The Lesson of the Soviet Union

Last week Paul Soglin had a post on the difficulty Dubai is having repaying its debt. The conclusion that he drew was that Dubai's difficulty was another piece of evidence in the case against capitalism.

I found this to be a bit of a stretch, so in the comments I asked Soglin that if Dubai's problems highlighted the dangers of capitalism, what lesson did he draw from the collapse of the Soviet Union. He was gracious enough to respond on Monday to this question. I'm not at all convinced by his argument.

He cites the usual overspending on the military and corruption as well as a general mismanagement in production, including, "not listening to the customers." This last point gets closest to what I think is probably the real case, but he can't quite get to the heart of the matter.

I would argue that the system of free-market prices is the best method we have yet developed for coordinating a system as enormous and complex as a modern economy. A system without this mechanism for coordination, like the Soviet system, is doomed to failure.

Prices are signals. They guide those within an economic system in making the correct decisions. Without prices you can get too many missiles and not enough bread, just like the Soviets ended up with. Without prices, there simply is no manageable way of "listening to the customers." The history of the Soviet Union was like one epic game of The Price Is Wrong, with the average Soviet bearing the brunt of this stupidity.

Soglin sums up his argument with this:

The one reason that Communism failed that was inherent to the system was lack of freedom of expression, which has less to do with economics and more to do with the power of rock n' roll.

A notion only a baby boomer could embrace, I'm afraid, and one that veers out of the realm of reality and into romanticizing the Soviet experience. Prices, profits, and losses are not dirty words, they are the necessary catalysts for creating a vibrant economy. And such an economy is the best hope for the average citizen to improve his quality of life.