First, let me say: if this is supposed to be a frivolous attempt at entertainment, then that’s all well and good. I must confess there are several moments in it where a broad smile came to my face and I burst out laughing. Good entertainment can be fiction.
On the other hand, if people think there is anything really serious in it, they will be sorely disappointed. This video presents a caricature of Keynesian thought.
I address some of the more important points below.
I. Hayek’s influence is overrated.
The first point is that the fight over economic policy today has little if anything to do with Hayek. Today’s debates are essentially between New Keynesians versus New Classicals/monetarists. All of them are neoclassicals, and the free market New Classicals and monetarists are not Austrians.
Secondly, back in the 1930s and 1940s there were epic debates between Keynesians and Austrians like Hayek: and the Austrians lost those debates.
In fact, a good many of Hayek’s bright students at the LSE in the 1930s like Abba Lerner and Nicholas Kaldor simply abandoned his theories once they came to understand Keynes’ ideas. The defeat of Hayek and the Austrians was rather spectacular, as the world converted to Keynesian economics, and Austrians like Hayek and Mises were relegated to outer darkness.
When neoclassical synthesis Keynesian came under attack in the 1970s, it was not Austrian economics that overthrew it, but Milton Friedman’s monetarism and then the revived New Classical macroeconomics.
Furthermore, one of the major debates between Hayek and the emerging Keynesians in the 1930s and 1940s was over Hayek’s business cycle theory. One can note that even the Marshallian neoclassicals found his business cycle theories dubious, even before Keynes published the General Theory in 1936. The following anecdote illustrates this:
Immediately before giving his early 1931 lectures at LSE, which were his introduction to the school, Hayek gave a one-lecture to the Keynes-dominated Marshall Society at Cambridge. Richard Kahn, one of Keynes’ followers and later his literary executor, described the scene. Hayek had “a large audience of students, and also of leading members of the faculty. (Keynes was in London.) The members of the audience—to a man—were completely bewildered. Usually a Marshall Society talk is followed by a lively and protracted barrage of discussions and questions. On this occasion there was complete silence. I felt I had to break the ice. So I got up and asked, ‘Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes,’ said Hayek. ‘But,’ pointing to his triangles on the board, ‘it would take a very long mathematical argument to explain why’” (Ebenstein 2003: 53).It is no wonder that by the late 1930s Hayek’s LSE students were deserting him in droves.
Lest you think I am exaggerating, let Hayek speak for himself:
“At about the same time [viz., 1946], I discredited myself with most of my fellow economists by writing The Road to Serfdom, which is disliked so much. So not only did my theoretical influence decline, most of the departments came to dislike me, so much so that I can feel it to the present day. Economists very largely tend to treat me as an outsider, somebody who has discredited himself by writing a book like The Road to Serfdom, which has now become political science altogether. Recently—and Hicks is probably the most outstanding symptom—there has been a revival of interest in my sort of problems, but I had a period of twenty years in which I bitterly regretted having once mentioned to my wife after Keynes's death that now Keynes was dead, I was probably the best-known economist living. But ten days later it was probably no longer true. At that very moment, Keynes became the great figure, and I was gradually forgotten as an economist” (Kresge and Wenar 1994: 127).
II. A command economy is not a mixed economy, and Keynesian stimulus is not about war.
From 3.00 to 4.00 in this video, there is a truly stupid attempt to paint Keynes or Keynesians as supporters of war as a method of stimulus, in the comments on the Second World War.
And the producers of this video can’t even understand the nature of Western economies in WWII. Of course, the US and other nations did have huge government spending in WWII, but they also had moderate command economies in these years, with price controls and rationing. I say “moderate” because the US command economy was certainly not as extreme as that of the Soviet Union.
Other nations like the UK, Canada, and Australia also had moderate command economies during WWII.
The real lesson from WWII that is devastating to Austrian and other libertarian buffoons is that advanced capitalist nations showed that their type of command economy was extraordinarily successful – in fact they won the war for us. We owe our freedom from German and Japanese fascism to central planning of production and the way the economy was run in those years. The experience in WWII refuted the Austrian idea that government can never plan production on a large scale. If that were true, how on earth did any government produce anything in these years, let alone win the war? Of course, the WWII was a horrific disaster and any wartime economy is brutal and wasteful military spending.
None of the comments above is, in any way, an endorsement of war or a reason to re-establish command economies today – they are just statements of fact. I don’t personally support a command economy, nor do Keynesians, and it is not in doubt that rigid, communist command economies in backward nations were grossly immoral, brutal systems that faced severe problems and, in the long-term, serious inefficiencies.
But Keynesians do not advocate a command economy; they support a mixed economy, a very different thing from a command economy. Modern capitalist economies are mixed economies, where there is a vast space for private production of commodities and private enterprise.
In a Keynesian system, we can stimulate the economy into full employment without war or military spending. You can give a huge Keynesian boost to the economy by (1) large infrastructure spending, social spending, education spending, or increased R&D. Alternatively, you can also give a stimulus by (2) simply cutting taxes without cutting spending, which is also a classic Keynesian method.
These are the two methods of stimulus preferred by every Keynesian I know, not war.
III. Hayek recanted his views on “secondary deflation”.
Towards the end of his life, Hayek basically recanted his earlier view on the role of deflation in 1929–1933:
“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression” (Pizano 2009: 13).Hayek argued that a secondary deflation had negative effects on the US economy after 1929 and admitted that his earlier views had been wrong:
“Although I do not regard deflation as the original cause of a decline in business activity, such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek 1978: 206).In saying that he agreed with Milton Friedman, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions (some claim that Hayek also supported limited fiscal policy actions, but I have yet to see evidence of this).
In other words, even the Hayek in this video is a travesty. By the end of his life, he moved closer to a monetarist position on “secondary deflation,” and approved of “evil” state interventions to stabilise the money supply.
IV. Hayek and Keynes shared some important ideas on economics.
As I have pointed out before, there are some interesting similarities in the thought of Hayek and Keynes:
“Hayek and Keynes: Not So Far Apart?,” April 19, 2011.
This involves the issue of methodology and the role of econometrics. Even Hayek himself noted Keynes’ negative views on econometrics:
“But Keynes himself did not think very highly of econometrics, rather to the contrary. Yet somehow his stress on aggregates, on aggregate income, aggregate demand, encouraged work in both macroeconomics and econometrics. So, very much against his own wishes, he became the spiritual father of this development towards the mathematical econometric economics. Now, I had always expressed my doubts about this, and that didn’t make me very popular among the reigning generation of economists. I was just thought to be old-fashioned, with no sympathy for modern ideas, that sort of thing”(Kresge and Wenar 1994: 127).
BIBLIOGRAPHY
Ebenstein, A. O. 2003. Friedrich Hayek: A Biography, University of Chicago Press, Chicago, Ill. and London.
Hayek, F. A. 1975. A Discussion with Friedrich A. Von Hayek, American Enterprise Inst., Washington.
Kresge, S. and L. Wenar (eds). 1994. Hayek on Hayek: An Autobiographical Dialogue, University of Chicago Press, Chicago.
Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York.
Eh, the last I checked, a government during wartime still has to pay a price for obtaining goods from the market, still has to pay wages for hiring workers from the market, still has to pay transportation charges for all the steel and lead it has to send to factories for development of arms, and so on.
ReplyDeleteYour argument was that the Western style wartime economy did not fail as badly as the Soviet one, because it still had to rely on information provided by prices, wages, and interest rates? If so, I agree. Is this what you call a command economy? If you stretch the definition, maybe.
Wartime interventions involved controlling the prices to reduce the cost for the government and then rationing the supply of the produce for everyone else in order to prevent fall in supply for the government. With maximum wage laws and price ceilings, the government could immediately direct away as many workers and as many goods for its wartime use. Since all industry was directed towards wartime use, there was nowhere left to invest one's money other than war bonds, so the government got all the capital too.
Certainly the US government should have been in a position with which it can obtain everything cheaply and conveniently. And yet, as Thomas Sowell explains in one case example in Applied Economics, these war bonds paid back less than what people had put into them.
Meaning that the US government was consuming and reducing the stock of capital available, even when it had price controls and rationing to make everything affordable. Had the war gone on much longer, they would have run out of capital. Is this a success of a wartime economy?
Lastly, yes, the war had enough industrial production to provide for soldiers. Industrial productivity built over from the previous 200 years of a capitalist system in United States - when this industry was taken over by a wartime government for its use, it's a shock that it could provide for war? The real question we might ask is whether such a system would have been tenable for another 100 years, instead of just 4.
In short, I don't understand what is exactly the success of a wartime economy, that forces a reduction in everyone's standard of living, uneconomically exhausts scarce capital, leads to a recession at the end of the war when workers and industry are removed from wartime uses, and uses the productive power of an already existing managerial and industrial capacity of a capitalist system to succeed.
In the US command economy in WWII, wage and prices were administered. The budding Keynesian John Kenneth Galbraith had a major role in this as deputy head of the Office of Price Administration.
ReplyDelete"Meaning that the US government was consuming and reducing the stock of capital available, even when it had price controls and rationing to make everything affordable. Had the war gone on much longer, they would have run out of capital. Is this a success of a wartime economy?"
If you are using "capital" in the sense of money for government spending, how can you run out of fiat money, when it can be created by the central bank at will?
Are you aware that the US was monetizing its budget deficits massively during the war?
The sale of war bonds to the public was about checking inflation and consumption - not about "financing" government spending.
The amount of economic activity in the US was limited by real resources, real labour and capital goods, not about "money".
In no sense, would the US have "run out of capital [= money]."
"In short, I don't understand what is exactly the success of a wartime economy, that forces a reduction in everyone's standard of living"...
ReplyDeleteExactly as I have said above: it was tremendously sucessful at production of war material and winning the war for us:
"We owe our freedom from German and Japanese fascism to central planning of production and the way the economy was run in those years. The experience in WWII refuted the Austrian idea that government can never plan production on a large scale. If that were true, how on earth did any government produce anything in these years, let alone win the war?"
"The real question we might ask is whether such a system would have been tenable for another 100 years, instead of just 4."
ReplyDeleteYou are correct. But don't tell me that a command economy can never work.
Yes, a rigid command economy will probably face inefficiencies in the long term.
Also, subjective preferences for fashionable consumer goods are better satisfied by private enterprise meeting that demand, instead of government planning production.
But even here there are things that be provided as public goods, like health care, public works etc.
As I have said above, Keynesianism favors the mixed economy, not a command economy.
The members of the audience—to a man—were completely bewildered.
ReplyDeleteVery illustrative on how "the Austrians lost those debates": by ignoring them to the point of being "bewildered" that Austrian point of view even existed. Austrians never lost the debates, "bright" students of economy simply chose to ignore them because Austrians could never outbid Keynesians in government synecures as economic tsars. Same today. Social status of economists in keynesianism is infinitely higher than in austrianism (monetarists holding the middle ground).
We owe our freedom from German and Japanese fascism to central planning of production and the way the economy was run in those years.
You conveniently forget that German, Italy and Japanese fascisms were the original models of central planning solutions implemented in US during New Deal (eg industry-wide cartels). In other words, you conveniently forget that German, Italy and Japanese fasisms (national _socialisms_) were even _more_ centrally planned. And they lost the war. Can a man be even more biased than that?
If that were true, how on earth did any government produce anything in these years, let alone win the war?
Government can certainlly produce a _lot_. More specifically, it can produce a lot of stuff that government needs, like tanks or battleships.
Of course, the WWII was a horrific disaster and any wartime economy is brutal and wasteful military spending.
It is "of course" according to common sense (unless you believe in broken window fallacy).
It is "of course" according to Austrian School (because all government spending is wasteful).
But why is it "of course" according to Keynes?
You are just saying that, because common sense is too powerful to go against in this case.
But according to Keynes multiplier, GDP growth should have gone through the roof during WWII.
Now, obviously, as a Misesian, I'm happy for your points III and IV. Hayek did not even subscribe to praxeology, so no wonder he could have "shared some important ideas on economics" with Keynes, monetarists and whatnot.
"In other words, you conveniently forget that German, Italy and Japanese fasisms (national _socialisms_) were even _more_ centrally planned."
ReplyDeleteThey were not, actually.
The German command economy was poorly planned until Albert Speer was put in charge of it in 1942:
"At the time of Speer's accession to the office, the German economy, unlike the British one, was not fully geared for war production. Consumer goods were still being produced at nearly as high a level as during peacetime. No fewer than five "Supreme Authorities" had jurisdiction over armament production — one of which, the Ministry of Economic Affairs, had declared in November 1941 that conditions did not permit an increase in armament production. Few women were employed in the factories, which were running only one shift. One evening soon after his appointment, Speer went to visit a Berlin armament factory; he found no one on the premises..."
Speer overcame these difficulties by centralizing power over the war economy in himself. Factories were given autonomy, or as Speer put it, "self-responsibility", and each factory concentrated on a single product.[70] Backed by Hitler's strong support (the dictator stated, "Speer, I'll sign anything that comes from you"[71]), he divided the armament field according to weapon system, with experts rather than civil servants overseeing each department. No department head could be older than 55 — anyone older being susceptible to "routine and arrogance"[72] — and no deputy older than 40. Over these departments was a central planning committee headed by Speer, which took increasing responsibility for war production, and as time went by, for the German economy itself. According to the minutes of a conference at Wehrmacht High Command in March 1942, "It is only Speer's word that counts nowadays. He can interfere in all departments.
http://en.wikipedia.org/wiki/Albert_Speer#Minister_of_Armaments
But by 1943, Germany was already losing the war.
Furthermore, the Soviet Union had an extreme command economy and it smashed Nazi Germany on the eastern front.
You have no idea what you're talking about.
And I will also say: if anyone here wants a proper study of wartime production and a comparison of the various command economies (Soviet, German, US etc.), see Richard Overy, Why the Allies Won, Pimlico, London, 1996, pp. 180-207.
ReplyDeleteA sample:
"In 1943 the gap between Soviet and German production widened further. In the middle years of the war Soviet factories produced three aircraft for every two German, and almost double the number of tanks. The balance of heavy artillery was three to one.
The Soviet economy outproduced the German economy throughout the war from a resource base a good deal smaller and with a workforce far less skilled.
This was a remarkable achievement by any standard, but it is easier to describe than to explain. The simple answer might be that the Soviet Union operated a command economy, directed by the state and centrally planned."
Get it? The Soviet economy outproduced the German one because of better planning.
It was also extremely brutal, repressive and
used slave labour, just like the German one, but there is no doubt that planning was a major factor in it too.
I am not attacking Keynesianism at all.
ReplyDeleteI also don't buy into the idea that it is somehow central planning.
Anyway, getting into the nuts and bolts of the thing - is it really command economy when a country is still trading abroad? Talking about the wartime West, I mean.
The level of state control over the economy is always limited to what is possible with domestic commerce. A government can not control flow and distribution of resources abroad or the wages paid to workers abroad. If it still trades abroad, it is still not a fully planned economy, and early advocates of planned economies wanted a single cosmopolitan economic commonwealth to implement their ideas.
In a true sense, we can call the autarkies in Mao's pre-Nixon-meet China and Stalin's Russia as command economies. These were large resource-abundant countries where they could do without foreign trade. The result was extreme poverty in Ukraine, for example, but yes, it is barely possible.
Countries like UK, Australia,.etc can never truly become command economies, because it is genuinely impossible for them to be autarkies. They are always dependent on foreign trade.
So in a true sense, UK, Australia,.etc never became centrally planned at all, even during wartime. Right? Or am I wrong?
"is it really a command economy when a country is still trading abroad? "
ReplyDeleteOf course, it is still a command economy.
Autarky = an economy that is self-sufficient.
command economy = an economy in which the state plans production and distribution of goods and services.
There is no necassary connection between autarky and a command economy.
You can have an extreme command economy with a high degree of foreign trade, moderate trade or minimal trade.
I think the video is fair and it represents the actual thinking of both economists.
ReplyDeleteOf course there is a connection.
ReplyDeleteWe can't control production of goods that you buy from abroad. We can't control the prices and distribution of goods produced abroad. And to buy goods from abroad, we still have to sell goods abroad.
In this situation, we still see an economy dependent on information from the pricing system and on production limited by marginal costs.
If Perth, Australia were to be transformed into a planning based economy, it could still have to buy candy bars from the rest of Australia (beyond what they can produce in Perth itself). Because an authority in Perth would see that one kind of candy bar sells for 2 AUD outside Perth, he'd sell it for ~2 AUD in Perth, in order to ensure they don't run out of candy bars too quickly.
Such an interventionist economy would not reach the status of a command economy, because the planner never had to sit down and calculate any information. He simply imitated what was done abroad in a market economy.
Much the same way, Italian and German wartime price controls still managed to work, because the Germans and Italians still had information on prices of goods bought and sold abroad. That helped them set prices much more easily.
The German command economy was poorly planned until Albert Speer was put in charge of it in 1942
ReplyDeleteOr as I would say, basically one european country was able to conquer almost whole Europe _precisely_ because it was relatively "poorly planned"...
But by 1943, Germany was already losing the war.
In other words, more central planning did not help Germany in winning with the whole World, okay, even though it was doing pretty good up until 1942 when it had less central planning, okay.
Furthermore, the Soviet Union had an extreme command economy and it smashed Nazi Germany on the eastern front.
http://en.wikipedia.org/wiki/Lend-Lease
http://www.historum.com/european-history/10530-lend-lease-delivery-soviet-union-their-impact-ability-red-army-conduct-war.html
First of all, USRR received from USA thousands of bomber planes, thousands of tanks, hundreds of thousands of machine guns, millions tons of petrolum, hundreds of thousands of military vehicles and motorbikes, frigates, trawlers, torpedo boats, hundreds anti-submarine boats, thousands fighter jets etc.
But USRR did produce their own stuff as well. How? The USA shipped 2.3 million tons of steel to the USSR during the WWII years. That volume of steel was enough for the production of 70,000 T-34 tanks. Aluminum was received in the volume of 229,000 tons, which helped the Soviet aviation and tank industries to run for two years. One has to mention food deliveries as well: 3.8 million tons of tinned pork, sausages, butter, chocolate, egg powder and so on. The lend-lease agreement provided orderlies with 423,000 telephones and tens of thousands of wireless stations. Deliveries also included oil distillation equipment, field bakeries, tents, parachutes, and so on and so forth. The Soviet Union also received 15 million pairs of army boots.
In other words, even the stuff that USRR did formally produce would never be possible w/o raw stuff from USA (the least centrally planned of all the big players).
USSR won the war with 18-22 milions of casualities: three times Germans (civilians and Western front included). No doubt that Russian were the hardest to surrend, but can you define it an economic success of a central planned economy ???
ReplyDeleteYou stated that Germany, Italy and Japan were "less planned" economies, i.e. political system apart Mussolini and Hitler were comparatively more prone to "laissez-faire" than Allies. Nice: I wasn't aware they shared some ideas with Adam Smith. Maybe I'm wrong but I think that "lo Stato corporativo" and "lebensraum" are a little bit far from free market.
Even Spain and Portugal had a commanded economy and didn't engaged in WWII. What about their "performances", even a dedade after Spanish Civil War ? And what about Yugoslavia and Albania, they were neutral and indepentent from Moscow. What about "Tito's economics" ? What about the fact that Western Germany and Italy with much less planning than before and less planning than UK started to growth faster and faster after a lost war ?
As already stated, US Government could exploit the results of two centuries of capitalist development. Without capitalism the destiny uf USA would have been similar to the role of Russia: a big country in geographical term, with a much smaller place into the history.
Can someone show me an advanced economy that is Misean or Hayekian? I've yet to see one. Somalia? The world has proven through time that mixed economies work best. Austrians are too extreme in their ideology and so are hardcore socialists. It takes a balance.
ReplyDelete"Or as I would say, basically one european country was able to conquer almost whole Europe _precisely_ because it was relatively "poorly planned"
ReplyDeleteNoone said military strategy was not important.
The only real military power on the continent that could have stood up to Germnay in 1939 was France, but its generals were using outdated defensive war tactics of WWI.
Other nations had fairly small armies - they just couldn't stand up to Germany.
No one denies that the Soviet Union had a lot of help from the US.
But don't waste our time trying to deny that the Soviet command economy was not a major factor in its military success. Or that it outproduced the Nazi one.
Richard Overy, Why the Allies Won, Pimlico, London, 1996, pp. 180-207, destroys your rubbish. Try reading it.
Excellent post, Lord Keynes.
ReplyDeleteWhile I oppose Soviet-style communism on both economic and moral grounds, Robert C. Allen has written an interesting book arguing that that the Soviet economy was actually quite successful and that this success continued until the stagnation period of the 1970s. Here is a link to a little summary of Allen’s book at the Princeton University Press website: http://press.princeton.edu/titles/7611.html
In case it is not clear above, I also oppose communist/Soviet-style command economies: these authoritarian systems were murderous, brutal, vicious, and repressive.
ReplyDeleteHowever, as I have said, we also had moderate command economies in the West in the WWII as well, far more humane than the Soviet system.
Our moderate command economies were extremely succesful when our freedom was threatened, though I still don't support that kind of system today.
What we need is well run Keynesian mixed economy.
@Lord Keynes:
ReplyDeleteWhen attempting to debate modern pseudo-Hayekians, I find it's often worth pointing out that many private sector organizations are centrally planned. Walmart or ExxonMobil for example.
The general lesson seems to be: if you have a single well-defined objective (pump and distribute oil, defeat Hitler etc) then central planning is the organizational tool you deploy. However if you want innovation and have a multitude of different goals a more market-based approach is appropriate.
The sad thing is so many people are still ideologically committed to one or other extreme (command economy vs. libertopia) they don't stop to actually weigh each system on its merits.
I don't think TJ understands a major point of distinction here.
ReplyDeleteWal-Mart still has to purchase its retail items from other suppliers at prices those suppliers demand. Wal-Mart still has to hire workers from the job market at wages that people in the market demand. Wal-Mart still has to issue shares on the capital market to obtain funds for its ventures and still has to borrow funds at interest rates that lenders want - it still bears a cost of capital that outside investors demand.
Wal-Mart still depends on information provided by prices, wages, and interest rates from outside systems and is not controlling the entire consumption of goods for the final consumer without that information.
Had Wal-Mart instead been controlling the beginning-to-end production, distribution, and rationing of all its retail products, of its capital equipment, of all the land used for that production and distribution, and had Wal-Mart the power and responsibility to allocate all the workers in an economy towards given jobs, and had Wal-Mart's workers comprised all the people who consume its products - then it would be a centrally planned command economy like the Soviet Union.
I would have told you this, even if I wasn't a Hayek enthusiast. Oh wait, I am not a Hayek enthusiast. I am not even a "Misesian". Even Mises was not a Misesian. The man was opposed to doctrine and had no ideal society. Our job is to analyse, and not to appeal to Hayek or Mises. Or anybody.
And Hayek's own utopia had a welfare state - as we see from Constitution of Liberty. A blueprint that was fully adopted word-for-word by Social Democratic Chancellor Helmut Schmidt for Germany. It was not for nothing that this German Chancellor said, "We are all Hayekians now", referring to the post-1980s Central European "social market" model. You forget that Hayek was a Fabian Socialist.
"You forget that Hayek was a Fabian Socialist."
ReplyDeleteHe was until the 1920s, then abandoned it for classical liberalism.
@Prateek Sanjay:
ReplyDeleteRe price signals etc.
That's kind of my point: Walmart exists as a massive centrally planned entity within a market system. Walmart exerts a certain degree of monopsony and monopoly power (contra your assertion that it is simply another atomistic price-taking corporation) but in general the hybrid of markets and central planning works better than either extreme alternative. Best of both worlds and whatnot.
TJ, socialism can actually be defined as a single nationwide monopoly on every means of production of one private corporation. Quite illustrative (and ironic) of what socialists and central planners of all sorts have (unknowingly) been trying to implement.
ReplyDeleteTJ, there is no central planning - AT ALL - when you rely on outside information. You never have to plan anything, when you have immediate information to which you can act as and when it happens.
ReplyDeleteWal-Mart doesn't have to worry today about how many screwdrivers it must stock in its branch in Texarkana, Texas on March 12, 2016, because it can handle that later on March 2016, when it see what the local price and cost of selling those screwdrivers is on March 2016. This is pure market. There is no central planning involved.
Wal-Mart does not have to operate like Stalin's Russia, which had to formulate Five Year Plans stating productivity targets for wheat, rice, and other commodities far in advance for the largest geographic region in the world.
Also:
A government nationalised industry is not central planning, because that nationalised industry still has to buy goods from domestic and foreign private corporations, still has to raise funds at a cost of capital that the capital market demands, and so on. (Of course, it does give the government an incentive to take complete control of all other industry and capital markets. But that's another story.)
To argue that a nationalised industry that doesn't fail or an arbitrarily large corporation that doesn't fail somehow disproves what opponents of central planning said....
is to simply go off topic.
LK, the basic fact is, US, the least centrally controlled country (all the fascist New Deal cartels and price controls notwithstanding), won WWII basically singlehandedly. USSR barely made it, only because of
ReplyDelete1) twice as big population, scattered over 50 times bigger land.
2) enormous help from US, both raw and end products.
3) only one front (you conveniently forget that Germany had to fought on three)
The US played a major role.
ReplyDelete"Singlehandedly" won the war is a ridiculous statement. The Soviet Union's contribution to the war effort and victory was enormous, as they were fighting most of the German army.
And what about the UK? Australia? New Zealand? Canada?
The Soviet Union's contribution to the war effort and victory was enormous
ReplyDeleteRussian soldiers combined with enormous amounts of american weapons and raw materials did significantly contribute to the war effort. New Zealand, now you're being funny ;)
My understanding has always been that the bulk of the German army was forced to take on the Russians in the east. If that army had been in the west, US victory was not assured. Further, 3 out of 5 D-Day beaches were British and Canadian.
ReplyDeleteYes, Joanna, who has to dispute the fact that Russians had large industrial capacity for war? This was one of the largest war machines in the world.
ReplyDeleteTheir industrial capacity for it was so high, that ammunition supplies kept arriving and remained idle, even after requests were sent to factories that they had enough ammunition and did not need more.
They had steel plants all over the country to continue providing more and more steel for war purposes, and they always kept building more steel plants, as if Russians would wear steel pants or eat steel food or live under steel houses.
The point here is not the effectiveness or productivity of Soviet Russia, but the costs its war industry was capable of incurring when those costs had to be borne by the rest of the country.
And regarding lend lease, yes, the US gave the Soviet Union a lot of material from 1942, but you can’t even get the facts on this right either:
ReplyDelete“Although nearly half the population and the great industrial region of the Donets remained under German occupation, the Soviets still found men for new armies and vastly increased war production. They defeated the Germans at Stalingrad almost entirely through their own efforts and would probably have won the same victory if they had received no assistance at all. However, by the end of 1942, American lend-lease aid began arriving in sufficient quantity to be noticed, especially in field telephone wire and boots for the Russian infantry. The Americans could offer the Soviets very few arms through 1942, either because American production was too small or because Americans arms were not needed in Russia. For example, the Sherman tank was not available until 1942 when the Russians were already producing their own equally good or better T-34/85. Except in aircraft, American arms and weapons systems never made any large contributions to victory in Russia. But American aid in other categories began to arrive in abundance during 1943, increasing the tempo of Soviet offensives.”
Again, what you say is rubbish.
Prateek Sanjay,
ReplyDeleteProvide evidence and citations of sources for your claims:
"They had steel plants all over the country to continue providing more and more steel for war purposes, and they always kept building more steel plants"
"that ammunition supplies kept arriving and remained idle, even after requests were sent to factories that they had enough ammunition and did not need more."
You might be right, but I would prefer to see evidence.
They defeated the Germans at Stalingrad almost entirely through their own efforts and would probably
ReplyDeleteStalingrad was 1942/1943. First bombers and fighters were delivered already in 1941. By 1942, up to two-thirds (sic! eg on Karelian front) of all russian combat aircraft was already either British or American. Lend and lease deliveries were made to the USSR during the most difficult period of the war - during the second half of 1942:
http://lend-lease.airforce.ru/english/articles/geust/aircraft_deliveries.htm
Except in aircraft, American arms and weapons systems never made any large contributions to victory in Russia.
Haha, "except", and we liberals know that air force has always had only marginal impact on any war... 3,561 bomber planes, 3,362 fighter jets and 8,218 anti-aircraft emplacements could not have any impact whatsoever... 7,056 tanks, 131,600 machine guns and 595 ships (including 105 submarines!) also neglibible, that's already settled... Let our unbiased liberal minds focus on the delivery of 15 million army boots instead!
But no, it was all Soviet production that made it happen! USA never sent 2.3 million tons of steel that were enough to build 70,000 T-34 tanks! USA never sent 2.5 million tons of petroleum that made them run! Never! 229,000 tons of aluminium (enough to run whole Soviet aviation and tank industries for two years). 3.8 million tons of tinned pork, sausages, butter, chocolate, egg powder and so on? Negligible!
Okay, yes, there were 423,000 telephones delivered together with tens of thousands of wireless stations. But negligible as well. We liberals know that efficient communication has nothing to with war winning. Central planning does!
One relevant book is Turning Point: Revitalizing The Soviet Economy by Nikolai Shmelev and Vladimir Popov. I found out about it from a source given in Thomas Sowell's Basic Economics.
ReplyDeleteOne amazing passage on Soviet overproduction and accumulating inventories went like this:
"The figures are even more alarming for resources that end up in warehouse inventories every year. The enormous growth of inventories in recent years is a majestic monument to rationed supply allocation. Shelves are piled with unnecessary products that were planned in surplus and with necessary products in short supply.
Inventories in state enterprises comprised 460 billion rubles or 80% of the national income."
Another illustration how Soviets never focused on necessities during the 1930s:
"In the 1930s, because of much higher mortality rates, the population was stable or grew very slowly. Coal and steel production increased but people died as fast as others were born."
Anyway, about the overproduction of ammunitions, I thought I saw it in the same book, but I now think it was another. Hell, it was probably not from even an economics book, but as an anecdotal comment from a book by a stock market guru.
No amount of debate makes 2+2=5.
ReplyDelete“By 1942, up to two-thirds (sic! eg on Karelian front) of all russian combat aircraft was already either British or American.”
ReplyDeleteThat was on onefront. From your own link:
"Lend-lease aircraft amounted to 18% of all aircraft in the Soviet air forces, 20% of all bombers, and 16-23% of all fighters (numbers vary depending on calculation methods), and 29% of all naval aircraft."
http://lend-lease.airforce.ru/english/articles/geust/aircraft_deliveries.htm
In other words, the majority of aircraft throughout the entire war were Soviet-built ones. And the Soviets were also perfectly capable of designing and producing their own weapons:
(1) T-34 tank
“The T-34 was a Soviet medium tank produced from 1940 to 1958. Although its armour and armament were surpassed by later tanks of the era, it has been often credited as the most effective, efficient and influential design of World War II. First produced at the KhPZ factory in Kharkov (Kharkiv, Ukraine), it was the mainstay of Soviet armoured forces throughout World War II, and widely exported afterwards. It was the most-produced tank of the war”
http://en.wikipedia.org/wiki/T-34
(2) Kliment Voroshilov tank
http://en.wikipedia.org/wiki/Kliment_Voroshilov_tank
(3) Aircraft: Ilyushin Il-2 (36 000 produced)
Pe-2 bomber (11 500)
Lagg-3 (6 500 produced)
Yak-9 (16 700)
La-5 (10 000)
Richard Overy, Why the Allies Won, Pimlico, London, 1996, p. 350, n. 13.
On the Ilyushin Il-2:
“The Ilyushin Il-2 … was a ground-attack aircraft … in the Second World War, produced by the Soviet Union in very large numbers. In combination with its successor, the Ilyushin Il-10, a total of 42,330 were built, making it the single most produced military aircraft design in all of aviation history…. It is regarded as the best ground attack aircraft of World War II.[4] It was a prominent aircraft for tank killing with its accuracy in dive bombing and its 37mm guns penetrating their thin back armor …. Il-2 was designed by Sergey Ilyushin and his team at the Central Design Bureau in 1938.”
http://en.wikipedia.org/wiki/Ilyushin_Il-2
“USA never sent 2.3 million tons of steel that were enough to build 70,000 T-34 tanks! USA never sent 2.5 million tons of petroleum ….”
That the US and other countries sent raw materials was already admitted above, as was the US role in helping the Soviet Union.
And those raw materials were used in Soviet production, which just proves my point.
Your comments are now descending into sheer idiocy, with straw man arguments.
LK,
ReplyDeleteThat was on one front.
It takes _hours_ to fly a plane from Karelia to Stalingrad. In other words, even if true, Russians must have been _purposefully_ defending the city in that crucial battle without the thousands of American bombers and fighters already present in other way less intense Russian fronts close by. Maybe indeed Russians concentrated their own bombers and fighters that they still had in that crucial battle. That might have even made much sense, what with Russian pilots trained to use them best in 1942. But then again, it could have never been possible if American and British planes virtually did not took over most of their air force on other less important fronts. So when the author (evidently biased as he focuses on... army boots and telephones) says things like "They defeated the Germans at Stalingrad almost entirely through their own efforts", this is clearly an enormous manipulation, _even_ if indeed only Russian weapons were used there.
And those raw materials were used in Soviet production, which just proves my point.
Soviet production basically from 1943 up (it takes time to produce, even with "superior" central planning, doesn't it), that is when Soviets have already started winning the war thanks to land-lease of ready-to-use weapons in 1941 and 1942.
From what I have read and seen on the subject of centrally planned economies like the USSR, I have to conclude that they aren't all bad, but they have major flaws.
ReplyDeleteCommand economies are excellent at mobilizing resources, they can easily put everyone to work on production and build economies nearly from scratch. The USSR from the 1930s to the 70s had pretty impressive economic growth, resulting just from that, the mobilization of resources and the rapid construction of infrastructure and means of production.
However, their main flaw is the very complicated feedback communication system. By that, I mean the feedback from consumers, workers and local administrators. If products are overproduced or underproduced, it takes quite some time for the information to reach the ears of the central planners, and even when it does, the information may be lost in the amount of information that flows back to them. Even past all that, if a decision is taken to react to this, if the problem is underproduction, then resources already applied to other tasks have to be reassigned because almost all resources are used already, and this demand people to have immediate knowledge of which task can spare the resources, which, again, requires feedback.
Add to that autocratic regimes, which means the personal biases of the leaders can dominate decisions and result in inefficiencies, and you have a system that is slow to react and to adapt, even if it does have a lot of power to move around and can do so well if it so chooses.
BTW, I do agree with TJ that big corporations can be seen as doing some kind of central planning. To those who say that they do so in the context of a market economy, well the USSR also had to deal with that when trading with other countries, which it did profusely in the 30s... were the Stalinian years really market economies?
Big corporations have to mobilize their resources, plan ahead of time for expected demand for their products and what is an optimal price for the products. Like central planning governments, they may be wrong and overproduce or underproduce certain products, which then necessitates adjustments. The two cases are very similar, in both cases, basically people in power make decisions based on their best knowledge and the whole process is in truth a "trial and error" system. But the stronger the organization that does the planning, the longer it may continue to err, leaving inefficiencies alive.
However, the ability of central planning to mobilize a lot of resources fast may actually be better suited to certain aspects of the economy. Products or services that have relatively stable demand and not susceptible to much fluctuations can be provided by central planning relatively efficiently, sometimes even more so than with the market system. That is the case for health care, education, aqueducts, roads, etc...
However, their main flaw is the very complicated feedback communication system.
ReplyDeleteNo, the main flaw of socialism is lack of economic calculation.
http://en.wikipedia.org/wiki/Economic_calculation_problem
To those who say that they do so in the context of a market economy, well the USSR also had to deal with that when trading with other countries, which it did profusely in the 30s... were the Stalinian years really market economies?
With the knowledge of economic calculation problem you can see how socialist countries have managed to last so "well" so long (even though with dismal and slave-like salaries as compared with capitalist countries) - by imitating at least some rudimentary economic calculation of capitalist countries thanks to global free market prices. In other words, if socialism ever overtook the whole Earth, we would have Pol Pot Cambodia everywhere.
Products or services that have relatively stable demand and not susceptible to much fluctuations can be provided by central planning relatively efficiently, sometimes even more so than with the market system. That is the case for health care, education, aqueducts, roads, etc...
Rubbish, "health care" and "education" are certainly not stable products/services like aqueducts and roads. What an ignorance. To compare "health care" to roads would be like saying it is as simple as choosing between two kinds of drugs, highway or local. Same with education. For Simon, there are just two kinds of schools out there. Education and health care are just so simple that way... in liberal minds.
First, I am no liberal, I am a social-democrat, a socialist.
ReplyDeleteSecond, regarding the economic calculation problem, I think that in a way I described something quite a bit like this. The difference is that I considered the thing from an empirical, realistic point of view. Your "economic calculation" problem is built from a metaphysical starting point, which is based on assumptions that say more about the thinkers' bias than about reality.
Third, I did say "stable demand", not stable product. Demand for education and health care is relatively stable, or at least predictable through the study of demographics. So distribution resources from a central planner is feasible. Plus, the outcome of these industries tend to be possible to evaluate through experts, in fact, often the only ones who can really know if these services are good are experts. Which makes it not only even better for central planning, but also means that it makes markets ill-suited to the job.
Consumers are in no position to actually know the effects of different treatments or teaching regimen until they try them, after which there is no going back much of the time, it's too late to change idea. The market, as I said, is just a "trial and error" system, but if people aren't able to correct their errors, then it just doesn't work. A bad or inefficient treatment may remain popular even if it doesn't work, because profane people stuck in the condition for which the treatment is marketed cannot know that it is bad, unless people tell them and they believe these people instead of the ones who claim the treatment works.
Lack of economic calculation may seem "metaphysical" because no socialist country has ever complained about it. They usually do tons of accounting and they believe it's same. But if accounting is not based on market prices, it cannot give you true profitability estimates. In other words, on paper, all socialist companies can easily make profit no problem. After all, the owner controls all prices so tweaks them until they do. Hence inefficiencies keep piling up imperceptibly and society becomes "metaphysically" poorer and poorer even though everything looks fine on paper. Finally a socialist government starts to wonder why? But it has never heard of economic calculation problem so instead starts coming up with truly metaphysical culprits like "speculators" or "imperialists". This inevitable "methaphysical" cycle keeps repeating itself with every socialist country.
ReplyDeleteThere is pretty much stable demand for virtually anything if you use generic category enough, even in high tech industries like computers. Note I have used "computers", not PCs/laptops, same as you use "health care" rather than specific drugs or services. So no wonder you are a socialist :) Basically nationalize all industries except those which do not yet exist :)
Also Simon, when you say stuff like "consumers are in no position to actually know the effects of different treatments or teaching regimen until they try them", can you please stop for a moment and think maybe you should just speak for yourself? Why do you socialists keep making all those retarded presumptions on behalf of all consumers? If you are personally "in no position to actually know the effects of different treatments or teaching regimen until they try them", then libertarians will be happy to give you an option to renounce your freedom and enslave yourself to "experts" with no opt-out for all eternity, but leave the rest of us alone.
ReplyDeleteYou must realize that market prices aren't optimal either... Why do you believe bubbles exist? Do you think bubbles are just an exception in the normal, "optimal" price fixed by the "Market"? No, bubbles are just particularly bad cases of price deviation from their optimal value, but these deviations exist all the time. In the long term, prices will tend to fluctuate to approximates of the optimal price, but in the long term only, and it's always possible for the market prices to err once again (new bubbles for instance).
ReplyDeleteSo inefficiencies exist in every system, every economic system is based on trial and error. The problem with central planning is that the central planner is too slow to react, that is the real problem. That is the problem I understand, because I live in this world, I study the world and I try to understand it. Your metaphysics-based ideology constructs a world in their mind based on assumptions about how the real world operates, then they try to understand that parody of the world, to later transplant the conclusions into the real world. Not only is the metaphysical way susceptible to people's own bias through their assumptions, but it also leads to a refusal of the thinker to accept evidence that contradicts their pure world model. When reality contradicts their theories, they think there is something wrong with reality, and not with the theory. When empirical thinkers see problems in the world, they simply revisit their models and tweak them to take into account new evidence, making their theory better.
As to health care, you really don't get it. Health care is really stable in a way other products or services aren't, people just want to get better, that's it. The treatments must be tested and experimented, otherwise people would just be guinea pigs all the time. So central planning is really applicable in this case, and the truth of this is the success of health care systems in communist regimes. Cuba is a clear example of that, the country is very poor, but it manages to achieve health indicators on a par with the developed world. In the former communist bloc, it was a relative success story. Education is the same thing, communist countries formed their youth at incredible rates.
It's the same thing with countries with nationalized health care systems, which boast generally better health care indicators for a lower cost on society.
And no, I don't speak just for myself when I say that consumers wouldn't be able to know what the effects would be before trying the treatments. That is a fact. Oh, you can go by what the experts say, but companies don't put hundreds of billions into marketing knowing it doesn't work. In other words, you get a lot of contradictory information. Even if you try to get the information yourself, you're forced to rely on what other people say and then you're susceptible to find false experts propagating falsehoods. This leads many people to believe these false experts and to believe ridiculous things that they cannot know firsthand until they try them, at which point it's too late to change your mind.
For proof, just look at how many fools believe in Austrian economics...
Simon, optimality/efficiency illustrated:
ReplyDeletehttp://doctorbulldog.wordpress.com/2006/10/13/north-korea-at-night-as-viewed-by-a-satellite/
I would be interested how you work around that picture ideologically?
This is pretty weak. Point one, nobody argues that Keynes was more influential than Hayek during the 20th century. Indeed the video makes fun of this. This doesn't make Keynes right and Hayek wrong. While Keynes' theories have lost credibility with time, Hayek's have gained it. Otherwise European and American governments would not be singing in unison about the pitfalls of deficit spending.
ReplyDeleteThe Hayek quote about The Road to Serfdom is not a comment about Austrian economics but about the controversial nature of the book, which was not an economics textbook but a political statement about the dangers that collectivism poses to liberal democracy. The author of this blog post has obviously never read the work if he thinks that criticism of it is an indictment of Austrian economics!
Why, Keynes himself said that he was in "deeply moved agreement" with the central argument of The Road to Serfdom. Was he a follower of the Austrian school?
Point two, the video never says that Keynesian stimulus is all about war. But Keynesians have used World War II as their great example of their theory, so it's fitting that debunking this myth takes center stage. In fact, the blog author uses it again as an argument for Keynesianism, stating that central planning worked because we won that war.
Of course Hayek never said categorically that central planning does not "work" (towards the ends defined by the central planners) but that is an inefficient and undemocratic way to maximize social output and the welfare of the people (according to the people themselves.) Sure, central planning won the war, just like central planning built the pyramids and the great wall of China. But this is irrelevant to Hayek's point that central planning is relatively inefficient in coordinating the efforts of millions of people to satisfy their subjective needs.
Third point. Hayek changed some of his views on inflation. Big deal. Neokeynesianism substituted whole swaths of Keynes' theory to make it somewhat compatible with reality. No comparable change has happened with Austrian economics, which was the only theory that predicted the housing crash:
http://www.wagneriswrong.com/austrians-economists-predicted-the-crash/
"In fact, the blog author uses it again as an argument for Keynesianism, stating that central planning worked because we won that war."
ReplyDeleteI do no such thing. I point out precisely that command economies are not Keynesian mixed economies.
"No comparable change has happened with Austrian economics, which was the only theory that predicted the housing crash"
ABCT has very little, if anything, to do with the financial crisis.
And Post Keynesians predicted the housing bubble and economic problems it would cause:
http://socialdemocracy21stcentury.blogspot.com/2010/10/austrian-business-cycle-theory-its.html
"In saying that he agreed with Milton Friedman, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions (some claim that Hayek also supported limited fiscal policy actions, but I have yet to see evidence of this).
ReplyDeleteIn other words, even the Hayek in this video is a travesty. By the end of his life, he moved closer to a monetarist position on “secondary deflation,” and approved of “evil” state interventions to stabilise the money supply."
Hayek agreed with the explanation not the suggested solution. As a matter off fact I don't there is any evidence hayek would have done something about it. he would have advocated doing nothing in line with his principles.
As a matter off fact I don't there is any evidence hayek would have done something about it. he would have advocated doing nothing in line with his principle
ReplyDeleteYou could not be more wrong:
http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html