Available now: USAvailable now: UK
Wednesday
Aug152012

Central Planning in History – Tawantinsuyu  

In our last blog post we explained how the great societies of the Greek Bronze Age used central planning to organize their economies. Archaeologists don’t call this central planning but rather, following Polanyi (see his article “The Economy as an Instituted Process” in Trade and Markets in Early Empires), redistributive states, but it boils down to the same thing.

These societies were not alone in world history, and central planning was independently invented many times over, for example by the Incas (actually the Incas was the name of the ruling class of the empire of Tawantinsuyu – meaning the four regions) as they built their huge empire in modern Andean South America. The Incas had no money or writing but the state conducted decennial censuses. They built around 25,000 miles of roads, had a system of runners for sending messages and collecting information. They also recorded vast amounts of information of knotted strings called quipus, most of which cannot be read today.


In the Inca Empire, all the land was the Inca’s and large parts were allocated to the Temple of the Sun and other religious cults, others to the army, and yet others to the Crown. The rest which the state did not claim was granted to local communities for their subsistence production. The state lands, distributed throughout the empire, were then worked for free by the local people using various forms of corvée labor. Local people also had to weave llama wool given to them for this purpose by the state.

There seems to have been little or no market exchange but instead the state moved people into different areas where different crops could be grown, the so-called archipelago economy, and then distributed the goods by fiat. For example, Inca administrators who supervised the farming of crown lands would arrange for some of the goods to be moved to Cuzco or other regional capitals, while another part would be stored locally in warehouses. This system, vividly described by the anthropologist John Murra in his book The Economic Organization of the Inka State was a vast system of central planning developed without the aid of Das Kapital or indeed Eurasian role models.

It seems that like farming or democracy, central planning was independently invented many times over in world history. As Murra put it (page 121):

The Inca state functioned like a market: it absorbed the surplus production of a self-sufficient population and “exchanged” it by feeding the royals, the army and those on corvée as well as by issuing a lot of it as grants or benefactions.

Monday
Aug132012

Central Planning in History – The Greek Bronze Age

The idea that the central planning of the economy in the Soviet Union was driven by ideology seems compelling and obviously true. But it isn’t that simple actually.

For one thing, it turns out that centrally planning the economy was not something rare or anomalous in history. Actually, it was quite common. So central planning in itself has nothing whatsoever to do with Marxism.

To see what might have driven central planning as a way to organize the economy, let’s consider some famous historical examples of central planning. One of the best documented and agreed on occurs during the Greek Bronze Age.

Around 3200 BCE there was the start of the Bronze Age in the Eastern Mediterranean. Though this terminology refers to the use of bronze (an alloy of copper and tin) which replaced stone for tools and weapons, there was a whole series of correlated technological, social and political changes. In particular the Bronze Age was associated with increased political centralization and the formation of states throughout the Mediterranean basin.

How did the economy of the Greek Bronze Age states work? These states were based on a city where the political elite lived. We have a unique record of the activities of these polities because many clay ‘Linear B’ tablets written by state administrators have survived. Fascinatingly, these tablets have only survived from the period right before these states were destroyed in conflicts (think Troy…). The palaces were burned down, we don’t really know by who (the Sea People?), and the fire baked and preserved the clay. The tablets basically are state records of taxation and industrial production. There was no money and apparently no markets. As the Cambridge archaeologist T.J. Killen points out in his review article in Y. Duhoux and A. Morpurgo Davies’s volume A Companion to Linear B: Mycenean Greek Texts and Their World, only four or maybe five of the existing Linear B tablets ever use the word ‘bought’ and always in the context of slaves. 

The state seems to have taxed agricultural output, though we do not know to what extent they directly owned land. They seem to have controlled nearly all industrial production, for instance of textiles, ceramics, tools and weapons. They monopolized trade, and Killen characterizes trade as a type of reciprocal gift-exchange. This was useful probably because Knossos, for example, one of the best studied of the bronze age states, had neither copper nor tin locally and thus had to import them from outside via this type of exchange.

Since there was no money, the state basically moved around all of the goods itself by fiat. It supplied food and inputs to weavers and then took their output. It stored large amounts of food and goods in the palace complex.

As Killen puts it: 

the key role in the movement of goods and the employment of labour was played, not by a market or money, but by a central redistributive agency… in the Mycenaean world, by a central palace.

Killen concludes:

this was a redistributive (or command) economy.

Thursday
Aug092012

Was Central Planning Really Inefficient?

The great MIT economist Robert Solow once made the joke that the way to do a PhD in economics was to find some crazy social arrangement or outcome in the world and then think of the informational asymmetry that made it constrained efficient.

With this methodology in mind, it should come as no surprise that, contrary to what we presumed in our last post, some people do not regard central planning as that inefficient after all. The most plausible case along these lines was made by Robert Allen in his book Farm to Factory. Allen pointed out, rightly of course, that in 1917 the Soviet Union was a very backward economy with poor institutions and far behind the world technology frontier. Allen’s big leap was to argue that in an environment with poor institutions central planning was a rational way of industrializing such an economy. In fact, if you compare the growth of the Soviet Union to that of other parts of the world, such as Latin America, over the period 1928-1970, the Soviet Union does quite well. The next figure from Allen’s book illustrates this by plotting the level of income per-capita on the horizontal axis against the ratio of the 1970 to the 1928 level.

Though the Soviet Union does not do as well as Japan, it does better than the non-OECD countries which were as poor as it was in 1928 when its first Five Year Plan took effect.

It’s true of course that Soviet industrialization involved the forced collectivization of agriculture which created huge hardship and even deadly famine in the early 1930s, and was also based on the suppression of consumption in order to accumulate capital. Even here Allen argues that this wasn’t too bad. The next figure, again from his book, shows that though there was a 20% fall in average consumption after 1930, by 1935 it was back to the 1930 level.

All the same, even though the facts that Allen lays out are correct, they do not justify the conclusions.

For 40 years the Soviet Union was indeed a growth miracle, but it was a spectacularly unsustainable one based on extractive political and economic institutions. The powerful Soviet state could generate large productivity increases by moving people from rural areas and putting them into factories. But the system totally failed to generate incentives for improving productivity or for innovation except in military areas where they put a huge amount of resources.

Inevitably the Soviet economy ultimately collapsed. When people were not forced to buy the goods Soviet industry produced, they went out of business, and now the Russian economy is held up not by the benefits of centrally planned industrialization but by high natural resource prices.

The important leap in Allen’s conclusion, and the reason why his thesis is ultimately unconvincing is that as Gerschenkron noted long ago in Economic Backwardness in Historical Perspective, partly in the Russian context also, backward economies can grow rapidly and may do so using a variety of arrangements. This is made feasible because they are benefiting from catch-up and technological convergence. The fact that Soviet Russia took advantage of catch-up opportunities and transferred resources from its massively inefficient agriculture to industry implies neither that central planning was efficient in the short run nor that it could be a steppingstone for more growth-enhancing institutional structure in the long run.

Textbooks sometimes simplify things. But in this instance, the textbook treatment of central planning as economically inefficient is right.

So the next question is whether Soviet communists adopted and persevered with central planning despite its inefficiencies, mostly because of their Marxist ideology.

We’ll see in the next post that the answer is largely no.  

Monday
Aug062012

Ideology and Comparative Development

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.

More recently Dani Rodrik in “Ideas over Interests” takes his cue from Keynes’s famous remark in the General Theory that

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?

Wednesday
Aug012012

Mitt, Jared and David

We were doing so well. Writing about economics and politics for the last five months here without once mentioning the US presidential race. But it’s all over. Mitt Romney has given us no choice, wading into the debate about the origins of inequality and prosperity around the world.

Here is what Mitt says:

I was thinking this morning as I prepared to come into this room of a discussion I had across the country in the United States about my perceptions about differences between countries. And as you come here and you see the G.D.P. per capita, for instance, in Israel which is about $21,000, and compare that with the G.D.P. per capita just across the areas managed by the Palestinian Authority, which is more like $10,000 per capita, you notice such a dramatically stark difference in economic vitality.

He continues:

Culture makes all the difference. And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things. One, I recognize the hand of Providence in selecting this place. 

Mitt Romney also identifies the origins of his thinking as David Landes’s The Wealth and Poverty of Nations and Jared Diamond’s Guns, Germs and Steel (though presumably not the origin of his numbers, which are incorrect; the gap between per capita in Israel and West Bank and Gaza is about tenfold).

Well actually, Jared Diamond doesn’t say much about culture. In fact, his thesis is about how geographic and ecological conditions led to the differential development paths and prosperity among otherwise identical peoples. In fact his theory would predict that Israelis and Palestinians should have identical levels of prosperity.

Readers of this blog and of Why Nations Fail have already heard us inveigh against geographic determinism. Those interested in this debate can start from Jared Diamond’s engaging and critical review of our book in the New York Review of Books, and then look at our letter and Jared’s response. Perhaps it’s just us. But doesn’t Diamond just say that he disagrees with us but without substantiating how he counters our arguments?

In any case, we digress. Mitt Romney is instead taking his cue from David Landes. But as we show in Why Nations Fail, cultural differences cannot explain differing levels of prosperity. Deng Xaioping didn´t change Chinese culture after 1978 to make the economy grow, but he did change economic institutions a lot. Indeed, many cultural differences we see are the outcomes of different institutional choices. This is surely the case between North and South Korea, for example. After all, does Mitt and David think that there were huge cultural differences between the north and the south of the 38th parallel before the separation of Korea into two?

Of course the difference between Israel and Palestine is not the same as the two Koreas. It was created by the migration of Jewish people, mostly after World War II. Many came from much more developed parts of the world than Palestine which had endured centuries of debilitating Ottoman and then British colonialism. They brought more advanced technologies and high levels of human capital, which in themselves were the result of the institutions and incentives that they faced. As Maristella Botticini and Zvi Eckstein point out in their book The Chosen Few: How Education Shaped Jewish History, the origins of these very high human capital levels are in the historical adoption of institutions in Jewish society. This is where the roots of Isreal’s current prosperity lie. They have further been strengthened by Israel’s integration into the world economy, which has enabled it to continue the process of technology transfer and encouraged trade and investment.

Why hasn’t this prosperity spilled over to the Palestinians since the British left in 1948? A definitive answer would need to be based on much more research, but a plausible one comes from the reaction of Saeb Erekat, an aide to President Mahmoud Abbas of the Palestinian Authority, to Mitt´s remarks:

this man doesn’t realize that the Palestinian economy cannot reach its potential because there is an Israeli occupation.

It seems to us that Mr. Erekat, not Mitt Romney, has the right idea.

We end this by agreeing with what Sandeep Baliga and Jeff Ely say on their blog. Mitt should do some more reading.