11.10.2005

A tad on Communism

Karl Marx wrote 1984 before Orwell, but as a non-fication, and some people actually believed him. Marx is a utopian author that had dreams of an idealistic and altruistic population of individuals all working for the mutual benefit of eachother. Unfortunately, this is high impractical.
There is an inherent flaw built into the communist system, and it is simple. If one man cheats, the systems will tend to fall apart. An explanation maybe? Sure.
To begin, there is an assumption within a Communist system that all individuals will work, in any different specialisation they either desire to (if unskilled) or are qualified for (if skilled). There is a standard of education that is expected, or at least was touted, to be above that of the education of a Capitalist society (economy). Although this can be argued for days, I would agree that the distribution of education level would be tighter, thus creating less disparity, but would also argue that the mean education level in a Capitalist society to be greater than that of a Communist society (through the magic of economic incentives). This pattern will follow through for almost all industries and centralised activities; that being that there will be less disparity in output, but less output overall. If one is content in complacency, it sounds like heaven. But there are a flaws in this sytem that we must expose; the first being the problem of a zero-incentive economy. A Communist economy does not reward contribution over and above that of the average unit of labour; in other words, there is zero incentive for a worker to become more productive, even if it be simply by way of learning by doing. Although, if every member of the society were to strive to increase their personal productivity, the incentive would exist conditional to the fact that every individual within the economy becomes at least marginally more productive, leading each member to subsequently attain a higher general standard of living. The problem is, this is a very big condition for which to go out on a limb and attain a higher level of productivity; especially as the reward for the increae in productivity will come with great delay and most likely inefficiency loss, leaving you with your original share, plus the increase in average marginal product, minus the costs of distributing this average marginal product. I, unfortantely, believe the average human to be of a more selifsh and time-sensitive nature, meaning that they will react much more responsively to a near-instant incentive rather than an incentive which requires benefit sharing.
The second inefficiency is an extension of the first, but with a greater regard for the notion of the condition of increased productivity; that being that everyone must become more productive. Why? Or each individual that becomes more productive will not receive their "fair" share from becoming more productive. If a farmer becomes more productive and produces a higher yield, in the Communist society, he would receive much less more of his yield than what he actually creates, as it is shared amongst the population. Should he have a demand for something made by the blacksmith, yet the blacksmith remains at a more stagnant level of productivity, there will not be enough produced to fairly compensate the farmer (with another good he demands) for his increased productivity within his specialty. This implies that there is a free-rider problem inherently placed within socialism. There is a great interdependency amongst all the members of the community. Should any one member of the society choose not to participate in the improving of the standard of living, yet they cannot be denied their basic necessities provided by the rest of the community, you have a net-taker from society. In terms of Game Theory, there is an unbelievably large incentive to cheat. A single member of society can produce nothing in a given year, yet receive the exact same amount as he received last year by way of government transfers (whether in-kind, or in-cash). Unless there is a system of checks and balances in which each member of the community polices eachother in terms of ensuring individual productvity is at least remaining constant, if not improving, the resulting situation will be one of some individuals becoming better off (in terms of the ratio of effort put in over compensation received) and other individuals becoming worse off.
Mathematically,
Y = GDP of period 0
L = Working Population
Y/L = Marginal Product per working citizen (average)
y = increase (decrease) in total output in period 1
l = increase (decrease) working population in period 1
N = Non-working Population
P = L + N (Total Population)
Y/P = Rightful share of total product

Therefore, if there is one member of society that decides to exit the population L and become a member of the population N:
Effects...
Y decreases by y = (Y - Y/L)
L decreases by 1, therfore L. = L-1
Y/L. = (Y - y) / L-1
and
Y/P* = (Y - y) / (P + n)
where (Y/P)* is the rightful share of total product in the next period

Y/P* < Y/P by two factors, y and n Output has shrunk in total, and each individuals piece of the pie has also decreased. This is an obvious trade-off decision for the individual, has he will be determining his utility between putting in some sufficiently high level of effort to attain Y/N in comparison to putting in zero effort and receiving a slightly less in total, yet relatively cheaper, amount of (Y/P)*. So long as the effort required to attain Y/N is high enough, the incentive condition to exit the producing side of society will remain as:
E u[(Y/P)*] >= E u[Y/P] + E u[Work Effort]
where E u[] is the expected utility, which varies based on personal preferences, as well as a certain level of risk that revolves around the chance of an overall increase in the economy's productivity as opposed to a decrease. Meaning that there is even a chance that one could participate in the labour force, become more productive, but be subject to a decrease in their piece of the pie due to the lack of increased productivity in the aggregate. Although, I will acknowledge that this risk is spread across both sides of the inequality, as Y in the next period in the case of not participating in the market is also subject to the aggregate productivity of the economy. But it is certain that Y in the next period will be definitely lower if that one individual decides to exit the labour force than if he does not.
To estimate the effort function is quite difficult, but it can only be explained on an intuitive level. There will be some function that will show a scale of prefences subject to the individual deisres and characteristics of any particular member of society. There will be some negative coefficient multiplied by labour hours work (not simply a number, but a function of labour hours as well as any excess skill or effort required) that will have an adverse affect on the utility attained by the individual. This implies that the second term on the right side of the inequality, E u[Work Effort] will be negative so long as there is an assumption of negative utility received from effort.
The incentive to cheat is quite evident, both mathematically and intuitively (although, I will admit that the math is amateur at best, but still helps derive the point). And there is an underlying implication that once one member of society realizes this incentive to cheat, that the propsensity of individuals treating will only increase; as no person likes knowing that they are giving more than they are receiving. There is diminishining marginal utility of cheating, meaning that the first individual to cheat will face the greatest gain in the short-run; but as individuals exit the labour force one by one until such time as the incentive condition is no longer in the individual's favour, the incentive to cheat becomes marginally less each time. The final person to exit the labour force will be indifferent to the two possible pay offs.

The third inefficiency requires an assumption to be made that there is a fully established, functional and operatioanl Communist economy. Ha
After logic has been denied and the assumption has been achieved, the efficieny is as follows: There is an enormous incentive for black market activity in a socialist economy; even more than that of a Capitalist society (think taxation and regulation).
We assume that there is a regulated quota, price and distribution of widgets. Now suppose there is an individual widget manufacturer who has received his quota from the centralised government. He will proceed to acquire the necessary input materials to produce his quota; assuming that the supplier is also on a quota system (but wit more leaway due to possible inefficient use of materials, say a 10% lost materials rate), there will be a possible excess of materials remaining after quota is met. The widgets will be distributed to retailers at a fixed and regulated price in fixed and regulated quantities. Now, the widge manufacturer has leftover materials after meeting quota due to his allowement of a bad materials overage. There is an incentive for this manufacture to produce beyond quota and sell off the excess for a discounted price; as the cost of both the materials and the necessary capital is sunk. So long as the discounted price is suffice to cover the variable costs of production, it is efficient to proceed with production; so long as there is a retailer to be found. I find it hard to believe that there would not be at least one retailer in the industry that doesn't face a situation of excess demand and would not be seeking to acquire an amount of widgets in excess of his quota; especially at a discounted price. All of this, of course, but be done in complete secrecy without there being any knowledge from the centralized governemnt, as I'm sure they understand the consequences. If the retailer has aquired excess inventory at a discounted price, it is in his best interest to price discriminate and attempt to sell the excess at either a premium (should demand allow for it), at par, or at a discount to ensure minimal amount of possession time of the black market widget. Assume that there is a large volume of excess created by a particular manufacturer as he is able to vertically integrate his black market activity and find a supplier of materials willing to supply more materials at a discounted price (as it will increase his overall profitablity and wealth in the given period). When the materials are finished and are being distributed, by way of the black market, to the retailers at a discounted price; and once again, turned over to the general public at a discounted price; the black market goods have replaced the regulated market goods. There is an incentive down the entire supply chain for black market activity, and once black market activity becomes on a large enough scale to undercut the regulated price (a perfect example of the beauty of capitalism), the regulated industry has been proven to be inefficient.
Taking a step back, we must analyze this chain of events through the measure of pareto efficiency.
The input materials producer is better off due to increased profits from excess sales.
The widget manufacturer is better off due to the increased profits from excess sales.
The widget retailer is better off due to the increased profits from excess sales.
The consumer is better off due to discounted price as a result to a combination of increased supply and discounting due to black market risk of possession.

The law of supply and demand will determine the success of any particular black market, but the principle remains. There is always an incentive to break quota and produce more than what you are required. Think about OPEC, the words oil cartel, there is an incentive for every member of the cartel and any point to break quota and produce excess supply. There will be supernormal profits to be made by breaking quota and maxxing out capacity, but markets will see a decrease in price. Although oligopoly profits are always superior to that of the profits receieved in a competitive market, there are even greater profits to be made by cheating in an oligopoly.
Think of Communism as a massive oligopoly littered with quotas and regulated prices. The same argument applies to the production-consumption side of the economy as it does to the employer-employee side. Any labourer seeking to improve his individual position within the economy will be willing to work at a lower rate than that which is regulated from the government. So long as there are a sufficient number of labourers willing to work for less than the regulated wage to create a net increase in income, the regulated price will fail to remain efficient, nor recognized.

This has been a small part of my entire attack on communism and its inherent flaws.
Capitalism has its way of always emerging out of every type of economy that has ever been attmped; and that is because, in my opinion, Capitalism is not an ideology, but moreso a commentary on human nature and their responsiveness to incentives, as well as their constant desire to improve both their absolute, and sadly enough, relative positions in society.

1 Comments:

Blogger Democratus Referendus said...

Major Error Corrected.
In that mathetical section, the inequality should be Y/P
not Y/N
as P = N + L
I apologize for the error.

3:09 AM  

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