Monday, April 5, 2010

Managing money in a centrally planned economy is hard

We learn that the social planner does not need money to obtain an efficient allocation, as this is a command economy: everyone is just told what to do and what to get. A decentralized economy replicates this outcome, according to the Welfare Theorems, under some conditions, one of which is the absence of money. The Soviet Union strived towards such an utopian world of command and control, and one has thus to wonder why it maintained money.

It is thus interesting to read Yasushi Nakamura's essay on money management in the Soviet Union. There was some sort of division between the cash and non-cash economy, but it is not comparable to a Lucas-Stokey cash/credit economy. Money was passive in the Soviet Union in the sense that every transaction required authorization. Thus money did not have an active role like in a market economy, with endogenous prices reflecting relative scarceness. In the Soviet Union, prices were exogenous, and thus money in circulation had little to do with real activity.

While this text is poorly written, it still gives interesting insights on how the Soviet system, which seems so foreign to us, could function. For example, the banking sector was completely dominated by one bank that also acted as central bank. The limited use of credit made money demand and supply much more predictable, but this still could not prevent hyperinflationary episodes.


Agent Continuum said...

"Unit of account" + .

Presumably they wanted to "get there", eventually, once "the revolution" would *really* take off.

Agent Continuum said...

Oh, that should read "+ hand-waving about bounded rationality".

Also, let me engage in some amateur sociology of the profession and say that senior economists in the former communist countries, people "in-the-know" are embarrassed of their teachings and compromises at the time so they don't talk about it and the junior people either sort out and go to grad school in the West or they don't know what was going on anyway.