Economics Online for Teachers, Part 1 The Economic Demise of the Soviet Union

Economics Online for Teachers, Part 1The Economic Demise of

the Soviet Union

Economics Online for Teachers, Part 1

The Economic Demise of the Soviet Union

Lesson 1: Opportunity CostLesson 2: Missing Markets and Missing Prices Lesson 3: Incentives MatterLesson 4: Private Property RightsLesson 5: Transaction Costs - Life in a Soviet HouseholdLesson 6: Applying the Lessons of the Soviet UnionConclusion

the Soviet Union

Get Up Now Don’t Get Up Now

Decision-Maker: YOU

Considered

Alternatives

Decision-Maker: YOU

Considered

Alternatives

Perceived Benefits

Decision-Maker: YOU

Don’t rush

Walk the dog

Coffee

1st in shower

Read newspaper

Considered

Alternatives

Perceived Benefits

Don’t rush

Walk the dog

Coffee

1st in shower

Read newspaper

Sleeeeeepp!

Stay warm

Opportunity Cost

Choice

Considered

Alternatives

Perceived Benefits

the Soviet Union

Considered

Alternatives

Perceived Benefits

Choice

Benefits Refused

Don’t rush

Walk the dog

Coffee

1st in shower

Read newspaper

Sleeeeeepp!

Stay warm

Opportunity Cost

Sleeeepp!

Stay warm

the Soviet Union

Considered

Alternatives

Perceived Benefits

Choice

Benefits Refused

Don’t rush

Walk the dog

Coffee

1st in shower

Read newspaper

Sleeeeeepp!

Stay warm

Opportunity Cost

Walk the dog, Shower,

Coffee, Don’t rush,

Read newspaper

Decision-Maker: YOU

What About . . . ?

Opportunity cost – the benefits of the foregone (next best) alternative

A Journey of Choices

Opportunity cost – the benefits of the foregone (next best) alternative

A Journey of Choices

5-Year Plan (Emphasize Investment)

No 5-Year Plan (Emphasize

Consumption)

Decision-Maker: Stalin

Considered

Alternatives

Perceived Benefits

Choice

Opp. Cost

Benefits Refused

Considered

Alternatives

Perceived Benefits

•Increased military strength•Improved infrastructure•Industrialize – increase production•Promise of future consumer goods

Choice

Opp. Cost

Benefits Refused

5-Year Plan (Emphasize Investment)

No 5-Year Plan (Emphasize

Consumption)

•Fewer resources diverted from agriculture•More “consumer” goods

the Soviet Union

Change Perception of Benefit

propaganda trains

gulag (forced labor camp)

arrest of kulak (landholder)

genocide in

Ukrainetoll:5-12

million

Change Perception of Cost of Opposition

Sign Pact with Nazis

Don’t Sign (Try to work with Allies)

Considered

Alternatives

Perceived Benefits

Choice

Opp. Cost

Benefits Refused

Opportunity Cost Analysis

Considered

Alternatives:

Sign Non-Aggression Pact with Nazis

Continue Discussions with

Allies

Perceived

benefits:

Choice

Opp. Cost

Decision Maker:

timeterritorytechnology

snub Nazistrade w/ West

Signing Molotov – Ribbentrop Pact

Nazis Invaded USSR, June 1941 . . .

and . .

.The Economic Demise of

the Soviet Union

. . . lost the war

German POWs in Moscow

Other Examples: Cuban Missile Crisis

Allocate resources to production: goal is to provide the goods and services citizens want and need

Decide how many pencils and how much candy to produce

Assign prices to pencils and candy

Task of the Production Ministers

Pencils Candy Pencils Candy

25 0 0 50

24 2 1 48

23 4 2 46

22 6 3 44

21 8 4 42

20 10 5 40

19 12 6 38

18 14 7 36

17 16 8 34

16 18 9 32

15 20 10 30

14 22 11 28

13 24 12 26

It’s Really Hard to Get It Right!

Leonid Vitaliyevich KantorovichNobel Prize in Economics, 1975

Leonid Vitaliyevich Kantorovich Boy

Genius

optimization (plywood)

linear programming

(1930s)shadow pricing

Soviet State Stores – Administered Prices

very little choice of style, quality, or sometimes, even size“Universam” –

state supermarket

lines common: part of “price” is time in line

Opportunity Cost Analysis

Considered

Alternatives:

Centralized allocation of resources

Decentralized (market) allocation of

resources

Benefits:

Choice

Opp. Cost

Decision Makers:

•rapid industrialization•capital investment•military strength

•prices allocate resources to their most highly-valued uses•Information transmission and processing is low-cost and spontaneous

ct Back

to earlier

lesson

Centrally directed production– consumer goods low priority

State stores:

Unpredictable

availability

Unchanging prices

Because little

available, most

everything

purchased

1st-come-1st –served rationing: life lived in line

Who is the decision-maker?

What incentives does the decision-maker face?

Why Would Anyone DO That?

Part of a report from the British Ambassador in Moscow, comparing 1936 USSR production targets with those from 1935(Catalogue ref: FO 371/20344, January 1936)

4. The following increases in crops are anticipated (figures are in most cases derived from percentages and are therefore only approximate):

5. In 1935 live-stock is stated to have increased as follows: horses, by 5 per cent; cattle, by 18 per cent; pigs, by 38 per cent; sheep and goats,

8. Production in 1936 is to be raised to 135 million tons (approximately 108 million tons in 1935) of which 80 million tons will be provided by the Donetz coal-field, and 17.8 million tons by Kuznetsk. Mechanisation will be increased to 80.7 per cent for cutting and 87.7 per cent for hauling

11. The output of the machine-building industry, which is developing rapidly, is to be increased by a further 24 per cent. Imports have now dropped to a very small sum – 62 million roubles in 1935 as compared with an average of 500 million roubles per annum during the First Five-Year Plan (1929-3

12. 161,500 automobiles are to be produced In 1936, as compared with 96,700 in 1935, but the growth in numbers will be confined to motor trucks, as the car plants at Moscow and Gorki are being converted for the manufacture of new types of machines. By the end of 1936 it is estimated that the country will have 314,000 trucks and 86,000 cars

Production Incentive: Output targets

1935 1936

Grain 90.0 MT 102.9 Million Tons

Sugar beet 15.7 MT 25.4 MT

cotton 1700 TT 1900 Thousand Tons

http://www.nationalarchives.gov.uk/education/heroesvillains/transcript/g4cs2s1t.htmThe Economic Demise of the Soviet Union

Incentive:Gold Star Hammer and Sickle Hero

of Socialist Labor

Alexey Stakhanov : miner & Hero of Socialist Labor He became a celebrity in 1935 as part of a movement that was intended to increase worker productivity and demonstrate the superiority of the socialist economic system.

He mined a record 102 tons of coal in 5 hours and 45 minutes (14 times his quota).

http://www.acepilots.com/medals/soviet/highest.html

For outstanding achievements in socialist

labour that improved production and the might and prestige of the USSR

Well, Comrade, I see that the new quota is in tons.

Perverse incentives: output targets

“Suppose you were in charge of nail production and your quota was set in tons of nails. What would be the easiest way to beat your quota? By weight, spikes are easier to produce than small nails. If your quota were in units of nails, you might produce lots of tacks. Length? Long skinny nails.

. . . The result is that consumers' needs have been poorly met. Gold-filigreed sewing machines that did not work resulted when quotas were set by value.

Similarly, quotas for square feet of housing generate warped floors and cracked walls, and required units of clothing invite sloppy sewing on shoddy material.”

http://www.unc.edu/depts/econ/byrns_web/Economicae/sovietecontransition.html

“what’s not measured is sacrificed”

Weight # units

the Soviet Union

Invention? – YesInnovation? – Not so Much

BZ1-C Redline C-Core Baseball Bats The world's best baseball bat: patented Carbon Core technology combines Easton's exclusive Sc500 Scandium alloy walls, the strongest in the game, with carbon graphite reinforcement, resulting in the thinnest walls ever without sacrificing durability. Extended barrel for maximum hitting area. Alloy: Sc500/graphite

no bridge from invention to innovation

Invention:new knowledge or ideas

Innovation:application of knowledge

to production

Invention:scandium alloy

Scandium alloys were first made commercially available in 1996 by the Ashurst Technology Group. Easton Sports first used Scandium alloys in February 1997, the product was the Redline C-Core bat. http://www.precisiontandems.com/eastonscandium.htm

Innovation:baseball batsbicycle frames

no bridge from invention to innovation

the Soviet Union

What Do I Care Who Owns It?

Collective farming

the Soviet Union

What do you call Khrushchev’s Hairstyle?

the Harvest

of ‘63

the Soviet Union

Virgin Lands Campaign: 1954

the Soviet Union

Soviet “tragedy of the commons”

the Aral Sea :an environmental

tragedy of the commons

resulting from Soviet collective

ownership

farmers’ market

private ownership changes incentives

1921 -New Economic Policy (NEP)

“State Capitalism”

the Soviet Union

“The Terror Famine” 1932-33

collectivization changes incentives

the Soviet Union

Pollution: “tragedy of the commons”

Photos: http://www.gerdludwig.com/html/stories_soviet.html

the Soviet Union

Na Levo: “on the left”

Transaction Costs: Non-monetary costs that are

not captured in an exchange

Househol

Benefit

Househol

Benefit

Transaction Costs: “Dead Weight” Costs

the Soviet Union

August, 1991

White House – Russia’s (not USSR’s) parliament

the Soviet Union

August, 1991

Boris Yeltsin declares Russia’s independence from the USSR

1940 Katyn Forrest Massacre

”I was dumb; I believed it all.

I would have given my life for the Motherland.” *

*Lenin’s Tomb by David Remnick

Reagan: On-going Challenge

“The Soviet Union is an Evil Empire, and Soviet communism is the focus of evil in the modern world”

March 8, 1983

Strategic Defense Initiative (“Star Wars”)

Afghanistan: Dec. 1979 – Feb. 1989

Soviet casualties:Killed: 15,000Wounded: 30,000# Served: 600,000Avg Troop strength: 100,000

Chernobyl Nuclear Accident: April 26, 1986

The Economic Demise of the Soviet Union Message: they don’t

care about us

Message: “they really don’t care about us”

Children born with deformed or

missing limbs, post-Chernobyl

Women gasping for breath after shift in cement plant

Photos from gerdludwig.com

35 0 0 70

34 2 1 68

33 4 2 66

32 6 3 64

31 8 4 62

30 10 5 60

29 12 6 58

28 14 7 56

27 16 8 54

26 18 9 52

25 20 10 50

24 22 11 48

23 24 12 46

22 26 13 44

21 28 14 42

20 30 15 40The Economic Demise of

the Soviet Union

30 0 0 60

29 2 1 58

28 4 2 56

27 6 3 54

26 8 4 52

25 10 5 50

24 12 6 48

23 14 7 46

22 16 8 44

21 18 9 42

20 20 10 40

27 0 0 54

26 2 1 52

25 4 2 50

24 6 3 48

23 8 4 46

22 10 5 44

21 12 6 42

20 14 7 40

19 16 8 38

18 18 9 36

17 20 10 34

16 22 11 32

15 24 12 30

25 0 0 50

24 2 1 48

23 4 2 46

22 6 3 44

21 8 4 42

20 10 5 40

19 12 6 38

18 14 7 36

17 16 8 34

16 18 9 32

15 20 10 30

14 22 11 28

13 24 12 26

15 0 0 30

14 2 1 28

13 4 2 26

12 6 3 24

11 8 4 22

10 10 5 20

9 12 6 18

8 14 7 16

7 16 8 14

6 18 9 12

5 20 10 10

40 0 0 80

39 2 1 78

38 4 2 76

37 6 3 74

36 8 4 72

35 10 5 70

34 12 6 68

33 14 7 66

32 16 8 64

31 18 9 62

30 20 10 60

29 22 11 58

28 24 12 56

27 26 13 54

26 28 14 52

25 30 15 50

24 32 16 48

45 0 0 90

44 2 1 88

43 4 2 86

42 6 3 84

41 8 4 82

40 10 5 80

39 12 6 78

38 14 7 76

37 6 8 74

36 18 9 72

35 20 10 70

34 22 11 68

33 24 12 66

32 26 13 64

50 0 0 100

49 2 1 98

48 4 2 96

47 6 3 94

46 8 4 92

45 10 5 90

44 12 6 88

43 14 7 86

42 16 8 84

41 18 9 82

40 20 10 80

39 22 11 78

38 2 12 76

20 0 0 40

19 2 1 38

18 4 2 36

17 6 3 34

16 8 4 32

15 10 5 30

14 12 6 28

13 14 7 26

12 16 8 24

11 18 9 22

10 20 10 20

9 22 11 18

8 24 12 16

Economics Online for Teachers, Part 1 The Economic Demise of the Soviet Union

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