A question on the superiority of free-market economies

[Adam Parsons]

One of the things that pretty much everyone in the West takes for granted is the superiority of a free-market economy over a state-controlled command economy. And, in fact, nations with market economies do perform better in various areas than command economies. However, I'm not certain whether this is a universal law, or the fact that the world has been organized on conditions that favor market economies.

So, supposethe world operated on sort of a "maximum-USSR" mode, with all of Eurasia communist and command-economy, and having enough control of other areas of the world to be essentially self-sufficient, so trade with the free-market world is not a necessity. Would free-market systems still be superior?

(Keep in mind I don't know much about the subject, so feel free to point out my false assumprions)

 

[Brilliantlight]

One of the things that pretty much everyone in the West takes for granted is the superiority of a free-market economy over a state-controlled command economy. And, in fact, nations with market economies do perform better in various areas than command economies. However, I'm not certain whether this is a universal law, or the fact that the world has been organized on conditions that favor market economies.

So, supposethe world operated on sort of a "maximum-USSR" mode, with all of Eurasia communist and command-economy, and having enough control of other areas of the world to be essentially self-sufficient, so trade with the free-market world is not a necessity. Would free-market systems still be superior?

(Keep in mind I don't know much about the subject, so feel free to point out my false assumprions)

Yes, and easily. There are simply way too many problems with a command economy.

1)They are too inflexible. You have to try to predict the economy years in advance because of the overhead of planning. This makes it very difficult to take advantage of new technology. One big advantage the Western World had over the former USSR is that they could use breakthroughs very quickly but the USSR had to wait either to the end of the five year plan or change the plan midstream.

2)Prices are off and usually too low which leads to hoarding. Since it is underpriced you tend to try to buy more then you need just in case you can't get it. Since it costs them nothing enterprises tend to "cook the books" so that they can have a surplus they can use in an emergancy.

3) You have the problem of too many variables. A modern economy like the US or even the former USSR has far too many products (In the tens of thousands at the very least even in the USSR) to accurately predict so you tend to lump them together such as tons of glass or square meters of glass.

4) Problem 3 leads to problem 4 which is that the measurements tend to cause quality problems. When the USSR measured glass in tons the enterprises tend to make glass too thick since you can produce tons of glass much quicker that way. When they measured it in square meters of glass they tended to make glass too thin and very breakable because it easiest way to produce square meters of glass.

5) No incentives for the workers to work hard unless you are willing to use Stalinist methods. Why should a worker knock himself out to produce if he can't get fired and gets promoted more by kissing up to the bosses then actually producing anything useful?

 

[Norman]

I think that at least a part of the propblem with a command economy is that it doesn't account for two things. First, human greed, few people are altruistic until after thier piece is taken out, if there is no recognition of the baser side of people, most will sit back and enjot wahtever they can get.

Second, I believe a command economy also centralizes the element of 'risk'. In free markets, if you guess wrong, you (at least theoretically) go belly up. In a command economy, the central planning agency takes on and spreads this this risk throughout the economy, allowing failure to accumulate.

 

[Matthew Craw]

I think that at least a part of the propblem with a command economy is that it doesn't account for two things. First, human greed, few people are altruistic until after thier piece is taken out, if there is no recognition of the baser side of people, most will sit back and enjot wahtever they can get.

Second, I believe a command economy also centralizes the element of 'risk'. In free markets, if you guess wrong, you (at least theoretically) go belly up. In a command economy, the central planning agency takes on and spreads this this risk throughout the economy, allowing failure to accumulate.

It should be noted that this isn't actually an inherant feature of command economies; there is no obvious reason why such economies need to feature uniform wage rates or universal employment so, at the level of individual workers at least, a command economy can have incentives and penalties.

 

[Matthew Craw]

Obviously that only applies to the first point Norman raised, his second is perfectly valid, although the graetest weakness of a command economy is simply the impossibility of imposing central control on complex modern economies without massive inefficiency.

 

[Abdul Hadi Pasha]

It seems to me that a pure free-market economy is at a severe disadvantage against those of countries that have government that are willing to engage in protectionism.

For instance the Ottomans were bound by the Capitulations which mandated a flat 8% import tax and 1% export tax. Thus, Ottoman industries were severely disadvantaged against European companies that were protected by very high import taxes. For instance, Egyptian sugar was cheap and of high quality, but had a hard time competing against French imported sugar due to the subsidization of the French government, which the Ottomans couldn't compensate for with a higher tariff.

 

[robertp6165]

4) Problem 3 leads to problem 4 which is that the measurements tend to cause quality problems. When the USSR measured glass in tons the enterprises tend to make glass too thick since you can produce tons of glass much quicker that way. When they measured it in square meters of glass they tended to make glass too thin and very breakable because it easiest way to produce square meters of glass.

This is very true. I remember reading that in the early 1980s, the USSR was measuring production by MATERIALS USED instead of by ITEMS PRODUCED. So the factory which made frying pans for the Soviet military was making them twice as heavy as a normal frying pan in order to exceed production quotas. When meant Soviet infantrymen had to carry these monstrosities around in their packs so a factory manager could look good to his superiors. And waste product...metal shavings and etc. that were swept up off the floor and discarded....all got counted in "production." A very inefficient system.

 

[Grey Wolf]

I think that the 'superiority' is that a free market economy is the natural state of an economy. All others have controls imposed, and by interfering with a balanced organism they can have unpredictable effects. I'm a bit too tired to explain this, but no doubt people know what I mean

Grey Wolf

 

[Weapon M]

What Wolf said. The most effective and rewarding human interactions are voluntary.

 

[cow defender]

The most effective and rewarding human interactions are voluntary.

which of course is a major anarchist pillar of thought

hehehe

 

[NapoleonXIV]

I think that at least a part of the propblem with a command economy is that it doesn't account for two things. First, human greed, few people are altruistic until after thier piece is taken out, if there is no recognition of the baser side of people, most will sit back and enjot wahtever they can get.

Second, I believe a command economy also centralizes the element of 'risk'. In free markets, if you guess wrong, you (at least theoretically) go belly up. In a command economy, the central planning agency takes on and spreads this this risk throughout the economy, allowing failure to accumulate.

Whereas in capitalist economies, the spreading of risk is called "insurance". Yes, I realize its a different type of risk but the concept is the same

 

[eschaton]

Hi, I mostly lurk, but I thought I would post a defense of planned economies. I'm pretty much a socialist, though I personally have issue with the idea of a planned economy (I'm closer to a syndicalist in thought), but here are the essential lines of argument against a free market/in favor of a planned economy.

1. Capitalism is very efficient in generating profit, but profit does not always equal the same thing as being the most efficient at providing service. As an example, private health insurance is typically more expensive to run than government run plans per person, because of greater administrative overhead in claims processing. While having this administrative apparatus leads to the health plans being more profitable for the shareholders, it soaks up more capital and labor then it would if it were simply government controlled.

2. Waste caused by competition. Coke and Pepsi, to use an example, spend billions per year advertising when everyone older than a child already has an established preference for one or another. Drug companies spend more money marketing their drugs than they do actually researching new medicines. In a market without competition the capital and labor used towards these functions would be freed up for use in human needs (or building a bigger war machine, if you desire a dystopia).

3. The inherent efficiencies in a monopoly. Now, in the long run, monopolies do lead to corruption, higher prices, etc. But even capitalist businesses want to become monopolies. Just as when a company makes a purchase of another, and integrates management, it cuts cost, an entire sector of the economy with integrated management should, in theory, be more efficient by an even greater degree. An example my Trotskyist friends say is a nation with one airline would need fewer planes, because they would not need to offer competing (and partially empty) flights. This would lead to substantially cheaper ticket prices.

4. The centralization leading to a loss of incentive to work is not needed, though it may have been true in the Soviet system. In a properly managed socialist economy, workers become more efficient and work harder to shorten their workweek and have more time for leisure, rather than for a wage incentive. I find the idea that greed is inherent to humanity always somewhat farcical. Sure, humans have a desire for status and recognition for their accomplishments, but there are societies without money or private property. A properly engineered economy could create these status rewards without excessive monetary compensation. Also note that in a capitalist system, raises are not given neccessarilly for hard work, but just about any reason the boss wants, unless there is an explicly stated policy. Merit pay generally *does not* cause harder work than companies that have seniority systems.

a quibble: There is no such thing as a 'free market'. Even the wildest libertarian dream provides for a system of property rights, including intellectual property that by their very nature cannot be neutral. In an actual lawless state a market would be impossible, as contracts would be unenforceable, and companies could settle disputes with violence. What a ‘free market’ entails is a set of property rights that is in favor of established ownership over communal control.

 

[Chrispi]

I think that the 'superiority' is that a free market economy is the natural state of an economy. All others have controls imposed, and by interfering with a balanced organism they can have unpredictable effects. I'm a bit too tired to explain this, but no doubt people know what I mean

Grey Wolf

These "unpredictable effects" you mention can be either good or bad, all things considered...

And yes, Abdul, developing countries that use protectionism (China, Malaysia) seem to do better than developing countries in the free market (Argentina, Chile)...

 

[Brilliantlight]

Hi, I mostly lurk, but I thought I would post a defense of planned economies. I'm pretty much a socialist, though I personally have issue with the idea of a planned economy (I'm closer to a syndicalist in thought), but here are the essential lines of argument against a free market/in favor of a planned economy.

1. Capitalism is very efficient in generating profit, but profit does not always equal the same thing as being the most efficient at providing service. As an example, private health insurance is typically more expensive to run than government run plans per person, because of greater administrative overhead in claims processing. While having this administrative apparatus leads to the health plans being more profitable for the shareholders, it soaks up more capital and labor then it would if it were simply government controlled.

2. Waste caused by competition. Coke and Pepsi, to use an example, spend billions per year advertising when everyone older than a child already has an established preference for one or another. Drug companies spend more money marketing their drugs than they do actually researching new medicines. In a market without competition the capital and labor used towards these functions would be freed up for use in human needs (or building a bigger war machine, if you desire a dystopia).

3. The inherent efficiencies in a monopoly. Now, in the long run, monopolies do lead to corruption, higher prices, etc. But even capitalist businesses want to become monopolies. Just as when a company makes a purchase of another, and integrates management, it cuts cost, an entire sector of the economy with integrated management should, in theory, be more efficient by an even greater degree. An example my Trotskyist friends say is a nation with one airline would need fewer planes, because they would not need to offer competing (and partially empty) flights. This would lead to substantially cheaper ticket prices.

4. The centralization leading to a loss of incentive to work is not needed, though it may have been true in the Soviet system. In a properly managed socialist economy, workers become more efficient and work harder to shorten their workweek and have more time for leisure, rather than for a wage incentive. I find the idea that greed is inherent to humanity always somewhat farcical. Sure, humans have a desire for status and recognition for their accomplishments, but there are societies without money or private property. A properly engineered economy could create these status rewards without excessive monetary compensation. Also note that in a capitalist system, raises are not given neccessarilly for hard work, but just about any reason the boss wants, unless there is an explicly stated policy. Merit pay generally *does not* cause harder work than companies that have seniority systems.

a quibble: There is no such thing as a 'free market'. Even the wildest libertarian dream provides for a system of property rights, including intellectual property that by their very nature cannot be neutral. In an actual lawless state a market would be impossible, as contracts would be unenforceable, and companies could settle disputes with violence. What a ‘free market’ entails is a set of property rights that is in favor of established ownership over communal control.

Planned economies have failed everywhere they have been tried. One of the fastest ways to destroy an economy short of war is to start planning it. There are reasons that it had 70 years of failure in over a dozen countries. It simply DOES NOT work!

 

[Brilliantlight]

Whereas in capitalist economies, the spreading of risk is called "insurance". Yes, I realize its a different type of risk but the concept is the same

The thing is reducing your risk to the insurance company can lead to lower rates (If you are smart enough to get quotes from various insutance companies) which means that there is an incentive to reduce risks. There is none in a planned economy.

 

[Dave Howery]

Eschaton> you're right in that there is no pure capitalist economy in the world, just as there was never a pure planned economy either. However, I find the rest of your arguements unconvincing. To be sure, you have hit upon the weaknesses of capitalism (waste that competition generates, etc.), but you ignored all the advantages.. and there are many (such as the fact that competition leads to more R&D and technical advancements than a planned economy ever could). You're also completely wrong in that a monopoly will lead to cheaper prices. Theoretically, it could... if the monopoly was run by altruistic, benevolent, and charitable chairmen. What is much more likely is that the monopoly will charge whatever it feels it can get away with... what are you going to do, run to the competition? Like any business, they will charge the highest price they can get without reaching the point where they turn too many people away. In addition, monopolies are notorious for poor service (as anyone who can remember when AT&T was the only phone service around can attest to). While you did list some of the advantages of a planned economy (less waste, etc.), you didn't bother with any of the substantial disadvantages (mainly involving the lack of incentive... others on here listed plenty of other problems). The telling point is that our modified capitalist economies are well and thriving... and all the planned economies are gone. If planned economies were superior, we'd have them around now....

 

[Chrispi]

I'm not sure that "x is superior to y because x is still around while y has died out" is a valid argument, at least with things like ideas that can be resurrected. After all, Justinian could have made the argument that "divine right of kings is superior to democracy because the democratic states have died out and I'm still around!"

A better argument for a free market is the one that I used in my proof for democracy that I laid out in another post, that the accuracy of decision making increases with more people participating...

 

[Matthew Craw]

The only real advantage of a planning is that it's better at goal-oriented economics, i.e. if you want your economy to most efficiently distribute resources to maximise utility free markets win hands down, but if instead you see the purpose of your economy as being meeting production goals in specific fields (i.e. doubling steel output in 5 years) planned economics works better, although this is a deeply flawed way of evaluating economic success in peacetime.

 

[George Carty]

For instance the Ottomans were bound by the Capitulations which mandated a flat 8% import tax and 1% export tax. Thus, Ottoman industries were severely disadvantaged against European companies that were protected by very high import taxes. For instance, Egyptian sugar was cheap and of high quality, but had a hard time competing against French imported sugar due to the subsidization of the French government, which the Ottomans couldn't compensate for with a higher tariff.

Could you tell me more about the Capitulations? Are they a tax set at a rate fixed by the Islamic Shari'ah itself (cf zakat at 2.5% or jizyah at 10%)?

 

[eschaton]

Planned economies have failed everywhere they have been tried. One of the fastest ways to destroy an economy short of war is to start planning it. There are reasons that it had 70 years of failure in over a dozen countries. It simply DOES NOT work!

I wouldn't claim that the full range of planned economies has been tried. Most were Stalinist, and those that were not were, on the whole, even loopier. Certainly the failure of the Soviet system shows that something was wrong with their brand of planned economy, but I don't think one could make the claim it disproves all planned economies.

Also, at worst, planned economies lead to stagnation, not decline, unless you're talking about loopy places like North Korea or Cambodia. The most unreformed Marxists (as opposed to Leninists/Stalinists) have always claimed that socialism is impossible without at least one nation taking part which was aready incredibly industrialized by capitalism, because a developing country having a revolution does not have the base to adequately support human needs.