He Leadeth Me and Paul Krugman
I suppose it may be a symptom of an unbalanced intellectual life, but one question that occurred to me while reading He Leadeth Me (an excellent and moving account of a Catholic priest who was imprisoned for over two decades in the Soviet Union) several months ago was a question about the failure of the Soviet economic system. In the book, Fr. Ciszek recounts year after year of back-breaking labor for 12-14 hours a day in Siberian labor camps. He and his fellow prisoners lived in squalid conditions, and were provided with hardly enough food to keep them alive. This is all horrible, of course, and I’d recommend Fr. Ciszek’s work to anyone who has a tendency to complain about the difficulties of pursuing sanctification in their jobs.
But it seemed to me that, unless the prisoners were basically digging ditches and filling them back up again, this type of coercion would increase economic efficiency, given that the inputs required to organize the prisoners were minimal and the workers were producing a great deal. Certainly, Soviet workers in these mines were producing more than unionized U.S. workers of the time. As it turns out, I am not the only who thought this way. As Paul Krugman helpfully explains, claims about the economic superiority of the Soviet Union were commonplace in the 1950’s and 1960’s, and many prominent economists reluctantly concluded that centrally planned economies had unique efficiency advantages:
Illustrative of the tone of discussion was a 1957 article by Calvin B. Hoover. Like many Western economists, Hoover criticized official Soviet statistics, arguing that they exaggerated the true growth rate. Nonetheless, he concluded that Soviet claims of astonishing achievement were fully justified: their economy was achieving a rate of growth “twice as high as that attained by any important capitalistic country over any considerable number of years [and] three times as high as the average annual rate of increase in the United States.” He concluded that it was probable that “a collectivist, authoritarian state” was inherently better at achieving economic growth than free-market democracies and projected that the Soviet economy might outstrip that of the United States by the early 1970s.
These views were not considered outlandish at the time. On the contrary, the general image of Soviet central planning was that it might be brutal, and might not do a very good job of providing consumer goods, but that it was very effective at promoting industrial growth. In 1960 Wassily Leontief described the Soviet economy as being “directed with determined ruthless skill”–and did so without supporting argument, confident he was expressing a view shared by his readers.
But, as U.S. economists began to research economic growth in the Soviet Union, they found a result that surprised them:
When economists began to study the growth of the Soviet economy, they did so using the tools of growth accounting…when efforts began, researchers were pretty sure about what they would find. Just as capitalist growth had been based on growth in both inputs and efficiency, with efficiency the main source of rising per capita income, they expected to find that rapid Soviet growth reflected both rapid input growth and rapid growth in efficiency.
But what they actually found was that Soviet growth was based on rapid growth inputs–end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent.
The immense Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country’s industrial output back into the construction of new factories. Still, the big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing left to explain. The most shocking thing about Soviet growth was its comprehensibility.
In other words, Soviet leaders were able to more efficiently mobilize certain inputs that are critical for economic growth – people, natural resources, and directed effort. However they were not able to imitate the pattern of incremental knowledge accumulation and innovation that converts inputs into outputs. And that type of technological knowledge is the primary driver of growth in developed nations:
How, then, have today’s advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have lead to a continual increase in total factor productivity–a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.
One of the difficulties that besets even qualified defenses of free markets is that it is often difficult to explain how the process of incremental innovation works. It’s clear that a Toyota Camry today is a remarkable improvement on the Model T, and that the internet is a vastly more efficient way to communicate information than moving massive amounts of paper around the world, but people often take the processes of investment, risk, and gradual improvement for granted. Mr. Krugman’s article above provides a helpful reminder that technological improvement doesn’t just happen, even when governments explicitly seek to encourage such improvement. One of the problems, for example, with taking large amounts of money from private companies and using it to prop up failed industries like GM is that it impedes this process of incremental investment and improvement, and instead sinks large amounts of money into failing, if well-intentioned, projects.