Commenting on this post, Jaroslav Borovicka says:
Well, Samuelson simply uncritically took over data which were cooked up
by the Soviet statistical office (or, better, by the political
leadership). This data was of course dreamt up to the extreme, but you
see some pressures to "polish" GDP data in the western economies as
well – even today.
Of course, Samuelson himself now understands just how kooky were the data that he used to estimate Soviet growth rates. Here’s Samuelson writing in the February 2005 issue of the Economic Journal; it’s an obituary for Abram Bergson:
Abram Bergson was a realist par excellence. He applied generous reasoned discounts to the statistical growth claims of the Stalinist and post-Stalinist statisticians. And yet, after the dozen post-Gorbachev years of communist dissolution, the emerging evidence suggests to me — and I think to ‘Honest Abe’ as he was known at Harvard — that the Soviet system was even less productive in most sectors than the international almanacs had estimated. Why? Plain Machiavellian lying? No doubt there was some of that as all our experts did recognize.
More important, I suggest after much reflection, is the fact that what are called ‘prices’ in a controlled society have little true relationship to relative scarcities and technical trade-off costs. From copious non-meaningful statistical inputs will have to come quite non-meaningful statistical estimates. [P. F132]
Indeed. That’s pretty much what Mises and Hayek argued in the 1920s, ’30s, and ’40s: prices that don’t emerge from voluntary exchange of property rights aren’t really prices; they don’t incorporate and convey the information that must be acted upon by economic agents in order for lasting prosperity to be created. But not only will elimination of market pricing make statistical estimates of the performance of that economy meaningless, it will inevitably bring an economy to ruin. It’s not clear to me from Samuelson’s recent concession that socialist ‘prices’ make for poor statistics that he grasps the deeper point that real, market prices are necessary for economic prosperity.
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On the whole, I'm *very* sympathetic to the point made, with a single exception… when you say "market prices are *necessary* for economic prosperity", well, that's unproved, technically speaking.
If you have market prices, preferably free markets too, then economic prosperity follows. What is not proved is that there can be no other way to economic prosperity.
prices -> prosperity
prices
——————–
prosperity
But not…
prices -> prosperity
non-prices
——————–
non-prosperity
That's invalid.
So the claim can't be that prosperity is possible *if and only if* we have market prices.
Socialists still have the hypothetical alternatives of prosperous economics not based on prices, or for a theory of workable command prices.
Macroeconomists and international finance experts are increasingly concluding that China is also lying about their economic data just the way the USSR did. Their national income accounting arithmetic just doesn't add up.
>Socialists still have the hypothetical alternatives of prosperous economics not based on prices, or for a theory of workable command prices.
No they don't. They tried it for 75 years and it doesn't work. You cannot have economic calculation without market prices nor can you have prosperity without a workable system that includes prices and knowledge of supply and demand.
Economists battled this out in the 1930s (though many knew even before 1917) and the theories played out in the square until 1990. It is demonstrably clear who won.
"Macroeconomists and international finance experts are increasingly concluding that China is also lying about their economic data"
Surely this realization isn't recent? I can remember talking to China analysts based in Hong Kong during the "Asian flu" (around 1998). China's official statistics showed no decrease in growth at all, so analysts were looking at other measures such as electricity usage. They were pointing out that a large drop in power usage doesn't usually occur during the type of economic growth that China was reporting. China's response? They started rigging power consumption numbers too, and the analysts had to look for other measures that hadn't yet been 'coordinated'.
I'm surprised that there was even a debate about whether the Chinese Communist Party was rigging official statistics. This is a Party that imprisons people for releasing accurate statistics on health issues such as the AIDs or SARs trends. They've thrown journalists in jail for releasing 'state secrets' such as what a Party member with no official government position planned to say in a speech the following day. They still have a Soviet mindset in most areas related to power, even during their 'temporary' market phase (which they say may last 100 years but is only an early stage in the evolution to true communism).
In my 12th edition (1985), Samuelson & Nordhaus have an extended discussion of the Soviet economy that mentions casually that "prices are set to more or less clear the market" without a single word about the shortages that defined daily life. This was not a secret. I think Yakov Smirnov already had his routine based on that by that time.
In Soviet Russia goods and services purchase you!
Ann,
Nice points on China. Are they really staying true to Communism, with this just being a blip? Where did you read about this? Thx
I think even with regard to principles Samuelson fully understood, he had an astonishingly soft spot for the Soviet empire.
Consider the strength of Samuelson's association with the idea of revealed preference (Google "Samuelson revealed preference"). Would you expect that the man would be able to write (p. 881 of my tenth edition of _Economics_) the following (and only the following) to address the question of whether the subjects of the system were happy with it?
"It is a vulgar mistake to think that most people in Eastern Europe are miserable. Although it is undoubtedly true that few citizens of the West would trade their degree of economic comfort and political freedom for life in the Soviet, it is also true that a Soviet citizen thinks he is living in a paradise in comparison with life in China or in earlier times. Remember that life under the Czars was no bed of roses for most classes; and to the eye of the traveler from impoverished Asia and Africa, the rising degree of Russian affluence must seem impressive."
Of course, the passage is literally quite true: it was a statistical inevitability that there were a number of nonmiserable people among the millions in Eastern Europe. However, it's a bizarrely irrelevant thing to say about the question of attitudes: I doubt that any reasonably mainstream critic ever claimed that *everyone* in Eastern Europe was miserable. But how much misery was there? Even to ordinary folk, the use of walls, barbed wire, guns, dogs, and antipersonnel mines in order to hold people in is an interesting bit of evidence as to how common the miserable people were. Remarkable, then, that Professor Revealed Preference himself didn't deign to consider it.
It was proven by Mises and Hayek that economic calculation in the absence of prices is impossible. Even the socialists acknowledged this. Of course they turned around and said they'd just have pretend prices and that would work, thus missing the point completely.
But you don't even need the Mises/Hayek work to show that prosperity depends on market prices:
1. prosperity arises from production and exchange
2. on any significant scale, this requires markets
3. markets only function with prices
QED
Good point Noah. You can also use this line of reasoning (wordy but interesting):
1. The only way to determine a price is to balance the supply of a good against the demand for it, as the willingness of the buyers to purchase sets the price – any other setting of a price contains no information.
2. Without a price that contains information, it is impossible to choose between production of goods – both end user goods and input goods – on any scale above the scale whereby you can compare every good against every other good as often as any consumer's mind might change: eg every day. You won't have price information (eg relative costs) nor information about what is demanded or what is left for supply.
3. Without information about what is demanded and what relative costs are, an economy will necessarily stagnate. There will be no productive exchange, comparative advantage, efficient use of resources and choices will have to be made centrally. A decentralized structure that only is supported by central resources cannot function because they would ask for resources but not be able to compare costs or maximize profit. The only one that could possibly do that is one which could compare all information: a central body. Choices made centrally reqire planning which is also near impossible without prices – the central body must compare all resources, make choices and pass them on to lower units – and the struggle to efficiently run things from a central point means the system must be structured and orders must be given in a totalitarian manner, similar to a military unit.
CB -
The Chinese Communist Party isn't staying true to anything except its own quest for power. When Jiang Zemin announced, several years ago, that markets were needed in the early stages of communism and that the early stages might last 100 years or more, it was a face-saving measure. After all, their last few Five Year Plans haven't seemed to advance central planning, and yet they still officially say that they're communist.
But basically they'll do whatever they think will keep them in power. Right now, they think that the way is to lighten up economically but not politically. It remains to be seen whether this will work for long.
By the way, their official stand on North and South Korea is still that they hope to see them united under the control of Kim Jong Il.
Bill Newman –
Great point! Communist countries face the problem of too many wanting to leave, while the US faces the problem of too many wanting to enter. In terms of revealed preference, the ranking seems pretty clear.
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