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Economy

Former socialist economist explains why central planning never works

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16 minute read

From the Fraser Institute

By Matthew D. Mitchell

Central planning from the inside—an interview with a Soviet-era economist

In our descriptions of socialism in Poland and Estonia, we often quoted firsthand accounts of Poles and Estonians who lived through the period. These were workers, consumers, victims of oppression and resistance fighters. One voice that we didn’t capture was that of the planner—the government official charged with making the economy work, despite socialism’s enormous handicaps.

To better understand that perspective, I recently interviewed Gia Jandieri, an economist who worked for the State Supply Committee in Georgia from 1984 to 1989.

In 1989 Gia cofounded the very first non-governmental organization in Soviet Georgia (the Association of Young Economists) to push for market economic education. And in 2001 he established a think-tank, the New Economic School, to promote economic freedom. The New Economic School has been a full member of the Economic Freedom Network since 2004.

Here’s our discussion (lightly edited for readability):

Matthew Mitchell (MM):

How did you become an economist and a Soviet planner?

Gia Jandieri (GM):

It was accidental. In 1984 my mother worked at the Gossnab (the State Supply Committee for the Central Planning Authority) and she offered to introduce me to her boss. At that time I was only 23 years old and had graduated from the Georgian Polytechnical Institute. My knowledge of economics was mostly from life and family experience (my parents worked at a metallurgical plant).

But as a student in 1979 I had had what I thought were a few strange discussions with a teacher of political economy. Like most teachers, he was no true believer in socialism (it was hard for anyone to believe at that time). But he was required to teach the propaganda. What surprised me was that he was willing to publicly agree with me about my suspicions that the system was failing and might even collapse. This was rare, and he was taking a risk. But it also inspired me. It is also important to note that he wanted to hide his hesitation about Marxism and the Soviet system and he also wanted me to stop my questions, and/or stop attending his lectures (which was of course not allowed). I recall he told me: “either I report you or someone reports both of us for having prohibited discussions.”

When I finished my university study of engineering, I was already sure I wanted to be an economist. So, when the opportunity arose in 1984 to work at the State Supply Committee, I seized it.

MM:

Tell us a little bit about the job of a planner. What were your responsibilities? And how did you go about doing them?

GJ:

Our department inside of Gossnab was responsible for monitoring the execution of agreements for production of goods and government orders. My task was to verify that the plans had been executed correctly, to find failures and problems, and to report to the higher authorities.

This included reading lots of reports and visiting the factories and their warehouses for auditing.

The Soviet economy had been in a troublesome condition since the 1970s. We (at the Gossnab) had plenty of information about failures, but it wasn’t useful. We knew that the quality of produced goods was very low, that any household good that was of usable quality was in deficit, and that the shortages encouraged people to buy on the black market through bribes.

In reality, a bribe was a substitute for a market-determined price; people were interested in paying more than the official price for the goods they valued, and the bribe was a way for them to indicate that they valued it more than others.

The process of planning was long. The government had to study demand, find resources and production capacities, create long-run production and supply plans, compare these to political priorities, and get approval for general plans at the Communist Party meetings. Then the general plans needed to be converted to practical production and supply plans, with figures about resources, finances, material and labour, particular producers, particular suppliers, transportation capacities, etc. After this, we began the process of connecting factories and suppliers to one another, organizing transportation, arranging warehousing, and lining up retail shops.

The final stage of the planning process was to send the participating parties their own particular plans and supply contracts. These were obligatory government orders. Those who refused to follow them or failed to fulfill them properly were punished. The production factories had no right or resources to produce any other goods or services than those described in the supply contracts and production plans they received from the authorities. Funny enough, though, government officials could demand that they produce more goods than what was indicated in the plans.

MM:

What made your job difficult? Let’s assume that a socialist planner is 100 per cent committed to the cause; all he or she wants to do is serve the state and the people. What makes it difficult to do that?

GJ:

There were several difficulties. We had to find appropriate consumer data and compare it to the data of suppliers (of production goods mostly). I was working with several (5-15) factories per year. I needed to have current and immediate information, but the state companies were always trying to hide or falsify their reports. In some cases, waste and theft could be so significant that production had to be halted.

The planners invested vast sums of money and time in data collection and each had special units of data processing.

This was a technical exercise and had nothing to do with efficiency or usefulness. The collected data was outdated by the time it was printed. The planning, approval, and execution processes could take many years to complete, and by the time plans were ready, demand had usually changed, creating deficits of what was demanded and surpluses of what was not demanded. The planners, no matter how dedicated or intelligent they might be, simply couldn’t meet the demands of the customers.

Central planning was not an easy exercise. The central planners needed to understand what was needed—both production supplies and consumer goods. But, of course, we had no way of knowing what people truly wanted because there was no market. Consumers weren’t free to choose from different suppliers and new suppliers weren’t free to enter the market to offer new or slightly different goods.

One of the more helpful ways to find out what people wanted was to look at what consumers in the West wanted since they actually had economic freedom and their demands were quickly satisfied. The government also did a lot of industrial spying to steal Western production ways and technologies.

MM:

Were most of the planners you encountered 100 per cent committed to the cause? Were they incentivized to serve the cause?

GJ:

Some of the staffers were dedicated to their work. Others were mostly thinking about how they could obtain bribes from the production factories as a reward for closing their eyes to mismanagement and failure. The planners were also involved in more significant corruption to allow the production factories to have extra materials and financial resources so they could produce for the black market or so they could simply steal.

Then the revenue from these bribes would be divided among all personnel from different agencies (like the Price Committee, Auditing (“Public Control”), and several other agencies charged with inspections). So, in fact, the system generated corruption as a substitute for official incentives. If anything was still operating, this was mostly due to these corrupt incentives and not in spite of them.

The planning system was quite complex and involved many governmental offices though the main decisions were made by the Communist Party. Planning authorities would report to the Party leadership what they thought would be possible to produce and Party leaders would inevitably demand higher quantities.

Gosplan was bureaucratic to its core, both in principle and character. Nobody was allowed to innovate other than planned/artificial innovation. Everyone had to work only by decrees and orders coming from the political leadership. The political orders and bribes were the only engines that were moving anything. Market incentives didn’t exist. Bonuses (premia) were awarded according to bureaucratic rules, and, paradoxically, these destroyed the motivation of the genuinely hard workers.

MM:

Moving beyond economics a bit, how did the socialist system affect other aspects of life? Culture, families, relationships, civil institutions?

GJ:

One of the examples is Western pop-music. Soviet propaganda tried to hide Western culture. Music schools mostly taught Russian classical music and some folk music of various Soviet ethnic nationalities, but it was mostly Russian.

Jazz and hard rock were not prohibited but very much limited. That of course encouraged smuggling and illegal dissemination, as in every sector. Soviet music factories were buying some rights to the music (for instance the Beatles, Louis Armstrong and Ella Fitzgerald). But these recordings were only available in limited quantities and were of bad quality in order to limit their influence.

Small illegal outfits would make unofficial and illegal copies of any popular western music (not classical).

Cultural institutions like theatre or cinema were harshly censored and mostly served the propaganda machine. The people involved in these sectors did what all producers of goods did. They needed to lobby their benefactors in the bureaucracy, bribing and currying favour with them in different ways. It was said that only one out of four films produced would be shown in the cinemas. The other three films were only produced so studios could steal the resources and obtain higher reimbursements.

Before Soviet rule, Georgia was a property rights and ethics-based society. We have ancient proverbs that testify to this. The Soviets killed the ethical leaders, the property-owning elite, and confiscated their property. The stolen property was supposed to be held in common. In fact, the bureaucracy took it.

State ownership of property opened the way to waste and theft of construction and production materials, office inventory, fertilizer, harvested agricultural products, etc.

In Georgia, one bright spot was underground education. Georgians succeeded in growing a network of informal tutors who effectively operated despite very harsh efforts by the authorities to quash them. These skillful teachers prepared the young people for university exams. This was so widespread that some successful young people (including my wife and friends, for instance) started offering private (completely illegal) teaching services when they were university students.

MM:

To this day, socialism remains alluring to many in the West, especially young people. What do you have to say to the 46 per cent of Canadians aged 18-34 who support socialism?

GJ:

Very simply, it is a mistake to think socialism fails because of the wrong managers. This mistake allows people to think that it’ll work the next time it is tried, if we just have better people. In fact the opposite is true—socialism invites the wrong managers. It doesn’t reward a great manager who tries to improve the system but a person who can adapt to and accept the corruption, waste and theft. Socialism also encourages corruption. When more resources are in the control of politicians and the bureaucracy, there is more favouritism, privilege, and discrimination. Jobs and business opportunities are based on privilege rather than market competition. This means naïve people will always be cheated by brazen liars and manipulators.

Poor people are told that the state is under their control but in fact the bureaucracy and political hierarchy control everything.

In socialism, nature and natural resources are abused and wasted. The Tragedy of the Commons runs rampant without private property, voluntary cooperation, and ethics. The government tries to manage everything centrally and totally fails because it lacks dynamic information, competitive discipline, and proper incentives.

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Business

Jury verdict against oil industry worries critics, could drive up energy costs

Published on

Offshore drilling rig Development Driller III at the Deepwater Horizon site May, 2010. 

From The Center Square

By 

“Did fossil fuels actually cause this impact?” Kochan said. “Then how much of these particular defendants’ fossil fuels caused this impact? These are the things that should be in a typical trial, because due process means you can’t be responsible for someone else’s actions. Then you have to decide, and can you trace the particular pollution that affected this community to the defendant’s actions?”

A $744 million jury verdict in Louisiana is at the center of a coordinated legal effort to force oil companies to pay billions of dollars to ameliorate the erosion of land in Louisiana, offset climate change and more.

Proponents say the payments are overdue, but critics say the lawsuits will hike energy costs for all Americans and are wrongly supplanting the state and federal regulatory framework already in place.

In the Louisiana case in question, Plaquemines Parish sued Chevron alleging that oil exploration off the coast decades ago led to the erosion of Louisiana’s coastline.

A jury ruled Friday that Chevron must pay $744 million in damages.

The Louisiana case is just one of dozens of environmental cases around the country that could have a dramatic – and costly – impact on American energy consumers.

While each environmental case has its own legal nuances and differing arguments, the lawsuits are usually backed by one of a handful of the same law firms that have partnered with local and state governments. In Louisiana, attorney John Carmouche has led the charge.

“If somebody causes harm, fix it,” Carmouche said to open his arguments.

Environmental arguments of this nature have struggled to succeed in federal courts, but they hope for better luck in state courts, as the Louisiana case was.

Those damages for exploration come as President Donald Trump is urging greater domestic oil production in the U.S. to help lower energy costs for Americans.

Daniel Erspamer, CEO of the Pelican Institute, told The Center Square that the Louisiana case could go to the U.S. Supreme Court, as Chevron is expected to appeal.

“So the issue at play here is a question about coastal erosion, about legal liability and about the proper role of the courts versus state government or federal government in enforcing regulation and statute,” Erspamer said.

Another question in the case is whether companies can be held accountable for actions they carried out before regulations were passed restricting them.

“There are now well more than 40 different lawsuits targeting over 200 different companies,” Erspamer said.

The funds would purportedly be used for coastal restoration and a kind of environmental credit system, though critics say safeguards are not in place to make sure the money would actually be used as stated.

While coastal erosion cases appear restricted to Louisiana, similar cases have popped up around the U.S. in the last 10 to 15 years.

Following a similar pattern, local and state governments have partnered with law firms to sue oil producers for large sums to help offset what they say are the effects of climate change, as The Center Square previously reported.

For instance, in Pennsylvania, Bucks County sued a handful of energy companies, calling for large abatement payments to offset the effects of climate change.

“There are all kinds of problems with traceability, causation and allocability,” George Mason University Professor Donald Kochan told The Center Square, pointing out the difficulty of proving specific companies are to blame when emissions occur all over the globe, with China emitting far more than the U.S.

“Did fossil fuels actually cause this impact?” Kochan said. “Then how much of these particular defendants’ fossil fuels caused this impact? These are the things that should be in a typical trial, because due process means you can’t be responsible for someone else’s actions. Then you have to decide, and can you trace the particular pollution that affected this community to the defendant’s actions?”

Those cases are in earlier stages and face more significant legal hurdles because of questions about whether plaintiffs can justify the cases on federal common law because it is difficult to prove than any one individual has been substantively and directly harmed by climate change.

On top of that, plaintiffs must also prove that emissions released by the particular oil companies are responsible for the damage done, which is complicated by the fact that emissions all over the world affect the environment, the majority of which originate outside the U.S.

“It’s not that far afield from the same kinds of lawsuits we’ve seen in California and New York and other places that more are on the emissions and global warming side rather than the sort of dredging and exploration side,” Erspamer said.

But environmental companies argue that oil companies must fork out huge settlements to pay for environmental repairs.

For now, the Louisiana ruling is a shot across the bow in the legal war against energy companies in the U.S.

Whether the appeal is successful or other lawsuits have the same impact remains to be seen.

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Alberta

Is Canada’s Federation Fair?

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The Audit David Clinton

Contrasting the principle of equalization with the execution

Quebec – as an example – happens to be sitting on its own significant untapped oil and gas reserves. Those potential opportunities include the Utica Shale formation, the Anticosti Island basin, and the Gaspé Peninsula (along with some offshore potential in the Gulf of St. Lawrence).

So Quebec is effectively being paid billions of dollars a year to not exploit their natural resources. That places their ostensibly principled stand against energy resource exploitation in a very different light.

You’ll need to search long and hard to find a Canadian unwilling to help those less fortunate. And, so long as we identify as members of one nation¹, that feeling stretches from coast to coast.

So the basic principle of Canada’s equalization payments – where poorer provinces receive billions of dollars in special federal payments – is easy to understand. But as you can imagine, it’s not easy to apply the principle in a way that’s fair, and the current methodology has arguably lead to a very strange set of incentives.

According to Department of Finance Canada, eligibility for payments is determined based on your province’s fiscal capacity. Fiscal capacity is a measure of the taxes (income, business, property, and consumption) that a province could raise (based on national average rates) along with revenues from natural resources. The idea, I suppose, is that you’re creating a realistic proxy for a province’s higher personal earnings and consumption and, with greater natural resources revenues, a reduced need to increase income tax rates.

But the devil is in the details, and I think there are some questions worth asking:

  • Whichever way you measure fiscal capacity there’ll be both winners and losers, so who gets to decide?
  • Should a province that effectively funds more than its “share” get proportionately greater representation for national policy² – or at least not see its policy preferences consistently overruled by its beneficiary provinces?

The problem, of course, is that the decisions that defined equalization were – because of long-standing political conditions – dominated by the region that ended up receiving the most. Had the formula been the best one possible, there would have been little room to complain. But was it?

For example, attaching so much weight to natural resource revenues is just one of many possible approaches – and far from the most obvious. Consider how the profits from natural resources already mostly show up in higher income and corporate tax revenues (including income tax paid by provincial government workers employed by energy-related ministries)?

And who said that such calculations had to be population-based, which clearly benefits Quebec (nine million residents vs around $5 billion in resource income) over Newfoundland (545,000 people vs $1.6 billion) or Alberta (4.2 million people vs $19 billion). While Alberta’s average market income is 20 percent or so higher than Quebec’s, Quebec’s is quite a bit higher than Newfoundland’s. So why should Newfoundland receive only minimal equalization payments?

To illustrate all that, here’s the most recent payment breakdown when measured per-capita:

Equalization 2025-26 – Government of Canada

For clarification, the latest per-capita payments to poorer provinces ranged from $3,936 to PEI, $1,553 to Quebec, and $36 to Ontario. Only Saskatchewan, Alberta, and BC received nothing.

And here’s how the total equalization payments (in millions of dollars) have played out over the past decade:

Is energy wealth the right differentiating factor because it’s there through simple dumb luck, morally compelling the fortunate provinces to share their fortune? That would be a really difficult argument to make. For one thing because Quebec – as an example – happens to be sitting on its own significant untapped oil and gas reserves. Those potential opportunities include the Utica Shale formation, the Anticosti Island basin, and the Gaspé Peninsula (along with some offshore potential in the Gulf of St. Lawrence).

So Quebec is effectively being paid billions of dollars a year to not exploit their natural resources. That places their ostensibly principled stand against energy resource exploitation in a very different light. Perhaps that stand is correct or perhaps it isn’t. But it’s a stand they probably couldn’t have afforded to take had the equalization calculation been different.

Of course, no formula could possibly please everyone, but punishing the losers with ongoing attacks on the very source of their contributions is guaranteed to inspire resentment. And that could lead to very dark places.

Note: I know this post sounds like it came from a grumpy Albertan. But I assure you that I’ve never even visited the province, instead spending most of my life in Ontario.

1

Which has admittedly been challenging since the former primer minister infamously described us as a post-national state without an identity.

2

This isn’t nearly as crazy as it sounds. After all, there are already formal mechanisms through which Indigenous communities get more than a one-person-one-vote voice.

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