Market Economy, Command Economy and Market Failures

Posted by PITHOCRATES - April 30th, 2012

Economics 101

Money replaced the Barter System making it Easier to Trade Freely and Voluntarily

We did our first economic exchanges in a market economy.  Agricultural advances gave us our first food surpluses.  These food surpluses gave people free time.  To do other things besides growing food.  Like developing an alphabet and writing.  Mathematics.  A code of laws.  And we made material goods.  Like pottery.  Farming tools.  Processing olive oil for lamps.  People who were good at making one thing made a lot of that one thing and traded with other people.  Who were good at making one thing themselves.  These people met.  And traded.  Freely and voluntarily.

Free trade.  A key element of the market economy.  Where people freely met and traded the things they made.  With other people who are freely trading the things they made.  Free trade came before money.  We bartered our first trades.  Trading goods for goods.  We then created money to make our trades easier.  Reducing the search time to find people to trade with.

Money is something that can store value.  Which allowed people to trade their goods for money.  Then they took that money and traded it with someone else.  To get something they wanted.  Money allowed people to spend less time finding people to trade with.  Because you didn’t have to find that one person that had what you wanted AND was willing to trade it for what you made.  Money allowed us to advance beyond the barter system.  Which proved more and more inefficient as we produced more and more goods.

Because of Market Failures the Government taxes to Provide Public Goods and Eliminate the Free-Rider Problem

As we produced more and more goods our standard of living rose.  We had more things in our lives that made that life easier.  More comfortable.  And more enjoyable.  Civilizations with a bustling market economy were great places to live.  Because there were a lot of nice things to make life better.  Which other people saw.  From beyond the civilization.  And they wanted what they saw.  And they took it.  By force.  Raiding parties would enter a developed civilization and rape, murder and plunder.  So to enjoy the amenities of an advanced civilization required the ability to protect your civilization.  Which led to one of the first market failures.  The failure of the market to provide city defenses through the free and voluntary trading of people engaged in economic activity.

We call it a market failure because building city defenses and creating an army are things the market economy can’t provide.  One person can’t make a fort or an army.  And trade it with someone else.  It’s too big.  It takes a lot of people and a lot of effort to make these things.  But it doesn’t take everyone.  If everyone else is contributing one person could skip contributing.  That person would still be able to enjoy the benefits of that fort and army.  Living in safety.  And enjoy living in safety for free.  Something we call the free-rider problem.  The fort and army are examples of public goods.  Things the free market can’t provide.  Or that the free market fails to provide.  Not that the market is broken or operating poorly.  It’s because people rarely act freely and voluntarily to benefit other people.  Because any time and money spent doing this is time and money taken away from their own families.  Which would bring hardship to them.  So the government provides these things that are necessary AND cause personal hardship to individuals to provide.  The government forces everyone to contribute.  Which minimizes the hardship each individual must bear.

Some in power like to take this further.  And call things that people can provide for themselves that benefit only themselves public goods, too.  Such as health care.  Higher education.  Housing.  Food.  Everything the people can buy for themselves by working to earn the money to buy these things.  And when they do they alone enjoy the benefits of these goods.  These goods they incurred hardships to obtain.  By working to earn a paycheck.  Or sacrificing other things to have these things instead.  It’s their call.  Their choice.  A choice they enter freely and voluntarily.  Therefore these things are not public goods.  But that doesn’t stop some people from acting like they are public goods.  Usually to help them win an election to office.  Or to overthrow the government.

A Command Economy reduced Economic Activity and Introduced a Police State

Civilizations with a bustling market economy were great places to live.  If you had talent and ability.  If you did then you could work hard and trade your talent and ability for a paycheck.  That you could use to trade for other things in that bustling economy.  Those with great talent and ability would be able to trade these for great paychecks.  Those with less talent and ability would be able to trade these for lesser paychecks.  Which, of course, caused income inequality.  Which is a handy thing to exploit if you want to seize power.  So you can enjoy the best things the civilization has to offer.  When your talent and ability only can trade for one of those lesser paychecks.

History is full of people trying to seize power.  So this is nothing new.  What was new was the way these people seized power.  By using the teachings of Karl Marx and Friedrich Engels.  As they wrote in the Communist Manifesto.  Who attacked market economies.  And capitalism.  Saying that the new middle class, the bourgeois, maximized profits by exploiting the working class.  The proletariat.  Which they said was unfair.  And that the only way to make things fair was to destroy the very concept of private property.  Because only the bourgeois accumulated private property.  The proletariat had none.  And only got poorer and poorer while the bourgeois got richer and richer.  Under their system, then, nothing belonged to the person.  Everything belonged to the state.  If you created something with your talent and ability it belonged to the state.  And then the state determined how to distribute the fruit of your labors.  Basically according to the rule ‘from those according to ability to those according to need’.  Those with the greatest need got the most stuff.  And those with the most ability worked the hardest.  Well, you can just guess how that worked out.  Everyone tried to show as little ability as possible and the greatest need as possible.

Because people weren’t the masters of their talent and ability anymore they couldn’t trade freely and voluntarily.  Which meant there was no longer a market economy.  Instead there was a command economy.  Where the government made all the decisions.  What to make.  How to use resources.  Where people lived.  Where they worked.  And what prices they paid for the things in the state-run stores.  Which had shelves full of things no one wanted to buy.  And empty shelves where the staples went (soap, toilet paper, etc.).  Because the government decided what to bring to the state-run stores.  And in what quantity.  Not people trading freely and voluntarily.  Which reduced economic activity.  Reduced living standards.  And introduced a police state.  Because anyone who had a chance to escape to a market economy did.  Which is why the East Germans built a wall in Berlin.  To keep their people from escaping their command economy.  And going to the market economy across the street.

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FUNDAMENTAL TRUTH #71: “For socialism to be successful no one can be allowed to escape it.” -Old Pithy

Posted by PITHOCRATES - June 21st, 2011

One Country Socialism

There’s a debate in the communist community.  About the socialist revolution.  Can it happen in just one country?  Or does it need to be a permanent international revolution?  Lenin said you couldn’t have socialism in only one country.  Stalin agreed.  Until he changed his mind.  Then he was content to have socialism in only one country.  As long as he ruled that one country.  Which he ultimately did in the Soviet Union

But what exactly is the socialist revolution?  What is it revolting against?  Capitalism.  And Lenin saw capitalism export its oppression of the working class into less developed countries.  Capitalist imperialism.  Where advanced capitalist countries exploited the resources and workers of their capitalist colonies.  The capitalists got rich; the workers did not.  And that’s the way it always works.  So it has to stop.  But this is easier said than done.  For this is the ‘danger’ of capital.  It can go anywhere.  That’s why Lenin believed in permanent revolution.  To halt international capital flows.  Which was absolutely necessary for the triumph of socialism over capitalism.  Because if you halt capital inflows in one country, that capital will just seek out another.  And as long as you allow capital to seek out these ’emerging markets’ it will.  Just like that Whac-A-Mole game.  Where you hit the mole down in one location only to see it pop up in another.  And so it is with capitalism.

But there is another problem with ‘one country’ socialism.  If you ignore these international flows of capital things happen.  Sometimes nice things.  A lot of these ‘exploited’ nations got wealthier.  The standard of living improved for some.  And for those who it didn’t they could see what it did for others.  And it looked good.  The ‘have nots’ just saw how much more there was to have.  And they wanted to have it, too.  Interesting fact.  As bad as the working conditions were in some of these ‘exploited’ countries, some of the best jobs were in the imperial economy.  Working in sweatshops for dollars a day sure beat working in the fields for subsistence.  The imperialists helped modernize these poorer countries.  Even made them into better countries.  As much as people liked to hate the British Empire, look at the countries they ‘exploited’ today.  The United States.  Canada.  India.  South Africa.  Australia.  New Zealand.  These aren’t third-world countries.  They’re actually pretty nice places to live.  And immigration patterns prove this.

The Free Rider Problem

This is one of the biggest problems of ‘one country’ socialism.  Because if you compare a socialist country with a capitalist country, the capitalist one always looks better.  Again, based on the direction of immigration.  That’s why it’s hard to maintain a socialist revolution in one country while a neighboring capitalist country is richer and enjoys a higher standard of living.  Because people can simply leave the socialist country and move to the capitalist country.  Let’s look at a simple analogy.  Let’s say you get to study abroad.  You have a choice of two universities.  The Murmansk State Technical University north of the Arctic Circle in Russia.  And the International University of Monaco on the French Rivera.  Which are you going to choose?  Nothing against the Murmansk State Technical University, but I’m betting you choose the warm one by the beach.  Because the weather is nicer.  There’s lots of stuff to do in that nice weather.  And there are a lot of beautiful young people who enjoy sunning themselves with little on in that nice weather.  Because if it’s our choice, we’re going to choose what’s best.  And though Murmansk Tech may be very good, fun in the sun is always better.  So when students choose between the two, Murmansk just isn’t going to win that contest.

In theory socialism is a utopia.  Everyone lives together in one big, happy family.  Everyone works hard.  For the family.  There’s no I, me or mine.  Everything is we, us and ours.  Your labors aren’t yours.  They belong to everyone.  Whether you work a lot.  Or a little.  And the product of all that labor belongs to everyone, too.  Whether you work a lot.  Or a little.  And this is where the utopia breaks down.  Where reality starts setting in.  Because of the free rider problem.  You could be busting your ass for the family while a bunch of worthless wastes of space aren’t.  And yet everyone shares equally in the proceeds of all your labor.  Ergo you work less.  As does everyone else.  Eventually until everyone is doing the bare minimum to get buy.  Or to avoid punishment.

Over time the socialist utopia is not much of a utopia anymore.  If it was ever one.  It’s more of a gray, bleak life.  Where you’re hungry more times than not.  And are always in need of something.  Wanting for the things we take for granted in our capitalist lives.  Toilet paper.  Soap.  A pair of blue jeans.  Things we just go to a store when we need them.  And we do.  We don’t wait for hours in a line at a store with empty shelves in hopes of getting something we need.  Now imagine this store across the street from a store in a rich Capitalist city of plenty.  Which way do you think the people would go?  From the rich city of plenty to the bleak city of empty shelves?  Or the other way around.  Turns out, it was the other way around.

Unhappy in East Berlin

If you’re old like me you know what city I’m talking about.  Berlin.  Which was divided between East Berlin and West Berlin after World War II.  Why?  Because the allies had agreed to occupy the German capital.  Which happened to be deep inside East Germany.  Where the Soviet Red Army still had a presence.  Keeping it in the Soviet sphere.  And in that sphere there was nothing but socialism.  Soviet style.  Stalinism.  The East European countries in the Soviet sphere were for all intents and purposes a part of the Union of Soviet Socialist Republics (USSR).  So whether they liked it or not they now lived in that socialist utopia.  All except a lucky few, that is.

Soviet socialism sucked.  Those in it wanted out of it.  And those in East Berlin could do that by simply walking across the street.  As could anyone that made it to East Germany and into East Berlin.  Caused a bit of a problem.  The best and the brightest in and around East Berlin were walking to their freedom by walking across the street to West Berlin.  Because life was so much better in West Berlin than in East Berlin.  And if you made it to West Berlin you could even leave East Germany.  Go anywhere in Europe.  The UK.  The USA.  Anywhere.

The Soviets learned how it was not possible to have socialism on one side of a street and capitalism on the other.  Because side by side it was clear.  Capitalism was better.  And the people said so with their feet.  Until the Soviets put a stop to it.  You see, for socialism to work, especially in an area where there’s a better life nearby, you just can’t allow people to escape your socialist utopia.  Which is what the Soviets did.  Eventually building a wall between East and West Berlin.  And a kill-zone on the eastern side of that wall.  To dissuade anyone from climbing over that wall.  By killing them before they got there.

The Key to Socialism is Universal Misery

Countries that embrace a more extreme brand of socialism (Marxism, Leninism, Stalinism, etc.) typically share a common theme.  They have very secure borders.  Not to keep people out.  But to keep people in.  Because their people want to escape to a better life.  And the government in that socialist utopia wants to prevent them from getting to that better life.  And does.  Often with extreme force.  Such as the kill-zone in the former East Berlin.

On the other side of the border, though, there is no such police state.  You can come and go as you please.  That is, anywhere but into an extreme socialist state.  Not that anyone would want to.  Because few people choose to live where they go wanting for food and the basic necessities of life.  Or in a police state where your neighbors sometime disappear after talking a little too much about that better life on the other side of the border.

Socialism can work.  It can be that utopia.  As long as people have no choice.  Everyone is equally miserable.  And a better life doesn’t exist anywhere.  It’s hard to lose your freedom.  Many who do try to get it back.  But it’s a different story if you never had it in the first place.  And if it’s the same on the other side of that border.  Because you’ll then be content in your misery.  Blissfully ignorant of anything better.  Obedient.  And that’s how socialism can work.  If there’s universal misery.  And the people are subservient.

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