What’s
wrong with Sovietology?
The West has responded to the Russian
incursion into Ukraine
in a weak and confused fashion. That’s
partly because the English-language scholarship on the old Cold War is weak and
confused, at least in its economic analysis.
Policymakers have nothing better to draw upon.
For example, in his well-regarded Cold War: A history, Martin Walker
suggests that the Soviet Union imploded
because of inefficient investment in the 1970s.
“[B]y its own doctored statistics the Soviet economy was running faster
and faster to stay in the same place.
Each extra 1% in national growth required an increase of 1.4% in
national investment, and an increase of 1.2% in output of raw materials.”
This claim is mystifying. In most economies, returns to a particular input
do eventually diminish. Why must this
doom the Soviet economy in particular?
Some background here may help (especially since
Walker provides
none). The most common model of national
output has two inputs, labor and capital.
The latter refers to the things that we produce (hammers, lathe
machines, factories) in order to produce other things (furniture, autos,
whirligigs). Most fits of this model
assume that a 1% increase in all inputs leads to a 1% increase in output, a
result known as “constant returns to scale.”
For example, a 1% increase in capital may lift output by .7% (which is what
Walker is
saying); a 1% increase in labor, by .3%.
Thus the total increase in output is .7% + .3% = 1%. One justification for this model, at least as
it applies to a given industry, is that firms eventually figure out how to
build a factory that produces as cheaply as possible. To expand production, they replicate that
factory. Adding a plant to the 100
already in business – an expansion in all inputs of 1% -- will increase output
by 1%.
And that may be the end of the matter,
except that it’s not clear that Walker
knows what he is talking about.
Journalists commonly use “capital” and “investment” interchangeably, but
investment really refers to the increase in the capital stock. In our example, the new plant is an
investment that raises the capital stock from 100 plants to 101. The distinction is worthwhile, because
investment does not affect output in the same way as does the capital stock.
The
saga of the last computer
To see this, let’s distinguish between two
more terms that journalists interchange – “economic activity” and “economic
growth.” “Economic activity” usually means
the value of the nation’s production this year; it’s gross domestic
product. “Economic growth” is an
increase in economic capacity. GDP is
how much we actually produce; economic growth is how much more we can produce than before.
If Walker
is really talking about the impact of investment on economic growth, then his
claims are puzzling indeed. In the usual
model, investment at the margin has no
impact on economic growth in the long run.
The reason is diminishing returns.
Adding the millionth computer to an office with five workers is probably
not too productive. It would make better
sense to bring in computers until one more adds nothing to the office’s
capacity to produce. That happens when
the new computer just replaces a worn-out one; that is, it just maintains the
current stock of capital. But economic
capacity depends on the total amount
of capital and labor available, so it is not affected by the investment of the
last computer.
So maybe Walker is talking about GDP. Certainly, investment will raise this: We’re
producing one more computer. But now
it’s not clear why Walker
is disturbed that a 1% increase in investment raises GDP by less than 1%. After all, investment – which is the
production of inputs for producers – is just one component of GDP. We also produce for households, governments
and foreigners. Suppose, for example, that investment comprised 70% of Soviet
GDP. Then a rise of 1% in investment
would raise GDP by .7% -- perhaps a bit more, if we include the subsequent
rounds of spending.
Why does any of this matter? Because Walker
seems to assume, as most Soviet scholars do, that physical capital is the key
to economic growth. For more than 60
years, statistical studies have confirmed that the growth rate depends less on the
amount of inputs available than on what we know about how to use them
(“technology”). If the Soviet economy
was running faster and faster to stay in the same place, then maybe its
managers didn’t really know how to run.
Studies of Soviet stagnation could focus on education, training, and
incentives to innovators.
And Martin Walker could treat himself to
an economics textbook. –Leon Taylor, tayloralmaty@gmail.com
References
Martin Walker. The
Cold War: A history. Henry Holt and Company. 1995.
No comments:
Post a Comment