Thursday, 25 September 2008

Productivity growth under different economic systems

Many communist countries had high reported investment rates and high levels of human capital, but lower levels of incomes per person than capitalist countries. Some major economic growth models are evasive about the reasons for the difference, as they describe output and growth in terms of productivity, capital, labour, and human capital. Assuming that productivity levels could equalise across countries, communist country incomes should have been higher, not lower.

Productivity levels evidently did not equalize. Sometimes it was said (I can't remember where) that communism was good at large capital projects like steel production, but less good at innovative projects. I am cautious about accepting this as the single explanation for the income differences, and won't accept it at all without evidence. But there is some logic as to why a centrally directed state would not be great at innovation. In recent years, higher growth from technology projects has happened in countries with stock exchanges so that venture capitalists can realise their initial investments, and flexible markets so that technology start-up companies can form and fold without excessive cost. Neither of these features characterise state-controlled markets.

I think that any theory comparing economic systems should give great emphasis to examination of their relative effects on productivity and its growth.

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