forms of copper, but there was copper tubing in plenty.
That’s a fairly extreme example, but it’s a common enough story with command economies. A planned economy misallocates resources. If your society is wealthy enough you may not notice because there’s enough surplus to cater to the whims of the powerful and influential, but when resources are scarce the choices are more difficult.

.... Politicians always cut the budgets for the roads and the police before touching entitlements or the bureaucracy. In good times or in bad, das Buros steht immer, (the bureaucrats always stay) as Metternich observed.

Command economies distort the allocation of resources. Sometimes the effects are dire. An example: Senators Dodd and Kennedy (they of waitress sandwich fame), and Barney Frank decided that it would be a very good thing for more people in the United States to own their homes. They saw to it that there would be plenty of money for sub-prime mortgages.
  Now largely this is also what I believe to be the case. However there is one instance where a command economy appears to have succeeded. I know he has studied Marxism,. I wrote this to Dr Pournelle and he published it with the highlighted reply.
The counter example to that is the USSR during the late 1920s & 30s. Stalin may have exaggerated his productivity figures but WW2 proved that the USSR’s economy really had grown from destitution to the world’s second. Much of the appeal of communism was based on this achievement (at one time it appealed to me on those grounds) while the rest of the world was in Depression and I believe it has to be explained It can partly be explained by the pure human cost paid but if the command economy was that moribund that would not have been sufficient.
My current explanation is that Trotsky became electricity commissar in 1925 and set in train a decade of 23% annual growth in electricity capacity and that, then, newish technology was the or a pivotal one and allowed the economy to grow at 10% at a time when introduction of command factors into the US economy had depressed it. However this may be an after the fact rationalisation (and projection onto Trotsky) and I would be interested in your thoughts.

Neil

Actually, Lenin was forced to resort to his New Economic Policy much to the dismay of many devoted Marxists. Russia went from being the breadbasket of Europe to famine. Command economies can always produce some spectacular results in their areas of concentration. Intelligent masters understand that it is best not to bind the mouths of the kine who tread the grain.
And another correspondent wrote
A command economy says government experts are better able to allocate resources. This does not appear to be true. To the point:



Jerry,
         If a Capitalist society is the economic equivalent of a Maxwellian gas, the command economy is the economic equivalent of a laser: it can achieve spectacular results — at the cost of wasting 95% of the total energy (productivity) of the system.

Jim


Precisely

   I am more looking for an economic theory rather than the practical question of whether Obama or even any elected "socialist" politician should be trusted with economic decisions - clearly he shouldn't and it is difficult to name any who ought to be. Well ok Lee Kuan Yew of Singapore considered himself a socialist when first elected.

     A laser is a very effective device when used correctly. If the area of concentration is the industrial economy that is a pretty large area and arguably (I would argue it) worth almost anything to improve. Increase the rate of growth by 10% & in 10 years you have achieved a doubling of everybody's income. The cost to the people of the USSR was indeed starvation and about 10 million deaths which is a tough one to justify. However Hitler was intending to attack them and exterminate much/most of the population to provide "lebensraum" for German families so in that particular case even 10 million starving to death is clearly the lesser evil.

    I regard this as a major historic and philosophic question because the history of the 20th C clearly turns on the success, and ultimate failure of the USSR. Not only physically but morally.  The intellectual and political classes of Europe and America came to the subconscious and sometimes conscious conclusion that planned economies worked and were the wave of the future. In some few cases, as Kim Philby, they gave their loyalty to it. In many they decided that it must be stopped, or at least be held back for their time, by force.  In some, including most of these latter cases, they nonetheless decided they had to move towards economic planning to compete - hence FDR's New deal, Britain's post war government and Kennedy's decision that competing with the Soviets in going to the Moon could only be done by command rather than market processes. Indeed it was only with Friedman, Thatcher and reagan that the opposite view started to be seriously put.

    However for it to work I submit it is necessary for "government experts to be better able to allocate resources". This requires the government experts to be very expert indeed. It possibly requires the technology to be of the relatively unsophisticated (by 2011 standards) and already developed by other countries sort that the USSR went for. After all they are having to guess smarter in all the industries than commercial owners of each industry would. It also requires them to be genuinely motivated by the desire for wealth creation in a way that entrepreneurs are. Specifically the leader has to recognise the importance of a few small industries, like electricity, that are going to be pivatoal.

     Since, unlike entrepreneurs, democratic politicians do not benefit much from national wealth creation but do benefit from placating their own interest groups with pork barreling projects it may well be impossible for a democracy, where there are always some interest groups to be placated, to successfully work such a command economy. Another problem is that, over the long term, command control of what passes for the price system is bound to make sensible cost based economic decisions increasingly difficult.

    So my conclusion is that a successful command economy is not impossible - it merely requires to have an extremely intelligent, uncorrupt, person, driven by a desire for economic success; not micromanaging below the level at which the technology is unproven; with a degree of authority akin to dictatorship; in an economy that has not been command driven for long.

   Trotsky, in his role of electricity commissar (Stalin though disposing of him kept his industrial plans though, over time, they ran down) and Lee Kuan Yew in the early years of Singapore independence managed to achieve all these demanding conditions. It must be obvious how very unlikely it is that they will all be achieved by coincidence, which is why they are alone.

   As somebody who inherently distrusts big government I am not particularly happy to have found , as I believe, a condition, however difficult, under which it is optimum but that s the way I believe the evidence points.

   Nonetheless, in the world as it is libertarianism is still far better than the mess of parasitic governments we have. Even better than China's which, with a large state sector, has been a command economy for far to long for the necessary price signals tom be optimum.

   I intend to write more about this from the viewpoint of Trotsky. Perhaps I am idealising someone who is one of the 20th C's most romantic political figures. If so I hope someone will say so and why.

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Comments:
Electrification is one of the few things where it is right and proper for the government to step in and railroad it through.

The state does not need to pay for or build power stations, neither does it need to pay for or build the national grid (it can force the generators/users of electricity to pay) but because of all the planning permission required and NIMBYism.

Further, because generators/the national grid will always be a monopoly/cartel situation, there's no harm in the government capping prices.

So electrification is like roads or railways, it needs the government to make it happen - there was an interesting mini-series on telly recently on the national grid which explained all this.

There are plenty of other very specific examples of things which are best done collectively (police, refuse collection, defence, sewers and so on), but these are all just setting the framework within which the free market operates to provide everything else and are NOT examples of "Why controlled economies can do better".
 
Park Chung-Hee in South Korea. Decided to turn the economy to things they could export, and grew South Korea like crazy.

But he's one of the few good examples. The benefit of markets is that winners emerge.
 
Neil, Jerry Pournelle's reply about the NEP is beside the point, because the rapid growth you are talking about came after the NEP.

Trotsky's electrification plan may have helped, but it wasn't the whole explanation for Soviet growth in the 30s.

I would recommend Alec Nove's 'Economic History of the USSR' (Penguin) for basic facts. Many of Trotsky's writings including his own views (e.g.) on Soviet economic policy are available online at Marxist Internet Archive.
 
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