Free enterprise and the failure of feedback

The advantage of a free market economy over a centrally planned one is the feedback provided by the law of supply and demand.  If the supply of something decreases, the price increases and demand (at the increased price) decreases until the increased price brings forth an increased supply.  This admittedly is a crude system, but it is superior to central planning because it is impersonal.  It does not require a genius to make it work.

Ian Welsh, in a recent post, pointed out that one of the main reasons for the collapse of the Soviet economy was lack of feedback.  In a command economy, the planners need correct information.  I question whether any relatively small group of people could assimilate the information needed to direct a large and complicated economy.  Welsh, on the contrary, said the Soviet economy actually was successful for a time, but broke down when the feedback system failed.  Too many people within the system found it to their advantage to manipulate information for their own advantage.

The present-day U.S. economy is not all that different.  Our big corporations and financial institutions have become little miniature Soviet Unions, in which feedback does not work, either internally or externally

The advantage of capitalism v. central planning, is that information is sent through prices, supply and demand.  This information feedback, however, is still game-able by power blocs.  The exact strategies are different than in a command economy, but the end result is the same.  The West and America are currently undergoing this exact problem.

The entire financial crisis was about inaccurate feedback, and broken feedback loops: it was about the financial and housing industries deliberately damaging the feedback system.   Then, when it finally went off a cliff, they destroyed the capitalistic feedback system, which when properly operating, makes companies go bankrupt, by obtaining bailouts due to owning western governments.

There are myriad other problems with feedback in the developed world right now, from massive subsidies of corn and oil, to oligopolistic practices rife through telecom and insurance, to the runaway printing of money by banks, to the concealment of losses by mark to fantasy on bank books, to the complete inability and unwillingness to price in the effects of pollution and climate change.

via Ian Welsh on The Fall of the USSR.

Here is how lack of feedback plays out in an individual firm.

This company is being managed by the quarter. We have executives who have no vested interest in Walmart. All they care about is their salary and bonus. So when they make poor decisions, for example this Christmas when they had a One Hour Guarantee for multiple items. This was a complete [financial] disaster but yet the executive praise what a big success it was. […]

You know what direction us managers were given to do in January? Remember Walmart’s fiscal year ends January 31st. You guess it, cut hours. For the poor decision made by executives at Walmart who could care less where the company is at in 10 or 20 years, we had to cut hours. 

Not only that we had to cut all expenses. Home office put a hold on all our ordering of supplies and try explaining to customers you don’t have toilet paper for the rest rooms. We had to cut all our part-time associates from 32 hours to 25.5 hours. All our full-time associates had their hours cut too. […]

Do you know how hard it is to go to someone that make $8.85 an hour and tell him, sorry but I have to cut you down to 25.5 hours. These people can barely pay their rent as it is and with no notice we cut their hours.

via Decades of Greed: Behind the Scenes With An Angry Walmart Manager.

I don’t have a good answer to this.  It is a moral problem as much as or more than it is a structural problem.  I don’t see how any complicated economic or political structure can function unless there is a critical mass of people who care about the truth, and care about the common good, especially but not only at the top.

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