In Why Nations Fail we lay out some of the most popular alternative hypotheses about comparative economic development. There we paid little attention to the role of ideas, except to the extent that they play a role in economists’ favorite “ignorance hypothesis”. One form of ignorance could be that policymakers in poor countries just have the wrong ideas about how to make their country rich, or they have such ideas foisted upon them by international institutions or misguided economists. For example, Anne Krueger argued in her 1993 book Political Economy of Policy Reform in Developing Countries, that Latin American countries had inappropriately adopted inward looking “import substitution” policies in the post World War II period because they were fooled by the incorrect ideas of economists like Raúl Prebisch. Better ideas then came along and Latin American countries changed track towards greener pastures.
even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.
Rodrik similarly argues that many policies and arrangements should be understood as outcomes of mistaken theories rather than consequences of some powerful groups to mold them for their interests. Interestingly, his view is not that dissimilar from Anne Krueger’s but with one difference: the sign is reversed!
Rodrik thus sees the policies prior to reform in the 1990s as sensible, and the ones adopted afterwards in the era of the Washington Consensus as the incorrect ones.
Could this be the right way to think about underdevelopment?
In the next few posts, we’ll examine these ideas starting with one of the favorite examples of the ideas-drive-everything camp: government central planning of the economy.
When we were students, almost every undergraduate textbook contrasted the efficient way that markets allocate resources to the massive inefficiency associated with central planning, usually in the Soviet case.
But why on earth did the Soviet Union adopt such inefficient system? Textbooks usually resort to ideas and ideology as the explanation.
The story goes something like this: When the Bolsheviks took over Russia in 1917, they had a Marxist ideology which crucially relied on collective ownership of the means of production and assets, and on state planning of industry. (Never mind that central planning did not start until after Stalin’s rise to power). So they introduced central planning because of their ideas and ideology.
What were they expecting from central planning? Central planning was seen either as an attempt to create “socialist men and women” stripped of the bad effects of markets and private property on their character and work ethic, or simply as a facet of state ownership of the means of production. When the state owned everything, it had to decide what to do with the resources, which was what central planning was about. It would do this of course with an eye towards social welfare, which the Bolsheviks no doubt saw as something a market economy could not achieve. (However ironic it may sound today that Bolsheviks might have been interested in anybody’s social welfare). Indeed, prior to the adoption of central planning in 1928, they even abolished money (a.k.a. “the root of all evil”) at one point in the period of “war communism” between 1918 and 1921.
So this seems like a pretty convincing exemplar of hugely inefficient institutions introduced because of ideology. But is it?