On the Soviet economy

Very good piece at The G about the Soviet economy, where it all went wrong. A couple of great little points:

It had been a reasonable assumption, for nervous western onlookers in the early 60s, that a society which launched satellites must also have solved simple everyday problems such as supplying lettuces and children\’s shoes. When it turned out that it wasn\’t so, that the Hemel Hempstead branch of Start-Rite would have represented unimaginable luxury in a Soviet city, the space rockets stopped signifying a general, enviable \”high technology\”. They started looking like some pharaoh\’s pet project, a pyramid scraped together on the back of poverty, cruel and a bit ridiculous.

It was still true decades later….take the average Russian circa 1989/1990 into a standard western supermarket and they quite simply would not believe that this was reality. This was all Potemkin, wasn\’t it? There are stories of various aid and economic training missions doing exactly this with various bureaucrats in the early 1990s, taking them from Russia and parading them through some suburban Sainsbury\’s and they absolutely not believing that this was just how things were.

It even happened to me….I was living there from 91 onwards and in 93 made a quick trip to the US. Jet lag had me wandering through a supermarket at 4 am, wondering over the cornucopia. There simply wasn\’t anything like this at all back in Russia: this one food hall in a suburb of Boulder (it was, I think, a King Super) had more variety than every shop in the entirety of Moscow, a city of 10 million plus, put together.

All of the perversities in the Soviet economy that I\’ve described above are the classic consequences of running a system without the flow of information provided by market exchange;

That was, indeed, the problem. No, not the absence of capitalism, capitalists or entrepreneurs. But the absence of markets.

However, having praised this piece so far the underlying thesis has its flaws. That thesis being that the Soviets tried to get around this problem through cybernetics:

And so follows the oddest implication of the Soviet moment. It may not be over. It may yet turn out to be unfinished business. For, from the point of view of \”economic cybernetics\”, the market is only an algorithm. It is only one possible means of sharing out and co-ordinating economic activity: a means with very considerable advantages, in terms of all the autonomous activity and exploration of economic possibilities it allows, but not the only one, and not necessarily the best either, even at allowing autonomy and decentralisation. In the 20th century, devising the actual apparatus for a red plenty was an afterthought to the ideology. In the 21st century, it may be the algorithm that appears ahead of a politics to advocate it. In which case, the contest of plenties will be on again. And every year our processing power increases.

It didn\’t work and yet, with our more advanced technology, perhaps it can? Which is to ignore something from before the computer age, from Mises and Hayek. Even if you had the processing power you simply cannot know enough, cannot collect enough information centrally, to be able to calculate the economy. The only thing which can calculate the economy is the economy itself.

To be trivial for a moment: how can you set up a model of the economy that allows for the emergence of virtual red roses on Facebook? To be not trivial for a moment: imagine wheat prices rise and therefore bread prices do as a result of, say drought (as is happening now). We know that we\’re going to see some associated changes in demand for barley, oats, rice, rye, potatoes, millet and maize….as people substitute away from wheat to these other grains and carbohydrates. But we cannot, in advance, calculate what those changes in demand are going to be without knowing what are everyone\’s (yes, everyone\’s) second preferences to wheat….and possibly even their third preferences given the potential price rises in their second preferences.

This is information that we cannot possibly collect in advance: at least in part because people themselves don\’t know in advance. Your reaction to higher bread prices will in part depend upon changing fashions, has Julia just released a book on potato bread, Jamie  told us all to eat polenta not pasta? this is information that we can collect, yes, in agggregate as well, but only after the fact, only by observation, only after the economy as a whole, through those markets, has done the processing for us. And while what happens this time can be used as a guide to the future, given the underlying changes in technology, tastes and desires (maybe the Atkins Diet will get another run? Who in hell knows?) it isn\’t an absolute guide to the future.

We might even, in the way that WalMart already does, be able to use cybernetics to gain a near real time picture of what is actually happening: but that still doesn\’t allow us to predict with certainty and it is prediction with certainty that we need in order to be able to plan. And even then planning doesn\’t enable us to deal with changing technology.

So while the story (it\’s the basis of a book which comes well recommended) is both great and well told, the author\’s hopeful thesis comes up against a brick wall constructed by reality. No, advances in computers are not going to be able to make planning work for we cannot, in logic let alone reality, ever have enough information to put into the planning system. For it is the workings of the economy as a whole that provide that information to us and so we can never get ahead of the game.

In short, only the economy itself can do the information processing required to plan the economy. Which means that all dreams of detailed modelling, in the detail required to plan the economy in detail, die for we simply cannot construct any other method of information processing than the economy itself.

Of course, another way of putting it is why on earth should we bother to model the economy so as to plan it, when we\’ve already got an excellent information processing and planning system: the economy?

14 thoughts on “On the Soviet economy”

  1. It’s like that saying about modelling the universe (I think it was in an Asimov book possibly but it might have been New Scientist).

    It is impossible to model the universe accurately without using every molecule in the universe to do so.

  2. In 1992 (IIRC) I took a party of East European journalists to see my company’s input into the Winter Olympics in Albertville.

    All they wanted to do after the briefing and before the return flights was to visit the local hypermarkets to buy clothing for their children back home.

    Later in 1993, with a similar party to Scotland and on a visit to a Whisky distillery it was notable that they could just about afford a miniature of the stuff to take home as they wanted to save the money for a spending trip in Tesco’s.

    When I lived in Vienna in the early ’90s, Saturday mornings saw the city overflowing with coachloads of Poles, Czechs, Slovaks etc on weekly shopping trip to Mariahilferstrasse.

    Western market capitalism’s superiority demonstrated by experience.

  3. All true, but markets are soo unfair. A perfectly planned economy would be much fairer, which is really what the Guardianistas care about (from their villa in Tuscany)

    Do try to keep up;-)

  4. Funny that free markets end up with land values and accommodation prices rising so disproportionately,that ordinary people do not have enough ready money to buy the things they produce.(There are plenty of completely empty shops where I live: they have gone out of business.) Marx called Henry George’s ideas to correct this imbalance “capitalism’s last ditch” but the arrogance with which this insight has been ignored is no different from the Soviet’s arrogant idealism. The article in The Guardian paints a sad picture of all the mouldering concrete of failed Communism.How do yo explain the hundred of thousands of empty houses in Spain and the USA built planless but in direct response to supposed market signals?Or were they false signals in the old Communist false consciousness get-out ?

  5. DBC

    If we lived in a true free market you might have a small point.
    We live in a society in which the State and its goons interfere in every way they can think of.
    It is a great tribute to the market that it can still function reasonably well despite daily abuse from statist dickheads.

  6. DBC – come on – the false signals were provided in spades by the endless abuse of the money supply, interest rates, planning restriction, favours to the politically well-connected.

    As Mr E says, you’d have a point if those signals were generated by the free interactions of millions of consumers and producers; but since they weren’t, not even remotely, you don’t.

  7. ah but it’s such a a wonderful dream isn’t it. A machine that can tell you just what present will melt that girl’s heart. For if it can’t do that then it can’t possibly know the value of things.
    This is dreaming of a Saviour- dreaming that someone, or something will solve all our problems for us with no effort on our part.
    Quite apart from the thing being impossible why would anyone do that for free? and why would anyone supply the machine for nothing. We will have to pay the Saviour and/or the machine maker the true value for the service- which, if it works as advertised, would be everything we have.
    Of course there will be an endless queue of people touting this service in the hope of a large payout before they are rumbled.

  8. Further thought- writers in e.g. the Guardian purport to present policies that will make us all better off – but last I heard they only do so if they are paid. They don’t give the money back if the policies don’t work- they make excuses and keep the dosh.

  9. Even if all those villas in Spain were wrongly built as a consequence of the action of markets it doesn’t undermine the point that markets are as a rule better at distributing resources than state planners for the reasons Tim elucidates.

    After all, markets *have* to be fallible as they’re composed of human beings. They will do things that in hindsight will look wrong. But that doesn’t mean they don’t tend to be more right than anything else.

    A similar point can be made about John Gray’s lauding of China. China’s success needn’t undermine the theoretical superiority of markets even if you assume (wrongly) that free markets aren’t behind China’s success. A group of guys sitting around a table in Beijing can get lucky once, twice, three times…

  10. Tim, you are unusually kind to this article, which I’ve just read. The author assumes that the Soviet unpleasantness was incidental to a planned economy and that if planning was undertaken in a better society with better tools everything might work out fine. This is, of course, to fundamentally misunderstand the nature of a planned economy.

    So just more lefty apologetics and what-ifs: next time it really will work…

    Well written though.

    Tim adds: Yes, but…..I wanted only to point to the inevitable failure of his hope rather than go through the horrors of planning again.

  11. Tim,
    Would you consider accepting the position of Master of the Universe? After the Anointed One moves on to some think tank (soon, we hope), there will be an opening for someone to take charge of the rapidly unraveling People’s Republic of America and I think you would be a great choice.
    In the meantime, Tim, keep posting. If nothing else, I take comfort that someone out there both gets free markets and can write lucidly about them.
    For DMC Reed: If you think that there has been anything “free” about real estate markets anywhere in the world, (my experience is with the US) for the last several decades, then no wonder you think free markets are a bad idea. Start with tax subsidies for home finance, move on to exemptions on capital gains (something you don’t get if you invest in a business), then pile on government guarentees for loans to people who no one would lend their own money to otherwise, then artifically lower interest rates (so you are basically giving people free money to buy a house–once again never happens for businesspeople), then tell everyone that they can’t lose money on a house and you have the perfect recipe for a non-free market.
    We haven’t had much in the way of really “free markets” (even in the US–much less Europe) for many decades. However, even with markets that are constantly being distorted for the political (and monetary) benefit of politicians, our quasi-free markets have produced prosperity orders of magnitude above the miserable performance of command and control economies.
    Try reading a little wider than the socialist “just so” stories of the popular media and academics (those lovable Marxists that forget nothing and learn nothing).
    Discussing complex issues is good. Constructing “straw men” and knocking them down may get you elected President but it doesn’t make you interesting.
    PS. Sorry for the long post

    Tim adds: “Would you consider accepting the position of Master of the Universe?”

    No certainly not. As a good little liberal (classical branch) the major point is that no one should be Master of the Universe. It would be difficult to take a position which one was certain shouldn’t exist.

    then again, that’s probably the definition of the only sort of person you would want to have such a position if exist it had to.

  12. @DBCR:

    There are many empty shops all over the place, for a few simple reasons, the chief of which is the extortionate amount of ‘business rate’ charged by ever-expanding councils and central government. Add in a demand dip and the result is High Streets full of charity shops, many of which sell products commissioned in the third world only for sale by them. These are businesses in all but name but are permitted to ‘complete’ with the market.

    So, there are some distortions which suggest that the only true free market is the one where the state plays no role at all. Business rate is, after all, like many taxes, effectively unearned income. Or ‘protection’, as gangsters call it.

  13. These criticisms of what is really Henry George’s position is a bit wide of the mark.George saw land values spiralling out of control in California at the end of the nineteenth century i.e. the robber baron era admired by the ridiculous Ayn Rand which was practically a free-fire zone for laissez-faire policies.His Single Tax on land values was a response to a no rules /no planning/no control of the money supply situation.(There were other people such as the Greenbackers trying to deal with the tight money system hence William Jennings Bryan’s Cross of Gold speech).BTW the term” laissez faire laissez passer was the slogan of the first land tax movement (and first modern economic system): the pre French Revolutionary Physiocrats.
    None of this will have any effect on people who keep ranting on about the State and are dumbfounded that the abolition of exchange and credit controls etc plus privatising the natural monoplies of water supply railways etc has not been the unparalled success they fondly imagined.

  14. “Tim adds: “Would you consider accepting the position of Master of the Universe?”

    No certainly not. As a good little liberal (classical branch) the major point is that no one should be Master of the Universe. It would be difficult to take a position which one was certain shouldn’t exist.

    then again, that’s probably the definition of the only sort of person you would want to have such a position if exist it had to.”

    I seem to recall DNA writing something along those lines, albeit about the slightly less exalted post of President of the Galaxy…

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