24 August 2011

Central Planning - It's Not Just For Communists Anymore

I found this email from a reader to be very interesting, and I asked him for permission to share it with you.

Most students of economics are aware of the tendency of 'perfect competition' to zero economic profit over time, unless there is a continual renewal and reinvention of the business, under the guidance of a wise, insightful, and responsive management. Even the best enterprise involves a risk of loss, the expense of well paid employees, and significantly hard work, all combined with a bit of luck. Little wonder that a minority of businessmen find this arrangement less satisfactory that other alternatives, which unfortunately includes various forms of cheating, if not outright fraud.

And therefore there is a constant tendency of participants in capitalist systems to foster the unreasonable profits of cartels and the stable pricing power of monopolies, natural or otherwise, with a measure of discretionary control over resources and choices, legislation and information, and political and monetary power.

Corporations are creatures of the law, and inferior to it. Without it, they don’t exist. What better way to create the supreme monopoly and maintain it in perpetuity than to skew the law in one’s favor?

When corporations obtain an inordinate amount of power over the social fabric of regulation and governance, the creation of an oligarchy distorts the real economy through the accumulation of too much power in too few hands, in the manner of the central planning bureaucracies of the old line communist nations.

And this is why the standard economic solutions of both stimulus and austerity for normal cyclical excess can be doomed to failure, as they are at this time. The system itself has become distorted and broken, and is badly in need of reform.  Whatever one puts into it will come out badly, and be turned to fruitless purposes, corrupted by the unprecedented concentration of power in the hands of the few, the partnership of the Wall Street banks, big media, multinational corporations, and their servants in the government.

The hallmark of a corrupt enterprise is that while it has the power to confiscate and destroy, it cannot create sustainable organic growth and recovery that benefits the broader public.

The modern, somewhat romantic theory of naturally efficient markets peopled by inhumanly rational and altruistic individuals is a fairly modern twist on the noble savage ideal of Rousseau, and just as other-worldly and impractical when applied to a modern society. Certainly no one who has driven recently on a modern highway in rush hour could believe it.

The corrupting tendencies of the concentration of power is an intriguing idea, with an historical resonance from the trust-busting Teddy Roosevelt, and his distant cousin Franklin, as well as the famous observation of Lord Acton:
"And remember, where you have the concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that."
Nineteenth century Americans viewed the business trusts as un-American "internationalists, and  heartless, abusive exploiters of the public interest." And rightly so. They looked for relief to the reform of their government, and the power of democracy and the law.  

This struggle of the individual to maintain a balance of power with the organizations, whether they be the corporation or the state, is a recurrent theme, a continuing saga throughout human history.  Big Government and Big Business have both been inimical to human freedom.

Whether such an accumulation of power in a few hands is achieved by the gun and star chamber, or the pen and the bribe, may not matter to the end result, which is a society plagued by corruption, stagnation, and at its end, a growing instability with a resort to physical force and more overt repression on its own people.

Central Planning - It's not Just for Communists Anymore
By Matthew K
23 August 2011
Vancouver, BC

It's been a rough few weeks for the capitalist system, which bestrides the globe like a teetering colossus. Not only has there been stock market turmoil worldwide, and the temporary threat of a US default on its debts, but an esteemed, mainstream economist suggested that Karl Marx was right. In the Wall Street Journal, no less! Karl Marx Was Right

That would be Nouriel Roubini, whose claim to fame came from timely warnings about the US housing bubble and subsequent US stock market collapse.. It is important to note that he only said that Marx was right in that capitalism could collapse on itself,  not that it actually would.

Most people are familiar with the spectacular failures of central planning in the Communist regimes. According to the resurgently fashionable Austrian school of economics, an economy is too complex to be managed by one expert, or even one committee of experts, regardless whether the clubhouse door reads "Politburo" or "Shark Tank."

According to the Austrians, society's fastest path to prosperity consists of allowing every person to decide freely what is in their best interest, with the emphasis on individual transactions.

A biological analogy comes from flocks of birds, schools of fish, and ant colonies, among others. These swarms function extremely well, despite being composed of simple creatures following simple rules, and despite the anarchic lack of a leader directing things. Our own "simple critter rules" in modern society are probably along the lines of "try to get a higher paying job, and pay lower prices for stuff, within the laws of the land, and without making too many enemies."

A business analogy comes from Toyota. Their quality went from hopeless to fearsome by training every employee to be competent enough to figure out how to do their own job better, and then allowing them to do so. If their management tried to dictate how each task was to be done, they might have peaked at early-80’s American car maker quality levels.

In a similar way, they decided not to try to predict the right production levels for each model, colour, and trim. Instead they pre-built enough cars to fill dealership inventory, and each time a customer purchased a vehicle, they would build one more of that same model, colour, and features. In economic nerd speak, they responded to that "market signal". So if 5% of Corolla drivers wanted a green car with deluxe extras, in the long run 5% of Corolla production would consist of deluxe green vehicles.

Since the flaws of central planning and benefits of distributed decision-making occur in the public sector, the private sector, and even in biology, we can generalize that the USSR's economic problem was ultimately that a small group of people would decide how to (mis)allocate most of the country's resources.

In the past thirty years, there's been an immense concentration of wealth -- particularly in Anglo-American countries (the US, UK, us, the Aussies). The US is at the leading edge of this trend, with the top 1% owning 42% of the wealth, or about six times as much as the bottom four fifths of the population, and a significant portion of the means of production and public information (media) and influence over the course of society.

In recent decades Western capitalism has moved towards the central planning model of a relatively small number of people in charge of directing the allocation of resources. This narrowing of perspective has in turn led to policies progressively more disastrous for the moved and the shaken... which was the Soviet denouement.

I have to credit the influence of the thoughtful blog of a well-to-do American entrepreneur and military strategist, and especially this particular posting. Central Planning and the Fall of US Empire

Capitalism's path back from the self-perpetuating central planning will require a more equitable, or at least a less inequitable, distribution of wealth and power, by which to rebuild the middle class and promote decision making based on individual choice and a more widely based entrepreneurial meritocracy. Which is what Roubini was complaining about, in saying that too much wealth was being redistributed from labour to capital.

It would be a terrible irony if Marx was proven correct, and unchecked capitalism destroyed itself by evolving the self-crippling features of a centrally planned communist economy.  One can only hope that we can reform our current market systems before things get worse.