Tuesday, 2 July 2013

Mark Carney should learn from the failure of the Soviet shoe industry

By John Butler

GROWING up in the West in the 1980s, new Bank of England governor Mark Carney was almost certainly inundated with stories about how the Soviet Union was not only an odious regime, but how even the possibly well-intentioned aspects of Soviet central planning inevitably resulted in sub-optimal economic outcomes.

A classic example was shoes. Absent a pricing mechanism to match supply and demand, there was invariably either a glut or shortage. And even when there was a glut, there were plenty of summer shoes, but a shortage of winter boots. Central planners just couldn’t get it right. By contrast, the largely capitalist West, responding to real price signals in real markets, did a pretty good job at producing, in sufficient quantities, a range of shoes that customers wanted, that fit, that they could afford.

But you can’t produce shoes without machines and materials. Machines and other productive assets comprise the capital stock producing all things that we consume. To provide a higher standard of living in future, the capital stock must grow and adapt. And as it ages and depreciates, maintenance is required just to keep it working efficiently. But if central planners can’t even get the day-to-day shoe situation straight, how are they going to maintain, grow and adapt an economy’s entire capital stock to provide for the future needs of consumers?

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