Digression: Flat Earth Economics; Capitalist and Communist Varieties Contrasted

Communist systems could not be maintained without coercion and authoritarianism, which tended to exclude the great majority of the people from participation in administration and policymaking.

Communication with the governed was restricted because suggestions for change or adjustment of policy were regarded by the government as criticism and therefore as a potential threat; and by the governed as an act of daring best not undertaken. Any responsiveness by the government to suggestions from the people was seen as a sign of weakness that could open the gates to a flood of criticism and protest.

Since rigid ideology had always to prevail, though much of it be in conflict with the real world and with the actual behaviour of people and economic systems, much of the criticism would have to be rejected, causing further discontent.

This combination of repression, poor communication between government and governed, and theory that persists with the authority of religious dogma against changes in the real world and in knowledge and understanding of it, tends to make communist systems less efficient than capitalist at generating throughput and not able to achieve such high rates of throughput-increase (TI), given similar circumstances.

But the ability of capitalism to generate higher throughput rates makes it more unstable, more susceptible to the economic stresses set up by pushing harder against resource limits, and, in trying to prevail, more obviously in conflict in its theory and practice with the limited nature of the world.

Thus the belief that environmentalists must side with the extreme political left might have been a partial truth in that the world’s resources and life systems would undergo slower depletion and degradation if the whole world had been communist. But the resistance to change and the repression of ideas and criticism would have drastically impeded progress towards a new sustainable economic theory and practice, so that the ecosystem might have fared worse in the end.

The degree of human freedom which capitalism, for its most efficient functioning, must allow permits far more dissent, debate and communication with governments so that new ideas can develop.

One essential characteristic of capitalism is that it must at all times strive to maximise the consumption of every possible resource. The aim of each individual company is to maximise the consumption of its goods. The maximisation is to occur in this part of the throughput chain. In structuring the goods, the money profit must be maximised., so the resource consumption entailed in the structuring must be minimised. However the resultant of all economic activities pursuing this aim is to maximise resource throughput. A company buying resources necessary for its operations will want to minimise their consumption, but the company selling those resources wants to maximise sales. Since both buyer and seller want to maximise consumption of their goods, the overall pressure is to maximise resource consumption.

This conflicts with the requirement of round earth, i.e., sustainable, economics, that the consumption of resources must be limited to the available renewal rate. The available renewal rate is the natural one plus the rate available from any human-made processes that are actually immediately operable, not just at the theoretical stage.

Similar remarks would have applied to communism, except that the requirement to minimise resource consumption per unit of goods structured, would have disappeared, since there is supposed to be no private profit or capital accumulation and selling prices of goods were determined very often not by the money cost of structuring them, but by the government’s idea of what people ought to be able to buy given their level of money income.

One consequence was a leak in the throughput chain in communist systems. This meant that resources were throughput straight to waste matter without serving a term as useable goods on the way through.

Examples of this in the former USSR and the former communist states of eastern Europe were well documented over decades.

  • Up to half the USSR grain crop was lost because there was no money profit incentive to maximise the percentage of grain that actually ended up in the silos. During harvesting, threshing, collection and transport, much was simply dropped by the way.
  • Metal goods used to be made far too heavy because of “production” targets based on the total weight of “production” rather than on the number of useable items made available.

Another consequence was a break in the throughput chain when goods were consumed faster than they were brought to market.

One example was the Polish milk racket, reported in 1982.

The Polish government, for reasons of social idealism, decided that people should not have to pay more than the equivalent of thirteen U.S. cents per litre for milk. This was put into practice by heavily subsidising the cost of milk so that the government paid dairy farmers more than sixty cents per litre for the milk and made up the difference from general government revenue.

But unavoidable wage and other outlays caused milk to cost the dairy farmers up to a dollar a litre to make available. To keep selling to the government at far less than this would quickly have broken them.

So farmers bough much of their milk from the government at thirteen cents per litre and sold it back to the government at a profit of about fifty cents per litre, while selling milk they had actually produced themselves, at a cost to them of about a dollar a litre, to the government at a loss of about forty cents per litre. This practice enabled the farmers to enjoy a cash income for a while. It was a roundabout, cumbersome method of getting a production subsidy. However it broke down because to enable it to work, for some time milk was being consumed faster than new milk was being made available. The end of that road is obvious.

Many other examples could be given where socialist governments decided that the people had to have a certain level of access to goods and this must determine wages and prices, without regard to the money value of work and the money cost of making goods available.

What steps could have been taken to avoid the Polish milk problem?

The government could have taken over the dairy farms entirely and paid farmers a wage to produce milk which could then be sold at whatever low price was compatible with the government’s social ideals.

What would have been the consequences of this?

First, the Polish government, already burdened with huge debts to western banks, would have been saddled with large extra outlays.

Perhaps they could have repudiated the debts on the principle of redistributing “wealth” (in fact throughput) from more to less perfluent nations.

This principle may be valid in theory, but in practice the precedent set by one major debtor defaulting and getting away with it would have been disastrous for the world economy where there is so much debt. It would have set off a wild binge of what could only have been called stealing. To function, an economic system must have discipline and if this discipline sometimes goes against what’s just and fair then the rules must be changed. But this change must come about by orderly means, not by violating loan contracts agreed to by both parties in good faith. Relief for almost unrepayable debt incurred under existing rules must be sought within those rules. This is discussed in other posts, including “The Problem of Government Debt”.

Repudiating the debts would be a good way not to get any more loans. Increased borrowing beyond ability to repay would have the same effect. Thus there must be a limit to government money outlays. This limit is a reflection of the ultimate limit on the world’s wealth and capacity for resource throughput, just as the stresses on the world economy reflect the increasing stresses being imposed on the ecosystem.

Second, the payment of a fixed wage to milk workers regardless of the quality or quantity of product would lead to losses, leaks in the throughput chain, as with the former USSR wheat harvest.

Raising the price paid to farmers so that it exceeds the money they spend to realise milk would have enabled them to make a living but would also have increased government outlays yet further and encouraged inefficiencies by creating the expectation that the government would raise the price paid to farmers every time they complained about their cash flow and threatened to start the racket again.

Another way could have been for the government to stay out of it altogether, save their money, and let dairy farmers sell to consumers directly or through retailers at prices consistent with the money outlaid to make the milk available. This would have been against communist ideology but would have worked in the sense of getting supply, demand, realisation (“production”) cost, and consumer price into a sustainable relationship.

Some communist countries at the time compromised strict ideology by adopting this system for many commodities and their economies escaped the problems of others less bold. Some, like China, did it so well that communism still survives there, though not in a form that its founders would approve.

It may seem here that the great capitalist “truth” of letting the free interplay of consumers and producers optimise the availability and consumption of goods and services, that is, of being ruled by the “iron law” of the market place, is being advocated here.

Truth it is, but only a partial truth because it takes no account of the “iron law” of the world’s limits.

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