Those who believe that industrial policy, which is an attenuated form of government economic planning, helps produce more goods and services might learn something from a report in today’s Wall Street Journal (Georgi Kantchev, Yuliya Chernova, and Stephen Fidler, “Putin Grips Economy Tighter to Supply Russian War Machine,” December 6, 2022). It explains the Russian government’s problems in boosting production of military supplies for the war in Ukraine, the “special military operation” in Putin’s terms:
Russia’s defense industry was shattered after the collapse of the Soviet Union in 1991. Mr. Putin has tried to rebuild it since the mid-2000s. He renationalized enterprises and brought the industry under the control of a major holding company called Rostec, which controls more than 800 companies. A 2021 report from the Swedish Defence Research Agency describes the industry as “top-down controlled and primarily government funded.”
Some people believe that central control of the economy is more efficient than economic freedom and competition, despite historical evidence to the contrary. One aspect of the problem is corruption, but this is an effect more than a cause. Interference with prices and incentives is more important. More to the point, corruption is not absent from industrial policy in our own countries: it just takes the legal form of special interests and crony capitalism through protectionism and subsidies. The situation in Russia is akin to advanced crony capitalism (if we can call this “capitalism”):
Russia’s defense industry, meanwhile, struggles with corruption and inefficiencies. In October, the head of the anticorruption committee and the chairman of the defense committee in Russia’s Duma sent a request to the country’s prosecutor general to investigate why the Defense Department couldn’t properly outfit the mobilized troops given it was fully financed to do so, according to state media.
As if it were sufficient for a government to “fully finance” something on a stack of paper called “budget” for the stuff in question to be produced in the required volume and at an acceptable quality!
READER COMMENTS
Jim Glass
Dec 6 2022 at 5:51pm
Putin made a genuine attempt to modernize the Russian army on the western model, lean and efficient, after its awful performance in Georgia in 2008. As his Minister of Defense to do it he even hired an economist, Anatoly Serdyukov.
The Putin-approved ‘Serdyukov strategy’, was to fire 1/3rd of the army’s officers, 66,000, from generals down … slash procurement of unneeded equipment from state suppliers … open military procurement to competitive bidding from foreign suppliers … end the Soviet practice of having “military towns”, etc. It’s hard to know what most horrified those then stealing an estimated 20% of the military’s budget.
Oh, wait, it was this:
Well, after not too long Serdyukov was caught in a purported “honey pot” sex scandal with an alleged girlfriend (he denied it, who knows?) who’d allegedly stolen $58 million of military funds. He was purged and … she was set free! Go figure. How odd.
Putin killed the reforms and hired his current crony as Minister. That’s when the renationalization and consolidation of Russian defense industries took off. Before the current war as much as 40% of the military budget was estimated stolen. Corruption is culture. And as the late, great Peter Drucker said, “Culture eats strategy for breakfast.”
One aspect of the problem is corruption, but this is an effect more than a cause. Interference with prices and incentives is more important.
The incentives for preserving corruption are HUGE. Once it exists on this scale, one can kiss dreams of pricing reforms farewell as they go blowing away on the wind.
Craig
Dec 6 2022 at 6:29pm
US/NATO dwarf Russia in essentially every metric (population/GNP) and the military budgets are just not even remotely close. Russia is fighting the Ukraine directly, but the US/NATO weapons are really that much better. Its been this way actually for quite some time actually. Arab/Israeli Wars, US/Iraq. The Russians suffer from a relative disadvantage that is insurmountable.
What we’re seeing in the Ukraine is the reason the US doesn’t have free health care. We chose a gargantuan military budget that spends $700bn+ year after year after year after year.
The US is really, really good at killing and destroying things. Its our specialty.
We should be so proud.
Craig
Dec 6 2022 at 6:31pm
Sorry, actually did not mean that as a reply just a stand alone statement.
Pierre Lemieux
Dec 6 2022 at 6:40pm
Craig: Somewhat incidentally, why do you say “we”? You did some killing yourself?
Craig
Dec 6 2022 at 6:50pm
You know some folks were born made to wave the flag (channeling Creedence Clearwater Revival) and for those who might be so inclined even when they aren’t some senator’s son, I write that statement so that they can take stock about what the measure of a nation is because its not its collective capacity to kill and destroy.
David Seltzer
Dec 6 2022 at 6:23pm
Milton Friedman’s pencil is a wonderful example of spontaneous order that is profoundly antithetical to centrally planned industrial policy.
David Seltzer
Dec 6 2022 at 10:58pm
I was referring to Friedman’s I, Pencil video. I, Pencil is an essay written by Leonard Read. It was first published in a 1958 edition of The Freeman. Friedman tells the story originally written by Leonard Read. Apologies for any confusion. Thank you for pointing that out Pierre.
Thomas Lee Hutcheson
Dec 6 2022 at 6:54pm
Industrial Policy is attenuated classical liberal economic policy. 🙂
Pierre Lemieux
Dec 9 2022 at 10:25am
Thomas: Interesting point. Assuming that industrial policy is half way between central planning and “liberal economic policy,” logic and arithmetics would seem to support your comment. When you look at it in an economic way, though, you need to wonder about incentives, institutions, and dynamic stability. It then becomes pretty clear that industrial policy does not lead to laissez-faire. For example, that is not where 17th-century mercantilism, the Weimar republic, Putin dirigisme, Chinese post-Mao policy, or Peronism led.
Mactoul
Dec 6 2022 at 8:45pm
There is malinvestment in private sector as well. Plenty of companies go under all the time. But i suppose what really is matter with state malinvestment of industrial policy type is that the state is often able to carry a loss-making enterprise indefinitely.
I would also add that corruption or a failure to actually build something doesn’t show failure of industrial policy per se. What shows failure is to build something which is not economically efficient.
Like bullet trains running empty because people prefer other modes of travel.
Jon Murphy
Dec 7 2022 at 9:45am
I see what you are saying, but I disagree. I think failure to build something does show failure of industrial policy per se in the technical sense as well as the colloquial. It’s a failure of coordination of plans. We see the same thing in the market, as you rightfully point out. Failure of plans happens all the time. If industrial policy cannot bring about its plans, it has failed. Just like my private planning of going to the store today to buy milk fails if they do not have milk at a price I am willing to pay.
Craig
Dec 8 2022 at 10:13am
Just to expound here for one moment. Has anybody noted the distinction between the post-Afghanistan grain embargo of the Soviet Union by the US, a country that had a grain deficit which also then included the Ukraine, versus today when part of the discussion is Ukraine’s ability, in the midst of an armed conflict, to resume grain exports?
And of course an army marches on its stomach, doesn’t it?
Jon Murphy
Dec 6 2022 at 9:39pm
Good stuff here. The post made me think of Hayek’s chapter “The Meaning of Competition“. One of the reasons central planners and industrial planners give for the supposed superiority of their schemes is that they can achieve the same results without wasteful competition (Oskar Lange makes precisely this claim in “On The Economics of Socialism”). Hayek is most famous for pointing out that the price system generates the very knowledge needed to guide it, but I think his point on competition is just as important in understanding why centralized planning fails: the supposedly “wasteful” competition in the market is precisely the process we learn what works and what doesnt:
By assuming away the problems of competition, pricing, and discovery, centralized planning eliminates the very tools needed!
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