Real-world planned economies: what's wrong with 'em?

[argeiphontes]

Somebody necro'd a thread about there being markets in North Korea. Wikipedia says that the ban on markets has been lifted and there are all sorts of special economic zones in the country.



So, my question is, why is the planned economic system unable to provide what North Korean and Cuban (the last two, most-planned economies in the world) people want and need? Why are they turning to private market activity rather than just reforming their planning system? North Korea has an aerospace program that can launch ballistic missles, but they can't plan an economy. They had extreme famine conditions and weren't even able to provide basic food to their citizens for a number of years. They grow potatoes and grain, but can't grow enough to ensure food security and abundance. What gives?

(A side question would be, why are they giving up the baby with the bathwater? Why don't they allow private cooperative enterprises to form but not allow wage labor? Or, why don't they implement some kind of labor-based currency, increase worker control, and try to push the revolution forward? Are they just stuck in a mindset where they have to model either the Soviet Union or Sweden?)

These are the closest anybody has come to fully planned economies. I don't care whether or not they are actually communist, I'm just interested in discussing the planned economy aspect.

Anyway, what's wrong with these two real-world "planned" economies? Maybe there is nothing wrong except lack of political freedom, and the regimes just don't care what economic system is in place as long as they remain in power, like in China?

[Schumpeter]

Some micro economic theory helps us understand why markets operating in relatively free market conditions are often successful, relative to markets operating in planned economies.
Here we have a basic S/D diagram:



As we see the market is at an equilibrium quantity Q* and Price Q*, this is the natural result of free exchange. The demand for the good in question is derived from the utility (or 'happiness) that people gain from consuming that good, this diagram shows the consumer and producer surplus that is derived from the production of the good in question (the total contribution to the 'greater good').



Due to nature of individuals wanting to maximise their own personal gain ( you want the best value for your money) they will attempt to allocate their resources (money) to producers which make the goods that they want thus there is more contribution to the greater good and society overall is better off.

Lets have a look at what happens when the demand for a good increases in a free market.



Here we see demand shift from Demand 1 -> Demand 2, it has increased.
The result is an expansion of the quantity from Q1 -> Q2, as producers are incentivized to increase by as more people are willing to buy their products which means more profit.
With a price increase from P1 -> P2 acting as a rationing mechanism to prevent waiting times or queues for the products or to simply prevent there being too many customers relative to the amount of stock, for example imagine you are running a lemonade stall and you have 8 cups of lemonade left to sell but 10 people waiting to be served. It is beneficial to you to raise your price in order to increase profits and as a result depending on the customers marginal propensity to consumer your product, certain customers are dissuaded from the product due to the higher prices, so two leave and the product has been rationed.

In a planned economy the government controls the allocation of resources instead of it being left to the market mechanisms described above, it is very hard for central planners to estimate the correct level of demand for a good or service. So often they get it wrong and end up producing too many of a good or not enough, so the surplus generated by the production of the goods is not as large as it would be in a free market and as a result there is less contribution towards the common good.

Examples of failures within planned economies



Waiting lines in the USSR





Stalin's forced collectivisation of agriculture in the Ukraine and the USSR resulted in a massive under supply of grain, resulting in mass starvation in the years 1932-1933.



Thanks for reading

[Tim Cornelis]

There are various intrinsic problems with central planning, those primarily concerning the subject you raised are:
- misinforming planning agencies
- slow implementation of innovative technology
- centralised nature of matching supply and demand (unresponsive, uncertain, static).

The first two concern the built-in incentive in central planning regarding the meeting of production quotas by enterprise managers: understating production capacity enhances the chances of surpassing production quotas; and implementing innovative technology disrupts the production process and risks not reaching the production quota in addition to not making any future gains from implementing innovative technology as enterprise manager.

The reason they don't reform in the way that you suggest is, I would say, is that their power is tied up with the class system they head. Reforming the planning system would be an entire restructuring of this class system, and possibly an inversion, whereas market reforms align with the present class system and so can be done incrementally (as with China). Though Cuba has promoted cooperatives.

I have tried looking up why the DPRK's central planning system is so particularly awful in comparison to other forms of central planning but couldn't find a clear answer. I also briefly tried looking up how it was that the DPRK's economy was doing better than the South's up until circa 1975 some time ago but couldn't find what made the DPRK stagnate so abruptly.

[NGNM85]

I don't mean any disrespect to the OP, I think this is a subject worthy of discussion. However, it just kinda bugs me that every debate about economic planning goes straight to China, North Korea, and the USSR, as opposed to, say; Coca-cola, or Microsoft. It's kinda like how when you tell people you're a Socialist, they always think of Stalin, Mao, and Ceausescu, as opposed to, y'know, Einstein, Oscar Wilde, and Martin Luther King.

[Schumpeter]

I don't mean any disrespect to the OP, I think this is a subject worthy of discussion. However, it just kinda bugs me that every debate about economic planning goes straight to China, North Korea, and the USSR, as opposed to, say; Coca-cola, or Microsoft. It's kinda like how when you tell people you're a Socialist, they always think of Stalin, Mao, and Ceausescu, as opposed to, y'know, Einstein, Oscar Wilde, and Martin Luther King.

MACRO-ECONOMIC PLANNING (USSR - MAO ETC)
PLANNING WITHIN A FIRM (Business management? or micro economics if they have 100% market share?)
But I'm not sure why you are comparing macro economics to the running of a firm?

[Futility Personified]

Because those firms are fucking huge, surely. There are Macdonalds and Coca Cola products on every continent, all to the same specification, operating on centralised directives. Both those companies probably have profits in excess of some countries GDP, how can they not be used as examples of macro-economics?

[liberlict]

Aside from the obvious disadvantage of economic planning, there are some idiosyncratic handicaps to North Korea and Cuba.

NK, especially. Their issue is that the planners are not communists in any real sense apart from using centrally planning. It's a Caligula regime run a bunch of delusional psychotics. The government is much more interested in armaments and rent-seeking than feeding their citizens.

Chris Hiitchens wrote a great article about NK being a fascist regime:

North Korea:
A Nation of Racist Dwarves

VISITING NORTH KOREA some years ago, I was lucky to have a fairly genial “minder” whom I’ll call Mr. Chae. He guided me patiently around the ruined and starving country, explaining things away by means of a sort of denial mechanism and never seeming to lose interest in the gargantuan monuments to the world’s most hysterical and operatic leader-cult. One evening, as we tried to dine on some gristly bits of duck, he mentioned yet another reason why the day should not long be postponed when the whole peninsula was united under the beaming rule of the Dear Leader. The people of South Korea, he pointed out, were becoming mongrelized. They wedded foreigners—even black American soldiers, or so he’d heard to his evident disgust—and were losing their purity and distinction. Not for Mr. Chae the charm of the ethnic mosaic, but rather a rigid and unpolluted uniformity.
I was struck at the time by how matter-of-factly he said this, as if he took it for granted that I would find it uncontroversial. And I did briefly wonder whether this form of totalitarianism, too (because nothing is more “total” than racist nationalism), was part of the pitch made to its subjects by the North Korean state. But I was preoccupied, as are most of the country’s few visitors, by the more imposing and exotic forms of totalitarianism on offer: by the giant mausoleums and parades that seemed to fuse classical Stalinism with a contorted form of the deferential, patriarchal Confucian ethos.

Karl Marx in his Eighteenth Brumaire wrote that those trying to master a new language always begin by translating it back into the tongue they already know. And I was limiting myself (and ill-serving my readers) in using the preexisting imagery of Stalinism and Eastern deference. I have recently donned the bifocals provided by B. R. Myers in his electrifying new book The Cleanest Race: How North Koreans See Themselves and Why It Matters, and I understand now that I got the picture either upside down or inside out. The whole idea of communism is dead in North Korea, and its most recent “Constitution,” “ratified” last April, has dropped all mention of the word. The analogies to Confucianism are glib, and such parallels with it as can be drawn are intended by the regime only for the consumption of outsiders. Myers makes a persuasive case that we should instead regard the Kim Jong-il system as a phenomenon of the very extreme and pathological right. It is based on totalitarian “military first” mobilization, is maintained by slave labor, and instills an ideology of the most unapologetic racism and xenophobia.

These conclusions of his, in a finely argued and brilliantly written book, carry the worrisome implication that the propaganda of the regime may actually mean exactly what it says, which in turn would mean that peace and disarmament negotiations with it are a waste of time—and perhaps a dangerous waste at that.
Consider: Even in the days of communism, there were reports from Eastern Bloc and Cuban diplomats about the paranoid character of the system (which had no concept of deterrence and told its own people that it had signed the Non-Proliferation Treaty in bad faith) and also about its intense hatred of foreigners. A black Cuban diplomat was almost lynched when he tried to show his family the sights of Pyongyang. North Korean women who return pregnant from China—the regime’s main ally and protector—are forced to submit to abortions. Wall posters and banners depicting all Japanese as barbarians are only equaled by the ways in which Americans are caricatured as hook-nosed monsters. (The illustrations in this book are an education in themselves.) The United States and its partners make up in aid for the huge shortfall in North Korea’s food production, but there is not a hint of acknowledgment of this by the authorities, who tell their captive subjects that the bags of grain stenciled with the Stars and Stripes are tribute paid by a frightened America to the Dear Leader.

Myers also points out that many of the slogans employed and displayed by the North Korean state are borrowed directly—this really does count as some kind of irony—from the kamikaze ideology of Japanese imperialism. Every child is told every day of the wonderful possibility of death by immolation in the service of the motherland and taught not to fear the idea of war, not even a nuclear one.

The regime cannot rule by terror alone, and now all it has left is its race-based military ideology. Small wonder that each “negotiation” with it is more humiliating than the previous one. As Myers points out, we cannot expect it to bargain away its very raison d’être.

All of us who scrutinize North Korean affairs are preoccupied with one question. Do these slaves really love their chains? The conundrum has several obscene corollaries. The people of that tiny and nightmarish state are not, of course, allowed to make comparisons with the lives of others, and if they complain or offend, they are shunted off to camps that—to judge by the standard of care and nutrition in the “wider” society—must be a living hell excusable only by the brevity of its duration. But race arrogance and nationalist hysteria are powerful cements for the most odious systems, as Europeans and Americans have good reason to remember. Even in South Korea there are those who feel the Kim Jong-il regime, under which they themselves could not live for a single day, to be somehow more “authentically” Korean.

Here are the two most shattering facts about North Korea. First, when viewed by satellite photography at night, it is an area of unrelieved darkness. Barely a scintilla of light is visible even in the capital city. Second, a North Korean is on average six inches shorter than a South Korean. You may care to imagine how much surplus value has been wrung out of such a slave, and for how long, in order to feed and sustain the militarized crime family that completely owns both the country and its people.

But this is what proves Myers right. Unlike previous racist dictatorships, the North Korean one has actually succeeded in producing a sort of new species. Starving and stunted dwarves, living in the dark, kept in perpetual ignorance and fear, brainwashed into the hatred of others, regimented and coerced and inculcated with a death cult: This horror show is in our future, and is so ghastly that our own darling leaders dare not face it and can only peep through their fingers at what is coming.


Cuba, on the other hand, is not the worst place in the world to live. It's ruled by relatively benevolent despots. I think their economy just struggles because of the old lack of incentive problem.

[Criminalize Heterosexuality]

Cuba and the DPR Korea suffer from both a nationalist, conservative bureaucratic caste that has systematically mismanaged the economy - both by impressionistic experiments and through corruption, market reforms etc. - and imperialist encirclement which forces them to compete in the world market on highly unequal terms. Formerly, the Soviet Union and China to a lesser extent could alleviate that encirclement somewhat, although these states were encircled as well. With the collapse of the Soviet Union, many economies that depended on a close relation with the Soviet Union foundered.

[Vladimir Innit Lenin]

Schumpeter, why are you using year 1 micro-economics to respond to a discussion on planning?

It proves nothing. When you get into second and third year economics, you'll realise that even the bourgeois economists don't believe in perfect competition. It's a load of baloney, and that you're trying to use such bullshit to dis-prove planning shows that your capacity to engage in this debate is, at best, limited.

[Schumpeter]

Schumpeter, why are you using year 1 micro-economics to respond to a discussion on planning?

It proves nothing. When you get into second and third year economics, you'll realise that even the bourgeois economists don't believe in perfect competition. It's a load of baloney, and that you're trying to use such bullshit to dis-prove planning shows that your capacity to engage in this debate is, at best, limited.

I'm outlining the basics of the argument against planning, utility, the argument presented being that utility maximization will be reached under a free market, Certerus paribus of course. (Assuming we drop LTV like 99% of the world has)

[Schumpeter]

Because those firms are fucking huge, surely. There are Macdonalds and Coca Cola products on every continent, all to the same specification, operating on centralised directives. Both those companies probably have profits in excess of some countries GDP, how can they not be used as examples of macro-economics?

It depends you can't compare an individual firm to a whole country merely because of size as a country is made up of different components to a firm (e.g a currency central bank, many different competing firms and industries). I guess it is technically macro economics as that would include the theory of production etc.

Also Microsoft etc are run from top - down as a single firm, you wouldn't want to run a country like that for obvious reasons. Also I'd doubt you'd want to use either profit or revenue as an indicator (state run firms) as seeking profit or revenue maximization would lead to idealogical conflict

[Tim Cornelis]

I'm outlining the basics of the argument against planning, utility, the argument presented being that utility maximization will be reached under a free market, Certerus paribus of course. (Assuming we drop LTV like 99% of the world has)

Could you explain what the LTV has anything to do with what you're saying at all?

[Futility Personified]

If we were talking about a planned economy, surely different competing industries would be taken out of the equation?

As for not wanting to run a country top down.... that's kinda what the thrust of this thread is, is it not? And I don't know why everyone makes so much noise about so many people dropping the LTV. I always found it was essentially just a perspective rather than a statement of fact, just a perspective I happened to agree with. The world is aggressively run by capitalists, it would not make sense for them to keep that mindset, would it?

[Vladimir Innit Lenin]

Could you explain what the LTV has anything to do with what you're saying at all?

He read it in his micro-economics 101 textbook/heard his professor talking about it, most probably. That + shit troll.

[Vladimir Innit Lenin]

I'm outlining the basics of the argument against planning, utility, the argument presented being that utility maximization will be reached under a free market, Certerus paribus of course. (Assuming we drop LTV like 99% of the world has)

But you're not outlining the basics of the argument. When you say 'under a free market', what you really mean is 'perfect competition', in economics jargon. Perfect competition has never existed anywhere on any measurable scale, and no serious economist, even a bourgeois one, holds certerus paribus in the way I think you mean (i.e. holding EVERYTHING else in the world constant, and literally only considering price and qty demanded/supplied as the variables in ANY economic transaction) when modelling real economies and their variables.

What you have been taught is what was assumed in the 1970s and 1980s when radical free market microeconomic theory did indeed supersede ideas about state planning. But with what happened in Latin America, the USA and much of the developed world through the 1980s, and 2008 onwards, that theory has really been debunked.

So no, you're not outlining any arguments against planning. You're regurgitating something you know nothing about and clearly haven't thought too deeply about yourself. Go home, little troll. Back to your year 1 microeconomics textbook!

[Loony Le Fist]

Some micro economic theory helps us understand why markets operating in relatively free market conditions are often successful, relative to markets operating in planned economies...

As we see the market is at an equilibrium quantity Q* and Price Q*, this is the natural result of free exchange. The demand for the good in question is derived from the utility (or 'happiness) that people gain from consuming that good, this diagram shows the consumer and producer surplus that is derived from the production of the good in question (the total contribution to the 'greater good').

[diagram removed]

How do you get from consumer and producer surplus to greater good? The surpluses remain under private control.

[image removed]

Due to nature of individuals wanting to maximise their own personal gain ( you want the best value for your money) they will attempt to allocate their resources (money) to producers which make the goods that they want thus there is more contribution to the greater good and society overall is better off.

Lets have a look at what happens when the demand for a good increases in a free market.

[image removed]

Here we see demand shift from Demand 1 -> Demand 2, it has increased.
The result is an expansion of the quantity from Q1 -> Q2, as producers are incentivized to increase by as more people are willing to buy their products which means more profit.

[snipped out basic economics lesson]

In a planned economy the government controls the allocation of resources instead of it being left to the market mechanisms described above, it is very hard for central planners to estimate the correct level of demand for a good or service. So often they get it wrong and end up producing too many of a good or not enough, so the surplus generated by the production of the goods is not as large as it would be in a free market and as a result there is less contribution towards the common good.

Again, I don't see how goods produced in private hands are going to serve any greater good unless people have the money to buy those goods. It's not for the common good, because those products remain in private hands.

You seem to be arguing since private hands control the allocation of resources in a free-market that somehow makes the problem easier? Estimating demand is a very difficult problem to solve in all cases--as are all attempts to predict the future. Perhaps Kenneth Arrow might pose some interesting exceptions, but the problem is for the most part intractable outside of a few corner cases. It is non-convex, and it's something that's been known about for 40 years. I.e. monkeys throwing darts at a chart will fare no worse than most economic planners, regardless of them being public or private. Mutual fund managers rarely can outperform rest of the market, and they can only do so sporadically.

Of course every example you have provided assumes full efficiency, full consumer and producer rationality, and complete consumer information. They also assume a single producer and consumer. Once you involve more than that all the economic models breakdown. Real economies consist of a heck of a lot more than just a single consumer, and a single producer. I think we also know that people are less than rational.

It can be shown mathematically that success or failure in the market, in the long term, has a lot more to do with available resources and random chance than having a better product or service. Given enough resources and time, random chance will grant you the opportunity. And that is precisely how free-market economics truly works--it is a big casino. Of course, you have no chance to win if you don't know the rules or don't play. So either way, it's worth playing it, since you will starve otherwise.

The collapse of these societies has more to do with other factors. Central planning was the least of the problems with these societies.

If you need some papers on more updated economics, I will gladly provide them.

[argeiphontes]

I don't mean any disrespect to the OP, I think this is a subject worthy of discussion. However, it just kinda bugs me that every debate about economic planning goes straight to China, North Korea, and the USSR, as opposed to, say; Coca-cola, or Microsoft. It's kinda like how when you tell people you're a Socialist, they always think of Stalin, Mao, and Ceausescu, as opposed to, y'know, Einstein, Oscar Wilde, and Martin Luther King.

No problem, you should feel free to say what you mean. I don't think that this has much to say about communism per se. I agree with everybody else that those are not communist regimes. Socialism is about worker's control of the MoP, and that's not NK or Cuba. I'm interested if anybody has insights as to why they don't fix their planning problems. I think Tim Cornelis had the best answer, and pointed out the obvious fact that state capitalism is more easily turned into semi-free-market capitalism than continuing along revolutionary lines.

Those are the socialists I think of, btw.

Obviously, whether or not planning is feasible is somewhat important to communism, but there are other models like neo-gift economies and ParEcon that are still communistic but aren't the same. Those "experiments" can't be done in those countries for political reasons, of course, because it would mean turning over power to people that don't have any right now, as Tim Cornelis suggested.

[liberlict]

I don't mean any disrespect to the OP, I think this is a subject worthy of discussion. However, it just kinda bugs me that every debate about economic planning goes straight to China, North Korea, and the USSR, as opposed to, say; Coca-cola, or Microsoft. It's kinda like how when you tell people you're a Socialist, they always think of Stalin, Mao, and Ceausescu, as opposed to, y'know, Einstein, Oscar Wilde, and Martin Luther King.

I think this is something of a red herring.

A centrally planed economy is an independent unit in and of itself that both makes and expends its produce. A corporation is something quite different in that it exists and adapts amid all sorts of externalities. Corporations, while internally planned, can't make plans for the future without consumer feedback; and this in turn effects their internal plans.

[Schumpeter]

Schumpeter, why are you using year 1 micro-economics to respond to a discussion on planning?

It proves nothing. When you get into second and third year economics, you'll realise that even the bourgeois economists don't believe in perfect competition. It's a load of baloney, and that you're trying to use such bullshit to dis-prove planning shows that your capacity to engage in this debate is, at best, limited.

Whats is your point? I'm very aware of the flaws in the assertions of perfect competition, but that is not to say that the model cannot be used a theoretical point of comparison.

Did you really expect me to go through all of the nuances that exist under different market structures? There was no real life example given so I used the simplest model with S/D at equilibrium, ceterus paribus, equilibrium is the utility maximizing (moral) point of production. Obviously due to lack of perfect information, barriers entry, homogeneous products etc etc it will be off in teh real world, the extent to which depending on the market conditions. Something doesn't need to be perfect to be better than all the other options.

[Schumpeter]

But you're not outlining the basics of the argument. When you say 'under a free market', what you really mean is 'perfect competition', in economics jargon. Perfect competition has never existed anywhere on any measurable scale, and no serious economist, even a bourgeois one, holds certerus paribus in the way I think you mean (i.e. holding EVERYTHING else in the world constant, and literally only considering price and qty demanded/supplied as the variables in ANY economic transaction) when modelling real economies and their variables.

What you have been taught is what was assumed in the 1970s and 1980s when radical free market microeconomic theory did indeed supersede ideas about state planning. But with what happened in Latin America, the USA and much of the developed world through the 1980s, and 2008 onwards, that theory has really been debunked.

So no, you're not outlining any arguments against planning. You're regurgitating something you know nothing about and clearly haven't thought too deeply about yourself. Go home, little troll. Back to your year 1 microeconomics textbook!

Take something like take aways (assuming you are not using LTV) this industry should be relatively unregulated and is very easy to enter. As it would not be too far off the utility maximizing point.

Something such as rail travel should nationalized due to the barriers to entry etc.

Just because of a few industries do not give the desired results in a relatively free market does not mean that those which do should suffer over regulation.