Saturday, June 18, 2016

John Robb on central planning

ETA: The post in question is from 2011. I discuss it here because David Brin cites it in his recent article, Stop Using Adam Smith and F.A. Hayek to Support Your Political Ideology, (which, with all good luck, I'll address shortly).

In Central Planning and The Fall of the US Empire, John Robb offers an instance of the trope that central planning doesn't work:
One of the most interesting underlying reasons for the decline of the Soviet Union, and soon the US, is misallocation of resources due to a reliance on central planning [emphasis original].

. . .

A system of economic governance where small group of people -- in the Soviet Unions [sic] case bureaucrats -- had all the decision making power. They decided what was spent and where. Even with copious amount of information, they decided badly.

Why did they decide badly? The massive economy of a modern superstate is too complex for a small group of people to manage. Too much data. Too many uncertainties. Too many moving parts.

Although I do not know that Robb is wrong, I am quite skeptical of this thesis: I have good reasons to believe he might be wrong.

First, I have never seen an empirical study that showed that the Soviet Union (or China) misallocated resources in an unusually egregious way. (No economy perfectly allocates resources.) The only instance I'm aware of of egregious misallocation is Mao's Great Leap Forward. However, I would argue that the underlying source of that misallocation was not "central planning" per se in the sense that Robb implies: the problems of the Great Leap Forward were not the result of the planners being overwhelmed by the complexity of the Chinese economy. I'm not an expert in the subject, but I have read a bit about the Chinese economy, and it looks like the problem was simply bad central planning. The "planners" could have known it was a bad idea, they should have known it was a bad idea, and they shouldn't have massively reallocated agricultural production to the production of steel. Still, even in Soviet and Chinese eras of the most strongly centrally planned economies, both countries transformed themselves from colonized subsistence agricultural economies to world powers, a notable achievement.

And there isn't any way to independently determine whether resources have actually been "misallocated". In economics, "efficient allocation" is a theoretical concept, not an empirical one. There is no way to look at some arbitrary allocation of resources and test how efficient it is. Instead, we create a specific model of resource allocation (perfect competition) and declare it "efficient." We then create other theoretical models (monopoly, oligopoly, etc.) and declare them "inefficient" to the degree that they differ from perfect competition. But not only can we not empirically measure efficiency of allocation, we can't empirically determine whether or not which model applies to any particular real-world firm or industry.

It's worth noting that according to our economic models of efficiency, it is inefficient to pay workers more than the bare minimum needed for survival and reproduction. And our models of efficiency are known to fail in the provision of public goods.

This is not to say that theoretical models of allocative efficiency are entirely useless, but they are quite abstract. To declare some economy "inefficient" is to bring in no small few untestable assumptions.

Similarly, Robb argues that the present problems of the United States are the result of central planning. Although the government is not the whole problem, he claims it is definitely a part.
As more and more of US economy was controlled by a narrow group of decision makers allocating government resources, the more sluggish the entire economy became (most of this was due to massive growth and mis-allocation in entitlements and defense). Further, the ability of government bureaucracies to extend their decision making to remaining majority of the economy through regulatory action, is also a form of centralization.

Again, I have not seen convincing empirical evidence that this claim is correct. What specific time period is Robb talking about here? When specifically did "a narrow group of decision makers" control "more and more of [the] US economy?" Is he talking about 1950 to 1979, where the economy grew by an anemic average of 4 percent per year (in contrast to the post-regulation growth of 1980 to 2016 at a robust 2.4 percent average)? Is he just talking about Lyndon Johnson? I dunno.

Second, I can't think of any better examples than the three he offers that not only fail to illustrate Robb's claim but actively undermine it.

There are bad regulations, of course, but on the whole, regulations work. They keep us from getting sick from our food and water, they keep our airplanes from crashing, and they keep (or kept) our financial system from destroying the economy. When we "deregulate" we get e-Coli in our food and lead in our water, plane crashes, and the Global Financial crisis. And yes, there are bad regulations, but we have a (more or less) democratic process to change them.

It is difficult to see how "entitlements" constitute a misallocation. Is it a misallocation to ensure our parents and grandparents unconditionally have enough to eat, a place to live, and necessary medical care? Is it a misallocation to ensure that our children go to school, get a good education, and also have enough to eat? Is it a misallocation to make sure that people who work, who are actually productive, have enough to eat and have medical care? About 90 percent of "entitlements" go to the elderly (53 percent), disabled (20 percent), and working households (18 percent). What would Robb consider an "efficient" allocation? Soylent Green?

I'm certainly no fan of our imperialist (and quite expensive) military. But as an economist, I have to admit that people want a very strong military, and from a purely economic perspective, giving people what they want is exactly not "misallocation".

(It's also worth noting that every military is completely centrally planned (as are all large corporations), and the centrally planned militaries of the United States and the Soviet Union defeated the centrally planned militaries of Germany and Japan. Of course, we make military blunders all the time, but these blunders are not due to the planners' inability to manage the complexity of operating the armed forces.)

Robb continues to complain that wealth inequality is a form of central planning.
[A]n extreme concentration of wealth at the center of our market economy has led to a form of central planning. The concentration of wealth is now in so few hands and is so extreme in degree, that the combined liquid financial power of all of those not in this small group is inconsequential to determining the direction of the economy. As a result, we now have the equivalent of centralized planning in global marketplaces. A few thousand extremely wealthy people making decisions on the allocation of our collective wealth. The result was inevitable: gross misallocation across all facets of the private economy.

Again, I'm no fan (to put it mildly) of the concentration of wealth in the hands of bourgeoisie. But I don't see "misallocation" (which I can't measure anyway), and I certainly don't see any problems due to information overload, nor can I think of any way to measure information overload.

Robb offers an alternative to centralization:

The only way to manage an economy as complex as this is to allow massively parallel decision making. A huge number of economically empowered people making small decisions, that in aggregate, are able to process more data, get better data (by being closer to the problem), and apply more brainpower to weighing alternatives than any centralized decision making group.

But what does this mean? What is "massively parallel decision making"? That's supposedly what capitalism is, but Robb does not seem to be an apologist for capitalism, since it is capitalism that has given us the wealth and income inequality he correctly condemns (but for the wrong reason).

Interpreting this alternative in light of Robb's deprecation of centralization seems to imply that all centralization is bad, i.e. some sort of full-on "anarchism". But total decentralization has well-known problems, such as the Prisoner's Dilemma and Chicken games, information cascades, and the war of all against all. As a former computer programmer, I know that trying to accomplish anything with parallel processing is a very challenging engineering problem. Robb might be correct, but if so, he is proposing a system a thousand times more radical than pure Stalinism.

One alternative cause of our own economic problems and those of the USSR and China is not economic or information-theoretical, but political. The USSR, China, and the US in 21st century all lacked or are losing democratic political oversight and control of the economy. The small groups who control the economy are not overwhelmed by the information necessary to manage the economy; instead, they are simply acting rationally in their own self-interest, trying to accumulate as much wealth and power as they can from the people at large and from each other.

I do not advocate absolute centralization. I don't think such a system is even possible (and neither the Soviet Union nor communist China were absolutely centralized; even if it were possible, absolute centralization does not seem optimal. However facile it is to say so, some things need to be centralized, some things need to be distributed. The hard part is figuring out what to centralize and what to distribute, and how to make it all work. There is no silver bullet: managing all the economic behavior of seven billion people will take hard work, expertise, and democratic decision making.

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