Change In The East

CHANGE IN THE EAST

(Outline of Chapter 40, Economics: Principles, Problems and Policies,

McConnell, Brue; www.mcconnell16.com)

I. Labor Theory of Value and Communism

1. Labor creates value. Owners of capital goods will employ individuals for wages lower than the value of their labor. The difference between the value of labor and wages actually paid, in Marx' terminology the 'surplus value', will remain with the owner of capital goods. As the workers, being in an inferior bargaining position, are dependent on offering their labor at any price, this pattern is not to change - leading to exploitation of the workforce, the so called 'proletariat'.

2. The proposed solution to this conundrum: the 'proletariat' itself represented by government and the ruling party, the communist party, owns all capital goods and distributes the surplus value evenly among those who create it. This quasi-ownership of all capital goods by the government entails managing the entire economy in fullest detail. The government does so by long term central planning.

II. Central Planning

1. Features of central planning

i. Allocation of resources by governmental decision (i.e. bureaucracy) rather than by market decisions.

ii. Governmental price setting to control prices.

iii. Passive monetary and fiscal policies since money but output is the yardstick for the performance of the economy.

iv. Emphasis of economic goals according to the political agenda,

(a) in the case of Russia (former Soviet Union): industrialization (literally at any cost) and military strength.

(b) in the case of China: rural development and, to a lesser extent, military strength.

v. No unemployment.

2. Consequences and deficiencies of central planning

i. Overcommitment of resources to reach set goals (GDP growth).

ii. Overstaffing and, thus, underemployment.

iii. No or little foreign trade, self-sufficiency.

3. Inherent problems with central planning

i. Economies of countries are (or became) too complex to be planned centrally.

ii. Little to no flexibility in long term, global plans.

iii. Impossibility to prescribe every detail of the economy, in particular the quality of products.

iv. Already one error in the central plan will significantly affect other parts of the economy as one plant's output is the input for another: bottleneck problem.

v. By such erroneous planning or purposefully shifting the emphasis to other fields, certain products, in particular consumer goods, were not produced in sufficient number and quality.

vi. Governmental price setting in combination with a shortage of consumer goods gave no incentive for workers to increase their wages by working harder, more efficiently or by being innovative.

vii. Price setting led to inefficiencies as the price for a good did not reflect its real value (e.g. artificially low energy prices led to waste).

III. Market Reforms in a Phase of Transition

All these shortcomings, and in the case of Russia the economic burden of military strength, led to the decline of production - and eventually to the collapse of the Soviet Union, of which Russia was the largest part.

1. Russia:

Russia