I think this is a GQ…
The fall of communism in the former USSR has led me to wonder about the economics behind communism itself. The question I had is, Was the fall of communism due to it being a closed economy? If that is the case, as we head (or already are) into being a world economy, how is this not a similarly closed system?
Or is there essentially no problem with a closed economy?
According to economist and Nobel laureate, Friedrich August von Hayek, socialism, the underlying economic system of communism (a politcal system), failed basically because it was unable to set prices effectively, owning to the sluggish response of central decision making. That’s the nutshell version. See the link for more detail.
No economy is a completely closed economy, simply because no politically delimited entity can possibly provide for every one of its constituents’ needs. Trade has to happen; of course the forms this trade can take are numerous.
Reaction to the Russian Revolution essentially blocked trade for the country as much of the West clamped down on it with embargoes and other such measures. Seeing as how the levels of production in Russia in 1918 were a tiny fraction of what they had been in 1913, and in fact were, in some aspects of production, equal to the production of Western Europe in the seventeenth century, it’s fairly obvious that they were off to a very shaky start - and self-reliance was the last thing able to support it.
Whether or not you try to close yourself off or other countries are doing it to you, the pressure of international competition continues to be felt, and this was the reason behind the monster industrial drive under Stalin in the 1920s and 1930s - at the expense of consumer goods.
After the Second World War, of course, Stalin got the chance to grab Eastern Europe, which eased the pressure somewhat as Russia got new sources of raw materials and new outlets for industrial and consumer goods - primarily the former. Combined with the overall worldwide boom and expansion, things did get better for a while, at least economically. But as economic growth slowed, consumer and domestic goods again felt the bite first and as the industrial sector slowed as well the system began collapsing completely.
While the trade barriers did have an effect on the economy of Russia and Eastern Europe, they weren’t the cause of the collapse. The disproportionate focus on industrial development at the expense of consumer goods meant that domestic life was tolerable at the best of times and beyond unendurable at the worst. Like now.
The world, on the other hand, is not a closed system. Obviously it has everything we could need to satisfy our basic and complex needs, or else we wouldn’t be at 6 billion people today. Essentially there’s nothing outside Earth that we need to trade with for survival, and there’s no one outside the planet to cut trade off with us if they don’t like our political or economic system(s).
There is a problem with a closed economy - it limits the progress and development of the entity/area closed off from trade.
Socialism is not the economic aspect of communism, no more than communism is the political aspect of socialism. Communism and socialism are economic, political, and social - communism is the mature version of socialism. The former can only come about with the successful worldwide implementation of the latter.
Capitalism is rife with central decision making; the only difference is it happens in individual units of production rather than across an industry or society as a whole. Price-setting is only a concern where profits come into play; in a society that bases production on human need rather than the maximization of corporate income the need to set prices will become superfluous as the medium of exchange between goods and services (money) becomes less and less necessary.
So in other words, if “socialism” was a failure, it was because it wasn’t “allowed” to become communism, because the world wouldn’t obligingly let itself be conquered?
And if those units make stupid decisions, they become extinct. Then companies that didn’t make such stupid decisions take their place. But in a state-directed command economy, no unit of production is allowed to fail, because there’s nothing to replace it.**
Congratulations! You have rediscovered the completely naive and discredited idea that profitibility is an artificial construct of free markets. The material universe does not give a damn what humans think they need, want, or deserve.
Geez, boss, how many SUVs do we need this year?
Cans of peas?
How about NIKEs?
Who’s settin’ these numbers, anyway?
Answer’s simple, Beatle. You are setting them yourself. Don’t want an SUV? Don’t buy one.
Other people do want SUVs. Car companies make SUVs. The price of an individual SUV is a negotiation between someone who has an SUV and doesn’t want it, and someone who doesn’t have an SUV and wants it.
And Olentzero: That’s nice, centralized decision making, only decentralized into hundreds of companies and millions of consumers. Wouldn’t you say that’s a leeeetle bit more decentralized than a totalitarian state making all production decisions? Especially when they have the power to shoot you or send you to the Gulag if you don’t agree with their decisions.
I suspect Communism failed for political reasons: the Armenian earthquake and Chernobyl persuaded Gorby’s ruling circle that they presided over a decrepit and unreformable system. But that’s a GD topic…
There was no economic collapse preceding Communism’s fall, only stagnation. So looking for economic causes requires some nuance.
I don’t know of any mainstream trade theories that state that closed systems lead to economic collapse. Any theory that did so would certainly be peculiar, since the world economy as a whole is by definition closed. The theory of comparative advantage says that if 2 countries trade with one another, both will be made richer. But that’s a separate argument. (Lenin may have been wary of closed economies; I’m not sure.)
Finally, the Soviet bloc was not entirely closed off. In 1983, the US got one half of one percent of its imports from the Soviet bloc. In Europe, the corresponding figures ranged from 2% (Britain) to 4% (France) to 11% (Austria).
Just exactly who defines “human need”, government? And on what basis? Certainly not empathy. When have politicians in control of government ever even experienced a material need?
Speaking of need, I assume you mean material need, right? If you’re going to get rid of money without somehow destroying any and all incentive to work, why not address needs that aren’t material? Just as you would force earnings out of the purses of peaceful honest people to address needs that you or your bureaucrats imagine exist, why don’t you force smart people to tutor dumb people? Send thugs to Michael Jordan’s home and make him teach inner-city kids how to play basket ball. Force musicians to give music lessons to whomever you decide needs them. Crash the headquarters of Chicago Reader and make them offer equal access to ignoramusses.
An economy is about profit. Do you expect me to make you a shirt simply because you need one…? What sort of economic praxis is that…?
Nice to see you all back in the thread. Tell you what, let’s take this over to GD and we can try again. I hate to have a thread moved just because of the perennial argument between the two sociopolitical viewpoints. Y’all go over there, open the thread, and I’ll check in once it’s set up.
Thanks for the link, Lib. I’m not sure what article you were referencing in particular, but good reading there anyway.
Lumpy, I’m not sure how else you feel profit is created. Apart from that, do you see any problem with closed economies? I’m sure you won’t need to take the “moral high ground” to answer that.
By way of background for this question, I have grilled the three people who work here that my company has “imported” (heh) from the former USSR. All had many wonderful tales to tell, I assure you.
My main concern was if closed economies themselves are, in some way, a problem economically speaking. The only closed economies I know of occur under communism. Communism is having problems. Hence, the question.
There isn’t anything morally wrong with a closed economy. A closed economy is just one where no trade comes in or out of a particular region. From a business standpoint, most people have found that it beneficial to trade outside of their region in order to gain access to products they can’t produce at home (like bananas) or they could produce but seem more exotic because they come from another country (like BMWs).
Russia/USSR is/was NOT a closed economy. They trade with other countries just like we do. The diference is that prices are set by a central authority and not the market.
Whenever a central authority like the govment tries to set prices, it usually leads to shortages because they often set the price lower than the market price.
Here’s an example of how this happens in our economy. In cities that have rent control, the government sets the price below the market price. The result is that more people choose to find appartments instead of finding substitutes (living with parents, moving to a new town, rooming with 2-3 people, living on the street as a bum).
Because there are more people looking for apartments than apartments available, this leads to shortages. Builders don’t want to build new ones because they can’t earn a profit and people don’t want to give up their appartments because they know its hard to find a new one. Its pretty much basic economics.
The reason the USSR collapsed was because this happened with everything from bread to housing.
I’m not debating, Olentzero. Just answer a simple general question, please. What exactly is it that every human needs?
Ayn:
That link was about Hayek in general. Here is a link to contextualize the nutshell I gave you: link.
Here is a brief exerpt:
I’ll try and give GQish answers. First, I don’t think it is the case that only Communist countries have been closed economies. Certainly Germany under Hitler prior to WWII had a policy of autarky (self-sufficiency) as a means to escape the depression. A number of developing countries have deliberately isolated themselves from the world in (largely unsuccessful) attempts to industrialise. I’m pretty sure Burma (a decidedly non-communist country) was closed for a fair while post WWII.
Secondly, “open” is a relative term. Few if any countries – not even the former Hong Kong – have no restrictions on capital flows, goods, technology and (especially) people. The USSR did undertake some trade, so it wasn’t entirely closed.
You are really asking two questions aynrandlover: was the closed nature of the USSR a problem for it? and is the fact that we aren’t going to be trading with the Martians (with whom, if you believe international trade statistics, we have a substantial current account deficit) a problem?
International trade is a useful thing for economies. I sketched out the bones of the theory in KarlGauss’s recent Teach me about free trade. For very small or otherwise special economies, trade is essential. Singapore, for example, would not be able to feed itself in autarky. International trade makes it viable. But for large economies like the US, the former USSR and of course the world, it’s not that big a deal. To pick a number for the US, say 5% of National Income (higher for my country, Australia).
Contrary to many people’s notions, economic growth and development do not have to spring from any of the following things (although they may be useful, and some of them are probably generated by the process of growth):[ul][li]new opportunities from international trade[]technological change[]exploitation of certain groups (like labour or the third world)[]population growth[]discovery or greater exploitation of natural resources.[/ul][/li]The key thing is captured in Adam Smith’s (1776) remark that: the division of labour depends upon the extent of the market. As the economy grows, more specialised and productive techniques of making stuff become viable (I’d say “socially profitable”, but it seems some people are little touchy). In a sufficiently large economy in other words, growth creates opportunities for further growth, without having to assume that outsiders buy the goods, have their environments ruined or whatever. The greater size of the market allows more productive specialisation.
This is not to take anything away from those who would argue that[ul][li]in practice other factors are as or more important[]demand-side problems (like Marxian crises or Keynesian slumps) might choke off this process[]the piles of consumption goods this process creates do not constitute much of a solution to the human condition[/ul]all of which I would agree with to some extent: I am merely saying that in principle there is no problem with the world being a closed economy, or with finite natural resources, or an end to technological progress – economic growth (and rising standards of living as measured in terms of consumption goods) could go on.[/li]
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Now, the former USSR. I don’t think its closed economy staus had much to do with its economic problems (and FWIW, I don’t think its economic problems had all that much to do with its demise). Clearly the USSR was a big country, so even though trade might have been useful, if the economy was otherwise functional the place could have done without it.
Indeed, it is questionable whether more trade would have helped the economy. If the central planners could figure out what the country’s comparative advantage and disadvantage goods were, then more trade would have been helpful. If, on the other hand they didn’t have access to the required information (which according to the arguments of von Mises and Hayek, they couldn’t have) then an obsession with exports and imports could have made things worse.
BTW Olentzero, you need to update your terminology – I don’t think there are any monetrists left.
I don’t know… healthy food? Decent clothing? Comfortable housing? A first-rate education? Quality medical care?
And yes, you are.
No, I’m not. I’m just asking questions.
What is healthy food? Do diabetics get special food? Do Jews have to eat pork? Will you make Catholics eat meat on Friday? What about vegetarians?
And what’s decent clothes? Will we all have to wear Mao jackets? Will you close all the Gap stores? No more fashion shows? What is comfortable housing? What if my wife likes the thermostat set at 70, but I like it at 65? What is a first-rate education? What if I want my son to be a farmer? What if I think I can teach him better than you can? What is quality medical care? Do I get to have my eyes fixed now, or is that frivolous? If there are 5,000 people needing kidney transplants with only 500 kidneys available, how will you decide who gets them, and what about “quality care” for the other 4,500?
And who is going to pay for all this, or will you just put us all to work providing for everyone else as slave labor?
Of course you’re debating Libertarian. Not all questions are GQs. Surely you can see that the transplant question has no answer independent of ethical systems. And of course your “human needs” question is a GD question. Sheesh.
Furthermore, your last line – coming as it does out of nothing – is an example of why GD tends more towards heat than light.
I think it’s been argued pretty well that closed economies are an economic problem. Albania and Cuba are two instances of that - Albania an example of the country closing itself off, Cuba an example of a country being closed off by other countries. Economic stagnation hit them both pretty hard.
Are they, or were they, communist or socialist?
Marx and Engels define socialism as “the self-emancipation of the working class”. Meaning that the workers have to take economic and political power by and for themselves. It cannot be brought to them from above, either from another class within the country or without, nor can a socialist revolution be made without their active participation.
Albania had a government installed by the Russians after World War II. Cuba’s army of liberation consisted of a handful of people that fought for the overthrow of a colonial dictator but didn’t look to the working class for support or help. All Castro’s later rhetoric aside (he proclaimed the revolution Communist several years afterward), it was done by a minority for the majority instead of the majority themselves.
Closed economies sooner or later will suffer setbacks. True socialism (and therefore true communism) doesn’t operate based on a closed economy.
Of course I’d say that’s more decentralized. But those units of production are in direct competition with each other for a greater share of the profits, meaning they’re both going to look to sell as much of their product as they can and look for cheaper ways to produce them. Which in turn means they’ll seek to keep wages low and utilize methods of production that are unsafe - either endangering the health and safety of the men and women on the line or the community in which they’re located because of the waste products generated.
I honestly don’t see how you can think the consumers have a real effect on corporate decision-making. I myself would like a car whose engine gets 80 MPG (an invention that already exists, if I’m not mistaken) - with the attendant benefits of reduced emissions and smaller gas expenses. By your argument, I should be able to affect corporate thinking by refusing to buy any car that doesn’t get 80 MPG. Where does that leave me? Riding public transportation. So obviously thousands of other people have to do the same thing in order to affect GM’s or Ford’s or Toyota’s or BMW’s product line. And how would I go about convincing others to refuse to buy cars that don’t get 80 MPG in this heavily automobile-dependent society?
Your last sentence is a bit of a puzzler. Are you saying that all central planning is tantamount to totalitarianism or just central planning at a certain level?
So your basic assertion here is that the market is much like a force of nature, only barely controllable and which should be ignored at a country’s or corporation’s peril.
Wrong. The market is an entirely human invention. Animals don’t have markets, or trading, or even a barter system. They should if it were some sort of natural force. True, if human society were to suddenly cease to exist, so would the market - but that does not mean the converse is true. The market exists because production is (and has been only for a short time, in terms of human history) geared towards making a profit. Produce as much as you can, but if it can’t be sold, it doesn’t get used. If human society is retooled so that production is geared towards meeting human need (here, Libertarian, I would like to point out that the praxis is not you make a shirt because I need one, but because everyone needs shirts), then we produce as much as we can, create a large and permanent surplus of goods, and use it as we need it.
Saying Nazi Germany was socialist is like saying the fruit of the tomato plant is poisonous because it’s related botanically to the nightshade. That got proved wrong by someone actually eating a tomato and living through the experience. I’d recommend reading other perspectives on Nazi Germany besides just Hayek. The Nazis, Capitalism, and the Working Class by Donny Gluckstein is a good socialist argument on the subject.
Okay, Picmr, I guess you make sense. Sorry about that.