Economics & Finance

Stupidity–Communist-Style and Capitalist-Style

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There’s an old story about a Soviet-era factory that made bathtubs. Plant management was measured on the total tonnage of output produced–and valves & faucets don’t add much to the weight, certainly not compared with the difficulty of manufacturing them. So the factory simply made and shipped thousands of bathtubs, without valves or faucets.

The above story may be apocryphal, but the writer “Viktor Suvorov” tells an even worse one, based on his personal experience. At the time, he was working on a communal farm in Russia:

The General Secretary of the Party set a task: there must be a sharp rise in agricultural output. So the whole country reflected on how best to achieve this magnificent aim.

The fertilizer plant serving the communes in Suvorov’s area resolved to do its part:

A vast meeting, thousands strong, complete with brass bands, speeches, placards, and banners, was urgently called at the local Chemical Combine. To a man, they shouted slogans, applauded, chanted patriotic songs. After that meeting, a competitive economy drive was launched at the Chemical Combine to harvest raw materials and energy resources.

The drive lasted all winter, and in the spring, on Lenin’s birthday, all the workers came in and worked without pay, making extra fertilizer from the materials that had been saved…several thousand tons of liquid nitrogen fertilizer, which they patriotically decided to hand over, free of charge, to the Region’s collective farms.

The local communes were told that all fertilizer must be picked up in 24 hours–the factory’s product tanks were full, and if the bonus fertilizer was not removed, production would come to a standstill. Suvorov was the truck driver for his collective, and it was his task to go to the plant and pick up the farm’s allocation. Problem: the truck could only carry 1.5 tons at a time, and a round-trip to the plant would take about 10 hours. The commune’s allocation was 150 tons. There was also a shortage of fuel for the truck. And Suvorov knew that if he didn’t complete his mission, the director of the commune would be replaced. While the man was not to everybody’s liking, his expected replacement was much worse.

What to do?

When Suvorov arrived at the plant with his truck, he saw that the other communal farms had faced the same problem, and had hit on a solution.

There was a long queue of trucks of different makes, dimensions, and colours standing outside the Chemical Combine. But the queue was moving fast. I soon discovered that lorries, which had only a moment before been loaded, were already returning and taking up new places in the queue. Every one of these lorries ostensibly needed many hours to deliver its valuable load to its destination and then to return. But they rejoined the queue in a matter of minutes. Then came my turn. My tanks were rapidly filled with the foul-smelling liquid, and the man in charge marked down on his list that my native kolkhoz had just received the first one and a half tons of fertilizer. I drove my lorry out through the Combine’s gates and followed the group of lorries which had loaded up before mine. All of them, as if at a word of command, turned off the road and descended a steep slope toward the river Dneiper. I did the same. In no time at all, they had emptied their tanks. I did the same. Over the smotth surface of the great river, the cradle of Russian civiliztion, slowly spread a huge poisonous, yellow, stinking stain.

The great fertilizer production drive was undoubtedly marked down in government records as a tremendous success.

Don’t be too smug, though, fellow capitalists. My next example of institutional stupidity comes from the American private sector.

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The Real Chicago Boys

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From City Journal:

“Pinochet had no clue about economics,” Lüders recalls, “and our country was in a desperate situation.” But when Pinochet asked Friedman, who had helped mold Chicago’s economics department, to provide solutions for hyperinflation, the great economist proposed just the right cure: monetary control. Harshly criticized in the U.S. for his “collaboration” with the dictator, Friedman responded by asking whether he should have let the patient—the Chilean economy—die instead.
 
Lüders admits that he and his fellow academics relished the chance to devise a new economic model on a blackboard and observe the results. At first, those results weren’t much to brag about. In the early 1980s, external shocks, capital flight, declining prices for copper (the main Chilean export at the time), and excessive trust in the market’s self-correcting mechanisms caused many glitches—and a severe recession.
 
Beginning in 1985, however, the more pragmatic Hernán Büchi, who served as finance minister under Pinochet, helped correct the errors through tighter control of capital flows into and out of the country. Though he holds a degree from Harvard, Büchi is still deemed a Chicago boy in a land where that city’s name has become a generic term for free-market economists. “The economic solutions we provided for Chile had nothing extraordinary about them,” Lüders says. “We privatized the companies, which had been nationalized by the Socialist Allende regime. We stabilized the currency. We opened the borders to trade. The strong Chilean tradition of entrepreneurship took over from there.”

(Thanks to Val Dorta for the link.)

Two Memes I Doubt Our Readers Buy

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Some here may be interested in the task Cafe Hayek sets its readers:

a contest to find examples from the web or the media that make the claim that our standard of living is stagnant or that the middle class can’t get ahead and so on. Or better yet that the middle class is falling behind. Or that all the gains of the last x years have gone to the top 1% or the top 20%.

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Facts and Fallacies with Thomas Sowell

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A series of video interviews about Thomas Sowell’s recent book.

(The same site also has videos of interviews with other conservative-leaning authors by Peter Robinson.)

“Which Is Greener?”

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Rand Simberg discusses discusses John Tierney’s NYT column in which Tierney compares the amounts of energy used in “green” and “not green” transportation. Tierney argues that green transportation methods may use more energy than do automobiles and other high-tech vehicles, whose use environmentalists want to discourage.

But really, most of these calculations are worthless because they do not take account of the value of people’s time. How can you compare the relative efficiencies of different processes if you don’t consider the value of a significant input in those processes? You can’t — unless you are homo antieconomicus, a modern environmentalist, and therefore place great value on every natural thing except humans and the things they create. But I digress. People using cars for short trips makes sense because people are productive, and the more productive they are, the more costly it is for them to be delayed by slow, cumbersome transportation. It does not make economic sense for Bill Gates to ride his bicycle to the office. Nor does it make sense for central planners to decide how different individuals should travel, because no individual or organization has enough information to make such decisions for others (see: communism, failure of).

The sensible way to handle such issues is to allow prices to fluctuate, and by fluctuating to communicate the current relative values of various inputs. Then everyone can accurately evaluate his own unique set of costs and benefits and make the best decisions for himself and, in the aggregate, society. (Note that we’re not talking about externalities here, but rather about production costs for goods and services that we use in our travels from place to place. Most of these costs are fully internalized in the prices of the respective goods and services.) But such individual decisionmaking is anathema to the control freaks of the enviro Left, for whom your time spent walking to the store counts for nothing, so they create rituals of correctness to enforce their norms on everyone else. You must recycle/bicycle/carpool/use mass-transit/save energy/etc. And it’s all bullshit — or, more precisely, a con job to get you to follow someone else’s preferences which, too often, are unexamined.

Tierney’s argument is a step in the right direction. It would have been a much better argument if he had raised questions about whether cost/benefit comparisons of various transportation methods can be made without considering the value of people’s time, and about whether such analyses can even be made by anyone besides travelers themselves.