8 ms·

The inevitable failure happened not because of particular details that the central planners disregarded, but because there WERE planners in the first place. The

by iwr 16y ago

The inevitable failure happened not because of particular details that the central planners disregarded, but because there WERE planners in the first place. The market has a network-optimality aspect to it that a monolithic institution cannot replicate. Read more: http://en.wikipedia.org/wiki/Economic_calculation_problem http://en.wikipedia.org/wiki/Economic_calculation_problem

tvorryn 16y ago
I agree with you there, because of the inefficiencies of the system they were in, they were bound to make a fatal mistake. Once they had, these two problems made the collapse inevitable, no matter what Garbachov or the counter revolutionaries did. I find the inevitability of the fall very interesting. Reminds me a little of Hari Seldon's psychohistory from his Foundation Series. http://en.wikipedia.org/wiki/Foundation_series http://en.wikipedia.org/wiki/Foundation_series
arethuza 16y ago
One thing I've wondered about is that when viewed from the inside, large organizations look like centrally planned economies - capital is allocated centrally and there is often quite strong command and control structures. So why do large companies manage to run centrally planned systems whereas centrally planned states seemed doomed to fail?
- coryrc 16y ago
  Because they do, indeed, fail quite often. Examples abound in the last economic downturn.
- cstross 16y ago
  Part of the mythology of western capitalism (as it is practiced) is that it's 100% market based. But as you've noticed, it's actually a whole bunch of centrally planned hierarchical petty dictatorships bumping and grinding like boulders in a sea of small businesses like sand grains. Sometimes one of the small businesses will swell up and become a boulder, and sometimes a boulder will crumble. The main advantages of the market seems to be that failure is usually localized and containable -- although we came frighteningly close to a widespread meltdown in 2008 -- and, arguably, markets are better at promoting information flow and responding to new demands (although I suspect the growth of IP law and the existence of trade secrets counteract this to some extent). But it's worth noting that the mean life expectancy of a publicly quoted corporation is around 30 years -- and the USSR made it through just over seven decades.
  - iwr 16y ago
    The difference is that companies are voluntary associations of individuals. A government is a monopoly of force and justice; it can exert its authority even on those that have not explicitly (via a free contract) agreed to it.
    - cstross 16y ago
      Today that may be so; but prior to 1914 it was possible to move around anywhere in Europe (including the UK -- excluding the Russian Empire) without a passport or identity documents, and pretty much legal to settle anywhere. While the cost and difficulty of moving back then was greater than it is today, states had very porous borders and it was practical to vote with your feet (as in fact my grandparents did). The first world war put an end to the old order and made nationality non-discretionary -- and we're still dealing with the fallout today (as witness the permanent floating founder visas thread on HN).
      - arethuza 16y ago
        I remember that from the start of Niall Ferguson's The War of the World - in 1913 the world looked quite a bit like it does today (at least from a "globalization" perspective).
    - JabavuAdams 16y ago
      Free contracts are a fiction. Everyone has obligations that tend to reduce their freedom. The ones who think they don't are called psychopaths. In personal development, an early stage is to understand that you can be independent. E.g. you can choose how to act and how to react to the outside world. A higher level of development is to realize that we're inter-dependent. No man is an island. There will always be constraints on our options. I don't like it, but I'm getting used to it. There is no absolute freedom, and there are no truly free contracts.
  - berntb 16y ago
    Creative destruction, as in the Austrian school, should be a major factor. Think evolution of organizations, economically inefficient ones die. People learn (in the Lamarckian way, too) what works best at the present time. Also... To quote an argument from your blog, there are many tens of millions of people needed to keep our civilization working efficiently (some specialized jobs might only have a few dozen practitioners, according to you). And to keep up with research and new methods, in every decade a large percentage of all those jobs will be totally different. Centrally planned system just can't touch that -- they can't even avoid traffic jams with a few million cars! (And those cars aren't [yet] genetically and culturally programmed to optimize their behavior individually and in groups.. and change a lot culturally every generation.) Own petard, etc. :-) Edit: A bit clearer, hopefully. Non-native language.
- iwr 16y ago
  That may be the reason that large organizations are difficult to maintain. How many of the Fortune 500 companies today were still there 4 years ago? As an organization grows, it requires people in support structures that are less linked to the ultimate bottom line. Ludwig von Mises proposed the idea that an organization requires a level of bureaucracy, in the absence of market signals. So to the extent that an employee is removed from from the direct market operations of the company, a bureaucracy is required. Now, the reason companies don't outsource all their work to bidding contractors is that there is some value in holding resources in reserve. A bid-contractor is only as good as the next assignment, he may leave for another company when you need him the most. The solution is to have a contract where the particular individual will reserve his time and energy to one company (a.k.a. an employee). The employee will be effectively "slacking off", but will be on call for when his resources are needed.
- forgottenpaswrd 16y ago
  That is because they are, but in my country 99% of the business number and 70% of the economy are small and medium companies. When MS wants to make kinect or Apple wants to add sound recognition to the Iphone they buy it from small companies. GM should have collapsed, all the megabanks and companies that were too big to fail show us how central planning works without control. Some things need central planning(mass production), communism is state capitalism with only one megacompany. That is a supermonopoly. I have friends that were in communist Russia, if you made -talked something that upset some member of the party(they were God), depending on the offense, you, your sister, your son won't be able to work anywhere(there is only one company after all). Nothing else was needed to control every one.
- cubix 16y ago
  The command structure may be there, but not the element of control. An employee is free to resign if he would prefer to work for someone else. He can't be sent to a gulag. Customers aren't forced to accept a company's product or service, and can choose a competitor instead. Managers can fire incompetent or insubordinate workers. Customers can criticize a product without fear of being shot. Customer, manager, employee, investor -- everyone is in the situation voluntarily, so they must negotiate on the basis of mutual self-interest. The company as an entity is more stable because its constituents aren't essentially at war with one another.
  - Daishiman 16y ago
    Unless the market conditions are such that workers cannot move from one place of employment to the other due to collusion between capitalists or if the economy is such that it's impossible to switch jobs. Let's be honest, job mobility even in market economies is a difficult affair for everyone but highly qualified professionals. The fact that IT workers can get a new job in a month is not indicative of the economy at large.
- Symmetry 16y ago
  First, they do often fail and are replaced by new companies where sclerosis hasn't set in yet. Second, even huge megacorps are tiny compared to countries. Microsoft is about the same population as Antigua and Barbuda, and if Antigua and Barbuda tried to go the Soviet state controlled economy route I predict that they would be much more successful at it than the Soviets were because its much easier to govern a smaller country.
- JabavuAdams 16y ago
  Because a single large companies can fail, without destroying society. Imagine if the company was all of society. What I'm more interested in is this idea of democracy (inefficent, but least of a number of evils) vs. enlightened dictatorship (efficient, sucks if your priorities are different from leader's). Small is beautiful in part because you don't need to convince a lot of people with disparate motivations to do something. The same pattern arises in startup vs. bigco, and visionary CEO vs. design by committee.
  - arethuza 16y ago
    Recent history suggests that this isn't true - the "too big to fail" banks.
- gamble 16y ago
  The answer is that most large companies aren't run like centrally-planned economies. Executives may imagine themselves as generals at the head of an obedient army, but they are in reality deeply dependent on the actions of middle managers and employees. In fact, real generals are just as reliant on independent decisions of their officers and troops. Successful executives (and generals) are the ones who learn to balance top-down and bottom-up decision-making. The largest companies are perpetually engaged in a game of consolidation and reorganization into more independent entities.
cstross 16y ago
Ah, no. The planners were fully aware of the economic calculation problem and tried to make an end run around it by building a networked real-time system for matching supply and demand (from their perspective, markets are "lossy" information transfer mechanisms that permit local inefficiencies, such as failing companies). However, they failed because of systematic falsehoods being injected into the system by managers -- who were afraid to tell the truth (in the wake of Stalin's terror). This is covered by Francis Spufford's book, "Red Plenty". Review here: http://www.guardian.co.uk/books/2010/aug/08/red-plenty-francis-spufford http://www.guardian.co.uk/books/2010/aug/08/red-plenty-franc...
- miked 16y ago
  However, they failed because of systematic falsehoods being injected into the system by managers -- who were afraid to tell the truth... Hedrick Smith gives many examples of this kind of lying in his book _The Russians_. While that's certainly part of the problem, I think you're missing the deeper issue that the parent is pointing to: the amount of bandwidth necessary to do efficient economic calculation is far greater than what can be done by a committee of nomemklatura and their computers. They simply don't have the fine level of data detail and massively parallel computing power that a distributed economy provides.
  - JoachimSchipper 16y ago
    I know this is a popular point of view, but: [citation needed].
    - drats 16y ago
      Naked Economics[1] is a good basic introduction. Hayek's Road to Serfdom[2] is also a key text if you want a historically embedded one. An interesting point about it is that Orwell reviewed it, with qualified praise, shortly before writing 1984. Like 1984 it is wider in its scope (i.e. even if you had the bandwidth and the models, how do you stop the people running them from becoming corrupt?). Finally "From Marx to Mises: Post-capitalist society and the challenge of economic calculation"[3] has a very comprehensive review of many aspects of the debate. [1]http://www.amazon.com/Naked-Economics-Undressing-Science-Revised/dp/0393337642/ref=sr_1_1?ie=UTF8&qid=1290188339&sr=8-1 http://www.amazon.com/Naked-Economics-Undressing-Science-Rev... [2]http://www.amazon.com/Road-Serfdom-Documents---Definitive-Collected/dp/0226320553/ref=sr_1_1?s=books&ie=UTF8&qid=1290188592&sr=1-1 http://www.amazon.com/Road-Serfdom-Documents---Definitive-Co... [3]http://www.amazon.com/Marx-Mises-Capitalist-Challenge-Calculation/dp/0875484492/ref=sr_1_1?ie=UTF8&s=books&qid=1290188616&sr=1-1 http://www.amazon.com/Marx-Mises-Capitalist-Challenge-Calcul...

by iwr 16y ago

tvorryn 16y ago

I agree with you there, because of the inefficiencies of the system they were in, they were bound to make a fatal mistake. Once they had, these two problems made the collapse inevitable, no matter what Garbachov or the counter revolutionaries did. I find the inevitability of the fall very interesting. Reminds me a little of Hari Seldon's psychohistory from his Foundation Series. http://en.wikipedia.org/wiki/Foundation_series http://en.wikipedia.org/wiki/Foundation_series

arethuza 16y ago

One thing I've wondered about is that when viewed from the inside, large organizations look like centrally planned economies - capital is allocated centrally and there is often quite strong command and control structures. So why do large companies manage to run centrally planned systems whereas centrally planned states seemed doomed to fail?

coryrc 16y ago
Because they do, indeed, fail quite often. Examples abound in the last economic downturn.
cstross 16y ago
Part of the mythology of western capitalism (as it is practiced) is that it's 100% market based. But as you've noticed, it's actually a whole bunch of centrally planned hierarchical petty dictatorships bumping and grinding like boulders in a sea of small businesses like sand grains. Sometimes one of the small businesses will swell up and become a boulder, and sometimes a boulder will crumble. The main advantages of the market seems to be that failure is usually localized and containable -- although we came frighteningly close to a widespread meltdown in 2008 -- and, arguably, markets are better at promoting information flow and responding to new demands (although I suspect the growth of IP law and the existence of trade secrets counteract this to some extent). But it's worth noting that the mean life expectancy of a publicly quoted corporation is around 30 years -- and the USSR made it through just over seven decades.
- iwr 16y ago
  The difference is that companies are voluntary associations of individuals. A government is a monopoly of force and justice; it can exert its authority even on those that have not explicitly (via a free contract) agreed to it.
  - cstross 16y ago
    Today that may be so; but prior to 1914 it was possible to move around anywhere in Europe (including the UK -- excluding the Russian Empire) without a passport or identity documents, and pretty much legal to settle anywhere. While the cost and difficulty of moving back then was greater than it is today, states had very porous borders and it was practical to vote with your feet (as in fact my grandparents did). The first world war put an end to the old order and made nationality non-discretionary -- and we're still dealing with the fallout today (as witness the permanent floating founder visas thread on HN).
    - arethuza 16y ago
      I remember that from the start of Niall Ferguson's The War of the World - in 1913 the world looked quite a bit like it does today (at least from a "globalization" perspective).
  - JabavuAdams 16y ago
    Free contracts are a fiction. Everyone has obligations that tend to reduce their freedom. The ones who think they don't are called psychopaths. In personal development, an early stage is to understand that you can be independent. E.g. you can choose how to act and how to react to the outside world. A higher level of development is to realize that we're inter-dependent. No man is an island. There will always be constraints on our options. I don't like it, but I'm getting used to it. There is no absolute freedom, and there are no truly free contracts.
- berntb 16y ago
  Creative destruction, as in the Austrian school, should be a major factor. Think evolution of organizations, economically inefficient ones die. People learn (in the Lamarckian way, too) what works best at the present time. Also... To quote an argument from your blog, there are many tens of millions of people needed to keep our civilization working efficiently (some specialized jobs might only have a few dozen practitioners, according to you). And to keep up with research and new methods, in every decade a large percentage of all those jobs will be totally different. Centrally planned system just can't touch that -- they can't even avoid traffic jams with a few million cars! (And those cars aren't [yet] genetically and culturally programmed to optimize their behavior individually and in groups.. and change a lot culturally every generation.) Own petard, etc. :-) Edit: A bit clearer, hopefully. Non-native language.
iwr 16y ago
That may be the reason that large organizations are difficult to maintain. How many of the Fortune 500 companies today were still there 4 years ago? As an organization grows, it requires people in support structures that are less linked to the ultimate bottom line. Ludwig von Mises proposed the idea that an organization requires a level of bureaucracy, in the absence of market signals. So to the extent that an employee is removed from from the direct market operations of the company, a bureaucracy is required. Now, the reason companies don't outsource all their work to bidding contractors is that there is some value in holding resources in reserve. A bid-contractor is only as good as the next assignment, he may leave for another company when you need him the most. The solution is to have a contract where the particular individual will reserve his time and energy to one company (a.k.a. an employee). The employee will be effectively "slacking off", but will be on call for when his resources are needed.
forgottenpaswrd 16y ago
That is because they are, but in my country 99% of the business number and 70% of the economy are small and medium companies. When MS wants to make kinect or Apple wants to add sound recognition to the Iphone they buy it from small companies. GM should have collapsed, all the megabanks and companies that were too big to fail show us how central planning works without control. Some things need central planning(mass production), communism is state capitalism with only one megacompany. That is a supermonopoly. I have friends that were in communist Russia, if you made -talked something that upset some member of the party(they were God), depending on the offense, you, your sister, your son won't be able to work anywhere(there is only one company after all). Nothing else was needed to control every one.
cubix 16y ago
The command structure may be there, but not the element of control. An employee is free to resign if he would prefer to work for someone else. He can't be sent to a gulag. Customers aren't forced to accept a company's product or service, and can choose a competitor instead. Managers can fire incompetent or insubordinate workers. Customers can criticize a product without fear of being shot. Customer, manager, employee, investor -- everyone is in the situation voluntarily, so they must negotiate on the basis of mutual self-interest. The company as an entity is more stable because its constituents aren't essentially at war with one another.
- Daishiman 16y ago
  Unless the market conditions are such that workers cannot move from one place of employment to the other due to collusion between capitalists or if the economy is such that it's impossible to switch jobs. Let's be honest, job mobility even in market economies is a difficult affair for everyone but highly qualified professionals. The fact that IT workers can get a new job in a month is not indicative of the economy at large.
Symmetry 16y ago
First, they do often fail and are replaced by new companies where sclerosis hasn't set in yet. Second, even huge megacorps are tiny compared to countries. Microsoft is about the same population as Antigua and Barbuda, and if Antigua and Barbuda tried to go the Soviet state controlled economy route I predict that they would be much more successful at it than the Soviets were because its much easier to govern a smaller country.
JabavuAdams 16y ago
Because a single large companies can fail, without destroying society. Imagine if the company was all of society. What I'm more interested in is this idea of democracy (inefficent, but least of a number of evils) vs. enlightened dictatorship (efficient, sucks if your priorities are different from leader's). Small is beautiful in part because you don't need to convince a lot of people with disparate motivations to do something. The same pattern arises in startup vs. bigco, and visionary CEO vs. design by committee.
- arethuza 16y ago
  Recent history suggests that this isn't true - the "too big to fail" banks.
gamble 16y ago
The answer is that most large companies aren't run like centrally-planned economies. Executives may imagine themselves as generals at the head of an obedient army, but they are in reality deeply dependent on the actions of middle managers and employees. In fact, real generals are just as reliant on independent decisions of their officers and troops. Successful executives (and generals) are the ones who learn to balance top-down and bottom-up decision-making. The largest companies are perpetually engaged in a game of consolidation and reorganization into more independent entities.

cstross 16y ago

Ah, no. The planners were fully aware of the economic calculation problem and tried to make an end run around it by building a networked real-time system for matching supply and demand (from their perspective, markets are "lossy" information transfer mechanisms that permit local inefficiencies, such as failing companies). However, they failed because of systematic falsehoods being injected into the system by managers -- who were afraid to tell the truth (in the wake of Stalin's terror). This is covered by Francis Spufford's book, "Red Plenty". Review here: http://www.guardian.co.uk/books/2010/aug/08/red-plenty-francis-spufford http://www.guardian.co.uk/books/2010/aug/08/red-plenty-franc...

miked 16y ago
However, they failed because of systematic falsehoods being injected into the system by managers -- who were afraid to tell the truth... Hedrick Smith gives many examples of this kind of lying in his book _The Russians_. While that's certainly part of the problem, I think you're missing the deeper issue that the parent is pointing to: the amount of bandwidth necessary to do efficient economic calculation is far greater than what can be done by a committee of nomemklatura and their computers. They simply don't have the fine level of data detail and massively parallel computing power that a distributed economy provides.
- JoachimSchipper 16y ago
  I know this is a popular point of view, but: [citation needed].
  - drats 16y ago
    Naked Economics[1] is a good basic introduction. Hayek's Road to Serfdom[2] is also a key text if you want a historically embedded one. An interesting point about it is that Orwell reviewed it, with qualified praise, shortly before writing 1984. Like 1984 it is wider in its scope (i.e. even if you had the bandwidth and the models, how do you stop the people running them from becoming corrupt?). Finally "From Marx to Mises: Post-capitalist society and the challenge of economic calculation"[3] has a very comprehensive review of many aspects of the debate. [1]http://www.amazon.com/Naked-Economics-Undressing-Science-Revised/dp/0393337642/ref=sr_1_1?ie=UTF8&qid=1290188339&sr=8-1 http://www.amazon.com/Naked-Economics-Undressing-Science-Rev... [2]http://www.amazon.com/Road-Serfdom-Documents---Definitive-Collected/dp/0226320553/ref=sr_1_1?s=books&ie=UTF8&qid=1290188592&sr=1-1 http://www.amazon.com/Road-Serfdom-Documents---Definitive-Co... [3]http://www.amazon.com/Marx-Mises-Capitalist-Challenge-Calculation/dp/0875484492/ref=sr_1_1?ie=UTF8&s=books&qid=1290188616&sr=1-1 http://www.amazon.com/Marx-Mises-Capitalist-Challenge-Calcul...