Gregory Mankiw, the author of the celebrated economics text book illustrates a principle: Markets are usually the best way to organize economic activity. Implied in his assertion is the price mechanism acts as an automatic stabilizer during market fluctuations. It is the invisible hand that drives the individual self-interest into a collective self-interest and enlightened collective self-interest. This was of course the paradigm put forth by Adam Smith as he built up the foundations of modern economic theory. Yet, Mankiw, like any economist, talks about ‘on the other hand’ arguing that government at times can improve market outcomes. Of course, his assertion is not about balancing both sides but built upon certain principles.
In the normal course of time, the invisible hand would work. Yet for the invisible hand to function, thus the primacy of the markets, it necessitates an alignment of individual interest and the community or national interests. In the conflict between the two, the invisible hand breaks down in what economists would call the market failure. This is where the governments have to step in to ensure the productive efficiency, allocative efficiency and distributive efficiency. Yet while for economists like Mankiw, it is more of an exceptional case, there are occasions where governments do intervene in the markets on grounds of national prestige. This is of course at one level the manifestation of state sponsored capitalism or as in the case of China, party capitalism.
There are however instances where the state has encouraged the private sector to grow in a certain trajectory ostensibly as a tool of foreign policy. An example that could be cited is of the farm wars between US and Soviet Union during the cold war. This thought was rekindled as one listened to or read script of the podcast of Freakonomics. The podcast is titled “How Supermarkets helped US win the Cold War and is available here. The podcast in its introduction argues that the supermarkets as manifestation of abundance was and is not an outcome of the fruits of capitalism that US for long seems to have internalised. In fact, the podcast presents it as an instrument in the hands of US administration as it sought to project superiority of the American system over the Soviet system. It was apparently an objective of domination and not nourishment that drew the rise of supermarkets.
Yet, at some level, it must be conceded that the supermarket would not have simply taken off in the Soviet Union and was perhaps possible in countries like US which predicated their economies on the primacy of the markets. The governments perhaps used these market innovations in their strategic calculus and added their might in making these ubiquitous and powerful. Without doubt, as the podcast suggests, the supermarkets have led to externalities but that would be off the topic with reference to this post. It would however be interesting to analyse how US used supermarkets to win over Soviet Union among many other things. In fact, chicken breeding and hybrid corn punched far above their weight as US sought to highlight its superiority over the Soviet system.
Supermarkets made their appearance in the early 1930s in the US. They were basically the end points of the industrial agricultural system that made possible the affordability of mass produced food products. Before the super markets made their appearance, there used to dry-goods store, something called grocery stores in India. In these dry-goods stores, the clerk or the manager of the store had to pick up the products from the shelves and give it to the consumers. Yet in the supermarket, the abundance of choice and size made possible for the consumer to select themselves the goods they intend to procure and have it billed in the payments section. It was the beginning of the self-service industry which expanded tremendously over the years. Furthermore, supermarkets allowed the sale of fresh produce like vegetables, milk, meat, fresh bakery products etc. which was not possible in its predecessors. By mid 1960s, the share of food products purchased in supermarkets had touched 70% from under 30% in the immediate years post-World War II.
The US in the first quarter of the twentieth century had essentially turned into an urban nation. There was an increasing shift of population from the agrarian rural to the non-agrarian urban, thus presenting challenges for the policy makers on how to feed the urban Americans at affordable prices. The industrial agricultural system of which the supermarkets was an endpoint seemed an answer to this puzzle. Therefore, there was lot of state financed research into the development of seeds as also the livestock breeding. It extended to the innovations in machinery. To ensure smooth and speedier transport, the Department of Agriculture even sponsored research on road construction and development. The state also ventured into electricity transmission and distribution in rural belts owing to possible market failure. But what economist seem to contend the greatest innovation was apparently in the domain of mechanisation and automation. These fetched increasing returns to the farm from crops to vegetables to fruits to live stock breeding. With government sponsored Research and development, the farm population was spared of expenditure on these areas. All they had to do was focus on production and transport thus reducing huge fixed costs and enabling leveraging economies of scale at the farm level. As economists in the podcast describe, the increasing returns in the pre-war era consolidated the US agricultural system into something on steroids in the Cold War era as US attempted to prove capitalism was the better of the political-economic systems. The supermarkets with its manifestation of abundance apparently symbolized this. The apparent logic seem to be driven by a desire to appeal to hearts and minds in the Russian system to ensure a change of heart and accept the US system as better of the two alternatives in play and practice.
US set up exhibition of its supermarket in Zagreb, Yugoslavia, something that appealed to President Tito. In fact, in some ways, this must have opened up Tito to the West leading to his split with the Soviet Union, a materialisation of intra-communism Cold War. An US editor in Iowa invited President Khrushchev, a request which found ready acceptance. A team of scientists from Soviet Union visited US to study the systems. Meanwhile in Zagreb, there were nearly a million visitors and supermarkets sprung up not just in Yugoslavia but across Europe making the Americans set up their exhibition in the heart of Communism, Moscow. In economics jargon, the signals were unmistakable. There was information asymmetry no doubt, but the nature and grandeur of US styled supermarket was a proxy in conveying the unmistakable virtues of US capitalism. It led to the famous debate between President Khrushchev and Vice President Nixon at the opening of this exhibition in Moscow. The former did visit US and in what was the earliest triumph for US in the Cold War came about when he decided to import food products into the Soviet Union. The Soviets were claiming on paper as the largest producers of food grains yet in practice they were importing from a system they detested and from a country that was antithetical to their system and ideology.
As the podcast argues, it was not the technology that was the barrier in increasing Soviet production but it was rather a problem of management and marketing. The crux of the Soviet problem lay in the differentials between demand and supply. In the US, the farm producers, to borrow from Taleb, had a skin in the game. Hence there would be alignment of consumer demands and the production of the goods. Yet in the Soviet Union, there was a divorce, to borrow a word from the podcast, between the consumers and producers. The producers had their own interests which conflicted with the interests of the consumers. Moreover, the approach was top down in USSR unlike in the US where it was bottom up. Therefore, it was possible the managers had little idea on the ground conditions when they instructed the producers on the goods and quantity of goods they needed to produce. In the US, the market dictated things and therefore, the producers were well aware of the ground realities. Rather than being a contest of a better organizational form, it was about the hierarchy and the understanding of the demand-supply intricacies and consequent absence of price signals that undid the Soviet system. All it did, again to borrow from the podcast was production of wrong things which ensured production happened but was wasted as there never seemed to be takers for it. In case where there were takers, there was underproduction. The prices were held constant and thus the prospective signals for producers were lost. In the US, this was never an issue. Despite a state backed capitalist moorings for the supermarkets, the primacy of prices and markets kept them on the tenterhooks thus ensuing an overwhelming advantage for the US in the farm race.
Thoughts on Theory and Practice 