There are at least three major problems of central planning: Two static and one dynamic.

First, in economic terminology Central Planning gives rise to a series of principal-agent relationships. This is simply economic-speak for the problem a superior has in making sure that his subordinates do not shirk or lie. For example, a landlord wants his workers to work as hard as possible, but he cannot know whether a mildly poor result is due to laziness of the workers or some other factor such as the weather. To solve these problems one needs some kind of disciplining device. In our case the landlord could hire a person simply to monitor his workers to see if the were shirking. This method was commonly used in the Soviet system. However, in a system of central planning there are numerous principal-agent relationships and there is a large need for people who simply monitor other people. There is further the problem of monitoring those who are supposed to monitor other people (and so forth). This large need for monitoring represents a problem because it is an inefficient way of maintaining discipline: All those who monitor other people could be doing productive work if there was another way of monitoring people.

There are at least two ways of reducing the monitoring demand. First, one may use so-called "boil-in-oil" contracts which means that you dramatically increase the penalty for shirking. The strict labour laws under Stalin may be seen in this light. Malia suggests that he is aware of this mechanism in politics (but not economics) when he writes that "In the absence of terror, the General Secretary was now ultimately accountable to them [the Politburo]" (p. 354). The second solution is to use the market mechanism to decrease the number of principal-agent relationships. If the farmer owns his own land, there is no incentive to shirk since he himself would bear the full loss of his laziness. Thus, with private ownership the principal-agent problem disappears. The lesson seems to be, contrary to Marxism, that a system of private ownership of the means of production is indeed more effective than one of public ownership.

Even if there was no problem of shirking or lying, there would still be problems in a centrally planned economy because of what Hayek called "information overload." Imagine you are working in Gosplan trying to create a plan of how many units of certain goods you should produce. The problem is this: You need to know the desired amount of various goods for all the individuals, the optimal production processes and the available resources. The problem is further complicated by the fact that all the variables are interdependent. If you decide to produce more shoes, you also need to produce more rubber and other raw materials, to produce more rubber you need more of the tools needed to produce rubber and you may have to cut the production of some of the other products requiring rubber and so forth almost forever. You may imagine the complexity of this thought process for about 24 million goods.

Of course, there are some economic and mathematical theories that help in this process. The economist W. Leontief developed a mathematical technique - "the Leontief Input-Output analysis" - dealing with the problem of interdependencies described in the above paragraphs. But even if this technique had been available in 1917 when the Communist took power, it could not succeed because the procedure assumes that you have precise knowledge of aggregate demand, the production possibilities and the available resources. As if this was not enough you also have the problem of time lags in planning and production. Finally, there is the problem of planning effectively in this system with "political prices" (p. 335) which, unlike market prices, do not reflect the scarcity of the good. How do you determine the most effective way of producing a refrigerator, when you do not know the "real" prices of energy, metal and all the other materials?

The third problem - the problem of innovation - is probably the most serious problem of Central Planning (noted by Malia on p. 335). The causes of this problem are multiple, but one major cause is the inherent conservatism in a bureaucratic structure. There is little incentive for a factory manager to risk trying a new production system if he can get his salary without dangerous experiments. Furthermore, even if he is willing to take the risk he cannot simply go out and buy research or new machinery. He must produce plans which must be sent for approval at a higher level (which in turn must be approved at a higher level and so on). In a free market system the incentive structure is exactly the opposite. You are greatly rewarded if you are able to invent a new and more effective method of production. Moreover, the factory owner is free to do so without obtaining a time consuming approval from the minister of that industry. Finally, because of the existence of market prices production is automatically switched to those sectors which people demand goods from. Capitalism is constantly and automatically changing, unlike Central Planning which has an inherent tendency to favour extensive over intensive economic growth.

It thus seems clear that the attempt to create Communism was build on a mistaken belief. Central Planning is less, not more, efficient than free market capitalism. In itself this mistaken belief need not do too much damage, but combined with the acceptance of force as the means to implement the program it becomes lethal. As correctly described by Malia it gives the history of Russia a certain rhythmic quality. First, the leaders try to implement their blueprint. Next - because the real world does not react in the way the ideology predicted - they retreat to gather force for a new attack. The attack leads to a new retreat and so it goes back and forth. One might question why the leaders simply did not give up at once when they experienced the failures. The truth is that in a way this is what they did in the end. In the words of Malia:

"... the economic decline discredited the claims of ideology, and Glasnost made it possible to proclaim this fact, thereby delegitimizing the system and, ultimately, depriving it of the will to coerce. And this circumstance in turn made possible the revolt of the minority nationalities and the collapse of the people's democracies..." (p. 492 and 493)

The problem, of course, was the slow learning process. It took more than 70 years before they were willing to attribute the failure to the system and not to the mistakes of individual leaders. There are three major reasons it too such a long time. First, psychologically people are not likely to give up a belief which you have fought extremely hard to implement or have held publicly for a long time. Second, and also psychologically, you are likely to attribute the failures not to the system, but to personal mistakes or external circumstances. Third, the propaganda made sure that many people did not believe they were as far behind the West as they really were.

Malia has thus created a theory which explains both the tendency to reform and the tendency to implement hard line policies. First there was War Communism, then reality forced the Communists into a period of economic relaxation with the New Economic Policy. After some time this gave way to Stalin's hard-line policies, which in turn was followed by a period of experimentation with Khrushchev. Brezhnev then put the breaks on and Gorbachev tried to reform. In sum, Malia's rhythmic theory does seems to explain a pattern in Soviet politics.

One may present the counterargument that his theory is a bit like a theory which says that the weather will constantly alternate between days of sun and days of rain. This seems to be a theory which cannot be refuted since it does not specify the length of time between the intervals. At some point in time it is bound to rain, as it is bound to stop raining at some other point. It is true that Malia's theory has this self-confirming quality and that this is a major weakness. I am not equally sure it is a fatal flaw since one might assess the plausibility of the theory even if it is theoretically impossible to ever assign it a zero probability of being true. For example, Malia's theory is more plausible than the weather theory because it gives a large and plausible causal account of why there were such alternations. The account is probable because both economic theory (and empirical evidence) lends plausibility to the statement that there was a conflict between the causal beliefs implicit in the ideology and the true causal connections in reality.

Malia's specific theory of the collapse of Communism, as presented above, is somewhat contradicted by his general thesis. The general thesis is that ideology has supremacy compared to economic forces in the explanation of the collapse of Communism. The specific theory is that "The most fundamental cause [of the Collapse] was the economic decline." (p. 492). Malia might argue that the economic decline was a consequence of the ideology and hence ideology is still the most fundamental factor. However, the cause of the economic decline is not simply ideology, but the incompatibility of the laws of economics and Marxist ideology. In this frame it makes as much sense to assert the supremacy of ideology over the law's of economics as to argue that the egg came before the chicken. The collapse was caused by an incompatibility of two factors, both were needed to create the incompatibility, neither were supreme.

Malia's general thesis may be viewed from a slightly different perspective. He might simply be arguing against the schools which held that Soviet policies were shaped by forces from "below" as opposed to the ideology of the leaders. For example Malia argues that "So long as the Stalin-bred generation of Brezhnev, Kosygin, and Suslov remained in charge, the belief in the 'international class struggle' was a real guide to policy" (p. 378) On this reading Malia would be more acceptable, but I still maintain that the consequence of policies (such as the collapse) is best viewed as the combination of policies and "true" causal connections.

In addition to the main argument dealt with in this essay, Malia offers a wealth of intelligent and provocative insights. I would like to share two of these with the reader. First, Malia has a provocative argument against the cultural explanation of events in Russian history. As he writes:

"The totalitarian nature of Communism is not to be explained as the prolongation of traditional Russian authoritarianism or Oriental despotism; nor is the collectivist nature of Soviet society to be construed as the continuation of traditional Russian communal and servile social relations. It is difficult to find any such agencies of transmission from the old to the new Russia in the actual policies pursued by the Bolsheviks after 1917, but it is very easy to find the origins of these policies in the socialist purposes of the Leninist party." (p. 134)

1. For a summary see J. Elster (1993), "Why things don't happen as planned" in Nordal Åkerman (ed.), The Necessity of Friction, Physica-Verlag, Heidelberg, 1993

2. p. xvii in R. Pipes, Russia under the Old Regime, Penguin books, London, 1990 (Reprint of the first edition from 1974)

[Note for bibliographic reference: Melberg, Hans O. (1996), Logical Logic (Review of M. Malia (1994): The Soviet Tragedy), http://www.oocities.org/hmelberg/papers/960405.htm]