Economic Efficiency, Soviet Style

[Cain]

So, as we all know, planned economies are highly inefficient, and helped contribute to the collapse of the Soviet Union.

Right?

Well, maybe not.

Around the time of the Soviet collapse, the economist Peter Murrell published an article in the Journal of Economic Perspectives reviewing empirical studies of efficiency in the socialist planned economies. These studies consistently failed to support the neoclassical analysis: virtually all of them found that by standard neoclassical measures of efficiency, the planned economies performed as well or better than market economies.

Murrell pleaded with readers to suspend their prejudices:

The consistency and tenor of the results will surprise many readers. I was, and am, surprised at the nature of these results. And given their inconsistency with received doctrines, there is a tendency to dismiss them on methodological grounds. However, such dismissal becomes increasingly hard when faced with a cumulation of consistent results from a variety of sources

.

First he reviewed eighteen studies of technical efficiency: the degree to which a firm produces at its own maximum technological level. Matching studies of centrally planned firms with studies that examined capitalist firms using the same methodologies, he compared the results. One paper, for example, found a 90% level of technical efficiency in capitalist firms; another using the same method found a 93% level in Soviet firms. The results continued in the same way: 84% versus 86%, 87% versus 95%, and so on.

Then Murrell examined studies of allocative efficiency: the degree to which inputs are allocated among firms in a way that maximizes total output. One paper found that a fully optimal reallocation of inputs would increase total Soviet output by only 3%-4%. Another found that raising Soviet efficiency to U.S. standards would increase its GNP by all of 2%. A third produced a range of estimates as low as 1.5%. The highest number found in any of the Soviet studies was 10%. As Murrell notes, these were hardly amounts "likely to encourage the overthrow of a whole socio-economic system." (Murell wasn't the only economist to notice this anomaly: an article titled "Why Is the Soviet Economy Allocatively Efficient?" appeared in Soviet Studies around the same time.)

Two German microeconomists tested the "widely accepted" hypothesis that "prices in a planned economy are arbitrarily set exchange ratios without any relation to relative scarcities or economic valuations [whereas] capitalist market prices are close to equilibrium levels." They employed a technique that analyzes the distribution of an economy's inputs among industries to measure how far the pattern diverges from that which would be expected to prevail under perfectly optimal neoclassical prices. Examining East German and West German data from 1987, they arrived at an "astonishing result": the divergence was 16.1% in the West and 16.5% in the East, a trivial difference. The gap in the West's favor, they wrote, was greatest in the manufacturing sectors, where something like competitive conditions may have existed. But in the bulk of the West German economy – which was then being hailed globally as Modell Deutschland – monopolies, taxes, subsidies, and so on actually left its price structure further from the "efficient" optimum than in the moribund Communist system behind the Berlin Wall.

Via link

This raises, to my mind, two possible scenarios.

The first, and one I have frequently argued for, is that our economic system is closer to the Soviet one than many people would be willing to admit.  Centralised planning aside, there is little difference between a technocrat in the Ministry of Gas and Oil and a manager in British Petroleum.  Because the same techniques of "rational" organisation and management prevail, similar outcomes in productivity are the result.

The second is that listening to mainstream economics wont only not tell you what you need to know, it will actively tell you things which are not so.  It will make you dumber, in other words.  I've also argued this before, but not in the case of the Soviet Union.

It's also worth noting the above two scenarios are not necessarily incompatible.

[LMNO]

Two very good points, Cain.The roles of the technocrats might have different names, but they function in a similar way.

[Mesozoic Mister Nigel]

Interesting. The main difference is in who's doing the planning, and why.