TCS Daily

Disciplined Pluralism

By John Kay - May 22, 2003 12:00 AM

In the most extraordinary controlled experiment in the history of social sciences, a country was divided into two zones. The economic organization of one was based on planning and coordination, while in the other economic power was decentralized and no explicit coordination was attempted. After fifteen years, a wall was built to sustain the experiment and prevent citizens of one zone fleeing to the other. Twenty-five years later, the citizens of both zones tore down the wall.

We forget now that the final outcome of the experiment was as surprising as it was decisive. Even in the 1960s, commentators on both right and left feared the economic power of centrally planned economies: they believed that communist regimes would be brought down by their moral rather than their economic bankruptcy. But in the 1980s it was to be the other way round.

The most common explanation of why markets worked and planning failed is that markets rely on the incentive effect of the profit motive. But this is too simple. No society in history has offered as wide a range of incentives as the Soviet Union: from the privileges of the nomenklatura at one end to the perils of the Gulag at the other. The fundamental problem was not lack of incentive; it was that the incentive structures in place were badly designed.

In 1958 Nikita Khrushchev visited the United States for the first time. When he visited a supermarket, he assumed that the shelves had been specially stocked for his arrival - as would have been true in Russia. But what made the greatest impression was a trip to Iowa. There was no faking the luxuriant fields of maize that stretched as far as the eye could see.

Khrushchev returned convinced that the future of Soviet agriculture rested on maize. Large tracts of arable land were converted to maize. The results were not successful. Soviet agricultural production fell and the economic setback that followed was one of the reasons Khrushchev was toppled from power in 1964.

At about the same time, Mao launched China's Great Leap Forward. Chinese agriculture was to be collectivised and the first commune, with 50,000 workers, was established in 1958. Within a year over 100 million people lived in agricultural communes. Peasants were encouraged to fetch firewood and melt down utensils to produce steel in backyard furnaces. The Great Leap Forward moved forward from farce to tragedy. Between 30 and 40 million people are believed to have died in the famines that swept China in the early 1960s.

In the winter of 1964 to 1965, Britain suffered electricity blackouts. The recently elected Labour government, with technological modernization as one of its slogans, reacted by commissioning five new nuclear power stations, to a yet unproven British design. "I am quite sure we have hit the jackpot this time," said Fred Lee, Minister for Energy, in his announcement of the decision. We had not hit the jackpot. Indeed the construction of the advanced gas-cooled reactors (AGRs) was possibly the worst commercial decision in business history. On average, they took over twenty years each to build. Construction costs were around $100 billion (at today's prices). Earlier this year, the whole of this investment was effectively written off when British Energy, the privatized business that owned these stations, reached agreement with its creditors.

The decision to build the AGRs was made by Lee on behalf of the Central Electricity Generating Board, which owned all power stations in England and Wales. The operation of Britain's electricity industry was reviewed by Lord Plowden, the central figure in promoting nuclear power in Britain. The problem with the industry, he concluded, was that it did not speak with "a single voice." Increasingly, it did. Those who opposed the programme or pointed out its costs or problems were sidelined or marginalized. The purge was less crude than exile to the Gulag, but no less effective.

In Khrushchev's Russia, Mao's China and Plowden's electricity industry the single voice was the problem, not the answer. Khrushchev, Mao, and Plowden were all men of exceptional ability. And the decisions they made - to grow maize in the Ukraine, to rationalize China's fragmented agriculture industry, to base new electricity generation on nuclear power - were not ridiculous decisions, although we can see with hindsight that they were mistaken decisions. They represented the sort of error that business people routinely make.

What makes these episodes stand out was the impact of the single voice. The disasters followed from the scale of the decisions, and the sycophantic feedback that the decision-makers received. "Under Socialism," Khrushchev was told, "maize can be grown anywhere." This is what leaders of large enterprises - politicians or business people - like to hear, and it is what they routinely do hear.

The dynamic of a market economy is based on disciplined pluralism. Instead of the single voice, there is freedom to experiment. Most experiments fail: that is why centralized structures generally reject them, and they are right to do so. But in a market economy, people go ahead anyway. The market economy offers feedback that is honest, and generally rapid. Central planning structures, by contrast, were neither pluralist nor disciplined: the single voice determined the course of action, and that course was continued long after its failure would have been evident to any objective observer. It is the contrast between single voice and disciplined pluralism that explains why, in the end, the Berlin Wall was bound to fall.

The author is an economist and the author of the new book, The Truth about Markets.

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