{"id":10880,"date":"2018-01-11T13:22:04","date_gmt":"2018-01-11T21:22:04","guid":{"rendered":"http:\/\/victorhanson.com\/wordpress\/?p=10880"},"modified":"2018-01-11T13:22:04","modified_gmt":"2018-01-11T21:22:04","slug":"why-socialism-fails","status":"publish","type":"post","link":"https:\/\/victorhanson.com\/wordpress\/why-socialism-fails\/","title":{"rendered":"Why Socialism Fails"},"content":{"rendered":"
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by <\/span>Paul R. Gregory<\/a><\/span><\/div>\n<\/div>\n<\/div>\n

Wednesday, January 10, 2018<\/span><\/div>\n<\/header>\n
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\u00a0Defining Ideas<\/em><\/div>\n<\/div>\n
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Image credit:\u00a0Barbara Kelley<\/h5>\n<\/div>\n<\/figure>\n<\/div>\n
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As the collapse of the Soviet Union approached, Francis Fukuyama proclaimed the victory of liberal democracy over planned socialism in his 1989 essay, \u201cThe End of History<\/a>?\u201d More than a quarter century later, the USSR has indeed disintegrated. Its former east European empire lies inside the European Union. China has a market economy, though the nation is led by a single party. And the \u201csocialist\u201d states of North Korea, Cuba, and Venezuela are in economic ruin. \u00a0Few now advocate \u201cback to the USSR.\u201d At the same time, many people still consider socialism an appealing economic system. Consider, for example, that Bernie Sanders\u2014an avowed supporter of a socialist United States\u2014is America\u2019s most popular<\/a> politician\u2014and that as many millennials favor socialism as capitalism.<\/p>\n

The analogy of the jockey and the horse explains the continued appeal of socialism. Socialists believe that socialist regimes have chosen the wrong jockeys to ride the socialist horse to its deserved victory. Bad jockeys such as Stalin, Mao, Fidel, Pol Pot, and Hugo Chavez chose tactics and policies that led their socialist horse astray. But actually, a look at how the Soviet Union actually worked reveals that it\u2019s the horse itself that\u2019s the problem.<\/p>\n

After gaining power a century ago and then holding onto it through a civil war, the Soviet communists were intent on building a socialist state that would overwhelm capitalism. State ownership and scientific planning would replace the anarchy of the market. Material benefits would accrue to the working class. An equitable economy would supplant capitalist exploitation and a new socialist man would rise, prioritizing social above private interests. A dictatorship of the proletariat would guarantee the interests of the working class. Instead of extracting surpluses from workers, the socialist state would take tribute from capitalists to finance the building of socialism.<\/p>\n

The basics of the Soviet \u201chorse\u201d were in place by the early 1930s. Under this system, Stalin and his Politburo set general priorities for industrial ministries and a state planning commission. The ministers and planners worked in tandem to draw up economic plans. Managers of the hundreds of thousands of plants, factories, food stores, and even farms were obligated by law to fulfill the plans handed down by their superiors.<\/p>\n

The Soviets launched their planned socialist economy as the capitalist world sank into depression, trade wars, and hyperinflation. Soviet authorities bragged of unprecedented rates of growth. New industrial complexes grew from scratch. Magazines featured contented workers lounging in comfortable resorts. The message: The West was failing, and the Soviet economic system was the way to the future.<\/p>\n

As the competition between capitalism and Soviet socialism became more pronounced during the Cold War, serious scholarly study of the Soviet economy began. The overarching research agenda of Western scholars was \u201cscientific planning\u201d\u2014the socialist belief that expert technocrats could manage an economy better than spontaneous market forces. After all, would not experts know better than buyers and sellers what, how, and for whom to produce?<\/p>\n

It was the Austrian economists F. A. Hayek and Ludwig von Mises who resisted this idea most forcefully. In their landmark critique laid out in a series of papers written from the 1920s through the 1940s, they concluded that socialism must fail. In modern economies, hundreds of thousands of enterprises produce millions of products. Even with the most sophisticated computer technology, managing such large numbers would be far too complex for an administrative body trying to allocate resources. Modern economies, therefore, are too complex to plan. Without markets and prices, decision-makers will not know what is scarce and what is abundant. If property belongs to all, what rules should those who manage assets for society follow?<\/p>\n

The Soviets\u2019 solution to the complexity and information problems was a national plan that spelled out production goals only for broad sectors, not for specific transactions. In other words, rather than mandate the delivery of 10 tons of steel cable by factory A to factory B, the planners set a target for the total number of tons of cable to be produced nationwide. Only a few specific goods\u2014such as crude oil, aluminum ore, brown coal, electricity, and freight-car dispatches\u2014could be planned as actual transactions. Everything else had to be planned in crude quantities, such as several million square meters of textile products. Product specifications, delivery plans, and payments were worked out at lower levels and often with disastrous results.<\/p>\n

Soviet scientific planning, in fact, directed only a minuscule portion of products. In the early 1950s, central agencies drew up less than 10,000 planned indexes, while industrial products numbered more than 20 million. Central agencies drew up generalized plans for industrial ministries, which issued more detailed plans to \u201cmain administrations,\u201d which prepared plans for enterprises. There never was a pretense that the top officials would plan the production of specific products.<\/p>\n

To make matters even more complicated, virtually all plans were \u201cdrafts\u201d that could be changed at any time by higher state and party officials. This constant intervention, called \u201cpetty tutelage,\u201d was an irritant from the first to the last day of the Soviet system, but it was a key pillar of resource allocation.<\/p>\n

Central planners prepared preliminary plans for a small percentage of the economy. These \u201cdraft plans\u201d set off huge \u201cbattles for the plan\u201d as ministries and enterprises scrambled to fulfill their production targets and meet their delivery quotas, all of which could be changed by party and local officials at any time.<\/p>\n

As the commissar of heavy industry, Sergo Ordzhonokidze complained in 1930: \u201cI guess they think we are idiots. They give us every day decree after decree, each one without foundation.\u201d An unnamed defense contractor echoed the same complaint a half century later: \u201cThey stick their heads into every single issue. We told them they were wrong, but they would demand that things be done their way.\u201d<\/p>\n

The manager\u2019s task was presumably simple: The plan was the law; the manager\u2019s job was to fulfill the plan. But the plan kept on changing. Moreover, it consisted of multiple tasks, such as deliveries, outputs, and an assortment program. Throughout the entire history of the Soviet Union, gross output (measured in tons, meters, or freight\/miles) was the most important plan indicator and the most malleable. Nail producers, whose output was judged by weight, would produce only heavy nails. Tractor manufacturers, struggling to meet their tractor quota, were caught delivering tractors without engines to their customers, who accepted them anyway for their spare parts. Shoe manufacturers, whose plans were based on quantity, produced one size and one color to the chagrin of customers. Other targets, such as cost reductions or new technologies, were ignored as counting less towards fulfillment of the plan.<\/p>\n

Under scientific planning, supply had to roughly equal demand\u2014and, given their distaste for the anarchy of markets, Soviet planners could not balance supply and demand by raising and lowering prices. Instead, they compiled \u201cmaterial balances\u201d using primitive accounting to compare what materials were on hand with what were, in some sense, needed.<\/p>\n

Soviet material-balance planning suffered from a number of deficiencies. For example, only a few balances could be compiled\u2014in 1938, only 379 central balances were prepared in a market of millions of goods. And then, the balances were based on distorted information. Producers of goods in the balance lobbied for easy targets that concealed their capacity. Industrial users in the balance overstated what they needed to be sure of fulfilling their own plans.<\/p>\n

Figuring out the proper balance was an exhausting exercise\u2014and Soviet planners did not reinvent the wheel each year. Instead, they resorted to what came to be known as \u201cplanning from the achieved level,\u201d which meant that each year\u2019s plan was last year\u2019s plus some minor adjustments.<\/p>\n

By the early 1930s, supply agencies were distributing materials based on what they did in the previous year. A fast forward to the 1980s reveals the same practice in place: When a producer of welded materials wished to use thinner metals, the official answer was: \u201cI don\u2019t care about new technology. Just do it so that everything remains the same.\u201d Material-balance planning was hostile to new products and new technologies because they required a reworking of an already fragile system of balances. American economists who were studying Soviet industrial production in the 1950s were astonished that the same machines were produced over decades without modification, something unheard of in the West.<\/p>\n

Material-balance planning was the most fundamental weakness of the Soviet system. It froze the Soviet economy in place. Each year\u2019s production was a replica of the previous year. A Soviet manager from 1985 would have felt quite at home in the same enterprise in 1935.<\/p>\n

Beyond material-balance planning, soft budgets constituted another key defect. The economist Janos Kornai of Harvard University grew up in Hungary under planned socialism. His research, which draws on his first-hand experiences, focuses on the economic losses associated with soft budget constraints. As Kornai, if enterprises do not face the risk of bankruptcy, they will not seek out cost economies and other survival strategies. From day one of the Soviet system, loss-making enterprises understood they would be bailed out automatically, if not right away.<\/p>\n

The primary cause of soft budgets was that the Soviet system was based on output plans. One enterprise\u2019s output was another\u2019s input. If output plans failed widely, the whole plan would fail. Taking an enterprise out of production due to insolvency was simply not an option.<\/p>\n

In practice, loss-making enterprises paid for deliveries with IOUs. Unsettled IOUs would grow until they reached crisis proportions. Gosbank, the state bank, would then step in and make good on the unpaid bills by issuing money and creating what Soviet banking officials called a monetary overhang\u2014more rubles chasing goods than there were goods to buy. In fact, Gosbank\u2019s main business in the early years of the Soviet Union was organizing bailouts. When one was completed, it was time to start working on the next.<\/p>\n

The problem with socialism isn\u2019t a bad jockey\u2014it\u2019s the horse itself. The Soviet economic system suffered from pathologies that would ultimately doom it. Starting in the late 1960s, the USSR economy went into a long decline, which came to be called the \u201cperiod of stagnation.\u201d Mikhail Gorbachev was elected General Secretary of the Communist Party in 1985 on the pledge that he, as a radical reformer, would reverse the decline.<\/p>\n

Gorbachev failed because the core of the Soviet planned system was rotten Despite his reform inclinations, he remained a believer in socialism. He was determined to save Soviet socialism by making it more like capitalism. In so doing, he created an economy that was neither planned nor a market\u2014a chaotic free-for-all, which the Russian people regrettably associate to this day with that they came to call \u201cwild capitalism.\u201d<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

by Paul R. Gregory Wednesday, January 10, 2018 \u00a0Defining Ideas Image credit:\u00a0Barbara Kelley As the collapse of the Soviet Union approached, Francis Fukuyama proclaimed the victory of liberal democracy over planned socialism in his 1989 essay, \u201cThe End of History?\u201d More than a quarter century later, the USSR has indeed disintegrated. Its former east European […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_newsletter_tier_id":0,"footnotes":"","jetpack_publicize_message":"","jetpack_is_tweetstorm":false,"jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[978,113,1],"tags":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p466Sb-2Pu","jetpack_likes_enabled":true,"jetpack-related-posts":[{"id":12182,"url":"https:\/\/victorhanson.com\/wordpress\/why-was-the-steele-dossier-not-dismissed-as-a-fake\/","url_meta":{"origin":10880,"position":0},"title":"Why Was The Steele Dossier Not Dismissed As A Fake?","author":"victorhanson","date":"February 6, 2020","format":false,"excerpt":"Please\u00a0read\u00a0the\u00a0following\u00a0article\u00a0by\u00a0my\u00a0colleague\u00a0Paul\u00a0Gregory\u00a0in\u00a0Defining\u00a0Ideas A cursory examination of the Steele Dossier should have convinced the CIA or the FBI that it was fake news. 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