Alex Chen, Geog 505, Discussion for Nov. 2

Alex Chen, Geog 505, Discussion for Nov. 2

A command economy is distinct from a market economy in that a central authority, or government, governs the supply, prices, and allocation of goods. It does this first by taxing people in order to create jobs and services that can employ workers. Then by restricting the social and economic freedom of people, the government can attempt to induce a portion of its population towards working in its desired directions - directions (suboptimal for the people) that they wouldn't take if they had an alternative. This often leads to surpluses in some product-regions and shortages in other product-regions. It often leads to both allocative and technical inefficiency. Technical inefficiency since people become disinclined to produce goods when they see no benefit in the increased production of goods. And allocative inefficiency since there was no spacefor a pattern to emerge from the comparative advantages of the economy – as such, there were redundant services and industries scattered throughout.

In China's example, the government prioritized industrial production at the expense of agriculture. In effect, it created a wealth and good transfer scheme from the rural sector to the industrial sector.So when China's industrial infrastructure was still heavily underdeveloped, Mao helped develop China's industrial infrastructure before substantial demand for such infrastructure existed (such demand later came in the form of exports to the United States). It also had a system of preferential treatment - where priority for goods and services was first given to urban-dwellers and last for rural-dwellers. The command economy of the Great Leap forward led to major food shortages in rural areas, which caused the great famine.

Such developments were quite common among lagging economies in the 20th centuries. Many of them desired a quick transition to an industrial economy, even when their bases were so heavily agricultural that there was little domestic demand for industrial products. In such scenario, there were no incentives for private companies to set up industry, and so artificial arrangements were made to lower barriers to the development of heavy industries. China had already seen the success of one command economy’s industrialization – that of the Soviet Union.While many believe that the Soviet Union’s example helped to inspire China,Justin Lin argued that the similarities between the two primarily resulted from the similarity in conditions between preindustrial China and the preindustrial USSR.

The great famine lasted from 1958-1961, perfectly coincidental with the Great Leap Forward. The Great Leap Forward resulted in the massive and rapid collectivization of agriculture. This collectivization reduced incentives for peasants to work. Furthermore, the Chinese started to force peasants to change their agricultural techniques to those attributed to the Russian agronomist Trofim Lysenko. His now-discredited ideas are now attributed to famine deaths in both Russia and China. The government also misestimated the effects of collectivization, not knowing that it would decrease output. It forcibly moved rural workers to join the iron and steel production workforce. This misestimation further contributed to reduced agricultural output. From 1958 to 1960, crop production fell from 200 million tons to 143.5 million tons.

Mao's policies discriminated against peasants due to several reasons. He wanted to transform China's economy into an industrial economy. As such, there were policies for treating the peasants differently from urban peoples. Discriminating against the peasants was moreover made easier through this preferential treatment, as it made the more powerful urban-dwellers benefit at the expense of the peasants. By severely restricting the choices of peasants, the government can exert a lot more control over the incentives of peasants. For one thing, peasants were motivated enough for subsistence farming - since they needed to produce enough food so that they wouldn't starve. Not only that, but since the government took much of their food, they had to produce more food than they needed for subsistence farming.Commercial and industrial classes require more incentives to produce, as they would not suffer from lack of production.

Why did the government desire preferential treatment? In the early 1950s, the government started to regulate wages. Under a unified system, the nominal wage rate was suppressed to a very low level. This wage may have been below the market-determined price for necessities. This scenario would trigger social unrest and the labor supply for heavy industry. So China decided to implement a low-price policy for agricultural products and living necessities and services. Due to shortages, the low-price policy could not be uniformly imposed throughout all of China, and as such, it was preferentially imposed among the industrial workers.

The Hukou system was an imposed discrimination system that (and in many cases, irreversibly) restricted the geographical and social mobility of people. This restriction helped reinforce the command structure of the economy that prioritized industrial sectors over rural sectors, since this would effectively force peasants to stay in their positions – they could not look for better opportunities. Through a household registration system, people were born into their classes depending on the location and family they were born into. Even though some workers could move from rural to urban areas, their class stuck with them and thus they could not enjoy the same services that their urban counterparts enjoyed. The top-down discrimination system eventually morphed into a bottom-up discrimination system as well, as many people from the urban classes refused to intermingle and marry people from the rural classes.An interesting side effect of this differentiation was that it drove up demand for very low wage labor in cities - since any urban job was more desirable than nothing - and they could only take the laborious comparatively undesirable jobs.

Due to informational asymmetries between the government and local sectors (and the massive costs of collecting information in the 1950s of China), the government often found it difficult to efficiently allocate resources in a direction that would be desirable to both workers and the government. Such informational asymmetries were responsible for the massive famine during the Great Leap forward. Perhaps China significantly accelerated its industrial development through its command economy, as there was a significant labor surplus on its farms, which may have stifled incentives for demand for industrial services. Furthermore, China managed to find a market for its industrial goods – the United States. The industrial infrastructure it developed did manage to be useful for the goods that China’s growing middle class now demands. But this command economy came at massive social and economic costs. In China’s example, a government may have been the only agent that can stimulate demand for industrial infrastructure. But perhaps there were alternative pathways that would not have the massive social and economic costs that the command economy of China resulted in.