Wednesday, June 5, 2019

Communism and Central Planning

- How communism used to work back in days still affect the way things are done
nowadays

- 1989 —> end of communism

- How to handle population growth?

• People used to lived in very small communities

• Production and consumption wasn’t an issue

MARKETS AS A SOLUTION

- As population started to grow, more people started to live in large societies so there
was need for other people to organize economy and population, one of these
solutions were markets (goods and services) to organize production

- Price tells us how scarce commodity is (price goes up less carrots). How much
products are demanded (for sellers)

- If you bring more lemons you make more money

- High prices motivates consumers to consume less

- When willing to pay more —> demand

- Motivate producers to produce more —> supply

MARKETS AS SOLUTION?

- Karl Max

• Second half of the 19th century.

• Said that markets were capitalist and that the system should be replaced

• Criticized capitalism but never actually proposed an alternative

• What was the aim of central planning? —> welfare for the people

• If you consume more you are happy today but will suffer in the future

• Invest produce in the future

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• Consume more you will grow

• How much are you willing to sacrifice?

CENTRAL PLANNING

- It is about markets vs. central planning

- Fundamental question: who plans for whom?

- In a market economy, everybody plans for him/herself

• There’s a way to get information from people

- In a central planned economy, few people plan for the rest of the society

• No way to get information from people

COMMON OR PRIVATE PROPERTY?

- Communism is about all of society. Welfare for all (Plato)

• Central planning: private property has an owner who decides. But if everything is
common then who decides?

- Aristotle —> people take care of only their things

• State decides about use of property

TRAGEDY OF COMMONS

- Over consumption of commons goods or resources

- Is it possible for “communism” to work? Under what conditions?

• Example of my bathroom and the public ones (you take care of what is yours)

- If I take something from the common, is it stealing? No, because it is technically

mine. The idea was tat things were common and anybody could use/take it

- Primary goal —> industrialization

- Consumption to investment

- Soviet economy started to grow really fast

- The price people payed for it —> sacrifice the welfare

- Central planning problem—> sacrificing other peoples lives (concentration camps)

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WESTERN OPTIMISM

- Paul Samuelson

• 1961 —> Soviet Union will catch up to the United States in per capita income by
1984 (their GDP was about half of the US)

• 1973 —> Soviet Union will catch up to the United States in per capita income by
1990

• 1976 —> vulgar mistake to think that most people in Eastern Europe

• 1989 —> said that socialist communism could function, but collapsed. The reality
(wasn’t what they expected) was that they were able to keep up in certain periods
of time but they were far from reaching the United States

SHORTAGE ECONOMY

- Central planning didn’t have information therefore couldn’t plan properly

- Can’t suppress markets. People were trading all kinds of goods and services

- It was more difficult to find trading partners

- Where did the effort disappear?

• Production function —> was there

• 1956 —> Kruschev speech that condemn Stalinism

• Resources were spent stupidly, so it was a wast —> tanks, bombs, state that was
built and blown up 3 years later

NORTH AND SOUTH KOREA

- One language, one culture, one religion, same kinds of laws, history, same level of
development

- Nevertheless, South Korea kept growing and North Korea shrank

- The North lost support

WEST AND EAST GERMANY

- East and west Germany had the same GDP per capital in 1949

WHY CENTRAL PLANNING FAILS?

- Preferences are subjective and unstable

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- It is impossible to aggregate preferences

- Information is dispersed and often tacit

- It is (too) costly to aggregate information

- Missing incentives to innovate or economize