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yurakm
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Soviet economics and why it failed

December 31st, 2009, 7:39 pm

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Traden4Alpha
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Soviet economics and why it failed

December 31st, 2009, 10:03 pm

Thank you, yurakm for forking the thread.QuoteOriginally posted by: torontosimpleguyGuys, you are all bunch of 'morons' who don't understand the chain of events. Both 'planned' economy and 'market' economy has their advantages and disadvantages but it is not why Soviet Union failed.It seems to me that the advantages of central planning are theoretical while the disadvantages are more tangible. In contrast, the market economies (as practiced in the US and EU) seem to have theoretical disadvantages but empirical superiority.QuoteOriginally posted by: torontosimpleguyThe USSR failed because it didn't have resources to resist the united forces of the US (in a broad sense) and China. The USSR was effectively dead when China changed sides in the conflict (why it did happen is a completely different story).Would China have turned toward the US if central planning had been generating superior economic growth, higher rates of innovation, and higher levels of worker productivity? Khrushchev thought that communism would bury capitalism. If central planning were so much more efficient, it should have produced massive surpluses of goods that could be sold to nonaligned nations. But that isn't what happened because central planning is less efficient and more wasteful. Khrushchev and his advisors made serious mistakes that, because of central planning, lead to significant economic underperformance. We speak of the dangers of "too big to fail" and that's exactly what central planning creates.===============================================QuoteOriginally posted by: torontosimpleguy Btw, I desire a happy New Year to everyone and a best wish to his/hers family. Yes! I, too, wish everyone a prosperous New Year with family and loved ones. I want to thank everyone for many stimulating discussions in 2009 and hope to have many more with all of you in 2010
 
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farmer
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Soviet economics and why it failed

January 1st, 2010, 8:33 pm

QuoteBoth 'planned' economy and 'market' economy has their advantagesWhy would someone with the power to plan waste his time on economics?That's like saying Superman can wash cars faster than a regular man can wash cars. It misses the point that anyone with superpowers is not going to waste his day washing cars.
 
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Cuchulainn
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Soviet economics and why it failed

January 2nd, 2010, 11:05 am

QuoteIt seems to me that the advantages of central planning are theoretical while the disadvantages are more tangible. In contrast, the market economies (as practiced in the US and EU) seem to have theoretical disadvantages but empirical superiority.Sounds awful general, and a bit ideological It depends what how you define these terms. The situation is not black and white. And I don't agree that US and EU are 100% market economies. Look at WTO, IMF, these are central planners.So, you need central planning and 'market freedom'. edit: it's the 'mix' of the two approaches that seems to lead to succesful economies and satisfied populace.
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Traden4Alpha
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Soviet economics and why it failed

January 2nd, 2010, 1:23 pm

QuoteOriginally posted by: CuchulainnQuoteIt seems to me that the advantages of central planning are theoretical while the disadvantages are more tangible. In contrast, the market economies (as practiced in the US and EU) seem to have theoretical disadvantages but empirical superiority.Sounds awful general, and a bit ideological It depends what how you define these terms. The situation is not black and white. And I don't agree that US and EU are 100% market economies. Look at WTO, IMF, these are central planners.So, you need central planning and 'market freedom'. edit: it's the 'mix' of the two approaches that seems to lead to succesful economies and satisfied populace.Agreed. We must distinguish between the theoretical versions of socialism and capitalism vs. the empirical versions of them (and then study why the real-world versions don't follow the idealized forms).Every economy must answer a series of "planning" decisions: What products/services get made, what quantities are made, who makes it, where the products/services are offered, who buys/receives the products/services, what price do consumers pay the makers? Centrally planned economies tend to reserve these decisions for a specialized, centralized cadre of planners that make these decisions on behalf of both the makers and consumers. Market economies tend to decentralize these decisions among a diversified population of buyers and sellers.Obviously, the real situation is complicated. Price collusion among capitalist market participants is a form of centralized planning (although not in the spirit of socialism!). And a Soviet citizen's decision to wait in the butcher's line vs. the baker's line is a form of market-based decision making.
 
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DavidJN
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Soviet economics and why it failed

January 2nd, 2010, 6:08 pm

"Khrushchev thought that communism would bury capitalism."Sort of. What I think he really meant was that capitalism would bury itself and the USSR would be left standing. Clearly he had it wrong, but not nearly so wrong as the past couple of years would suggest, no?
 
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Traden4Alpha
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Soviet economics and why it failed

January 2nd, 2010, 6:36 pm

QuoteOriginally posted by: DavidJN"Khrushchev thought that communism would bury capitalism."Sort of. What I think he really meant was that capitalism would bury itself and the USSR would be left standing. Clearly he had it wrong, but not nearly so wrong as the past couple of years would suggest, no?Yes, Khrushchev's "bury" rhetoric was somewhat mistranslated, apparently. He meant it in the sense of historical inevitability of capitalism's collapse rather than the sense of a socialist offensive.The events of the last few years show how a changing technological context can introduce new problems in an economy. In essence, capitalist entities fell into the same failure mode as is seen in central planning -- too many individuals, banks, and investors converged on the same plan of investing in housing. Rather than encourage a diversity of divergent competing approaches to financial investment (a key advantage of market economies over centrally planned ones), the transparency of high returns from housing, mortgages and mortgage-based financial products lead to a convergence of approaches. Everyone jumped on the housing bandwagon because everyone could see it was a real money-maker (the same phenomena occurred in the internet bubble).
 
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Soviet economics and why it failed

January 2nd, 2010, 9:49 pm

QuoteOriginally posted by: CuchulainnQuoteIt seems to me that the advantages of central planning are theoretical while the disadvantages are more tangible. In contrast, the market economies (as practiced in the US and EU) seem to have theoretical disadvantages but empirical superiority.Sounds awful general, and a bit ideological It depends what how you define these terms. The situation is not black and white. And I don't agree that US and EU are 100% market economies. Look at WTO, IMF, these are central planners.So, you need central planning and 'market freedom'. Yes, although much "central planning" can be achieved indirectly through market boundary conditions. For example, if you need to reduce the use of fossil fuels you raise the price that industries that use them have to pay. But you cannot raise prices too much without undermining the production that the economy needs. Quoteedit: it's the 'mix' of the two approaches that seems to lead to succesful economies and satisfied populace.Yes, but in my life time a "mixed" economy has come to mean a mixture of nationalized production and privatized production. The division has always been somewhat arbitrary and become a political football. To my mind, the way to do it is to keep government out of production itself but charged with managing and regulating a market environment, including resources, and to keep private industry out of government. The western "democracies" have gone the other route (with an arbitrary mix) and it has been a disaster for both the economy and democracy.
 
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farmer
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Soviet economics and why it failed

January 3rd, 2010, 2:13 pm

QuoteOriginally posted by: DavidJNcapitalism would bury itself and the USSR would be left standing. Clearly he had it wrong, but not nearly so wrong as the past couple of years would suggest, no?I agree 100% (typed into my 19-inch-screen laptop while sitting on my marble terrace waiting for my lobster-pesto pizza to be delivered and feeding my dogs pringles and bacon).
 
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Polter
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Soviet economics and why it failed

January 3rd, 2010, 7:09 pm

QuoteOriginally posted by: Traden4AlphaThe events of the last few years show how a changing technological context can introduce new problems in an economy. In essence, capitalist entities fell into the same failure mode as is seen in central planning -- too many individuals, banks, and investors converged on the same plan of investing in housing. Rather than encourage a diversity of divergent competing approaches to financial investment (a key advantage of market economies over centrally planned ones), the transparency of high returns from housing, mortgages and mortgage-based financial products lead to a convergence of approaches. Everyone jumped on the housing bandwagon because everyone could see it was a real money-maker (the same phenomena occurred in the internet bubble).If convergence is the problem, preventing it might be the solution. One of the reasons of the convergence is the limited outcome space. In this context, it means e.g. regulation and central intervention (not necessarily just government intervention (depends what one means by this)) -- e.g. central bank reducing the interest rates & keeping them low in response to 2001 slowdown necessarily limits the outcome space for the entities (consumers, firms, GSEs) operating in the market; or, rather, it limits the feasible outcome space (supported by expected profits, preferences, discounted w/ expected interest rates, etc. -- further complication arises here, since the probability measures used for those expectation by each entity might quite differ, preferences definitely do, etc). What is on average profitable in low-interest-rates-regime (borrowing money/leverage, risky malinvestments, etc.) isn't necessarily so in any higher-interest-rates one. Hence, centralized configuration of the interest rates might pretty much IMPOSES the herd behavior -- it might even be (locally) optimal for a large range of preferences/expectations' pr. measures ("it's optimal to ride the bubbles"/timing matters).I don't think it's realistic to expect that we can prevent for any X "everyone jumping on the X bandwagon because everyone could see it was a real money-maker" when the X bandwagon is pretty much artificially created in the first place, and then the market entities are steered/pushed (if not forced) into participating in it.---On a related note -- the economic calculation problem seems to support free market economics so far -- optimality of central planning seems to require stationary state (e.g. non-growth economy) as a necessary condition (not even mentioning the sufficient ones, perfectly rational fully-informed always-optimally-elected political entities with frictionless optimally-timed perfect legislation process being some of those, w/o analogous one being necessary in the decentralized free market case). Not that the current state of economy has anything to do with free market, mind you...---More on topic -- apart from obvious reasons (see: economic calculation problem above), Soviet economics failure nicely illustrates the failure of the assumptions required to hold for the central planning to be optimal -- it's easy to point out a few Enrons out of several million companies in the world and declare "the market has failed", it's even easier to point out most of the governments of nearly two hundred countries of the world and notice "the politicians (and governments) are failing almost all the time" -- it was just even more pronounced in the USSR case, all with political leaders being less than perfectly rational and eliminated if they got too close to threaten the current leader (Stalin-Red Army generals, Nikita Khrushchev-troika (Lavrentiy Beria, ...)), happening in the right conditions in the right moment. Attempts to hold an overstretched empire (violent suppression of Hungarian, Czechoslovakian, and other Eastern Bloc uprisings), forced massive heavy industrialization & militarization of the economy, very important propaganda factor (better to export "luxury goods", like chocolate, to demonstrate the "superiority of Soviet economy", rather than leave some for the citizens), botched Afghanistan "operation", etc. didn't help.
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Traden4Alpha
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Soviet economics and why it failed

January 8th, 2010, 12:51 pm

QuoteOriginally posted by: PolterIf convergence is the problem, preventing it might be the solution. One of the reasons of the convergence is the limited outcome space. In this context, it means e.g. regulation and central intervention (not necessarily just government intervention (depends what one means by this)) -- e.g. central bank reducing the interest rates & keeping them low in response to 2001 slowdown necessarily limits the outcome space for the entities (consumers, firms, GSEs) operating in the market; or, rather, it limits the feasible outcome space (supported by expected profits, preferences, discounted w/ expected interest rates, etc. -- further complication arises here, since the probability measures used for those expectation by each entity might quite differ, preferences definitely do, etc). What is on average profitable in low-interest-rates-regime (borrowing money/leverage, risky malinvestments, etc.) isn't necessarily so in any higher-interest-rates one. Hence, centralized configuration of the interest rates might pretty much IMPOSES the herd behavior -- it might even be (locally) optimal for a large range of preferences/expectations' pr. measures ("it's optimal to ride the bubbles"/timing matters).Interesting and I agree! I like your notion of the outcome space. I'm not sure I see why low interest rates leads to a limited outcome space (I'd have thought that cheap money would expand the outcomes space) but I love to hear your explanation.I do think that globalization and the internet impacted the outcome space in two ways (one good, the other very very bad).First, global financial markets and information supported a massive expansion of the outcome space. Investors now enjoy a "long tail" of investment alternatives (e.g. ETFs for most countries, commodities, and IR product as well as thousands of equities) and that's a very good thing for broadening the outcome space. On the supply-side, the outcome space is now much much larger than it was in the past.Second, global financial markets and information made it much easier for investors to find and move money into "winning" strategies. Everyone can pull up a list of the top-performing investments and tell their broker "put me in investment #1" The result is a winner-take-all effect that significantly constricts the demand side of the outcome space. The effect is especially problematic for regulated entities such as deposit-taking commercial banks. If all banks are "equally safe" due to FDIC/deposit insurance backing, and consumers can readily see that bank A offers better interest rates than bank B, what is bank B to do but push the boundaries of risk just a little further to goose returns on assets to enable offering a higher return to consumers? They are talking about re-enacting Glass Steagel in the US but I think they don't understand why it was repealed in the first place. Although the government can readily regulate the behavior of banks, it will have a harder time regulating the behavior of individual investors who can now readily move money out of deposit-taking banks and into a much wider array of instruments.I agree that "centralized configuration of the interest rates might pretty much IMPOSES the herd behavior." The fungibility of money means that central bankers have blunt tools. The Fed can raise and lower the aggregate amount of liquidity in the economic bath tub, but has relatively little power to prevent that liquidity from sloshing from one side of the economy to another. In both the dot-com bubble and the housing-bubble, we had deflationary parts of the economy (e.g., computers/electronics, cheap Chinese goods, and post-dot-com & 9/11 unemployment) that offset the inflationary/over-exuberant parts of the economy (dotcom and housing). The Fed couldn't prevent the cheap money that as needed to stimulate employment in the 2000s from flowing into excessive housing construction and refinancing activity.QuoteOriginally posted by: PolterI don't think it's realistic to expect that we can prevent for any X "everyone jumping on the X bandwagon because everyone could see it was a real money-maker" when the X bandwagon is pretty much artificially created in the first place, and then the market entities are steered/pushed (if not forced) into participating in it.Indeed! In the case of the housing bubble, both the left-wing and right-wing politicians were in favor of the housing bandwagon.
 
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Soviet economics and why it failed

January 8th, 2010, 8:16 pm

QuoteOriginally posted by: Traden4AlphaIn the case of the housing bubble, both the left-wing and right-wing politicians were in favor of the housing bandwagon.How terrible that anyone should think they might have a place to live!Of course, the banks complained loudly that it would create a bubble, spent hundreds of millions lobbying against it and refused to participate in the bubble.
 
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yurakm
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Soviet economics and why it failed

January 11th, 2010, 2:18 am

It is very interesting to read the thread to see how people perceive USSR in general, and particularly planning. However, the perception has not so much common with a (historical) reality.Specifically:1. Soviet planning economic system actually was viable. This is why it existed for about 60 years, from 1928 (first 5-years plan) till 1991. Preceding attempt of "Millitary Communism" of 1917-1922 was not viable, and "new Economic Policy" of 1922-1928, though viable, probably would became incompatible with being Soviet.2. Was the planning economics efficient is a different question. I believe that it was less efficient overall than, for example, the US form of capitalism. Though may be was not worse that Latin American's forms. However, it is impossible to prove. What is obvious is that, even we play a devil advocate and assume that it was slightly more efficient, the difference was not big enough to compensate for other handicaps.3. Planning system never aspired to be optimal globally (or country wide). Actually, when it it appeared in 1928, Soviet authorities definitely did not even hear about a concept of optimality. Neither economists, by the way - first publications appeared in 1939 or so, and about very narrow optimization, more technological than in economics. At most, few academic economists played with a economy-wide optimization as a theoretical idealization between mid 1960-th to early 1970-th. It became obvious for them very soon that it is impossible to build a single criteria to optimize - not to mention data and computational problems. Try to build a million by million Leont'ev matrix - and why said that dependencies are linear, by the way?(to continue)
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Soviet economics and why it failed

January 11th, 2010, 6:48 am

QuoteOriginally posted by: yurakmIt is very interesting to read the thread to see how people perceive USSR in general, and particularly planning. However, the perception has not so much common with a (historical) reality.Rational discussion of any alternative to capitalism is as impossible in a capitalist economy as rational discussion of free markets in a soviet one. You might as well talk about the earth being round when everyone knows it is flat.
 
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Traden4Alpha
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Soviet economics and why it failed

January 11th, 2010, 3:03 pm

QuoteOriginally posted by: yurakmIt is very interesting to read the thread to see how people perceive USSR in general, and particularly planning. However, the perception has not so much common with a (historical) reality.Specifically:1. Soviet planning economic system actually was viable. This is why it existed for about 60 years, from 1928 (first 5-years plan) till 1991. Preceding attempt of "Millitary Communism" of 1917-1922 was not viable, and "new Economic Policy" of 1922-1928, though viable, probably would became incompatible with being Soviet.2. Was the planning economics efficient is a different question. I believe that it was less efficient overall than, for example, the US form of capitalism. Though may be was not worse that Latin American's forms. However, it is impossible to prove. What is obvious is that, even we play a devil advocate and assume that it was slightly more efficient, the difference was not big enough to compensate for other handicaps.3. Planning system never aspired to be optimal globally (or country wide). Actually, when it it appeared in 1928, Soviet authorities definitely did not even hear about a concept of optimality. Neither economists, by the way - first publications appeared in 1939 or so, and about very narrow optimization, more technological than in economics. Interesting! Thank you.QuoteOriginally posted by: yurakmAt most, few academic economists played with a economy-wide optimization as a theoretical idealization between mid 1960-th to early 1970-th. It became obvious for them very soon that it is impossible to build a single criteria to optimize - not to mention data and computational problems. Try to build a million by million Leont'ev matrix - and why said that dependencies are linear, by the way?Indeed! But it's worse than a technological problem.The "criterion choice" problem is extremely serious, even debilitating for central planning, on at least two levels. First, as the number of criteria grows, the % of solutions on the efficient frontier becomes an increasing % of all the possible solutions. With enough criteria, all solutions become potentially efficient ones! Deciding among criteria (and plans) then becomes a non-objective decision that is subject to political factors more than rational factors. "The Party" rather than the people become the deciders.Second, how "efficient" will a workforce be if it's working toward a criterion that it disagrees with? As an economy becomes more heterogenous, as advancing economies do, then the probability that a given worker or worker organization agrees with the central planer's choice of criterion will diminish to zero. (Maybe this is why central planning can work in war time or in pre-industrial societies because everyone has the same criterion)QuoteOriginally posted by: yurakm(to continue)I look forward to that.
Last edited by Traden4Alpha on January 10th, 2010, 11:00 pm, edited 1 time in total.
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