Just finished Red Plenty by Francis Spufford. This book focuses on the Soviet dreams from 1940 to 1970. Leaders span Stalin, Krushchev and Brezhnev. Why did I read this book? It addresses the economy of the Soviet Union and is an insightful read into Russian history during this period. I like economics and history so it fits. Not a lot of finance insight but this was to be expected.
The large picture nugget that was given to me from this book is the insight that Marx did not intend for the the Revolution to occur in a backwards society - as Russia was at the time of their revolution. Marx referred to a revolution in a developed industrial society similar to England, Germany or the United States. The workers would simply take over the machine and out the intellectuals that were stealing labor (this makes Atlas Shrugs such an interesting read). The result is Russia took on a very complex problem. How to build a socialist society from an agrarian economy to an industrial economy. As the book reads through you see this was a significant oversight by the initial instigators.
To further complicate the ability to transition, Stalin removed the liberal arts (and related instructors to the gulags) from the universities creating vocational engineering and science programs at the universities to focus on developing industry. A brain drain ensued pushing the theoretical modeling abilities back a generation.
Linear programming was introduce to centralized planning giving the hope that supply an demand could be attacked through computer programming iterations. True supply and demand is not as simple as algebraic applications and requires calculus to determine optimization. While the Soviets were trying to pin down supply and demand through algebra, the West allowed for natural optimization through open markets. Red Plenty tracks how the system used paper folders to determine the demand and available supply of over 300 commodities required to run the economy - to the extent there was one man in a room wheeling between folders updating each for a change in resource requirements.
The book then goes into the black market and how it operated. An example was given of a factory that could not meet its demands and determined if they had an upgraded piece of equipment they could meet the demand. There was not a possibility of ordering a new piece of equipment since they already had one that was an older version. They decided to run a bulldozer through the plant as an accident causing an emergency need for the new piece of equipment - vs. just letting the authorities know that modeled demand was not deliverable with the older version of the equipment. Meanwhile, the black market operators stole key pieces that put together the machinery that was needed to fill demand from another factory trying to increase its production. Etc, etc.
So what's the take away from all of this. Human nature doesn't change regardless of political or economic structure. The key is how does information become transparent as soon as possible allowing markets to react efficiently. A free market allows for the quickest exchange of information between rational investors. As people, we are not necessarily better than others - we are just in a market that allows for a more transparent exchange of information.
We have had our share of failures in the West. While Stalin was murdering millions and causing millions more to suffer in severe poverty, the United States was in a great depression with millions suffering severe poverty. We have recently seen Wall Street deal makers and trusted investment managers hiding information from regulatory oversight. The result is millions at the age of retirement seeing their wealth reduced or wiped out. Transparency of information is critical to the success of any organization - large or small.
Let's ask ourselves about our own organizations. Do we allow information to flow freely? Is accountability transparent? Can executives really see what is going on in their organizations? Challenge yourself. We are only as good as what we know. While we smirk when we think of the planned economy, we may be sitting on our own little fantasy.
Great post, Pat. My brain seems to cave in on itself when dealing with economic theory/economics, but Red Plenty sounds like a really interesting book.
ReplyDeleteIf I understand you correctly, you propose two questions: "Do we allow information to flow freely? Is accountability transparent." That is, the second question is not an appositive--restating the first question. Free flow of information and transparent accountability are two necessary aspects of a free market. One without the other is useless.
In a decade that began with Enron/Arthur Anderson and ended with Goldman Sachs and their ilk, I've become pretty cynical that free flow of information or transparent accountability will occur. I'm a pro-regulation guy (but who isn't at this point?), but there is a group with a really loud voice who will proclaim any type of regulation, any type of accountability, as government intrusion upon the free market rather than necessary components of the free market. Regulation is simplified to mean "communism" and we've spent decades propagating the evils of communism so that now anything we can categorize as being "communist" in nature is seen as communist. It is seen as antithetical to the free market, even the good.
I may not be understanding you correctly, I know I didn't understand the paragraph about calculus and algebra, but I think there's a lot to think about just in your post. (I may not be able to handle the book!)
Brian
Brian
ReplyDeleteTwo key concepts/questions:
1. How do we really know what is going on in our organizations?
2. How do we create accountability systems that ensure compliance?
Transparency - Organizations are lulled into a sense of seeing what they want to see vs. what is really going on - allowing for lack of transparency. We want to believe the good news. This allows an investor to believe his/her returns are valid because they are above the benchmark. However, they question returns that are below the benchmark. Returns higher than industry average are just as likely to be a signal for investment manager fraud as lower returns (in some cases a bigger flag). How does the real information make itself visable?
Accountability Systems - These systems are required to ensure activity is happening within the organization as represented. The US economy is built on regulatory environment that sits on a free market. The concept is to let the market flow free but be on the lookout for those acting outside of the rules. The significant blow ups in the marketplace over the last 25 years have all been the result of inadequate regulatory practices - for whatever the reason is. If the SEC (regulatory) does a basic review of the ineternal systems of Madoff then he is exposed years ago.
Both concepts are stand alone but work in concert to create a successful (or real) free market. All organizations face a similar challenge at the institutional level.
Keep in mind that a country's economic model is independent of the country's political model. The United States has a democratic political state with a capitalist economic model. China has a communist political state with a blended capitalist/planned economy. The Soviets had a communist political state with a planned economy support the communist political concept.
A good read on this concept is "Commanding Heights".
Pat