Communism versus Capitalism --- Central Planning versus Markets

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Communism versus Capitalism — Central Planning versus Markets

The following is from Thomas Sowell. Applied Economics. pp. 16 - 26

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Central Planning versus Markets

Differences between political decision-making and economic decision-making stand out in sharpest contrast when comparing whole systems of comprehensive economic planning by government officials with economic systems in which market competition among privately owned businesses determines what is produced by whom and at what prices. In both cases—socialism and capitalism—the rationales of the systems must be compared with the actual results, the rhetoric with the reality. The relevant question is not which system sounds more plausible but which produces what results.

What must also be understood is that both systems—in fact, all economic systems, including feudalism, fascism and voluntary collectives—operate within the inherent constraint that what everyone wants adds up to more than they can possibly get. This means that all economic systems must find ways of restricting and denying the use of both resources and finished products through one mechanism or another. In some systems this is done by imposing rationing or central allocation and in other systems people ration themselves according to how much money they have available to spend for various items.

All economic systems not only provide people with goods and services, but also restrict or prevent them from getting as much of these goods and services as they wish, since no economy can supply everything that everyone wants in the amounts that everyone wants. The systems differ in the manner in which they restrict consumption and in the effectiveness with which they allocate resources in ways that produce lower or higher standards of living.

Central Planning

The term "planning" is often used to describe an economic system where the key decisions are made by political authorities, whether these are democratically elected officials or representatives of a communist or other totalitarian government. However, there is just as much planning engaged in by owners and managers of private enterprises under capitalism. The difference is in who is planning for whom. In a free market economy, millions of consumers, business owners and managers, investors, and others have their own plans—each for his or her own well-being, leaving the overall coordination of these plans in the economy at large to changing prices and the economic incentives that these prices provide for mutual accommodation. What has generally been called "planning" has been central planning—planning by a small group of officials for the economy as a whole.

The same general principle of collective decision-making has also been applied by smaller settlements, such as the Israeli kibbutz or various other small enclaves of like-minded people who wish to produce and consume collectively, outside the framework of a capitalist market economy.

The most thorough-going control of entire national economies occurred during the era of the Soviet Union, which set a pattern that was later followed in China and other communist states. However, the governments of India and France also at one time either owned or controlled large segments of their respective economies. Moreover, wide sections of the political, intellectual and even business communities were often in favor of this expansive role of government. Swedish economist Gunnar Myrdal defined economic central planning this way:

The basic idea of economic planning is that the state shall take an active, indeed the decisive, role in the economy: by its own acts of enterprise and investment, and by its various controls—inducements and restrictions—over the private sector, the state shall initiate, spur, and steer economic development. These public policy measures shall be coordinated and the coordination made explicit in an over-all plan for a specified number of years ahead.

Although some have contrasted government planning with uncontrolled chaos in the private marketplace, in fact government central planning means over-riding other people's plans, since private individuals and organizations have their own plans, which are co-ordinated with one another through price movements. How well either set of plans is likely to work out is the issue. For much of the twentieth century, it was widely assumed that central planning was more likely to produce desired results than the uncontrolled competition of the marketplace. It was only after such planning was put into effect in a variety of countries around the world that the results turned out to be worse than anyone expected—leaving planned economies falling behind the economic progress in countries where the coordination of the economy as a whole was left to market competition and resulting price movements that directed resources and products to where they were most in demand. By the last decade of the twentieth century, even socialist governments and communist governments had begun abandoning central planning and selling government-owned enterprises to private entrepreneurs.

Prices not only direct goods and the resources needed to produce goods where they are most in demand, these prices also force consumers to limit their own consumption. Just as we can appreciate the important role of water more clearly during a drought, so the role of prices can be more clearly demonstrated by looking at places where prices are not allowed to play their usual role. For example, communal living in a kibbutz in Israel was based on its members' collectively producing and supplying their members' needs, without resort to money or prices. However, supplying electricity and food without charging prices led to a situation where electric lights were left on during the day, and members would bring friends from outside the kibbutz to join them for meals. Later, after the kibbutz began to charge prices for electricity and food, there was a sharp drop in the consumption of both.

The presence or absence of prices affects the use of the resources which go into the production of goods, as well as in the consumption of the goods themselves. Soviet industry used more electricity than American industry, even though American industry produced more output. Enterprises in the United States had to pay market prices for electricity and keep their production costs below the prices that supply and demand in the market would allow them to charge for their output. Otherwise they would make losses and face the risk of bankruptcy. Soviet enterprises faced no such incentives or constraints. Nor was electricity unique. More material inputs and energy in general went into producing a given amount of output in the Union of Soviet Socialist Republics than was used to produce the same output in the United States, Germany or Japan.

The USSR had one of the richest endowments of natural resources on earth, including more petroleum deposits than any other country outside of the Middle East, and some of the most fertile farmland on the continent of Europe. Moreover, the Soviet Union had a well-educated population, including many scientists, engineers, and technicians. But, while it seemed to have all the ingredients of national prosperity, it was in fact much poorer than the United States or the countries of western Europe. What was missing in its economy were the incentives and mechanisms capable of converting its abundant inputs into output at a rate comparable to that of the United States or other countries with price-coordinated markets.

Although the USSR had prices, these were prices set by central planners, and did not reflect the relative scarcities of particular resources, as prices resulting from supply and demand in competitive markets tend to do. Nor was it clear how centrally planned prices could have reflected anything so complex and volatile as the ever changing relative scarcities of innumerable resources and finished products, since there were 20 million prices for central planners to set.

This was a virtually impossible task for the central planners to perform well, though it presents no special problem in a market economy where millions of consumers and producers each keep

track of, and influence, a relative handful of prices which directly affect them. The net result was that it was common for the Soviet Union to have warehouses bulging with unwanted and unsold goods, while people were lined up in queues for other things that they wanted and hoped to get before supplies ran out. A visitor to the Soviet Union in 1987 reported, "long lines of people still stood patiently for hours to buy things: on one street corner people were waiting to buy tomatoes from a cardboard box, one to a customer, and outside a shop next to our hotel there was a line for three days, about which we learned that on the day of our arrival that shop had received a new shipment of men's undershirts."

In a capitalist economy, the prices of the surplus goods piled up in warehouses would have fallen because of supply and demand, forcing the enterprises which produced them to cut back production, in order to avoid continuing losses. This in turn would release resources (including labor) that would be in demand in other sectors of the economy, where shortages and rising prices would have produced higher profits—and thus greater demand for the labor and raw materials needed to increase the supply of the more profitable output. But no such process took place in a socialist economy, where simultaneous shortages and surpluses could persist for years, until overburdened central planners could get around io dealing with each problem.

Hiring more central planners would not solve the problem, which was that millions of prices had to be adjusted relative to one another, so you could not put one group of central planners in charge of setting prices for furs and another in charge of setting prices for undershirts, because the whole point was that too many resources had been devoted to producing animal pelts that were rotting in warehouses while people had trouble finding enough undershirts.

None of this was peculiar to the Soviet Union. Similar problems dogged other centrally planned societies, whether democratic societies like India or totalitarian countries like China. The USSR was a particularly striking example of the problems of central arming because it was a country richly endowed with a wide range of natural resources, whose people were nevertheless poor. Japan and Switzerland are contrary examples of capitalist countries with meager natural resources which nevertheless have some of the highest standards of living in the world. The peoples of the Soviet Union paid a high price for central planning. As a book by two Soviet economists pointed out, "not until the 1950s were we able to exceed the 1913 per capita level of agricultural output" and—writing in the late 1980s—per capita meat consumption "remains lower than it was in 1927."

China, after the death of Mao Zedong, began a piecemeal conversion from central planning to free markets—first in very limited geographical areas, and then expanded the operation of markets as those areas began to prosper dramatically more so than other parts of the country. As markets replaced politically managed economic decision-making, China experienced one of the highest economic growth rates in the world.

Although India had more than double the Gross National Income per capita of China in 1970, China had nearly caught up by 1991 and by 2000 had nearly double the Gross National Income per capita of India. Belatedly, India too began to rid itself of many government directives and controls and "freed the country's entrepreneurs for the first time since independence" in 1947, in the words of the London magazine The Economist. There followed a new growth rate of 6 percent a year, making India "one of the world's fastest-growing big economies."

Despite the sharp distinction in principle between government-planned economies and market economies, in reality there is a continuum between the two. Even in the days of the Soviet Union under Josef Stalin's iron control, some minor elements of free market activity were permitted, such as allowing people to sell produce grown on small plots of land around their homes. These gardens; incidentally, turned out to supply nearly a third of the agricultural output in the USSR, even though they occupied a tiny fraction of the land. Meanwhile, no capitalist country has ever been 100 percent free of government controls and directives. Just as Soviet agriculture was not 100 percent government-controlled, so American agriculture is not 100 percent free of government controls. Nor is American industry.

Price-Coordinated Economies

There are many names for economies in which individual plans and actions are coordinated by price movements in response to supply and demand, which serve as incentives for the different individuals to accommodate their respective plans to the total resources available. These terms include capitalism and the free market. But what such economies actually do, regardless of what they are called, is depend upon price movements to move resources, finished products, and people themselves to where they are in demand, without any central authority trying to control the whole process. This process may sound implausible to those who have never lived in such an economy, and even to some of those who have. One small but revealing episode involved the last Soviet premier, Mikhail Gorbachev, asking British Prime Minister Margaret Thatcher: How do you see to it that people get food? The answer was that she didn't. Prices did that. Yet the British people were better fed than those in the Soviet Union, even though the British have not grown enough food to feed themselves in more than a century. Prices bring them food from other countries.

Considering what a monumental task it is to supply tons of food every day to a city the size of London or New York, it is remarkable that we take it for granted that such a task is performed without anyone's being in charge of seeing that it all gets done. It would be remarkable even if Londoners or New Yorkers were supplied with only some very basic things to eat like bread and milk.

In reality, they are supplied with an incredible range of fresh, frozen, canned, dried, organic, Chinese, Italian, Mexican, French, Vietnamese, and other foods every day—all with no overall plan or control, except by prices responding to ever-changing supply and demand. No given individual, either in or out of government, even knows how much of all these things are brought into the city while it is happening, and often there are only estimates after the fact.

The operation of a free market may not even sound plausible, but it works, while the idea of a "planned economy" has sounded both plausible and attractive to many of the best educated people in the world, until it was demonstrated, again and again, in innumerable countries and at painful costs, that it does not work.

Failure is a big part of a free market's success. People fail to live up to their potential, or to carry out all their good intentions, in all kinds of economic and political systems. Capitalism makes them pay a price for their failures, while socialism, feudalism, fascism and other systems enable personal failures, especially by those at the top, to be ignored and the inevitable price to be paid by others in lower standards of living than they could have had with the existing resources and technology. There was a reason why long-time Soviet dictator Josef Stalin kept a tight rein on what Soviet citizens could learn about the west, severely restricting travel and blocking most western writings or broadcasts from entering the USSR.

At one time, however, the Soviet authorities thought that it would be a propaganda coup to show their people an American television program about the plight of blacks in the United States. But this plan backfired when what most struck the Soviet viewers was the obviously higher standard of living that American blacks had, compared to the standard of living in the USSR.

Footnote. When I saw the apartment buildings that Russians were living in, in St. Petersburg, the first thought that occurred to me was that I had seen better buildings than this boarded up in the poverty-stricken South Bronx.

The economic advantages of a market economy are accompanied by political disadvantages. Its overall operations are seldom understood, even by those who are successful at running their own individual businesses, and their articulation seldom matches that of intellectuals, who usually have neither experience in business nor expertise in economics. More fundamentally, the main incentive of capitalism is self-interest, which is by no means an attractive quality, however effective it may be for producing economic results—for others as well as for oneself.

The very expression "the market" suggests something impersonal, when in fact what is involved are simply all the very personal individual choices which are reconciled with one another through the competitive processes which are summarized as "the market." When a newspaper headline asks, "Should the Internet be Left to the Market," what this question really amounts to is: Should individuals be free to use the Internet as they wish or should some collective body restrict or direct what they do? A case can be made for or against restrictions on using the Internet, but that is the real issue.

Alternatives to a market economy may express nobler sentiments but the bottom line is whether this in fact leads to better behavior in terms of better serving their fellow human beings.

For example, a conscientious Soviet worker who was loading bread began to notice that the bread had bird droppings on it. She returned it to the bakery but was later told by a driver that this bread was not thrown out. It was simply ground up with the flour used to bake fresh bread and the finished product was then delivered to the stores, with the bird droppings now on the inside instead of on the outside. A capitalist enterprise doing such a thing would not only be liable to lawsuits and prosecution, it would risk losing its customers to its competitors if word ever got out, and could be ruined economically even before legal processes ran their course. But a government monopoly has less to fear. Environmental degradation was likewise worse in the Communist bloc in Eastern Europe than in capitalist countries, and the worst environmental disaster of all occurred in the Soviet Union at the Chernobyl nuclear power plant. Moreover, the ability of a totalitarian government to keep information secret meant that local Soviet officials could evacuate their own families first, while leaving the local population wholly uninformed and exposed to thousands of times more radiation than normal. Only after foreign countries detected the increased radiation in their own atmospheres and foreign radio broadcasts then began reaching the Soviet Union did ordinary people in the contaminated area learn that they were in danger.

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See the following little essay: I, Pencil

4 June 2024