Posts Tagged ‘I agree with McCaine’

Another aside:

November 4, 2007

If you don’t mind, I’d like to take the discussion back to this point. One of the critiques to command economies is that central planners (no matter how benevolent) lack the capability to efficiently allocate resources (input, labor and capital) towards the production of goods of value (private and public). This ‘lack of capability’ is because economic decision making is centralized under a single bureau or institution rather than between millions of private firms and households (like in a decentralized market system). It’s mainly a computational problem that has to do with an overload of information rather than the lack of perfect information. It has been said earlier that communism may have never had a fair chance because it didn’t have access to computers or information technology and I think there is some truth to this.

A stronger critique (I think) is that command economies suffer from agency problems . These problems arise when there’s a significant incentive for managers to simply lie to the owners of the means of production. Under capitalism, it’s when CEO’s lie on accounting statements and under communism it’s when factory managers lie to the government. Even if your democratically elected communist leader had the purest of intentions, even he needs accurate information as to how many inputs each factory is to get to meet his quota. Factories have significant incentive to under-report capacity to make quotas easier to attain and to avoid the steep punishment for not being able to meet them. Communes have an incentive to lie about their census to receive more resources from the government. In the end, what does this mean for the central planners? Any forecasting model can only work as well as the quality of the information put into it (garbage-in garbage-out as computer scientists would say) so the lack of quality information received by economic planners severely hampers efficiency which in the end translates into corruption.

Both types of problems are magnified once the economy becomes more sophisticated and intricate because the oversight mechanisms themselves could collude with factory managers. This is why I believe the USSR, China and Vietnam eventually switched to decentralized, open economies but Cuba and North Korea didn’t (or still havn’t) Note their relative sizes in terms of population.

As an aside (because this is a thread about the shortcomings of communism, not capitalism): large corporations and multinationals under capitalism have similar analogous accounting problems (world com et al), it’s just that most of the economy isn’t run by them (yet). Also, these problems are mitigated since there’s an incentive to under AND over-report financial statements. One is for tax purposes, and the other is to make your company stock look better. When stock options come into play however, that’s a different story.

I agree with McCaine when he says that ideologically based decisions aren’t unique to communism nor are bad policy decisions. But someone else on this thread already mentioned that bad policy decisions under communism/a command economy has a much worst effect than a decentralized/market one. This is because the functions of decision making and resource allocation are covered with a high degree of redundancy under a market system so if one firm fails or goes bankrupt due to bad decisions or misallocation of capital, not everyone suffers and only the people who made the poor decisions suffer for their mistakes.

Another aside: There are many policies in the States and elsewhere that is highly motivated by economic ideology rather than practicality. Many people would vote lower taxes despite the fact that taxes fund social programs that benefit the majority of the population at the cost of the minority of the rich simply because it is the complete opposite of socialism or the stigma of communism.