The Economic Demise of the Soviet Union

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The Economic Demise of the Soviet Union
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The Economic Demise of the Soviet Union
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The Economic Demise of the Soviet Union
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The Economic Demise of the Soviet Union

• Lesson 1 Opportunity Cost
• Lesson 2 Missing Markets and Missing Prices
• Lesson 3 Incentives Matter
• Lesson 4 Private Property Rights
• Lesson 5 Transaction Costs - Life in a Soviet
  Household
• Lesson 6 Applying the Lessons of the Soviet
  Union
• Conclusion

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A Journey of Choices

• Opportunity cost the benefits of the foregone
  (next best) alternative

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Changing Perception Benefit
propaganda trains
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Changing Perception Cost of Opposition
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Nazis Invaded USSR, June 1941 . . .
and . . .
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. . . lost the war
Don't Confuse Cost Consequence
German POWs in Moscow
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Other Examples Cuban Missile Crisis
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Soviet State Stores Administered Prices
lines common part of price is time in line
very little choice of style, quality, or
sometimes, even size
Universam state supermarket
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Centrally directed production consumer goods low
priority
State stores Unpredictable availability Unchangi
ng prices Because little available, most
everything purchased
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1st-come-1st served rationing life lived in line
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IncentiveGold Star Hammer and Sickle Hero of
Socialist Labor
For outstanding achievements in socialist labour
that improved production and the might and
prestige of the USSR
Alexey Stakhanov  miner Hero of Socialist
Labor He became a celebrity in 1935 as part of a
movement that was intended to increase worker
productivity and demonstrate the superiority of
the socialist economic system. He mined a
record 102 tons of coal in 5 hours and 45 minutes
(14 times his quota). http//www.acepilots.com/me
dals/soviet/highest.html
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Perverse incentives output targets
Suppose you were in charge of nail production
and your quota was set in tons of nails. What
would be the easiest way to beat your quota? By
weight, spikes are easier to produce than small
nails. If your quota were in units of nails, you
might produce lots of tacks. Length? Long skinny
nails. . . . The result is that consumers'
needs have been poorly met. Gold-filigreed sewing
machines that did not work resulted when quotas
were set by value. Similarly, quotas for square
feet of housing generate warped floors and
cracked walls, and required units of clothing
invite sloppy sewing on shoddy material. 
http//www.unc.edu/depts/econ/byrns_web/Economicae
/sovietecontransition.html
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whats not measured is sacrificed

• Weight

• units

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no bridge from invention to innovation

• Innovation
• application of knowledge to production

• Invention
• new knowledge or ideas

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no bridge from invention to innovation

• Invention
• scandium alloy

• Innovation
• baseball bats
• bicycle frames

Scandium alloys were first made commercially
available in 1996 by the Ashurst Technology
Group. Easton Sports first used Scandium alloys
in February 1997, the product was the Redline
C-Core bat. http//www.precision
tandems.com/eastonscandium.htm
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What Do I Care Who Owns It?
Collective farming
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1921 -New Economic Policy (NEP)
private ownership changes incentives
farmers market
State Capitalism
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The Terror Famine 1932-33
collectivization changes incentives
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Virgin Lands Campaign 1954
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Soviet tragedy of the commons
the Aral Sea an environmental tragedy of the
commons resulting from Soviet collective ownership
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Pollution tragedy of the commons
The Economic Demise of the Soviet Union
Photos http//www.gerdludwig.com/html/stories_sov
iet.html
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August, 1991
White House Russias (not USSRs) parliament
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August, 1991
Boris Yeltsin declares Russias independence from
the USSR
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1940 Katyn Forrest Massacre
I was dumb I believed it all. I would have
given my life for the Motherland.
Lenins Tomb by David Remnick
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Reagan On-going Challenge
Strategic Defense Initiative (Star Wars)
 The Soviet Union is an Evil Empire, and Soviet
communism is the focus of evil in the modern
world March 8, 1983
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Afghanistan Dec. 1979 Feb. 1989
Soviet casualties Killed 15,000 Wounded
30,000 Served 600,000 Avg Troop strength
100,000
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Chernobyl Nuclear Accident April 26, 1986
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Message they dont care about us
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Message they really dont care
about us
Children born with deformed or missing limbs,
post-Chernobyl
Women gasping for breath after shift in cement
plant
Photos from gerdludwig.com
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Transaction Costs Non-monetary costs that are
not captured in an exchange
Cost Benefit
Benefit Cost
Households
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Transaction Costs Dead Weight Costs
?
Cost Benefit
Benefit Cost
Households
The Economic Demise of the Soviet Union