Economics of Transition


The follow paper is a University upper 400 level term essay exam. This exam was written by me just 3 years ago and it's so shocking to see, while reading it now, how much has changed in America. I'm posting this exam because it is so incredibly relevant given the situation in America today with the bad economy, high unemployment and the massive printing of the dollar.

This paper also ties in with the paper I wrote from scratch regarding my childhood where I was born and raised in the Eastern Bloc which was the hardest of the hardline communists. The facts in this paper adds more factual color to the life events which I explained in painful detail in that particular paper.

Another important aspect of this paper is that each question explains in detail the various phases of how a government transitions from one form to another and how Economics is tied into the entire scheme. This is important to note as one reads the facts and try to use it as a backdrop or try and imagine by superimposing it over what we are going through right now here in the US. The reason is that I am, personally, starting to see some startling similarities emerge but I will not write what I'm seeing as I do not want to contaminate you, the reader, I want you to simply read the historic facts in the main body of this paper and see and come to you own conclusions as those self realizations are the ones which carry great convictions and lead to a strong opinion and desire to do something which brings about change. The good change, not the kind that is promised but never delivered or delivered not in any way as promised.

Another important reason for this paper is that most Americans today have forgotten what socialism or communism is and they don't recognize that some of the very politicians they vote for are in fact socialist, by their very admissions and/or actions, and unless you read up on what it is to be a communist, well, it seems most people have simply forgotten. This paper does a good job and not only explaining the theory which always sounded great and still does even today but it gives actual and factual events and a look at the economics of these oppressive regimes which always start out by taking away your rights and your property for your own good with the promise that everyone will be much better off so keep that in mind when you read the last part of the paper to see just how bad and inefficient an economy and an industry ran by a government, any government, can be - but especially so when a government is oppressive and corrupt in nature. People who forget the past are doomed to relive it and if we forget what communism is and the various aspects and flaws it has then we can be easily deceived by anyone if they should choose to repackage it and resell it back to us a few decades later under a different name.

One only has to peek inside and look to see that it's the same old failed system but under a different name and with a bigger, loftier goal in mind - the entire planet under one roof, under one regime, one currency, etc., and the economic term for this is - globalization, which doesn't sound all that bad and if you actually read up on it can have some pretty nice benefits for many other, in particular smaller poorer countries, but all of those benefits aren't free, someone has to pay for them and I'm all for trying to help my neighbor but I want to know what I'm getting into and I want to do it by my own free will which is why I try to stay up to date on the latest repackaging deals so I know what I'm signing up for when I do vote for a politician I know nothing about.

Because this was a classroom essay exam there are no citations but please feel free to Google any portion of this paper to verify anything which you may find questionable. This particular Economics class was taught at a very liberal University funded by very liberal state funds and taught by a very liberal professor so there is no bias or spin in the material which I learned in the lectures in this class which would favor an anti-communist bias or opinion. And knowing the professor was liberal I naturally tried my best to remain objective knowing, from experience, when it comes to essay exams a professor can grade you down excessively with no rational explanation simply because he doesn't agree with your point of view. For these reasons I think any reasonable person will find it objective, factual, informative and without too much personal spin. Thank you for reading and I hope you find this both educational and entertaining.

Economics of Transition

Question 1.

Describe the political and economic philosophy underlying the attempts to create a new socialist society and economy? What were the moral justifications for a socialist revolution? What was the idea of man in the communist thinking?

The political and economic philosophy to create a new socialist society and economy were outlined and to a certain extent described in the Communist Manifesto (Manifest der Kommunistischen Partei) written earlier, in 1948, by Karl Marx and Friedrich Engels. Vladimir Ilyich Lenin, born Vladimir Ilyich Ulyanov, was the leader of the communist revolution in 1917, and sensed the time for an uprising was at hand. Germany, hoping a revolution would weaken its enemy, Russia, transported Lenin in a sealed train from Berlin, where he was living in exile, to Russia. Lenin was a politician by nature and was an excellent strategist. With his leadership the communist party’s revolt was a success and communism was born.

The socialist political philosophy states that elimination of social classes cannot come about through reforms or changes in government. Rather, a revolution will be required. The manifesto also states that this change – this revolution cannot be stopped, it is inevitable, and is referred to as “the march of history” which is driven by larger economic forces. The relationship between classes is defined by that era’s means of production. However, according to the manifesto, these relationships cease to be compatible with the developing forces of production which is when a revolution must take place a new ruling class emerges. The compatible means of production is better known as the working force. Communism believes that the ruling class will continue to exploit the working class worse and worse until the working class can longer take it. This exploitation was more and more evident prior to 1917 as Russia started becoming industrialized. People were forced to work very specific shifts, long hours, for very low pay and under horrible working condition, and due to the high unemployment the ruling class had all the leverage. The poor became poorer while the rich got richer – this type of injustice fueled people’s anger toward the ruling class who began to see hope and change in the promises made by communism.

This incompatibility and greed by the ruling class is why Marx and Engels believed that Capitalism could never survive. Driven by greed capitalism would lead to monopolies which in turn would only make things worse for the citizens – as monopolies raised their prices on goods and services while lowering wages, leading to oppression and then to communism by way of revolution. The economic philosophy was not as involved, although, Marx was an economist. The basic belief was that with everybody being equal and all means of production belonging to the people; nobody would ever go hungry or not have a job. The Karl Marx slogan embodying this idea was: “From each according to his ability, to each according to his need. “ But for this theory to work, for communism to take hold, the means of production after the revolution could not simply be handed over to a new ruling class which would then, like its predecessor, be greedy and use the means of production to further enrich itself while exploiting the people. Per the manifesto, true communism required state ownership of all means of production, including land. No firm or individual was allowed to own any means of production. In this manner, the government would be able to allocate resources, jobs, agricultural land, living space, etc., to everyone, as needed. On the labor side of socialist economics, everybody able to work had to work, although, per Marx, it should not be alienated work. One question that pops in my mind is, if nobody was required to do alienated work, who then did that type of work? Marx argued that the need to work did not constitute in itself a restriction of freedom (provided it was not alienated work).

Because Marx believed all stages of society were inevitable, (the march of history) the moral justification for a social revolution was that communism was bound to happen regardless of what anybody did, but this way, through a revolution, the process is expedited and a classless society is more quickly achieved where everybody is equal and less people suffer. Lenin, the first leader of communism, fully believed in the teachings of Karl Marx and Engels, however; Lenin, knowing that the next stage of society should have been capitalism, thought it was best to completely skip over that stage and go straight to communism.

There is some dispute in regard to the idea of man in the communist thinking. Some scholars say that Marx changed his view from his earlier writings compared to when he was older and some suggest that Marx was a humanist who cared very much for the individual while Soviet Communism failed to put his views of man into practice. In reality, real world practice however, it is clear that the idea of man in communist thinking was that man’s individuality was not important and thus had little value. The focus was on the community rather than on the individual. In the communist system, man was the servant of the state and of production, rather than being the ultimate goal of all social arrangements. So in the end, man simply went from serving the rich ruling class to serving the oppressive government which itself was rich and ruled with an iron fist.

Question 2.

The Economy of Soviet Union can be looked at as one huge enterprise. Describe the main organizational task to run this or any enterprise. What are the similarities with and differences to a “normal” enterprise in a market economy? Why may this comparison be misguided after all?

I think the main organizational task to run any huge enterprise is supply and logistics or allocating resources (materials, parts, finished goods and labor) through a well-developed and efficient pipeline.

This was at the center of the soviet economic machine which is why their economy was also called a “planned economy”. Because there was no market economy and no supply and demand to dictate both prices and volume for all the various inputs the communist party had to develop a system which would allow their economy to function much like that of a market economy. But in order for this to work they had to artificially create things which were missing due to their economy not being a market economy. Things like prices. It was difficult to know what the price of steel should be when nobody was bidding on it, or the price of energy given the ample supply in Russia. Prices were one of the biggest differences between a planned economy and a market economy and the Soviet Union did its best to implement prices which worked, at least on the surface. The reason for this and why comparisons between planned economies and market economies are often misguided is that in a planned economy a firm or an industry can appear to be very profitable, but once you take a closer look at realize that many of its inputs are subsidized or their prices are far below market price you quickly realize that if those firms were to raise the price of inputs to market level their profits would evaporate and in some cases their firm or industry may actually prove to be a negative on their country’s GDP.

This is what happened to some firms when the Soviet Union corrected some input prices, mainly energy prices. Since the Soviet Union had such ample supplies of energy firms had access to all the energy they wanted and so developed industries which were very energy intensive, like the production of steel. Labor is another input which cannot be easily seen and compared to a normal economy. In the Soviet Union, especially under the rule of Stalin, millions of Soviet citizens were sent to work camps where they often worked for nothing and where many died. This massive amount of free labor can make an otherwise failing firm or industries look like a huge, profitable success. In a normal economy, labor is one of your major costs, a cost which can easily be found on your financial statements. In the Soviet planned economy each firm had a director and all of these firms were ran by and were supplied all of their inputs by a central organization. The Soviets manufactured approximately 2,000 products and many of these products shared some of the inputs which really complicated things. The flow of inputs and outputs was not linear, but rather circular. The final consumption, (Y), was a given and was always known. What wasn’t always known were the intermediate goods (X1, X2, X3, etc.) from other firms and industries. The central planning office had three ways of obtaining these inputs: through production, inventory and importing. Through careful planning and communicating to each director of each firm a plan was made every year to obtain and distribute the necessary inputs necessary for next year’s production. Another issue was that directors often lied about their own inventories as they wanted a layer of cushion and they also lied about their projections fearing severe penalties if they overpromised and under delivered.

For this reason an incentive program was set in place which somewhat helped these directors give more accurate projections but in the end not much changed. This system worked well for many years, and contrary to some western predictions, did not cause the economy to collapse from inefficient planning. This type of planning is similar to market economies where large corporations allocate thousands of employees and resources to planning, projecting and distributing inputs. These corporations also have incentives in place to entice their managers to be honest about production and to give them the incentive to produce as much as possible. Another big difference in a free market economy is that a high ranking manager does not have to fear for his life if he does not reach his target so it is much easier to be honest. Also, in a market economy, many corporations are public companies so one can easily go through their financial statements and find the costs of all of their inputs. This transparency was never available in the Soviet Union which can itself lead to corruption and manipulation of financial data.

Question 3.

How would you explain this phenomenon? Why doesn’t anyone produce spare parts? What are the impacts of a shortage of spare parts on the system as a whole? What loopholes the firms/people found to deal with the problem? How might you change the incentives to produce more desirable outcomes?

This phenomenon is best explained by the poor incentive system in the Soviet Union. Firm Directors do not wish to surpass their projected goal as that will not look good for them. To magnify this problem, their stated goal was most likely a lowball figure in the first place – a figure so low that they knew they could reach with no problems. The reason for this is that missed goals in many cases resulted in very bad things happening to the director, even imprisonment, sentence in a work camp or even death. For this reason, directors had not incentive to set a high goal and definitely did not want to surpass that goal. Therefore, all of the parts produced were enough for the final product and any necessary intermediate product, or input, necessary for the production of similar products. There was little or no excess parts for the normal citizen to use in older products which they may have purchased.

Another issue is distribution. Even if you were to have extra parts – where would these be stored since there were no stores to speak of? Many factories made many different components but I don’t see how the Soviet Union, in a planned economy could effectively make all of these parts available throughout the entire country without first opening up some sort of distribution channel. I suppose the factories themselves could carry the spare parts but that in itself presents another issue.

A shortage of parts cripples the system as a whole as people with little money scramble to find ways to get spare parts or money for bribing a local repair shop which in turn will guarantee they will do the job well. Parts shortages, like the broken down tractors, slow down production, productivity and output while raising costs. I imagine that in many cases the product that was broken down and needed repairs was something of utmost need, like a refrigerator. Since there were no stores to buy a refrigerator from and ordering one from the state took many months a family in desperate need to get their refrigerator fixed did whatever it took. Citizens adapted and became very good at stealing parts from others or preferably the factory (seen as the state) or they bribed a local repair shop who in turn found ways, usually stealing or bribing someone at the factory, to get the refrigerator fixed. It was like this for all of the products made in the Soviet Union and actually the entire Eastern Bloc. Honest people had to learn to quickly adapt and they had to learn to bribe and steal or else they would suffer.

This type of system punished the average citizen while teaching them to break the law in order to adapt while rewarding the people responsible for this shortage in the first place, the Directors and the firms. Directors always made sure their firms had an ample supply of parts and finished products as a buffer in case they ever came short of their projected goal. Directors and Firms found this loophole and I have no doubt that they sold part of their inventory via bribes, thus enriching themselves at the cost of the poor population. This was yet another incentive for the Directors to make sure excess parts were never produced. Given that the party never knew of their excess (buffer) inventory, all “sales” or bribes taken for parts or products were a cash sale and was a pure profit to those working for the firm and taking the bribes.

I would change the incentives so that Directors giving aggressive, honest projections would be rewarded, upon reaching those goals. I would also create an audit system to fight bribery and corruption, thus taking away any incentive a director may have to underperform while selling excess inventory for personal gain. These auditors would visit every firm and take inventory so that the books would accurately reflect what parts are available. Then every firm and director would have to answer for missing parts for which the state had received no revenues. With less corruption, Directors would have less incentive to lie about their production numbers.

- Maximilian Wilhelm

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