One of the favorite memes of the liberasts, which supposedly explains how greed and egoism of each individual capitalist leads to social prosperity, is the invisible hand. Usually it is interpreted this way - capitalism works in such a magical way, that if everybody does only what benefits himself and shits on everybody else, then through mechanisms of competition and other market sorcery society will keep advancing towards a better future. Therefore from the point of view of a radical “free-marketeer” a la Ayn Rand, everything that’s pro-market is good and everything anti-market is bad, because it only gets in the way of the hand. But the problem isn’t that the hand doesn’t exist, and not that free market is impossible, it’s that the hand can lead the market to a place where you might not want to end up.
ADAM SMITH IS DEAD, BUT HIS HAND KEEPS ON LIVING
The theory was created at times when every commercial activity was highly regulated and demanded special permits. Before the 19th century virtually nowhere except Britain could someone simply start manufacturing or selling anything. First you had to join an appropriate guild or corporation. Second, all manufacturing, trade and hiring were subject to the municipal laws and regulations, which also established fair prices in accordance with local standards of living. It was almost impossible for town folk to buy land in the country in lawful ways. The kings considered it their obligation in accordance with the ideals of enlightenment and mercantilism, to either educate their silly subjects on how and what to manufacture, or simply sold monopolies and privileges. So more than often everything ended up being either too complicated or too shady.
The contradiction between business and medieval mentality became especially acute, when factories, usually built outside of towns, began to produce unreal for those times amounts of commodities, even though of mediocre quality, but cheap. It got even crazier when the factories matured enough to begin producing commodities of higher quality than guild masters thanks to specialization of workers and quality control.
In this environment a humble Scottish professor Adam Smith published in 1776 his “Inquiry into the Nature and Causes of the Wealth of Nations”, where he raised a revolutionary idea: everybody should be able to manufacture, buy and sell everything at a price he considered fair. Then there will be more commodities on the market, the prices will go down, tax revenues will go up, and the state will become richer. Businessmen appreciated the idea, the book was published five times in England in Smith’s time already, and also once in France and Germany, which for the 18th century is comparable to the success of Harry Potters and Twilights combined.
Smith’s ideas were progressive and adequate for his time. Naturally, they found their practical implementation at the end of the 18th - beginning of the 19th century, when Watt’s and Hargreaves’ machines made well-kept sophisticated secrets of old-school masters obsolete, and the French revolutionaries demonstrated to the world the power of a new witchcraft called capitalism. In a situation, where any merchant or lawyer could easily buy himself some cheap raw material and basic equipment and hire a few peasants from the near-by village, Smith’s ideas really led to easily accomplishable success. But as always, every good idea sooner or later clashed with cold brutal reality - almost immediately the overproduction crises began to happen, in 1825, in 1837, in 1847. The last one awoke some serious revolutionary activity in Europe. And Marx.
“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing It.”
Adam Smith. The Theory of Moral Sentiments, 1759
It is somewhat ironic that a man considered by liberals as a poet of egoism, wrote the aforementioned book on morality. And in it in plain words he reproached blind worship of wealth, and acknowledged that rich people often get tormented by guilt. It means that his “invisible hand” theory was written with moral people in mind, but as always nobody gives a fuck.
HOW IT IS SUPPOSED TO WORK
“Three loonies are trying to sleep in the same bed, but it's cramped. So one finally gives up, takes his pillow and lies on the floor. The other one raises his head and says: ‘Hey, come back, there’s room here now.”
A commodity must be sold by a large number of independent sellers, unassociated with each other. There should also be a lot of buyers, otherwise they will start dictating the price. Then none single seller or buyer can dictate his will to his counteragent - a strong magic called competition emerges.
Any seller, whose commodity doesn’t satisfy the buyers’ demands, will be left without buyers, forcing him to lower his price or raise quality. If a certain commodity shows high demand its price goes up, and every manufacturer starts producing it like crazy, forcing the price down. In the end the buyer’s desire to buy cheaper and the seller’s desire to sell at a higher price lead, albeit egotistically, to a common advantage. Everybody prospers, and there’s no need to stick your dirty moralizing fingers into the works.
In its free form the market functioned (although not without bugs) until about the end of the 19th century. Then, on one hand, thanks to the economic crises the monopolization spiked, and on the other hand, scared shitless by Marx and schooled by Keynes western bourgeoisie realized that in modern conditions archaic market without government regulation can result in a little riot or even not so little revolution. Maximum workday hours were limited, private capital taxes were raised and social welfare was increased. The free market finally and irreversibly died during the Great Depression. Of course it is impossible to explain it to a liberast. They believe in the street magic of free market the same way the commies believe in the immortality of Marxism-Leninism. The “invisible hand” is so appealing to the couch liberast-marketeers because the driving force behind the progress becomes greed - a basic human quality, which means that there’s no need to do anything or struggle with anything, shit will fix itself naturally.
HOUSTON, WE HAVE A PROBLEM
And the biggest one is that the invisible hand is a spherical horse in a vacuum, with all the consequences. Economy is such a complex system that it becomes virtually impossible to describe its behavior. It is by no means a pseudoscience like astrology, but still there’s a big problem with prediction capabilities of its models. Nerds keep making up new ones every year, get Nobel prizes, even try gluing chaos theory to them, but still can’t predict when the next crisis will hit, and how deep in shit we will find ourselves. At least they can tell there’s one coming, that counts as something. On top of that in economics peacefully coexist contradictory models, for example classical and keynesian aggregate supply curves are strictly perpendicular.
Another problem is the IH was designed for a specific time and place - the era of Industrial revolution in Britain, which was already introduced to capitalism in the 17th century, and the American revolutionary war. Smith could only describe and explain the things he saw, so it would be weird to blame him for not taking into account monopolies and globalization, there simply weren’t ones at the time. Which leads to the obvious conclusion: the problems that revealed themselves later aren’t the result of Smith missing something or because IH is bullshit, but because society is constantly changing, and there's no point blazing him for not considering the economic impact of overproduction crises, consumerism, MNCs and all the other interesting stuff that appeared much much later. That of course doesn't excuse dumb laymen and manipulative liberasts who try to fix 21st century economy based on two-hunder-year-old models.
Besides the sheer complexity of the system, which itself eliminates any positive outcome of a free-market economy, there are other market-specific problems to consider.
There’s been developed a shitton of theories trying to explain the genesis of crises and their mitigation mechanisms in economics in general and overproduction specifically, and there’s not one of them that can fully explain everything - too many variables to consider. The most plausible explanation to this day was given by grandpa Marx.
It is actually quite simple and results from the effect of scaling - the more items of a certain commodity are produced, the less the cost of production of each single item becomes. It makes it more cost-effective to increase the production volume, sometimes even at a cost of slight price decrease. But the competitors, bunch of fucking asshole that they are, start doing the same and as a result not all of the produce gets sold. At some point the profits end, forcing you to turn off the lights and kick the proletariat to the curb. Now the proletariat is left with no money to spend on commodities. Oh, sh--! You have to cut the production even more, but the creditors want their investments back. Plenty of produce, no buyers, you starve to death next to a full fridge. So who gives a fuck about your greedy ass anyway, right? Well, here’s where a domino effect kicks in: with your successful demise all your suppliers soon begin to follow. Marx described all that in the second half of the 19th century, but the most epic overproduction crisis ever happened half a century later in 1929. Nevertheless, the Great Depression being the largest overproduction crisis also became the last one in its classic manifestation, even though the crises didn’t stop after that and regularly continue to happen to this day.
Capital mobility led to another type of crisis - financial. Something somewhere starts giving high return on investment. Money starts flying there like flies to shit. But money doesn't have brains (even though it has heads printed on it), so they fly there in accordance with the wills of investors. The invisible hand tries to explain them with gestures, that at some point the yield will drop to some average value and stabilize there. But the investors don’t know what that value is, all they see is the rate of its growth. The faster it grows, the more money flows if, the more money flows in, the faster it grows. The equilibrium is successfully missed.
Something is not right here, but the invisible hand explains again - it’s all good, the market will slide back a bit and stabilize. And really, all this back-and-forth creates some confusion and chaos, aka volatility, but seems to work. Stock traders see it multiple times a day. The trouble begins when the investors suddenly realize that they’ve been duped and either the market’s potential is substantially lower or something has changed in the world. A panic sets in, money flees the market, like those same flies from dichlorvos. And the faster it flees the faster the market drops, and the faster the market drops, well, you get the idea. The market collapses into singularity, and again to hell with it, but suddenly turns out that there are other markets that are correlated to it. The crisis spreads, grows, consumes other markets, countries, continents like the black plague in the 14th century. It will eventually stop, just like the plague. The recent examples are the dot-com bubble and the Great Recession, which started with a bubble inside the US mortgage market.
It is kind of funny that the problem of crises has been known since the middle of the 19th century, but in the entire history of the Nobel Prize in economics since 1969, it was only awarded for the research of crises exactly 0 times. Makes you think.
In order for the invisible hand to lead to common prosperity, the market has to be competitive. It means not only there has to be a lot of buyers, but also one buyer’s valet shouldn’t outweigh the wallets of everybody else combined, and the same goes for the sellers. When one seller holds a bigger half of the marker, the invisible hand turns into a very visible face.
The market becomes unstable: there are always those who do better and those who do worse. The former get more profit and increase production, the latter shrink and cry in the pillow. The number of manufacturers reduces, and even if a weaker competitor struggles and refuses to die, there are always other methods, like dumping. The price gets dropped below the floor, everybody suffers losses, but the stronger competitor survives and the weaker, doesn’t. In the end there will be only one. That’s what business shark means - he who ate all the small fish leaving him alone. Now the party begins, you can set any price you want, it maximizes the profit and covers all the losses due to demping, while the consumers have no other choice but to swallow. More than that, you can set a higher price for those who are able to pay more, and lower for those who aren’t. Price discrimination, maximum profit. The problem is that this kind of behavior of a monopolist reduces the total profit from economic activities, GDP and other economic growth indicators. In other words, some eat but don’t work, i.e. steal, like Luther said. That’s why monopolies are outlawed in every country. To buy out competition, even if the competitor himself is happy to sell, is a difficult bureaucratic procedure. And anti-dumping measures are often used by governments to stimulate domestic markets. Turns out the invisible hand doesn't work well without government oversight. Oh well.
But that’s not all. When there’s only a few sharks left, they can come to an agreement, form a cartel and set monopolistic prices. That is also against the law in civilized countries and is punished almost as hard as tax evasion. But you have to prove intent, and that’s not easy. It helps that the cartels don’t usually live long, one of the players gets greedy, increases the production and breaks the trust. But even without cartels, if a corporation controls a large enough market share it can affect the prices. That raises the question - what is “large enough market share” and how strong is the effect? The term “market power” gets introduced and is thoroughly studied on the subject of its genesis and how to live with it. Jean Tirole even got a Nobel prize in 2014 for analysis of market power and regulation of natural monopolies. Again with the fucking regulations!
Natural monopolies are a nightmare of all free-market advocates. And here’s why: certain economic sectors don’t really do well with competition in general. Pulling two separate cables into every house so that the consumer could choose which outlet to plug his vacuum cleaner into is not very cost effective. Pulling two parallel competing water lines - even dumber. Pulling two railroads… In these situations you have to tolerate monopolies, but to keep them in check, you have to do to their tariffs what? That’s right, regulate.
Or nationalize it altogether, transferring the entire sector into state’s ownership and keeping the profit margin close to zero or even less. But that opens entirely new prospects: since the management instead of the owners is now appointed officials, instead of the monopoly we get corruption, and it’s hard to tell which one is worse.
The first derivative of monopolization. If one country gets very good at building cars, then in an absolutely competitive market it will demolish the automotive industries of its neighbors, perhaps even by non-economical methods. For example, in the USSR medicine was cheaper than its production cost: it was considered inhumane to charge someone because he got sick. The idea was a man would pay back the cost of his treatment with labor when he gets better. After the dissolution of the USSR, the pharmaceutical industry was left alone in the competitive market with low capitalization. Foreign “investors” were buying stocks of pharmaceutical companies for cheap, and then selling their equipment for scrap metal. Same was happening in the carbide tools manufacturing industry.
That’s why a developed capitalist center always has a darkside - the periphery. It’s where resources, labor and capital are sucked out from, and where all the waste gets dumped. Life in the periphery is always not as bright and fun as in the center. The freer the market is, the poorer the life in the periphery, the higher the violence, the more slave-like (and sometimes simply slave) the labor is. For example Bangladesh knits socks for the entire America, but it’s highly doubtful that an average Bangladeshi can afford with his salary to buy his own socks in America. People who assemble Rolls-Royces don't drive Rolls-Royces, that’s obvious. For an American Bangladeshi’s labor comes basically free, and that’s exactly why an average American has such high living standards and can buy himself a train car full of socks on his American salary. What’s even worse, it turns out to be more profitable to force a peripheral county into narrow specialization (“banana republic”). As a result an event on the other side of the world can destroy the economy of an entire country or even several countries.
If money is the blood of the economy, then the inflation is the adrenaline - it constantly devalues the savings in your piggy bank and forces you to invest it anywhere you can, even if it's simply a savings account in the bank, from where your money is further re-invested and that drives the economic growth. In recent history the world first faced inflation when America was discovered and the Spaniards shipped tons of gold from the New World and seriously devalued it. Inflation became virtually inevitable after the downfall of the Bretton Woods system when the convertibility of major world currencies to gold was terminated.
Another reason for the constant inflation is the desire of central banks to gain profit for printing money called seigniorage. For example, The Fed’s seigniorage for 2010 was 53,7 billion, and two thirds of it (36 billion) was provided by foreign countries where the printed money was shipped to. It gets even worse when the printing press owner’s greed gets out of control. The money starts to devalue faster than it’s being printed and you end up in Zimbabwe in 2009. All of that leads to conclusion that there’s a certain optimal level of inflation. For the research in this area Friedman got his Nobel prize. The idea is simple - there are certain inflation expectations, and you only print enough to make sure the real inflation is equal to expected. A good economy is the one with creeping inflation (2-3%), if it’s more than 10% - time to get the fuck out.
You can argue indefinitely that a certain individual doesn’t have a job because he’s a useless lazy idiot. Or that it’s the result of technological advancements and increase in labor efficiency. In reality, it is much simpler and deeper at the same time. Workers are not people, they are resources. And full employment means that the human resource is used at 100% capacity, which changes all economical processes beyond recognition. In particular, the horizontal keynesian aggregate supply curve becomes classical vertical. Every capitalist wants to get his resources as cheap as possible, therefore business sharks are interested in higher mobility of workforce (it increases competition on the job market and lowers the expectations of the workers) which lowers the unemployment, but they never want it to go to zero, because the deficit of a free resource makes its price skyrocket. Conclusion in a market economy unemployment is unavoidable. If the economy functions normally, the unemployment rate is low, but during crises and recessions employees get kicked to the curb in large numbers. Nothing personal, it’s just business.
The more money you accumulate, the more possibilities you have, economical and non-economical. If you don’t have capital – you are a sucker and a loser. And even though technically all players in the market are equal, those with more money end up more equal than the others. Using their advantage, the rich multiply their capital, ruining small and middle businesses, lowering them to the level of hired labor.
As a result, beside the already mentioned monopolies, mass social movements emerge – social-democrat/communist amongst the working class, nationalist/fascist amongst small and middle businessmen. And if before people were spread around numerous small villages, now they are concentrated in large cities.
Then, it turns out individual egoist-businessmen aren’t very good at dealing with global problems, like wars, epidemics, low birth rate, shitty education, crime, natural disasters, ecology. Egoists usually view these problems either from a “not-my-problem” perspective or as an opportunity to make more money.
Lack of public goods
Public goods in economic theory is a kind of service, that is a vital part of healthy social functioning, costs money and is impossible to be provided by anybody other than the government, and sometimes supranational bodies, because of its scale and inability of a single market sector to handle it entirely, and when it comes to science - because of low success guarantees (~80% of all R&D is just heating up the atmosphere). They include:
Just based on that it becomes obvious that a free market can’t exist in a vacuum, independently from an external regulatory body. And the first thing the government does is organize the rules of pasturing and milking of free entrepreneurs.
Welfare and business
Of course, private enterprise attempts to get into the social goods sector with the goal of making profit: private schools, private hospitals, private security, private military contractors, even private prisons. But the problem is that private services can’t cover the entire demand of society. The profit from satisfying this demand would seem obvious, but (sic!) not to private enterprise for some reason. Meaning, business gladly agrees that it’s much nicer to conduct business in a civilized country, instead of some Somalia, but utterly disagrees to contribute to it. Even with taxes it tries to evade anyway it can. A society each member of which has a more or less decent job is much less criminalized, than one with high unemployment, but it’s always the government’s problem to solve, never of private enterprise.
Therefore, with low government oversight private businesses quickly turn from society’s cowes, that give it milk and butter, to its parasites. And the only thing that keeps them from going to that extreme is social traditions and measures to safeguard them. In other words, how high is the risk of getting ass invaded for foul play. All the cow wants is to eat, sleep, fuck and shit. And the lack of butter in the cowboy’s fridge is the cowboy’s problem. On the other hand, if the cowboy is satisfied with chewed grass as long as he doesn’t have to squeeze the tits, so be it.
The opposite of social goods. For example, manufacturers of booze and cigarettes don’t give a fuck about its harmfulness for their customers, because thay are not the ones covering the cost of that harm. Same goes for ecology, mill owner doesn’t give a fuck if the residents of the nearby town can’t breathe because of his mill’s emissions.
Natural selection method – is fucking expensive. For example, you need to organize cell phone coverage in your state, but what’s the best way? You can set up 2-3 major operators across the entire country, or 10-100 smaller operators 2-3 per each region, or 100-1000 even smaller operators 2-3 per each town. Which way is best you don’t know. The market offers this: launch all three variants at the same time and see which one survives (in each town there will be global, regional and local operators). More than that, this way you will probably find the most cost-effective way to organize cell coverage, but you will waste over 9000 of resources before the end. This method is only effective if there’s an external source of financial influx (it needs colonies and periphery). Once you found the most cost-effective method for every situation, even though you had to economically rob somebody in the process, you can start expanding into foreign markets and cover all the losses you stuffed in the process, except now you will be robbing somebody else’s colonies. Profit. But only if you can expand to foreign markets.
Another way: from the start with proper modeling, find the best solution and execute it, and to reduce the risks lawfully ban foreing expansion to the domestic market. This way the resources are not wasted and solid profit from the domestic market is guaranteed, but you probably won’t be able to expand to foreign markets.
Even though the unsuccessful businessman went bankrupt, he already destroyed a lot of capital and resources – natural, human, etc. And there will always be a lot of these kinds of unsuccessful solutions. So this method only works when there’s a lot of cheap resources readily available.
Decreasing rate of profit – a free market with many independent manufacturers quickly saturates. You have to make a lot of effort to sell each subsequent batch of product: lower production costs, increase efficiency, improve technology. Meaning, you have to spend more and more, at the same time the rate of profit (its relative, not absolute amount) tends to decrease with time. If in the old days you could get 150% profit from a heap of sticks and rocks and a bunch of hicks, then today you get 2-3% profit from the most technologically advanced equipment, highly qualified labor, special materials and effective management schemes. As a result, in a free market manufacturers have no resources left for R&D.
Maintaining demand – a serious problem that marketing, R&D and other departments are struggling to solve every day. As soon as giant factories able to produce thousands and millions of items appeared on the horizon, it suddenly became obvious that a single man can’t eat more than he can physically fit inside, wear clothes on more than one body or live in more than one house simultaneously. More than that, most are completely satisfied with beer, chips, a tv and a car. So they need to be convinced to buy all the shit that’s being produced. Luckily for a manufacturer, it’s much easier to trick a modern day lemming into buying crap than a penniless 19th century peasant/worker, even if it means credit.
Transaction costs - in an ideal world it would be easy to come to market and become a business even from your garage. But in reality, it might take a lot of money, time, qualified personnel, adequate QC plan, ISO9001 certification, etc. Also, according to Smith the ease of entry-exit means that a manufacturer can not only easily change the type of his product, but switch to another sector entirely. So a shoemaker can not only switch from making boots to flip-flops, but, if the shoe market becomes saturated, he can instead bake bread and cookies. In principle, you can teach a shoemaker to bake, but in real life it might be much more difficult to switch professions than in Smith’s theories. Especially for companies like Boeing to switch from making jets to growing apples. Same goes for workers: not many bakeries or jewelry stores will hire unemployed shoemaker, maybe out of pity - to sweep the floors.
WHAT ARE THE ALTERNATIVES?
A head instead of invisible hands
“... how does it happen that trade, which after all is nothing more than the exchange of products of various individuals and countries, rules the whole world through the relation of supply and demand – a relation which, as an English economist says, hovers over the earth like the fate of the ancients, and with invisible hand allots fortune and misfortune to men, sets up empires and overthrows empires, causes nations to rise and to disappear…”
Marx. The German Ideology
For Engels and his protege and freeloader Marx competition of everyone against everyone, which they gently called “real civil war”, is not simply desirable, but a necessary condition ensuring maximum effectiveness of private enterprise. A strike for higher wages was not an act for justice for them, but a stimulus to invent, mechanize and reduce the cost of labor that grows more expensive every day. They REALLY liked the invisible hand that was destroying class privileges and already increased workforce productivity by 27(!) times from 1770 to 1840. What they didn’t like were the living and working conditions of the proletariat, which they compared to slavery or even worse: if a slave or a serf was sold once and were guaranteed to have an owner or small chuck of land tomorrow, a proletarian was forced to elbow and bite his way through other workers in order to sell himself for -teen hours every day without any guarantees.
Flaming revolutionaries decided to end this state of affairs once and for all: abolish private property for means of production, and instead govern them democratically and collectively, and therefore elimite market with all its hands. The idea was to replace the blind instinct of the economic organism with the central nervous system, which will tie the invisible hand with other irreplaceable parts of humankind’s body like mind and conscience.
It was expected that the world revolution would begin in a technologically advanced country with highly productive manufacturing, which in the next 10-20 crisisless years would develop to such a level that there would be no point in exchanging limited amounts of goods – there simply would be enough of everything for everyone. There would be no commodities for sale, only produce - come and get as much as you need. But life turned out differently, and the revolution began in a country that was barely approaching large-scale manufacturing. At first they made do with war communism and other prodrazvyorstka’s, but when it became obvious that the revolution doesn’t scale to global scope, the commies were forced to develop large-scale manufacturing by any means in order to not be eaten by large peasant masses. In Lenin’s words - ally with western capitalists against domestic marauders.
This raised a question: WTF is all this?!?!? Spinned the slogans this way and that, and it turned out the revolution wasn’t against capitalist mode of production, but against exploitation. Allowed private enterprise (but without serfs and hired labor) and called it NEP. Shit started to move.
But the big problem was how to explain all that happened. They had to somehow politically correctly reconcile Marx’s planned economy, which critiques and means to overcome commodity-money relations, with commodity production mode. That’s when they came up with a partition into socialism now and communism later. It’s been decided, that socialism is state property and administrative oversight of commodity production, and communism is… let’s wait and see, we’ll figure it out if we make it through. What’s important is that they started calling a “planned economy” something other than what Marx had in mind. The main goal behind Marx’s planned economy was to avoid overproduction crises, for example, there couldn’t be any “overfulfilments” in the planned economy (something that was encouraged and rewarded in the USSR). “Gosplan” became a head for a small segment of the world economy, outside of which the invisible hand kept ruling with an iron fist, and its interests absolutely had to be considered.
Characteristically, the Soviet command-administrative system didn’t know any overproduction crises, but quickly revealed its own problems. What was going on during the first five-year plan (1928-1932) was colorfully described in a satirical novel “The Little Golden Calf”. But eventually satire’s sharp tongue, KGB’s blunt bullets and non-illusory possibility to change a comfortable leather chair for the fresh air of Siberian tundra solved most of the problems - during pre-war five-year-plans Soviet economy grew at unreal rates, which makes even modern China envious, leave alone the then capitalist countries steamrolled by Great Depression. Command-administrative system especially shined during WWII.
“When on one occasion the daily rifle production rate was missed and Ustinov honestly reported 9997 instead of 10000, Stalin insinuatingly remarked: ‘It is commendable that comrade Ustinov is an honest man, but if he repeats this report one more time, someone else will be occupying the Minister of Defense’s chair”.
“Stalin highly valued the “russian gem”, who totally dominated his rival Reich’s Minister of Armaments and War Production Albert Speer. Yearly his factories gave the army on average 1.5 times more artillery units and 5 times more mortars, than all of Germany’s with all its occupied territories. Total number of firearms increased by 22 times during the war.”
The war ended, food stamps were canceled and it would seem that everything will get better now, but somehow it didn't. When Lenin's Mausoleum got itself a new resident, vivifying lead injections and involuntary arctic vacations for non-fulfilment of the plan stopped, and very quickly everybody from cleaning staff to top management stopped giving a shit. Blue collars only care that the output quota isn’t raised (there goes productivity increase), and the director always has a partner company to blame. Of course, the partner company has its own plan and doesn’t care about the problems of its consumers.
You can’t say it didn’t work at all - in some sectors, like arms, where it was easy to estimate the demand and the costs didn’t matter, it worked perfectly. The trouble began, when they tried to apply planning to fast moving consumer goods. “Fashion what? Never heard of it” And again, to hell with the fashion, since it’s just a measure to artificially maintain the demand anyway. Sometimes there weren't even enough basic food products. Nobody died from hunger (at least not after the first couple five-year-plans), but there wasn’t much abundance or variety either, unless you lived in the capital or a closed city. Besides deficits there were also proficits: while good shoes were in deficit, the stores were full of rubber galoshes.
What’s interesting is the plan encountered the same problem as the market – economy is a very complex system, and as complexity grows the quality of planned management goes down. Each individual has his own preference profile: some prefer apples to tanks, some the other way around. These preferences aren’t necessarily transitive (apples are more important than tanks and tanks are important than moon landing, but moon landing is more important that apples), they can depend on the availability of alternatives (out of red, blue and yellow umbrella a woman will chose blue, but if you offer her a green one as well, she will chose yellow). But in the market system supply will eventually adjust to demand with the help of pricing signals.
The wealthier the society becomes the harder it gets to planned economy to figure out what and how much to produce: a poor man needs bread, clothes and heat (and he doesn’t mind that all shirts are black), at the same time one rich man wants a car, a house and ability to regulate the temperature in his house, while another wants a guitar or khakis (he doesn’t know himself which). The prices are set administratively (it’s unknown which of the intermediate goods are in deficit and which are in proficit), so the only thing that is getting optimized is the technological process. In principle, the problem of identifying demand could be solved by implementing Japanese kanban system, which allows their zaibatsu to be very flexible and adaptable, but that would require reforming the Gosplan in a way that would put it from dictatorial position into complaisant, which was impossible without the agreement of the political higher-ups. What’s interesting is that it’s exactly what Marx had in mind: “from each according to his ability, to each according to his needs”, so the calculation of the latter is a primary goal of the planned economy.
It’s worth mentioning that while the US was making movies about the Wild West, Nams, Chucks and Rambos - lone wolves heroically fighting wicked commies, the Soviet movies industry kept asking the same question: “why do those who work hard and honestly live in shit, while whose who fuck with the system, thieves and parasites - live in chocolate?” “A Trip Without a Load”, “Dima Gorin's Career”, “The Train Has Stopped”, “Different Fortunes”, “It’s all about him” are just few examples of movies raising the same the problem “honest worker gets a medal, asocial careerist gets money and candy”. Under Stalin this question was unanswered in a well known manner, after him – became rhetorical.
Of course the theoretical methods of the planned economy weren’t completely bad, hence all the impressive results in the interim. The bourgeois economist Keynes even visited the USSR to get acquainted with the working of the Gosplan and got so impressed that he was never considered to be True-bourgeois anymore. The capitalists were very curious about the non-material methods of workforce incentivizing: how is it possible that you don’t give extra money but people work harder in the name of labor glory. These methods later returned to Russia after being digested in the west: instead of “party meetings” and “subbotnik’s” – “team building” and “corporate culture”. The inability to overcome and replace capitalism logically led to implementing capitalist ways of whacking the invisible hand with an invisible ruler.
A straight jacket for invisible hands
In 1883 in good old England a boy was born. Must say, he picked a perfect place to be born in: not just in England, but in Cambridge itself, and not just in Cambridge but in an upper-middle-class family of a professor and a writer. The boy lived up to the expectations showing wonders of intelligence from a young age. His biggest interest though was the money cycle. After graduating from Eton college the young man successfully combined service to Her Majesty, academic study and stock trading. In each of these fields he showed remarkable results gaining wealth and restecp. But in 1929 when he was prophesying firm and stable growth, the markets crashed and Keynes lost all his money. “Holy Fucking Jesus!” he thought to himself but in view of innate politeness and puritanic victorian upbringing didn’t say it out loud and started thinking instead. As a result of this intent thinking he regained his capital and produced an epic systemic study “The General Theory of Employment, Interest and Money”. It contained a new branch of economics – macroeconomics with macroeconomic indicators and other blackjack and heresy like that the market isn’t actually a self-regulating system. And in order to regulate it and avoid crises, demand has to be stimulated with government spending. It doesn’t even have to bring any real value: a country can host the Olympics for example, and all the spent money through some tricky magic and multipliers will galvanize economic growth.
New holy war began with one of the most aggravated sides being the so-called austrian school, whose acolytes believe that the market in its pure refined form is in fact a self-regulating system and everybody needs to keep their stinking paws off, it already has its own invisible hand. And the government spending of freshly printed money will have a temporary effect and only speed up the inflation. One of Keynes’ most ferocious critics was Friedrich Hayek, but only remotely and on paper. When Keynes offered to meet and talk shit out face to face, Hayek pretended to be sick and didn’t come, even though he was in London at the time.
But the bourgeoisie still remembered the horrors of the Great Depression and so they sided with Keynes. The limey scientist became a recognized expert in the mysterious ways of money cycling, and was recruited in 1944 to engineer new post-war financial world order, which was successfully established in Bretton Woods. In 1946 Keynes participated in the opening of ZOG’s most powerful instrument - International Monetary Fund. But when he realized what he had done suffered a butthurt, a heart attack and died.
Keynes’ ideas and Marshall’s plan led to economic growth and were even referred to as “economic miracle” in Europe. Although, in a sense Marshall’s plan was also Keynes’ idea - after WWI he suggested not to ruin Germany with reparations, but to stimulate its economic growth instead. It kept working until 60-s and 70-s when the Bretton-Wood system kicked off. Now the liberal economists climbed on the high horse, Heyek even got himself a Nobel prize.
Later they tried to marry the keynesianism with the austrians and monetarists, and are still trying to this day. In practice it looks like this: if the shit is about to hit the fan or already did, take Keynes off the shelf, re-read and re-think; if the economy grows – let it grow, no need to regulate.
Sieg Heils with invisible hands
Basically the only footprint the austrian painter left in the history of economics was building a system that combined the worst qualities of both the plutocrats’ baby and the bolsheviks’ evil genius. It wasn’t bona fide capitalism, more like its frenzied version with violent government oversight for everyone who didn’t fit into the market, a kind that left in awe its arch friends on both sides of the ocean.
But let’s start from the beginning. What did the Weimar Republic look like before NSDAP? Thermonuclear level of corruption, decadence and poverty, on top of that the reparations that Germany had to pay after the loss in WWI somehow didn’t add social prosperity or stability. At least the cinema was good. Obviously the social turbulence was extremely high, and the most popular parties were the red (amongst working class) and the brown (amongst middle class and industrialists). The brown won with the support of the capital. And for a reason.
A characteristic trait of fascist regimes that often gets them confused with neoliberalism is strong friendship between the capital and the state. According to the classic market theory advocated by the IH-proponents, the state simply shouldn’t interfere and everything will be tip top. According to the regulation-proponents, it should interfere to make sure the hand doesn’t do some wicked shit. And according to fascist and neoliberal political theories, the state not simply should, but absolutely must make sure that not a single son of a bitch, be it political opponent or a foreign competitor, messes with the hand no matter what it does.
The planning was implemented in a form of state contracts (which covered up to 100% in some sectors), while the party controlled the execution (most capitalists were members of NSDAP). But, unlike the USSR, the execution of the contract was based on “cost accounting”. Meaning, “Rheinmetall” was actually buying steel and coal for more or less “market” (pre-agreed) prices.
You can often find in the internets a notion that Hitler kept all of his campaign promises. And it is absolutely true, the nuance however is in how he did it. Take unemployment for example. He simply took all the unemployed and sent them to work on idling factories for wages less than unemployment benefits. And still there wasn’t enough workforce, which proved unlucky for students. Basically all of Hitler’s ingenious reforms followed the same logic of “market needs plus a little coercion to plug the holes” and surprisingly it showed some results. The food problem was solved, there was an adequate level of order and stability in society.
The core problem wasn’t even that the described above bonuses like “monopolies” and social issues were positively laid on the shoulders of the working class, and his campaign promises Hitler solved at the expense of his electorate, but that those bonuses never went away. German economy under the seeming order was a nonviable golem of doctor Frankenstein, the Reich absolutely had to plug those holes by robbing its neighbors and with free labor of ostarbeiters. But as it opened the eastern front first the food suddenly disappeared, later the workforce became scarce, the demands of raging war grew every day but with every defeat there was less and less plunder to satisfy them. Everybody knows what was the result, but the idea of ostarbeiters was greatly appreciated by the western community, it’s just being implemented in a more modern fashion.
Invisible hand made in China
Mao respected Stalin and therefore unlike Khrushchev didn’t bully small business. Four small stars on China’s flag are suddenly four petty bourgeois parties. After Mao fell out with Khrushchev it became apparent that without USSR’s industrial might China is somewhat lackluster, and it went its own weird way with great leaps, sparrow genocide, smelting iron in backyard furnaces, cultural revolution and hongweibing.
Obviously the leaps with mass brainwashing and massacre of opposition led to a clusterfuck in the economy, and many got fed up with it. That’s why when Mao joined Confucius his closest allies including his beloved wife quickly found themselves in prison. The power was assumed by less excitable characters led by remaining after the cultural revolution Deng Xiaoping and shit started to roll.
China decided not to break backs in order to build technologically advanced manufacturing like the USSR. Instead they started with the agriculture: abolished chinese analogs of Soviet “kolkhoz’s” and turn the land into family-owned farms. Then they organized open economic zones where evil capitalists could invest money into manufacturing and OMG make profit. On top of billions of people ready to work for a bowl of rice it led to a lot of manufacturing being moved into China, and after the downfall of the socialist bloc to its rapid growth. The Chinese themselves started organizing small domestic manufacturing of all kinds of shit with expected quality. Then they even went and privatized some mid-level productions: if a director of a state-owned factory showed good results, he became its owner, and if he didn’t, he got replaced. And all of this under strict control of the Communist party, any doubt in monopoly of which resulted in swift and violent end.
It resulted in a mode of economics named by unimaginative economists as state capitalism. Not to be confused with Bismarck and Nazis. On one hand there’s a market, but growth directions are established by the state on CPC assemblies. Looks like the largest corporations compete with each other, but the control stock in all of them belongs to the state. CPC decided that this town produces socks, and this town produces zippers. And that’s it, now the socks and the zippers aren’t produced anywhere else in China, but the first town produces 95% of the world's supply of socks, and the second - 95% of the world's supply of zippers.
China has been steadily growing for 40 years now. In nominal numbers including financial services it is a second economy in the world, and soon will be the first. In real industrial manufacturing - it has long (since about the beginning of this century) been first. Global crises result in lower growth rate, for example from 9% to 5%.
But it’s got its own problems of course. When key decisions are made by party officials, it will inevitably lead to corruption. China fights it with ruthless lead therapy just like Stalin and Mao taught, which helps keep it down. One of the recent examples would be the case of Zhou Yongkang, who was a secretary of internal affairs and the 5th most influential man in the state. The confiscated swag including elite booze and 300 villas amounted to 14 billion dollars.
Shock therapy with invisible hands
After the peak in the 70-s oil prices began to rapidly fall and in the 80-s a barrel of black gold cost less than $20. The problems in the USSR started to aggregate and by 1989 the shitstorm got so close that it became impossible to ignore. Nor perestroika, nor uskoreniye, nor foreign credits given for the Berlin wall helped. And glasnost made things even worse - instead of working people started arguing how to fix the country. The first steps to liberalize the economy were made in 1988-89 – allowed cooperatives and NTTMs under the management of the Komsomol’s bright youth. The youth wasn’t quite what it used to be and didn’t appreciate the Party’s gift – started laundering money on khozraschyot. The scheme was simple: a factory or research institute director wants to launder some state money and signs a contract not directly with the executor, but with Komsomol who had a simplified process of acquiring cash from the budget. Komsomol gets the money, 10% goes to the executor, some goes for bribes, 80-90% gets appropriated. That’s how many Russian billionaires including Khodorkovsky started. At the same time under the cover of cooperatives all the other shady small businesses with untraceable cash flow were spreading fast. Simply put, everybody was stealing everything, and democracy and glasnost were just means to shut up the conservatives of the CPSU.
All this didn’t really help the economic growth and a homemade economist Yavlinsky offered in 1990 a program called “500 days”, which was supposed to bring the country to a bright capitalist future. But it was too complicated and it was already late in the evening so everybody decided to do it the old-fashion commie way - by confiscating money from suddenly appeared rich men. In January of 1991 they declared exchange of large banknotes with limited withdrawal amount from deposit accounts. And right after April Fools' Day on April, 2 liberated the prices on consumer packaged goods (they were regulated in the USSR), the prices went up 3-5 times, people didn’t appreciate it. No surprise that when a bunch of old-schoolers, one of which was an ideologist of this reforms, attempted a coup to save the Union from the horrors of democratization, people supported Yeltsin instead.
But the shock therapy hasn’t even started yet. Transfer of power, dissolution of the USSR, and King Boris’ accession to the throne led to the sudden ascension of young talented economists from the basements of economic schools.Led by Gaidar and Chubais they quickly explained that only the invisible hand and shock therapy can save the Homeland. Not many knew that behind these young prodigies was neoliberal economist Jeffrey Sachs. Later he will be explaining that the fail was caused by stupidity and greed of the aboriginals, but exactly the same shit happened in Bolivia and Poland where he was also advising left and right. Only in Bolivia they even managed to privatize the water supply, and then prohibited the collecting of rainwater. Everywhere it was implemented the shock therapy caused shock without any therapy.
The liberal economics teaches not to exaggerate inflation. So the state spending was reduced everywhere possible. Healthcare went to shit, research centers survived on humanitarian aid from the west (in exchange for access to soviet projects), but it still wasn’t enough and they turned on the printing press. As a result, inflation skyrocketed but there still wasn’t enough currency in circulation.
The next big sham happened right after the establishment of the Russian Federation - voucher privatization. It’s simple: printed a bunch of papers with 10000 rubles written on them, sold them for 25 rubles each and declared that anybody can use this voucher to privatize 10000 rubles worth of any state property. But later it turned out that not any property and not anybody. Those who happened to work in a factory that was incorporated could buy its stock for the whole sum. If somebody got himself a stack – also not an issue. But what could a regular jackoff do with this paper – his own problem. It led to the situation where vouchers were being resold for a price close to 25 rubles - two bottles of vodka, not to Volga’s like Chubais promised. Those who were smarter invested their vouchers in the newly established mutual funds, which disappeared shortly after collecting the vouchers, so the smarter ones didn’t even get any vodka.
The second act took place in 1995-96 when large pools of capital accumulated in the invisible hands of certain bankers who wanted more. So they pulled a flimflam called loans for shares scheme. Goes like this: the state doesn’t have money, it pawns stocks of state-owned enterprises on closed auctions, doesn’t repay the loans, the creditors get to keep the stocks for 5% of market value. It’s been said words failed even Jeffrey Sachs.