“In the 1961 edition of his famous textbook of economic principles, Paul Samuelson wrote that GNP in the Soviet Union was about half that in the United States but the Soviet Union was growing faster. As a result, one could comfortably forecast that Soviet GNP would exceed that of the United States by as early as 1984 or perhaps by as late as 1997 and in any event Soviet GNP would greatly catch-up to U.S. GNP. A poor forecast--but it gets worse because in subsequent editions Samuelson presented the same analysis again and again except the overtaking time was always pushed further into the future so by 1980 the dates were 2002 to 2012. In subsequent editions, Samuelson provided no acknowledgment of his past failure to predict and little commentary beyond remarks about "bad weather" in the Soviet Union … .
Among libertarians, this story has long been the subject of much informal amusement. But more recently my colleague David Levy and co-author Sandra Peart have discovered that the story is much more interesting and important than many people, including myself, had ever realized.
First, an even more off-course analysis can also be found in another mega-selling textbook, McConnell's Economics (still a huge seller today). Like Samuelson, McConnell estimated Soviet GNP as half that of the United States in 1963 but he showed that the Soviets were investing a much larger share of GNP and thus growing at rates "two to three times" higher than the U.S. Indeed, through at least ten (!) editions, the Soviets continued to grow faster than the U.S. and yet in McConnell's 1990 edition Soviet GNP was still half that of the United States!
A second case of being blinded by "liberal" ideology? If so, Levy and Peart throw another curve-ball because the very liberal even "leftist" texts of the time, notably those by Lorie Tarshis and Robert Heilbroner did not make the Samuelson-McConnell mistake.
Tarshis and Heilbroner were more liberal than Samuelson and McConnell but offered a more nuanced, descriptive and tentative account of the Soviet economy. Why? Levy and Peart argue that they were saved from error not by skepticism about the Soviet Union per se but rather by skepticism about the power of simple economic theories to fully describe the world in the absence of rich institutional detail.”
Alex Tabarrok, “Soviet Growth and American Textbooks”, Marginal Revolution (4 January 2010).
http://www.marginalrevolution.com/marginalrevolution/2010/01/soviet-growth-american-textbooks.html
Alex Tabarrok is a professor of economics at George Mason University and co-author with Tyler Cowen of the Marginal Revolution blog.
The problem of measuring the rate of growth of an economy is more complex than most people realize. In any economic system -- whether capitalist or socialist, centralized or decentralized -- the necessity of valuing the myriad and uneven streams of different kinds of output produced becomes a central question to be addressed. Inevitably, it involves the introduction of some sort of coefficient of economic choice stating the relative importance of any one commodity with regard to any other. In a capitalist economy, this choice indicator presents itself in the form of a price -- a generalized coefficient of alternative possibilities foregone, expressing the preferences of buyers for one particular good over all the other kinds of commodities that could have been purchased for the same amount of money. These prices represent the relative scarcity of the good and are determined in a market as the supply of resources, the state of technology, and the composition of demand interact to produce a constellation of these coefficients, each indicative of the scarcity of the good with which it is associated. They can be used to allocate resources and value output.
For the most part, the problem of determining scarcity prices for solving problems of resource allocation and output valuation has been ignored in socialist economic thought. Indeed, at the turn of the century, the very need for rational economic calculation under a socialist form of economic organization was not always recognized. Partly, this was due to the influence of Marx, who denigrated as “unscientific” any attempt to foresee the future structure of a socialist society. In addition, those entering the debate over socialism were not concerned with the economic aspects of the new order, choosing instead to concentrate on its moral and political foundations.
With the establishment of a centrally planned economy in the Soviet Union the question of prices had to be addressed because resources had to be allocated and choices had to be made. Although the Soviets recognized the importance of prices, initially their function was circumscribed in a deliberate policy decision and the setting of prices became a political rather than an economic decision. Prices were not allowed to be used in determining production and consumption at the macroeconomic level and at the microeconomic level they were used mainly for purposes of control and evaluation rather than for guiding resource allocation.
But they were not set arbitrarily. Prices of favored goods such as heavy industrial products and defense goods were set high while those for less favored goods such as those of agriculture were set low. When computing the average rate of growth of the national income of the Soviet Union the fast growing sectors of industry entered the total for the economy as a whole with a high weight while, conversely, slow growing agriculture entered with a low weight. Voila! Socialist Russia grew much faster than slow growing Capitalist America. Socialism was superior to and would inevitably overtake the decadent and exploitive Capitalists!
That the prices used to compute the rapidly growing Soviet national income were nonsense did not matter.
Note that all this has nothing to do with the reliability of the underlying statistics. Raw output data reported by all countries -- tons of steel, barrels of oil, number of autos, production of shoes, etc. -- tend to be reliable because these kinds of numbers are fairly easy to check and are subject to cross-checks -- e.g., barrels of oil consumed bears some relationship to tons of goods shipped. While falsification is not unknown -- indeed, falsification and other inadequacies are a major problem in the data of many countries -- it is nonetheless not considered to be the main problem before statisticians compiling comparative national income data. It pales in comparison with the problem of price distortion.
In the 1950s, 60s and 70s many people accepted the exaggerated growth rates reported by the Soviet statistical bureau as corresponding with reality -- just as people today accept the overstated 10 to 12 per cent GDP increases reported by the Chinese statistical agency as indicative of the actual growth of that country. We now know many economists of this period were wrong about the pace of Soviet growth. They were not wrong because of ideology or wishing to present the Soviet Union in the best possible light. They were wrong because they did not take the time to think about how those numbers had been constructed and what they really meant and what they said about the actual economic performance before their eyes.
We are now engaged in a debate about another grand question of a nation’s resource allocation but now it is not agriculture or industry but health care. And the question before us is exactly the same as the one before the Soviet planners: Does the existing structure of prices in this area truly represent the factor costs and the consumer benefits of the health care products and services we receive and what are the implications of any distortion in these prices for our economic welfare and for the sustainability of the services we expect to receive in the future?
Because the structure of health care prices in this country, like the structure of agricultural and industrial prices in the former Soviet Union, and for the same reason, bear little relation to true costs and realized benefits, the same problems of evaluating the growth of this sector and its contribution to our welfare exists that the Soviets faced. Like the old central planners, we do not seem to even understand that our view of a key sector of our economy does not correspond to reality.
And remember that the failure of the Soviets to see the nature of the problem they faced was a main reason for the collapse of their economy.
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