Wednesday, May 26, 2010

The deceptive lure of tyranny

Thomas Friedman has been a fan of the Chinese Communist party for a while now:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power.

The first fallacy he commits himself to is the notion that the wealth of country is given by the product mix produced in the country. This is the same kind of idiotic notion that wasted huge amounts of wealth while Third World countries frenetically tried to build their infant heavy industries in the 50s through the 80s.

It does not matter what is produced in a given country.

What matters is whether your citizens eat earthworms on a stick out of necessity or collect grain from cow poop to survive and the only means of transportation is by bicycle or on foot or if they can enjoy whatever foods they wish to enjoy and travel by whatever means they want to.

The second fallacy he commits is that somehow enlightened smart leaders with smart bureaucrats and technocrats can figure out the right product mix. As Mises explained eight decades ago, if the right product mix is defined as what people want and are willing to pay for rather than some dear leader's fantasy, no one can do any better than a free competitive market:

Guided by central authority according to central plan, a socialistic economy can be democratic or dictatorial. A democracy in which the central authority depends on public support through ballots and elections cannot proceed differently from the capitalistic economy. It will produce and distribute what the public likes, that is, alcohol, tobacco, trash in literature, on the stage, and in the cinema, and fashionable frills.

The capitalistic economy, however, caters as well to the taste of a few consumers. Goods are produced that are demanded by some consumers, and not by all. The democratic command economy with its dependence on popular majority need not consider the special wishes of the minority. It will cater exclusively to the masses.

But even if it is managed by a dictator who, without consideration for the wishes of the public, enforces what he deems best, who clothes, feeds, and houses the people as he sees fit, there is no assurance that he will do what appears proper to us.

The critics of the capitalistic order always seem to believe that the socialistic system of their dreams will do precisely what they think correct. While they may not always count on becoming dictators themselves, they are hoping that the dictator will not act without first seeking their advice. Thus they arrive at the popular contrast of productivity and profitability.

They call productive those economic actions they deem correct. And because things may be different at times they reject the capitalistic order which is guided by profitability and the wishes of consumers, the true masters of markets and production.

They forget that a dictator, too, may act differently from their wishes, and that there is no assurance that he will really try for the best, and, even if he should seek it, that he should find the way to the best.

Surely, in a capitalistic order a fraction of national income is spent by the rich on luxuries. But regardless of the fact that this fraction is very small and does not substantially affect production, the luxury of the well-to-do has dynamic effects that seem to make it one of the most important forces of economic progress.

Every innovation makes its appearance as a luxury of the few well-to-do. After industry has become aware of it, the luxury then becomes a necessity for all. Take, for example, our clothing, the lighting and bathroom facilities, the automobile, and travel facilities. Economic history demonstrates how the luxury of yesterday has become today's necessity. A great deal of what people in the less capitalistic countries consider luxury is a common good in the more capitalistically developed countries. In Vienna, ownership of a car is a luxury (not just in the eyes of the tax collector); in the United States, one out of four or five individuals owns one.

Ludwig von Mises, A Critique of Interventionism 1929

Finally, Thomas Friedman (who really ought to change his last name out of respect for the late Milton Friedman) thinks that so-called enlightened dictators can implement whatever they want by force of their authority.

History does not help him with that one either. Thanks to the work of Paul Gregory and Mark Harrison, we know now a little more about how resource allocation in the Soviet Union worked during Stalin's time. Their Soviet Archives Project and Behind the Facade of Stalin's Command Economy: Evidence from the Soviet State and Party Archives by Paul Gregory are worth every minute you spend on them.

In their 2005 paper Allocation under dictatorship: research in Stalin's archives, they give incredibly detailed insight into how things worked under the rule of one of the most powerful dictators the world has seen:

… The greatest burden fell on Stalin who, in a typical year, 1934, spent 1,700 hours in official meetings, the equivalent of more than 200 eighthour days (Khlevnyuk 1996). Virtually every communication requested his decision.

On rare occasions, Stalin would explode at this torrent of paperwork, for example in a tirade of September 13, 1933: I won't read drafts on educational establishments. The paperwork you are throwing at me is piling up to my chest. Decide yourself and decide soon! (Khlevnyuk 1996, p. 340). A few weeks later the same Stalin berated the Politburo for not following his proposed distribution of tractors to the letter (Khlevnyuk 1996). Stalin suffered the dictator’s curse (Gregory 2004): his power to decide all gave his most trusted colleagues the incentive to decide as little as possible. The less they decided, the less he could blame them when things went wrong.

China and the Chinese people are becoming much wealthier than was the case just 30 years ago. But, that is not due to the power of dictatorship.

Rather, it is a testament to how much wealth even a little bit of economic freedom around the edges can create over what is really a short period of time.

On a dark November night in 1978, 18 Chinese peasants from Xiaogang village in Anhui province secretly divided communal land to be farmed by individual families, who would keep what was left over after meeting state quotas. Such a division was illegal and highly dangerous, but the peasants felt the risks were worth it. The timing is significant for our story. The peasants took action one month before the reform congress of the party was announced. Thus, without fanfare, began economic reform, as spontaneous land division spread to other villages. One farmer said, When one family's chicken catches the pest, the whole village catches it. When one village has it, the whole county will be infected.

Ten years later, in August of 1988, Mikhail Gorbachev lifted his nation's 50-year-old prohibition against private farming, offering 50-year leases to farm families who would subsequently work off of contracts with the state. Few accepted the offer; Russian farmers were too accustomed to the dreary but steady life on the state or collective farm. Thus began reform of agriculture in Soviet Russia.

The results in each country could not have been more different. Chronically depressed Chinese agriculture began to blossom, not only for grain but for all crops. As farmers brought their crops to the city by bicycle or bus, long food lines began to dwindle and then disappear. The state grocery monopoly ended in less than one year. Soviet Russian agriculture continued to stagnate despite massive state subsidies. Citizens of a superpower again had to bear the indignity of sugar rations.

Paul R. Gregory and Kate Zhou How China Won and Russia Lost December 2009 & January 2010

It is sad to see prominent people who think what makes the living conditions in China orders of magnitude better than the living conditions in North Korea is that the Chineese have the right kind of communists and not that they have entrepreneurs and more freedom.

No comments:

Post a Comment