underconsumption again--and Luxemburg

Steve.Keen at unsw.edu.au Steve.Keen at unsw.edu.au
Tue Jan 31 09:38:30 MST 1995


Peace recently stated:
        I'm sorry if I was arguing with a point you did not make.  I will go
on, however, to point out that the "external constraint" of a lack of
"resource slack" assumes a very static model of an economy.  Complex
industries, (take aerospace) are always years ahead of both actual and
possible markets for their goods.  Your model coincides alarmingly with the
assumptions made by Lee Iacocca, for example, that socialist workers lack the
capacity for strategic business.  I posit that socialis workers will keep
much in the bank and pay themselves very reasonably.  They will have the same
slack that capitalist firms have because they will be making the same
resource decisions.  Now, it may be that a socialist system will produce an
economy so vital that it strains at its own capacities.  I yearn for that
day.

My (Kornai's) analysis isn't based on any assumptions about the nature
of socialist workers. The theory merely points out that a system which
is run at full capacity is more likely to run into external bottlenecks
than one which has built-in over-capacity.

The discussion I posted focused mainly on problems of the rate of
growth. But there is also the issue peace's comments raise of
innovation. In a demand-constrained economy--where lack of effective
demand is the main constraint on the output of the firm--the best
response is to innovate, and try to pull what demand there is away
from your competitors and towards you. In a resource constrained
economy, where demand far outstrips productive capacity (remember
the reunification of Germany, when Eastern workers had tens of
thousands of deutchemarks, on average, in their accounts?),
whatever you produce is likely to be sold; the pressure is
therefore on quantity, rather than quality or innovation.

My favourite example of the actual manifestation of that problem--
that the incentives in a resource-constrained economy discourage
innovation--was the Russian motorbike the "Cossack", purchased
back in '75 by my then girlfriend's brother for $650, which
worked out to a dollar a cc. It was identical to the 1942
BMW motorbike, right down to having a rubber saddle and exposed
frame; I'm sure American directors were buying them by the
truckload to appear in their WWII movies.

I'm sure someone will post that, what the heck, the fact that
it wasn't as fancy as the Western machine of the same vintage
is less important than the fact that it was a motorbike; but
the point is that it was both less well designed AND in short
supply--lots of Russians who wanted one couldn't get one,
because of the resource constraint (accentuated by the fact
that a few were sold o/s to raise foreign currency to cover
other resource shortages elsewhere in the economy).

Ultimately, the point of work such as Kornai's is not to
throw brickbats at the worker under socialism (which i
presume WAS the point of Iocca--how do you spell that??).
It's to try to work out why what went wrong with actual
socialism did go wrong. This could be useful information
if ever anyone ever gets a second chance at it.

Cheers,
Steve Keen

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