Wednesday, August 22, 2012

Stalinist incentives

Incidentally, Sandel's discussion of incentives below reminded me of some brilliant examples in Acemoglu and Robinson's book Why Nations Fail: The Origins of Power, Prosperity, and Poverty , which I looked at starting here. A focus on incentives turns out not to be just an artifact of hard-nosed capitalism. Stalin was very focused on incentives as well... but it did not work very well.

Stalin understood that in the Soviet economy, people had few incentives to work hard. ..In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. .. But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid.
The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value. To more specifically create incentives for innovation, the Soviet Union introduced explicit innovation bonuses in 1946.
Incentives also included prison and being shot.

In June 1940, for example, a law made absenteeism, defined as any twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months’ hard labor and a 25 percent cut in pay. All sorts of similar punishments were introduced, and were implemented with astonishing frequency. Between 1940 and 1955, 36 million people, about one-third of the adult population, were found guilty of such offenses. Of these, 15 million were sent to prison and 250,000 were shot. ..In any year, there would be 1 million adults in prison for labor violations; this is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia. Still, it didn’t work. Though you can move someone to a factory, you cannot force people to think and have good ideas by threatening to shoot them.
There's nothing as Communist as incentives.

It didn't work very well not because Stalin was not focused on incentives, both positive and negative, but because the system as a whole was morally bankrupt.


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