Tim Lee

Yglesias on Capitalism and Central Planning

A fantastic post from Matt Yglesias:

The basic business outlook is very focused on the key role of the executive. Good, profitable, growing firms are run by brilliant executives. And the ability of the firm to grow and be profitable is evidence of its executives’ brilliance. And profit ultimately stems from executive brilliance. This is part of the reason that CEO salaries need to keep escalating — recruiting the best is integral to success. The leaders of large firms become revered figures. Not only important because, in practice their decisions are significant. But they become celebrities and dispensers of advice and wisdom. Their success stems from overall brilliance, and thus they must have enlightening things to say on a variety of subjects.

The thing about this is that if this were generally true — if the CEOs of the Fortune 500 were brilliant economic seers — then it would really make a lot of sense to implement socialism. Real socialism. Not progressive taxation to finance a mildly redistributive welfare state. But “let’s let Vikram Pandit and Jeff Immelt centrally plan the economy — after all, they’re really brilliant!”

But in the real world, the point of markets isn’t that executives are clever and bureaucrats are dimwitted. The point is that nobody is all that brilliant. Nobody really has a reliable method of surveying the scene and accurately gauging What Is To Be Done. But in a market economy, we don’t need anyone to have such a method. Instead, a bunch of people get to do some inquiries into the issue and then give it their best shot. And the ones who are wrong will fail. And the ones who are right will succeed.

This is spot-on, and it’s a theme that I’ve blogged about in the past. One of the reasons I think that Matt’s point isn’t more obvious is that most industries are relatively homogenous, and so it’s hard to make an apples-to-apples comparison of different forms of industrial organization.

One of the things that makes the software industry industry interesting is that you have genuine institutional experimentation. You have 2-person startups toppling multi-billion-dollar firms. You have free software projects embarrassing proprietary software companies with budgets three orders of magnitude larger. You have venture capital firms investing tens of millions of dollars and angel investors investing tens of thousands. And so we get some real data on how efficient different forms of economic organization are. And it turns out that the centralized, bureacratics ones tend to be massively wasteful, relative to other ways of organizing software development.

Of course, software is special in part because their primary output is made of infinitely reproducible bits. You need a certain minimum of capital to start a car company or a bank. But still, it’s worth keeping in mind that the inefficiency of central planning isn’t limited to the government—the government just happens to be the largest bureaucracy with the least competition. But other organizations exhibit the same problems in proportion to their size and lack of competition. The larger an organization is, the more dysfunctional it’s likely to be and the harder it will be to reform. Which is one of the many reasons I hope Congress let’s GM collapse under its own weight.

November 23, 2008 | Comments |

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    It's important to remember that one of the key flaws in central planning is actually the inability to experiment with new forms of organization. The Soviet Union's economic bureaucracy was probably at least as risk averse as any American major corporation, but the difference is that it had an official monopoly on economic resource allocation that no corporation has in the United States. As a result, the competition we have in the software industry would have been literally impossible there unless someone managed to convince the right bureaucrat to give them access to funding and distribution for their product idea. So really, the problem with central planning isn't just inefficiency, but it's the fact that new forms of organization and utilization of capital may in fact be simply economically impossible because of the state's control over the allocation of capital.

    Personally, I'm hoping that GM will be given a chance to shed the unions after it goes into bankruptcy. My personal proposal would be for GM and Ford to split up into engineering firms and manufacturing firms, with the latter being liquidated and distributed between shareholders and union members.
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    Matt's post is terrific, as is your analysis of it, Tim.

    Unfortunately, Matt's point belies his and his friends' policy views on most topics. Myriad are the progressives, liberals, leftists -- or for that matter, even conservatives -- who profess a belief in markets, dynamism, and entrepreneurship...except, well, except in the case of health care...and maybe energy...and, oh yeah, education...and, I guess, retirement savings...and I probably have to throw in automobiles...and I suppose markets just don't work for finance, insurance, air travel, telecom, or the Internet either. And definitely not general labor markets. No, no, no. All these things are subject to dramatic and chronic market failure and are too important to be left to people and markets. But other than that, have at it!
 

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