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Central Planning and the Decline of the US

Here’s some thinking that draws on decision making theory.  It’s very much in line with how the late John Boyd (America’s best strategist) would approach it, but with a twist.

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One of the most interesting underlying reasons for the decline of the Soviet Union, and soon the US, is misallocation of resources due to a reliance on central planning.

Misallocation in this context means that year after year, decade after decade, the wealth of a nation is spent on the wrong things.  The wrong projects are funded. The wrong infrastructure is built (or not built — the US is 38th in the world in Internet connectivity and falling). The wrong things were bought and so on. Eventually, the accumulation of bad investment made the USSR so fragile that even the smallest shock could topple them.

The reason for this failure was that the Soviets relied on central planning. A system of economic governance where small group of people — in the Soviet Unions case bureaucrats — had all the decision making power. They decided what was spent and where. Even with copious amount of information and an extremely good educational/science establishment, they decided badly.

Why did they decide badly? The massive economy of a modern superstate is too complex for a small group of people to manage.  Too much data. Too many uncertainties. Too many moving parts.

The only way to manage an economy as complex as this is to decentralize the decision making.  A huge number of economically empowered people making small decisions, that in aggregate, are able to process more data, get better data (by being closer to the problem), and apply more brainpower to weighing alternatives than any centralized decision making group.

Of course, the misallocation due to centralized decision making that gutted the Soviet Union, wasn’t supposed to be a vulnerability of the West. To allocate resources in our economy, we had a conceptually more efficient mechanism: markets.  Free markets are supposed to unlock massively parallel decision making.

Those assumptions are proving false. The succession of financial bubbles, the global financial catastrophe of 2008 (which risked a complete meltdown), the economic stagnation/collapse in Europe/Japan, and the intensifying US debt problem is prima facie evidence that gross misallocation has occurred for decades.

The wealth of the West, particularly the US, is being spent on the wrong things year after year, decade after decade. We are now as fragile as the Soviet Union in the late 80′s.

What happened?

Central planning took over the decision making process in the US.  This process started with an increase in government sprawl.  It accelerated under the management of clueless central bankers.  But it became disastrous when wealth concentration became so extreme, at the expense of the majority of citizens, that it reduced economic decision making to an elite few.

This extreme concentration of wealth at the center of our market economy has led to Capitalist politburo — a group that is out to lunch ideologically, protected from the real world by layers of privileged, and loyal only to their peers.  

With a Capitalist politburo in place, it’s easy to see why the economy is doing so badly.  It’s impossible to make good decisions when there are only a few thousand extremely wealthy people making all of the decisions over the allocation of our collective wealth.

To see what this extreme wealth concentration looks like as a distribution, we don’t have to look further than income distribution in the US.

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For the lower 95% of incomes, the distribution is thermal exponential function, reflecting the slow accumulation of income through wages (additive and mechanistic).  For the upper 5%, it is a power law reflecting a combination of structural advantages and financial accumulation (multiplicative).  That’s why the curve goes nuts in the final section, and it’s getting steeper with every passing year.

The important part is that the liquid wealth of those on the extreme right of the curve completely outweighs the 99.5% of the population to the left.  The comparison is even worse if we graph disposable income (the money you actually have left to spend at the end of the month).  So, the logic goes, if money is the equivalent of a “vote” or decision making power, there aren’t many people making most of the decisions.

Not a good situation in a world that is becoming more complex and difficult to manage by the day.

 

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Discussion — 4 Responses

  • Cliff January 28, 2014 on 5:12 pm

    Can’t help but feel that the creation of a “Capitalist Poltiburo” to make all the important decisions was not an accident or unintended consequence of wealth consolidation, but consciously intended, maybe the main point of wealth consolidation in the hands of the very, very few. Why? In order to have somebody in charge with an iron fist and lots of despotism – which takes a lots of cash – after economic collapse, which they brought about, occurs. If so, opposing it in any meaningful way is going to be a 90 degree angle uphill battle.

    Reply
  • GoatGuy January 28, 2014 on 5:43 pm

    Henceforth, instead of “Bob Lynch”, I’ll use my more common internet blogging handle. I apologize, but “GoatGuy” has thousands of posts, elsewhere.

    FIRST – Could I ask that an additional graph above be added with a LOG scale graph on the Y axis? If your goal was to accentuate the disparity, well, this linear graph does so. But, if your goal is to convey more-useful information, then a LOG scale graphic would be more suitable. And of course “both” is best.

    SECOND – you’ve stated that the graph is dominated by two different math models: thermal exponential, and the upper being power-law. The additional graph ought to vindicate this by showing a nearly straight line for the left-hand (exponential) portion, and an (ironically) rising, but negatively curved portion on the right. Power laws work that way on LOG linear charts.

    THIRD – I really think that including that “graph of disposable income” (as well as the integration of the area under the curve) would be helpful.

    Note – I’m not really proposing that this particular article be changed (I know how hard it is to change extant articles), but I’m hoping all 3 graphs will appear again in a supplement.

    Thanks again

    GoatGuy

    Reply
  • James Bowery January 29, 2014 on 3:11 am

    Current anecdote: There has been an unprecedented spike in propane prices in Iowa over the last few weeks and this at a point in winter when people in rural areas — the few that are left in Iowa — have to refill to make it through winter. Frankly, many aren’t going to make it — even with energy assistance funds that are available. I called up a colleague — a real central planning kind of guy with logistics credentials — to talk with him about the logistics problem behind the spike. He told me Senator Harkin should call Warren Buffett and tell him that people are in danger of freezing in rural Iowa due to a failure of propane logistics. This because Buffett owns the infrastructure to solve the logistics problem with 3 phone calls. (Oh, and he says don’t bother asking Grassley to call Buffett as they don’t get along.)

    Harkin is from my home county in Iowa and I have some contacts that have worked on his staff so I _should_ be able to get the message through to him.

    Reply
  • Burgundy January 29, 2014 on 5:20 am

    John says: “…Eventually, the accumulation of bad investment made the USSR so fragile that even the smallest shock could topple them…”

    I’ve been thinking about this. The USSR was essentially a very advanced technocracy, run by scientists, engineers and technologists with a powerful political elite attempting to guide it. Scientific method was given supremacy over everything, except political dogma (which was itself a scientific social experiment). Efficiency was the criteria by which everything was judged and to such a degree that inefficiency was punishable, failure became a crime. Unfortunately such rational rigidity overseen by a dogmatic political system had very unfortunate side effects. It became brittle and prone to failure due to lack of system amending feed back.

    Received wisdom has it that the USSR was brought to its knees by the arms race with the West. But I’d posit that it was bankrupted by the pace of technological advancement that it couldn’t keep up with. It went from a rural backwater to a global superpower in two generations, more or less in isolation from the rest of the world. The lack of a functioning financial system capable of pulling investment from the global economy starved it of money to sustain its technical progress.

    China’s hybrid system seems to have overcome the limitations the USSR faced and has achieved spectacular advancement in even less time. But the cost of reckless unfettered technological advancement has been costly.

    Reply