The Performance Criteria in Comparative economics: an analysis of Socialist and Capitalist economies
An analytical framework for comparing economic systems is essential in the study of comparative economic systems. The most common bases of comparison are the ownership of the means of production and the method of resource allocation. The means of production may be owned privately (individually), as in capitalism, or publicly (collectively), as in socialism. Also, resources may be allocated by market through the use of prices, as in a decentralized market economy, or by administrative commands expressed in real (physical) terms, as in a centrally planned economy. And there are various combinations of instruments and institutions (for example market socialism combines public ownership with the use of markets and prices for decentralized resource allocation decision.
In addition to studying similarities and differences in economic systems, it seems very useful also to compare economic systems in terms of some common criteria which might be considered as “performance” or “success” indicators. This is our approach of comparing both socialist and capitalist economies.
Bela A. Balssa suggests that comparing economics using the performance criteria can be done by an evaluation in terms of a number of criteria (the success indicators); and combining the results according to a preference scale which expresses the relative importance of the various indicators. In fact he distinguishes five success indicators: static efficiency, dynamic efficiency, growth, consumer satisfaction, and income distribution. Some of these indicators may appear in some instance to be mutually supporting, while others may be mutually conflicting (The Hungarian Experience in Economic Planning, new Heaven: Yale University Press, 1959). These factors constitute the major points we will be using in our argumentation.
Static efficiency can be defined as production conforming to the preferences of the community when there is no possibility of increasing the production of one commodity without reducing the production of another; it is another way of talking of Pareto efficiency. It turns out that with regard to static efficiency the real difference stands on the one hand between free enterprise and the socialist market solution, and on the other hand, centralized physical planning. So from an analytical point of view, the workings of the purely competitive system and of the market solution for socialism, and the results that they all lead to are essentially the same. Centralized planning based on the physical allocation of resources dispenses with the price mechanism in resources allocation. In fact prices do not express the relative scarcities in this system but serve only for accounting purposes. In consequence, efficient allocation of resources cannot be achieved. With regard to static efficiency pure competition appears to be superior to the centralized system on the physical level.
Nevertheless, there are two types of market failure which impair the efficiency of a competitive system: those existing in a static world with perfect information, and those connected with imperfect information and uncertain expectations. In the first case competition will break down because monopolies will be formed. The second case of market failure comprises uncertainty and inconsistency of expectations, and resistance to change; which in turn will bring fluctuations in the employment of ressourses. In other words, a purely competitive economy will work at least part of the time with less than full utilization of existing resources
Dynamic efficiency is concerned with efficient resource allocation at a given point in time. An economic system may exhibit static efficiency even though production is unchanged from year to year. Dynamic efficiency, on the other hand, is concerned with the growth possibilities of an economy. In fact there is much disagreement on the question whether a free enterprise or a socialist economy is superior with regard to dynamic efficiency. According to Hayek, a higher growth rate could be secured in a free enterprise system “if we assumed that the same restriction of consumption, which has actually taken place in Russia, had been caused by taxation, the proceeds of which have been lent to competitive industry for investment purposes”(F.A. Hayek, Collectivist Economic Planning, London, R and Keegan Paul, 1935 The contrary conclusion is reached by Bergson when he says “one may imagine that in a highly dynamic economy a Centralist allocation of investment might lead to fewer and smaller errors than a competitive allocation”(in A Survey of Contemporary economics, Volume #1 1948). Although these remarks were addressed to the competitive (market) solution in a socialist economy, they may apply to free enterprise as well. All this leads us to the conclusion that economists cannot make a conclusive judgment on the dynamic efficiency of the blueprints of different economic systems.
But a distinction must be made between dynamic efficiency and the actual growth rate of national income. The actual growth rate is affected not only by the dynamic efficiency of the system, but also by the central authority’s action overruling individual preferences in regard to saving versus spending and work versus leisure. So despite dynamic inefficiencies, an economic system may achieve a higher growth rate through an increase in the saving ratio or through an involuntary increase in the amount of labor. In free enterprise economy, saving is determined by the preferences of the individuals and by corporate saving. In a socialist economy, the central authorities decide what part of the national income will be used for investment purposes.
The possibility of enforcement of a higher saving ratio in a socialist state makes a higher rate of growth feasible. In this line of thoughts Felner believes that “a totalitarian government, if it could establish itself in a country such as the United States, might not find it difficult to operate the economy at a level of consumption 20 or 25 per cent lower than the present consumption level, and then let the consumption rise slowly with the rise of aggregate output. By such a policy, the present American net capital formation could be more than doubled, and it is quite likely that the annual economic growth rate of the United States could be almost doubled” (In trends and cycles in Economic activity, NY,1994).
In discussing the three success indicators examined above we have postulated that production should correspond to the preferences of the community, which may mean individual preferences as well as those of the planner. In other words in evaluating these indicators no distinction has been made between a system based on consumer sovereignty and one based on autocratic decisions. It can be said that the three above indicators are free from value judgment.
Advancing consumer satisfaction as the fourth indicator, we introduce the possibility of making value judgments in evaluating the performance of various economic systems. This indicator takes a step further by making it possible to differentiate between the performance of economic system based on consumer sovereignty and those based on autocratic decisions. The level of consumer satisfaction reached can be indicated by the living standards of the population. But it seems very important at this level to take into account whether the goods produced are those desired by individuals. Also it is important to consider leisure. Foe a longer period, the temporal change in living standards should be considered. It turns out that it should be noted that over periods sufficiently long to enable the population to enjoy the results of investment activity, q high growth rate may raise future consumption. Yet this is not necessarily so: if, for example, the planners regard the increase of military capacity as their primary objective, a high growth rate will be accompanied by a permanent restriction in consumption.
In the works of economics following Pareto, income distribution has been said not to affect efficiency. It is assumed that once an efficient allocation of resources has been reached, income distribution can be changed at will, without impairing efficiency, by the use of lump-sum redistribution. But this is far from being true. Lump-sum redistribution is not only impractical; in a dynamic economy even lump-sum measures will affect efficiency. Lump-sum taxes and subsidies altering income distribution in one period will affect the amount of work supplied and risk-taking in the succeeding periods, which in turn, will affect the dynamic efficiency of the economy.
All this said economic arguments are not sufficient to make a choice between economic systems(in the present case between free enterprise and the socialist system).Two reasons have been established: we cannot determine the performance of the various blueprints with regard to the five success indicators, and we are unable to construct a scale of preferences, which would give the ranking of different values of the success criteria. In addition, even if the relative merits and demerits of the blueprints of various economic systems could be judged, their actual realization shows some deviations from the theoretical construction. Also as a result of sociological and psychological factors, a free enterprise blueprint may work better in one and worse in another country. Similar considerations are relevant with regard to the socialist blueprint.