Central planning – not just for the communists anymore

(written Aug 22, 2011; uploaded Aug 8, 2012 … but still valid, I think!     :)  )

(also, Jesse was kind enough to post a lightly-adapted version on his blog, last year)

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 (temporary) US default on its debts … but an esteemed, very well-to-do economist suggested that Karl Marx was right! In the Wall Street Journal, no less!

That would be Nouriel Roubini, whose claims to fame came from timely warnings about the US housing bubble (2005-ish) and subsequent US stock market collapse (2008-ish). Now, it’s important to note that he only said that Marx was right in that capitalism could collapse on itself. Not that it actually would. A slight distinction lost on many a lefty website in the past couple weeks. ;)

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Most people are familiar with the spectacular failures of central planning in Communist regimes. According to the resurgently-fashionable Austrian school of economics this is because 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 “Dragon’s Den”. Rather, society’s fastest path to prosperity consists of allowing every person to decide what’s in their best interest. It’s basically the “million monkeys at a million keyboards” approach. :)

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 critters 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’d’ve topped out at early-80’s American carmaker quality levels. ;)

In a similar way, they decided not to try to predict the right production levels for each model, colour, and trim level. Rather, they would pre-build enough cars to fill dealership inventory… and each time a customer purchased a vehicle, they’d build one more of that exact model, in that colour, at that trim level. (In economic nerdspeak, 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.

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Since the flaws of central planning / 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. (The little people, after all, could still choose whether to wait in line for an hour for bread, or wait in line for an hour for shoes…)

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Let’s move on to capitalism, now. In the past thirty-odd 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 4/5 of the population. And this means that in recent decades capitalism has moved towards the central planning ideal of a few people in charge of all the resources. This narrowing of perspective has in turn led to policies progressively more disastrous for the moved and the shaken… which was exactly the Soviet denouement.

I wish I’d come to this insight on my own, but I have to credit the thoughtful blog of a well-to-do American serial entrepreneur and, uh, military theorist. (I try to keep my reading varied. ;) )

Capitalism’s path back from central-planning roulette will require a more equitable (or at least, less inequitable) distribution of wealth, by which to rebuild the middle class. This in turn generally starts with higher taxes on the extremely wealthy. So one-time world’s-richest-man Warren Buffett’s recent New York Times editorial is timely; he asked why he paid 17% in taxes on his $40,000,000 of income last year, while his staff (earning probably one-thousandth as much) paid an average of 36%. Which is what Roubini was complaining about, in saying that too much wealth was being redistributed from labour to capital.

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There would be a terrible irony if Marx was right and unchecked capitalism destroyed itself by evolving the self-crippling features of a communist economy, and one does hope that we can reform our current market systems before things get worse. I wouldn’t mind a future that leans Swedish: for all their semi-socialist tendencies, the Nordic smorgasborgers still manage to regularly create free-market titans.* That’s a combination which could conceivably appeal to both the Conservatives and the (now-post-Layton) NDP. Don’t fear, though, I’ve become benumbed to vain aspirations… ;)

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* among them Ericsson, H&M, IKEA, Metro (the free commuter papers), Saab and Volvo, Tetra-Pak, and even BRIO, makers of those beloved wooden train sets of my youth.  Sure, some of them may now be on their last legs, but no doubt there are other emerging Swedish entrepreneurs to fill the gaps…

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