Bryan Caplan  

Easterly Contra Galbraith

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Back in the sixties, Galbraith famously argued that East and West were converging.  The East had government central planning.  The West had corporate central planning.  Same difference, right?  In his interview with Arnold and Nick, Bill Easterly begs to differ:
[T]he metaphor of the large corporate hierarchy has led to a lot of misunderstanding about planning... Henry Ford's success in automating production and building a large corporation on top of the assembly-line production of cars was actually one of the inspirations for some of Lenin's methods and the attempts to design a planned economy in the Soviet Union.

But what was missing - what Lenin did not get, and what all the subsequent planners who have been inspired by what appears to be corporate planning did not get - was that what corporations are really doing is searching for something that works. And when they find something that works, they try to reproduce it on a very large scale... The corporate planning and the large corporate hierarchy - what that is all about is really just scaling up the little thing that you found that does work, that does seem to meet the needs of consumers at a profit for the owner of the corporation.

But you always need the chaos and anarchy of the free market to keep searching for what works and to keep checking on whether the solution that you are scaling up is still working. So large corporations often turn into dinosaurs, because their original idea - which originally was a brilliant idea about how to do things right, how to make a great profit from meeting consumer needs - gradually becomes obsolete, and then they can't adjust.

...But what the planning mentality, as a whole, always misses is that you can't use planning to find what works. So if you build a whole system like foreign aid around planning, you're never going to find things that work. Because the planning is only a method for scaling up something that you have already found to work.
Two months ago, I asked:
Imagine the old Soviet Union gave up on manufacturing, specialized in natural resource extraction, and invited CostCo to set up 10,000 warehouse stores in the Evil Empire.  I think it's clear that this would have been a massive improvement for Soviet consumers.  But how much of a difference would it have made?  Would a USSR that swallowed its pride and outsourced its brain work and customer service still be around today?
Easterly's interview makes me wonder how he would answer.  After all, doesn't his story suggest that central planning would work a lot better if it focused on rote resource extraction, and outsourced learning-intensive production to the capitalist world?

Update: Easterly responds via email.
I still don't think it would have worked to save the Soviet Union. "What works" is constantly changing in response to other social changes. Just think of the fall of K-Mart that accompanied the rise of Costco. And natural resource extraction technology is a LONG way from static over time, and what technology you need at any moment depends on the constantly changing conditions of each field. Central planning only works OK to mass produce low quality over-expensive stuff for people who don't have much choice but to take it, like the army during wartime or the long-suffering consumers of the USSR.

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COMMENTS (4 to date)
david writes:

The PRC is still around today.

Reading the post you wrote two months ago, I saw a lot of confusion in the comments over whether the hypothetical Soviet Union was operating a free market or a licensed Costco monopoly, as if the latter would instantly degenerate into actual-Soviet inefficiency. Well, no - a strongly centralized state like the Soviet Union can play strategic games with foreign companies and cajole more performance and rent by, say, threatening to start a state-owned competitor, or inviting some other foreign corporation, and so on. It can certainly play these games more easily than it can with its own bureaucrats, since threatening foreigners is far easier. In strong states, the state becomes a potential competitor to any private market, and it's up to the state to play fair.

The US is obviously unable to do this because it is not in fact very centralized, compared internationally (it is democratic, and centralizes the bureaucracy without centralizing the ability for management to change it). But a careful Soviet Moscow would certainly have been able to do so. Ask Beijing.

As for centrally-planned extraction of resources, didn't you go to Singapore? They still make "our people are our only resource" proclamations every National Day Parade. Appropriately, housing, education, and healthcare are heavily planned and subsidized there. Nonetheless it retains a reputation for free markets merely because it doesn't actively manage what it owns (60% of GDP!).

If the advantage of capitalism is in diverse experimentation, there is every reason to outsource that, and leave the ability to crack skulls during a crisis firmly in the hands of the state (as far as a state's incentives go, at least). A long-lived state can credibly promise not to use the latter ability to seize rents in the short run. Beijing, even now, can easily mobilize the people it needs to seize ownership of all the foreign investment it's attracted, but why would it? The CPC expects to be still in power a generation from now.

bjk writes:

This is why America's real economic strength is in retail and wholesale distribution companies like Wal-mart and Fed-ex and Dell and Amazon and Starbucks, companies that don't invent something new but figure out a new form of distribution (and consumer packaged goods companies like P&G and Colgate, which rely on that sophisticated distribution system). Germany and Japan and China rely on the US consumer to figure out what works and what doesn't . . . if it was left up to the Japanese consumer, the search costs would be far too high.

Les writes:

The difference between central government planning and corporate planning is simply competition.

The central government has no competition. If its planning is poor, the economy will suffer, but the central government stays in power.

However, the corporation has competition. If its planning is poor, the corporation will suffer, and a competitor will take its place.

MattMc writes:

But how would the central planners decide which resources to extract? And at what cost? At some point you have to figure how much what you are doing is worth to someone else.

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