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losses and face the risk of bankruptcy. Soviet enterprises faced no
such incentives or constraints. Nor was electricity unique. More
material inputs and energy in general went into producing a given
amount of output in the Union of Soviet Socialist Republics than
20 APPLIED ECONOMICS

was used to produce the same output in the United States, Ger-
many or Japan.
The USSR had one of the richest endowments of natural re-
sources on earth, including more petroleum deposits than any
other country outside of the Middle East, and some of the most
fertile farmland on the continent of Europe. Moreover, the Soviet
Union had a well-educated population, including many scientists,
engineers, and technicians. But, while it seemed to have all the in-
gredients of national prosperity, it was in fact much poorer than
the United States or the countries of western Europe. What was
missing in its economy were the incentives and mechanisms capa-
ble of converting its abundant inputs into output at a rate compa-
rable to that of the United States or other countries with
price-coordinated markets.
Although the USSR had prices, these were prices set by central
planners, and did not reflect the relative scarcities of particular re-
sources, as prices resulting from supply and demand in competitive
markets tend to do. Nor was it clear how centrally planned prices
could have reflected anything so complex and volatile as the ever
changing relative scarcities of innumerable resources and finished
products, since there were 20 million prices for central planners to
set.
This was a virtually impossible task for the central planners to
perform well, though it presents no special problem in a market
economy where millions of consumers and producers each keep
track of, and influence, a relative handful of prices which directly
affect them.5 The net result was that it was common for the Soviet
Union to have warehouses bulging with unwanted and unsold
goods, while people were lined up in queues for other things that

5
Most of us, if not all of us, are utterly ignorant of the prices of well over 90 percent of the things
produced in our economy. Do you know the price of a Harley-Davidson motorcycle or a Linhof
camera or an appendix operation at your local hospital?
Politics versus Economics 21

they wanted and hoped to get before supplies ran out. A visitor to
the Soviet Union in 1987 reported, "long lines of people still stood
patiently for hours to buy things: on one street corner people were
waiting to buy tomatoes from a cardboard box, one to a customer,
and outside a shop next to our hotel there was a line for three days,
about which we learned that on the day of our arrival that shop
had received a new shipment of men's undershirts."
In a capitalist economy, the prices of the surplus goods piled up
in warehouses would have fallen because of supply and demand,
forcing the enterprises which produced them to cut back produc-
tion, in order to avoid continuing losses. This in turn would re-
lease resources (including labor) that would be in demand in other
sectors of the economy, where shortages and rising prices would
have produced higher profits”and thus greater demand for the
labor and raw materials needed to increase the supply of the more
profitable output. But no such process took place in a socialist
economy, where simultaneous shortages and surpluses could per-
sist for years, until overburdened central planners could get around
to dealing with each problem.
Hiring more central planners would not solve the problem,
which was that millions of prices had to be adjusted relative to one
another, so you could not put one group of central planners in
charge of setting prices for furs and another in charge of setting
prices for undershirts, because the whole point was that too many
resources had been devoted to producing animal pelts that were
rotting in warehouses while people had trouble finding enough
undershirts.
None of this was peculiar to the Soviet Union. Similar problems
dogged other centrally planned societies, whether democratic so-
cieties like India or totalitarian countries like China. The USSR
was a particularly striking example of the problems of central
planning because it was a country richly endowed with a wide
22 APPLIED ECONOMICS


range of natural resources, whose people were nevertheless poor.
Japan and Switzerland are contrary examples of capitalist countries
with meager natural resources which nevertheless have some of the
highest standards of living in the world. The peoples of the Soviet
Union paid a high price for central planning. As a book by two So-
viet economists pointed out, "not until the 1950s were we able to
exceed the 1913 per capita level of agricultural output" and”writ-
ing in the late 1980s”per capita meat consumption "remains
lower than it was in 1927."
China, after the death of Mao Zedong, began a piecemeal con-
version from central planning to free markets”first in very limited
geographical areas, and then expanded the operation of markets as
those areas began to prosper dramatically more so than other parts
of the country. As markets replaced politically managed economic
decision-making, China experienced one of the highest economic
growth rates in the world.
Although India had more than double the Gross National In-
come per capita of China in 1970, China had nearly caught up by
1991 and by 2000 had nearly double the Gross National Income
per capita of India. Belatedly, India too began to rid itself of many
government directives and controls and "freed the country's entre-
preneurs for the first time since independence" in 1947, in the
words of the London magazine The Economist. There followed a
new growth rate of 6 percent a year, making India "one of the
world's fastest-growing big economies."
Despite the sharp distinction in principle between government-
planned economies and market economies, in reality there is a
continuum between the two. Even in the days of the Soviet Union
under Josef Stalin's iron control, some minor elements of free mar-
ket activity were permitted, such as allowing people to sell produce
grown on small plots of land around their homes. These gardens,
incidentally, turned out to supply nearly a third of the agricultural
Politics versus Economics 23


output in the USSR, even though they occupied a tiny fraction of
the land. Meanwhile, no capitalist country has ever been 100 per-
cent free of government controls and directives. Just as Soviet
agriculture was not 100 percent government-controlled, so Amer-
ican agriculture is not 100 percent free of government controls.
Nor is American industry.


Price-Coordinated Economies

There are many names for economies in which individual plans
and actions are coordinated by price movements in response to
supply and demand, which serve as incentives for the different
individuals to accommodate their respective plans to the total re-
sources available. These terms include capitalism and the free
market. But what such economies actually do, regardless of what
they are called, is depend upon price movements to move re-
sources, finished products, and people themselves to where they
are in demand, without any central authority trying to control the
whole process. This process may sound implausible to those who
have never lived in such an economy, and even to some of those
who have. One small but revealing episode involved the last So-
viet premier, Mikhail Gorbachev, asking British Prime Minister
Margaret Thatcher: How do you see to it that people get food?
The answer was that she didn't. Prices did that. Yet the British
people were better fed than those in the Soviet Union, even
though the British have not grown enough food to feed them-
selves in more than a century. Prices bring them food from other
countries.
Considering what a monumental task it is to supply tons of
food every day to a city the size of London or New York, it is re-
markable that we take it for granted that such a task is performed
without anyone's being in charge of seeing that it all gets done. It
24 APPLIED ECONOMICS

would be remarkable even if Londoners or New Yorkers were sup-
plied with only some very basic things to eat like bread and milk.
In reality, they are supplied with an incredible range of fresh,
frozen, canned, dried, organic, Chinese, Italian, Mexican, French,
Vietnamese, and other foods every day”all with no overall plan
or control, except by prices responding to ever-changing supply
and demand. No given individual, either in or out of government,
even knows how much of all these things are brought into the city
while it is happening, and often there are only estimates after the
fact.
The operation of a free market may not even sound plausible,
but it works, while the idea of a "planned economy" has sounded
both plausible and attractive to many of the best educated people
in the world, until it was demonstrated, again and again, in innu-
merable countries and at painful costs, that it does not work.
Failure is a big part of a free market's success. People fail to live
up to their potential, or to carry out all their good intentions, in
all kinds of economic and political systems. Capitalism makes
them pay a price for their failures, while socialism, feudalism, fas-
cism and other systems enable personal failures, especially by
those at the top, to be ignored and the inevitable price to be paid
by others in lower standards of living than they could have had
with the existing resources and technology. There was a reason
why long-time Soviet dictator Josef Stalin kept a tight rein on
what Soviet citizens could learn about the west, severely restrict-
ing travel and blocking most western writings or broadcasts from
entering the USSR.
At one time, however, the Soviet authorities thought that it
would be a propaganda coup to show their people an American
television program about the plight of blacks in the United
States. But this plan backfired when what most struck the Soviet
viewers was the obviously higher standard of living that Ameri-
Politics versus Economics 25

can blacks had, compared to the standard of living in the
USSR.6
The economic advantages of a market economy are accompa-
nied by political disadvantages. Its over-all operations are seldom
understood, even by those who are successful at running their own
individual businesses, and their articulation seldom matches that
of intellectuals, who usually have neither experience in business
nor expertise in economics. More fundamentally, the main incen-
tive of capitalism is self-interest, which is by no means an attrac-
tive quality, however effective it may be for producing economic
results-”for others as well as for oneself.
The very expression "the market" suggests something imper-
sonal, when in fact what is involved are simply all the very per-
sonal individual choices which are reconciled with one another
through the competitive processes which are summarized as "the
market." When a newspaper headline asks, "Should the Internet
be Left to the Market," what this question really amounts to is:
Should individuals be free to use the Internet as they wish or
should some collective body restrict or direct what they do? A case
can be made for or against restrictions on using the Internet, but
that is the real issue.
Alternatives to a market economy may express nobler senti-
ments but the bottom line is whether this in fact leads to better
behavior in terms of better serving their fellow human beings.
For example, a conscientious Soviet worker who was loading
bread began to notice that the bread had bird droppings on it. She
returned it to the bakery but was later told by a driver that this
bread was not thrown out. It was simply ground up with the flour
used to bake fresh bread and the finished product was then deliv-

6
When I saw the apartment buildings that Russians were living in, in St. Petersburg, the first
thought that occurred to me was that I had seen better buildings than this boarded up in the
poverty-stricken South Bronx.
26 APPLIED ECONOMICS


ered to the stores, with the bird droppings now on the inside in-
stead of on the outside. A capitalist enterprise doing such a thing
would not only be liable to lawsuits and prosecution, it would risk
losing its customers to its competitors if word ever got out, and
could be ruined economically even before legal processes ran their
course. But a government monopoly has less to fear. Environmen-
tal degradation was likewise worse in the Communist bloc in East-
ern Europe than in capitalist countries, and the worst
environmental disaster of all occurred in the Soviet Union at the
Chernobyl nuclear power plant. Moreover, the ability of a totali-
tarian government to keep information secret meant that local So-
viet officials could evacuate their own families first, while leaving
the local population wholly uninformed and exposed to thousands
of times more radiation than normal. Only after foreign countries
detected the increased radiation in their own atmospheres and for-
eign radio broadcasts then began reaching the Soviet Union did
ordinary people in the contaminated area learn that they were in
danger.


IMPLICATIONS

To contrast the making of economic and social decisions through
politics and through the market is not to say that no other social
processes can deal with such activities or issues. Obviously fami-
lies, philanthropy, cooperative, and volunteer organizations and
numerous other institutions and arrangements can affect and in-
fluence many of the same things that markets and governments
handle.
Even the staunchest free market economists may, in their own
families, follow principles very much like the old socialist doctrine
of "from each according to his ability, to each according to his
needs." Thus a child who has contributed little or nothing to the
Politics versus Economics 27

family's economic resources may absorb growing amounts of those
resources over the years, especially when being supported for four
or more years in college. Informal arrangements have many ad-
vantages over both markets and governments but different things
can be better handled by a variety of social processes.7 The persis-
tence for centuries of both governments and market economies
strongly suggests that each fills a vital role. The question of where
the boundaries between them should be occupied much of the
twentieth century.
For at least the first half of that century, government's role in the
economy was expanding in most countries around the world. But
the negative consequences led to dramatic movements toward free
markets, not only in democratic countries but even in Communist
countries, toward the end of that century. Not everyone is con-
vinced of the greater efficiency of the free market, however, even
in the twenty-first century. Congressman Dennis Kucinich, for
example, declared in 2003:

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