Economics general

Economics is the study of the allocation of scarce goods which have alternative uses.

Today's edition: why the ex-soviet economists concede that a controlled economy can never work.

The problem was not that particular planners made particular mistakes in the Soviet Union or in other planned economies. Whatever the mistakes made by central planners, there are mistakes made in all kinds of economic systems— capitalist, socialist, or whatever. The more fundamental problem with central planning has been that the task taken on has repeatedly proven to be too much for human beings, in whatever country that task has been taken on. As Soviet economists Shmelev and Popov put it:

>No matter how much we wish to organize everything rationally, without waste, no matter how passionately we wish to lay all the bricks of the economic structure tightly, with no chinks in the mortar, it is not yet within our power.

This lesson proved hard for many others who lived in a centrally planned economy to accept. Mikhail Gorbachev was not the only leader raised in the Soviet Union who found the market’s operations and results in the West baffling. During the last years of the Soviet Union, Boris Yeltsin, later destined to become Russia’s first post-Communist leader, was equally struck by what he saw in a capitalist economy:

>A turning point in Yeltsin’s intellectual development occurred during his first visit to the United States in September 1989, more specifically his first visit to an American supermarket, in Houston, Texas. The sight of aisle after aisle of shelves neatly stacked with every conceivable type of foodstuff and household item, each in a dozen varieties, both amazed and depressed him.

Because Hayek's information problem exists dispite people's political desire to have communist and socialist command style economies.

>For Yeltsin, like many other first-time Russian visitors to America, this was infinitely more impressive than tourist attractions like the Statue of Liberty and the Lincoln Memorial. It was impressive precisely because of its ordinariness. A cornucopia of consumer goods beyond the imagination of most Soviets was within the reach of ordinary citizens without standing in line for hours. And it was all so attractively displayed. For someone brought up in the drab conditions of communism, even a member of the relatively privileged elite, a visit to a Western supermarket involved a full-scale assault on the senses.

When he returned to Moscow, Yeltsin spoke of the pain he felt after seeing in Houston the contrast between American and Soviet living standards. He described what he had seen in America to what was described as “a stunned Moscow audience.” Yeltsin’s aide said that the Houston supermarket experience destroyed the last vestiges of Yeltsin’s belief in the Communist system, setting the stage for his becoming the first leader of post-Communist Russia.

>people's

i think you should clarify that to be "people who do not understand economics' desire..."

The significance of free market prices in the allocation of resources can be seen more clearly by looking at situations where prices are not allowed to perform this function. During the era of the government-directed economy of the Soviet Union, for example, prices were not set by supply and demand but by central planners who sent resources to their various uses by direct commands, supplemented by prices that the planners raised or lowered as they saw fit. Two Soviet economists, Nikolai Shmelev and Vladimir Popov, described a situation in which their government raised the price it would pay for moleskins, leading hunters to get and sell more of them:

>State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen twice to lower purchasing prices, but the “question has not been decided” yet. And this is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices.

While markets coordinated by price movements— “capitalism” as it is called— may seem like a simple thing, markets are misunderstood more often than some other things that are considered much more complex. Although a free market economic system is sometimes called a profit system, it is in reality a profit-and-loss system— and the losses are equally important for the efficiency of the economy, because losses tell producers what to stop doing— what to stop producing, where to stop putting resources, what to stop investing in. Losses force the producers to stop producing what consumers don’t want. Without really knowing why consumers like one set of features rather than another, producers automatically produce more of what earns a profit and less of what is losing money. That amounts to producing what the consumers want and stopping the production of what they don’t want. Although the producers are only looking out for themselves and their companies’ bottom line, nevertheless from the standpoint of the economy as a whole the society is using its scarce resources more efficiently because decisions are guided by prices.

rice-coordinated markets enable people to signal to other people how much they want and how much they are willing to offer for it, while other people signal what they are willing to supply in exchange for what compensation. Prices responding to supply and demand cause natural resources to move from places where they are abundant, like Australia, to places where they are almost non-existent, like Japan, because the Japanese are willing to pay higher prices than Australians pay for those resources— and these higher prices will cover shipping costs and still leave a larger profit than selling the same resources within Australia, where their abundance makes their prices lower. A discovery of large bauxite deposits in India would reduce the cost of aluminum baseball bats in America. A disastrous failure of the wheat crop in Argentina would raise the incomes of farmers in Ukraine, who would now find more demand for their wheat in the world market, and therefore higher prices.

While telling people what to do might seem to be a more rational or orderly way of coordinating an economy, it has turned out to be far less effective in practice. The situation as regards pelts was common for many other goods during the days of the Soviet Union’s centrally planned economy, where a chronic problem was a piling up of unsold goods in warehouses at the very time when there were painful shortages of other things that could have been produced with the same resources. In a market economy, the prices of surplus goods would fall automatically by supply and demand, while the prices of goods in short supply would rise automatically for the same reason— the net result being a shifting of resources from the former to the latter, again automatically, as producers seek to gain profits and avoid losses.

During a brief era of greater openness in the last years of the Soviet Union, when people became more free to speak their minds, the two Soviet economists already mentioned wrote a book giving a very candid account of how their economy worked and this book was later translated into English.* As Shmelev and Popov put it, production enterprises in the Soviet Union “always ask for more than they need” from the government in the way of raw materials, equipment, and other resources used in production. “They take everything they can get, regardless of how much they actually need, and they don’t worry about economizing on materials,” according to these economists. “After all, nobody ‘at the top’ knows exactly what the real requirements are,” so “squandering” made sense— from the standpoint of the manager of a Soviet enterprise.
Among the resources that were squandered were workers. These economists estimated that “from 5 to 15 percent of the workers in the majority of enterprises are surplus and are kept ‘just in case.’” The consequence was that far more resources were used to produce a given amount of output in the Soviet economy as compared to a price-coordinated economic system, such as that in Japan, Germany, and other market economies.

Citing official statistics, Shmelev and Popov lamented:

>To make one ton of copper we use about 1,000 kilowatt hours of electrical energy, as against 300 in West Germany. To produce one ton of cement we use twice the amount of energy that Japan does.

The Soviet Union did not lack for resources, but was in fact one of the most richly endowed nations on earth— if not the most richly endowed in natural resources. Nor was it lacking in highly educated and well-trained people. What it lacked was an economic system that made efficient use of its resources. Because Soviet enterprises were not under the same financial constraints as capitalist enterprises, they acquired more machines than they needed, “which then gather dust in warehouses or rust out of doors,” as the Soviet economists put it. In short, Soviet enterprises were not forced to economize— that is, to treat their resources as both scarce and valuable in alternative uses, for the alternative users were not bidding for those resources, as they would in a market economy. While such waste cost individual Soviet enterprises little or nothing, they cost the Soviet people dearly, in the form of a lower standard of living than their resources and technology were capable of producing.