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Central Planning
Those who designed the Soviet economic system began with
a belief that "the problem with capitalism is that it
produces for profit instead of for people's needs," and they
set out to build a system that produced directly for
people's needs and not at all for profit. "There was a
period early in Soviet life when it was argued that the
Soviet worker and manager would work because of their
enthusiasm for the revolution and their ideological fervor.
That phase passed rather quickly."1 Because use
of markets violated Marxist ideology, there was only one
system of coordination possible. A system of central
planning evolved; a system in which all decisions about what
people needed were decided from the top.
To see how this system worked, consider how the operator
of a shoe factory in the United States would make decisions.
His major concern would be whether he could sell at a profit
the shoes he made. In the Soviet Union, however, profit was
of no concern to the manager of the state-owned shoe
factory. Neither did he worry about selling the shoes. His
only concern was to produce what he was told to produce, and
if he could do that, both he and the workers of the plant
received sizable bonuses. The problem the Soviet Union had
was that it is very difficult to specify in physical terms
what a manager should do. (If you do not believe this, try
to write down a set of instructions specifying what sort of
shoes should be produced. Remember, instructions to produce
"good shoes" or "attractive shoes" involve instructions that
are not measurable.) The Soviet Union produced huge numbers
of shoes that no one would buy because they were of such low
quality.
Or consider a nail factory. If it were told to produce as
many nails as possible, it would produce only small nails.
If told to produce as large a weight as possible, it would
produce only very large nails. The Soviet Union wasted
billions of rubles searching for energy because it rewarded
drilling crews on the basis of the number of feet drilled.
Because it is easier to drill many shallow wells than a few
deep wells, drillers drilled lots of shallow wells,
regardless of what was advisable geologically.
Unwanted incentives can be given whenever there are
attempts to measure performance. In a series on the Soviet
Union, the Chicago Sun Times reported a case in which
a hospital had turned away a seriously ill patient because
"they were nearing their yearly quota for patient
deaths--and would be criticized by authorities if they
exceeded it."2 Certainly, a good hospital should
have fewer deaths than a bad hospital, other things
constant. Thus, it seems reasonable to ask hospitals for
their death statistics, and these could be used to evaluate
them. If they are evaluated on the basis of this statistic,
they have the incentive to provide quality care. But they
also have the incentive to avoid patients who are likely to
die.
However, one need not go to the Soviet Union for examples
of incentives with unintended results. An incentive problem
that occurred in the Job Corps program in the United States
in the late 1960s was much like the hospital example of the
previous paragraph. Job Corps was designed to provide job
training for those who had very low levels of skills. In
evaluating various centers that implemented the program, an
attempt was made to see how many of those who went through
the training got jobs. This statistic was used to determine
how funding would be distributed in the future. On the
surface, this seems a very reasonable way to evaluate each
training center. Those that are good should have had a
higher placement rate for their graduates than those that
are poor. However, this evaluation method had an undesirable
consequence. Training centers began to try to attract people
who were only moderately deficient in skills because they
would be more likely to get a job, and they began to
discourage those who were severely deficient from the
program.
A reason that designing effective incentives is so
difficult is that information and knowledge are scarce.
People have a limited capacity to know. In small groups,
people know a great deal about others simply from day-to-day
interaction. But in large groups, knowledge about others
requires expenditure of time and effort. For a modern,
complex economy to function well, people must coordinate
their actions with the actions of many people, but all of
these people have very limited knowledge of how their
actions fit into the big picture. A good set of incentives
gives people the essential information they need to know so
that their decisions will mesh with others, and then
encourages them to make those decisions. Not all sets of
incentives do this task equally well, and none is without
problems.
1 Marshall Goldman,
U.S.S.R.
in Crisis: The Failure of an Economic
System. New York: W. W.
Norton & Co., 1983, p. 32
2 Nov 22, 1983, p.
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Copyright
Robert Schenk
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