Planned economy cannot be innovative!

The well-organized economic system and its continuous development are very important for economic growth and stability of the country. The importance of innovation is inevitable and significantly crucial for sustainable economic development. Today’s giant high and medium-tech companies, pharmaceuticals and industries achieving remarkable market shares primarily through their research and development (R&D) activities, namely innovation. Sustainable innovation requires well-structured market regulation, competitive market, reliable business atmosphere, as well as rule of law and efficient institutions. In this article, we are going to analyze the functionality and productivity of innovation activities in planned economies, in comparison with free-market economies.

Being one step up from the traditional system, planned economy is the main feature of communist countries where incomes, investments, distributions, prices and other economic decisions about the production is determined, regulated and controlled by central authority or government. While most of these are determined by individuals and market in free-market economies, in other words here the market intervention of government is significantly low in comparison with planned economies.

Initially granted, one particular reason is why the planned economy cannot be innovative is because of the lack of competition. Even though competition is one of the major forces of innovation, the government controls all companies and does not encourage competition, even instead attempts to eliminate it. In a planned economy, central authority does not allow companies or industries to carry out R&D. There is no need to make production more qualified or more sophisticated for the future than they are today. The government authority makes a decision about what, how and where to produce. The point is that they cannot be well informed about production decision, because the economy is designed to meet consumer’s needs, not their wants or preferences. Planned economies are reluctant to the improvement or diversification of the product, which in other words exerts unconcerned approach to consumer satisfaction. In addition to this issue, this centralized administrative planning does not even allow employees to take risks to improve the standards of products. Workers have to accept and obey the rules of the central authority. Typically, the government rewards all company-makers for following the directives rather than discovering and inventing new ways to raise the quality of goods. This trend in itself limits employee’s freedom, creativeness, and productivity. Consequently, that hinders their ability to bringing and applying innovative ideas. All planned economies like Cuba, North Korea, and the former Soviet Union go through the problem of producing useless and low qualified items, which are not competitive in the market.

Since it is obvious that the vast majority of innovations; advancements in technology, medicine or science have come from countries with a free-market economy or less government engaged economies. According to the below Global Innovation Index report 2019, it is possible to notice that global innovation leaders are countries which are mainly free-market economies. The significant part of global innovation is carried by US giant companies which are perfect examples of the US free-market economic system.

Top Innovative Countries: 2019

Source: Cornell SC Johnson College of Business, INSEAD, and the World Intellectual Property Organization

Note: HI = high-income, UM=upper-middle-income

In careful analyzing of the above report, China draws attention with its remarkable change by taking 14th place in the table. Even though Chinese government maintained a planned economy for a while, but at the end of 1978, China adopted gradual transition to the free market economy by allowing both private and public companies to compete with each other and stimulate growth. Since then this long-term transition contributed to China a lot and it made a social and economic development. According to the researchers, China’s GDP (Gross Domestic Product) has in average approximately 10 % annual growth and over 850 million people were able to lift themselves out of poverty in the last three decades.

Briefly, government intervention decreases the level of competition and productivity, where both companies and talented employees are reluctant towards product and process innovation. Free market economies create enormous opportunities for competition and innovation, which are the main driving forces of economic growth and development around the globe, without an exception.

References

01 Global Inovation Index, 12th Edition, Cornell SC Johnson College of Business, INSEAD, and the World Intellectual Property Organization , 2019 Available on: https://www.globalinnovationindex.org/Home

02 China Overview/ The World Bank in China, Available on: https://www.worldbank.org/en/country/china/overview#1

03 The World’s Most Innovative Countries, 2019 Available on: https://knowledge.insead.edu/entrepreneurship/the-worlds-most-innovative-countries-2019-12016

04 The 4 Types Of Economic Systems Explained, Available on: https://blog.udemy.com/types-of-economic-systems/

Temperature and Economic Development

There are many factors that have an impact on the development of the country’s economy, such as human resources, natural resources, technological development, social and political factors and etc. Some factors do have a direct impact on economic development, while some others may have an indirect effect like geographic proximity, culture or historical path. I would like to discuss the climate differences that have a significant impact on almost a great majority of countries.

In this sense, my argument is that, if we have a look to the correlation between temperature and economic development of many countries, where we can explicitly see that the significant majority of countries which have a relatively low-temperature degree are mainly developed countries than those which are relatively high. In other words, when the average annual temperature decreases, the level of economic development rises. In the graph below, it is possible to see that most of the countries which have a higher Human Development Index (HDI) (prepared by the United Nations in 2018) are relatively cold countries. 

Table: Human Development Index (UNDP, 2018).

HDI is one of the widely used indicators of economic development, which is capturing human progress, combining information on people’s health, education, and income in just one indicator.

There is no unique explanation for this correlation; it has many subjective or objective interpretations for sure. Rather, I have my own subjective approaches for this interesting nexus. First, in relatively hot countries, people wear short clothes and everyday walk with slippers, so they do not care about clothes or equipment that may keep them warm. Since this situation is much more different for the inhabitants of cold countries. I mean, they have to prepare for winter, and for this reason, people need warm clothes and they have to make their homes resistant for cold climate. For solving such problems, the population in these countries are more prone to invent or create a warm environment for themselves. Therefore, I may say that the industrial revolution started from the cold countries, which is an outcome of survival need.

Secondly, I want to stress the importance of “education” which refers to the development of human capital, studying and knowledgeable labor force, which plays a major role in country’s economy as a crucial factor for the sustainable development. To glance through a link between academic achievement level and temperature, it is obvious that countries with hot climate have lower educational performance in this platform, where this situation can lead to negative long-term consequences, namely it may affect student’s future academic success or career plans. More broadly, hot weather has both indirect and direct effects on the studying level of children through psychology, cognitive abilities, memory, and decision-making. In extremely hot conditions, it is quite hard for school learners to concentrate on subjects and to stay focused during lessons, where they can be easily distracted. Additionally, heat exposure causes the reducing of student’s decision-making abilities when they are in difficult tasks or exams. To explain the impacts of heat in the decision-making, researchers Amar Cheema and Vanessa Patrick put healthy adults in two separate rooms, and they were asked to take the most beneficial cell phone plan when they have given two choices. Adults in the cooler room picked the correct plan ½ of time, but the adults in the warmer room picked the right plan only 1/4 of the time. According to another study conducted by an undergrad at Loyola University, found that air temperature has an impact on memory. By employing a computer-generated memory test, 52 students randomly attended in memory tests in various temperature rooms. The investigation used 72, 80 and 64 degrees F for room temperatures. The result exerted that in the environment with temperatures of 80 or 64 degrees, memory was impacted negatively. The result of test score was remarkably higher in the room where the temperature was 72 F.

In order to show it in more detailed, the study published by the National Bureau of Economic Research, assessed test scores from 10 million high school students who took the PSAT exam multiple times, between 2001 and 2014, individual test-taker scores declined in years when higher temperatures were recorded. On the other side of coin, in cold countries, the level of academic achievement is much higher. In my opinion, cold weather makes students much smarter, productive, therefore in cold weather, decision-making skills experienced to be sharper. A new study conducted by researchers from Stanford, Ben-Gurion, and Bar-Ilan universities found that cold weather helps the improvement of cognitive skills.

As a result, having seen both direct and indirect effects of temperature on economy, we can simply say that the rising of temperature causes the decreasing economic development. By inhibiting the development of cognitive abilities, heat exposure leads to the lack of energy, lower exam results, losing memory on the students. Therefore, hot weather conditions minimize studying skills and education, which are one of the major catalysts for the economic development in a country.

References

1.      Heat and Learning (Joshua GoodmanMichael HurwitzJisung ParkJonathan Smith) Link- https://www.nber.org/papers/w24639
2.  How Temperature Affects Our Decision Making Abilities Link-
https://examinedexistence.com/how-temperature-affects-our-decision-making-abilities/
3. Do Classroom Temperatures Affect A Student’s Ability To Learn? Linkhttps://www.screenflex.com/classroom-temperatures-affect-students/       
4. Does cold weather make you smarter? Linkhttps://www.fromthegrapevine.com/health/cold-weather-may-help-you-make-better-decisions 
5. Human Development Index (HDI) (prepared by United Nations in 2018).

Quality or Quantity of Economic Policies: What is the priority for the government?

The main macroeconomic goal of economic policies is Economic Growth, which is the growth of total production in an economy. In other words, economists measure economic growth by the change in Gross Domestic Product (GDP), which is the change in the sum of the total consumption, private investments, government spending and the difference between exports and imports. Since, economic development is a broader term; reflecting both qualitative and quantitative indicators in a certain economy, such as education, healthcare, infrastructure, quality of private and government institutions, life expectancy, economic growth, and etc. Despite economic development is much more vital for countries, but in many economies, policymakers focused on growth rather than development. In this article, I am going to highlight the primary reasons for this paradox.

The reasons for many governments to prioritizing economic growth policies are many, whereas I would like to stress the importance of long-lasting results of policies, reputation concerns, and tax return expectations. Firstly, if the government focuses on the development of the economy, then the expected outcome of their policies will be widely known after a long period by the population, who are their voters in elections. For instance, if policymakers will decide to invest in the development of education or healthcare, then the consequences will be felt after several years, like at least five, which may be observable as the first initial outcomes of the development policies. This is a quite long duration for political parties because it is their average maximum administration period, where they can lose a significant number of potential voters.  

Another remarkable reason for procrastination of economic development is the immediate or early consequences of economic growth policies that can attract many voters and enhance the reputation of the political party. One explicit example is the unemployment reduction policies, which is the stimulation of government and private investments, resulting in the increase in GDP. Moreover, government investments in infrastructure and construction are much more observable by population than the investments in education or healthcare. Because, the majority of people value the immediate steps taken by the government, rather than waiting for the quality development of the economy.

Tax returns attained from the outcome of the economic growth policies is the third important cause of preferring growth to development. I mean, when as a result of growth policies the GDP increases, it means the unemployment rate decreases, investments and consumption increases, which means tax accumulation increases. For example, if consumption rises, that means the amount of sales taxes paid by consumers are also increases. This tax return expectation of government incentivize them to increase growth measures because the budget is the main concern for many political parties or governors. With this increased amount of budget, governments may reduce the budget deficit, and may increase the wages and pensions, which will increase the reputation of managing political party and probability of victory in the elections.

Summing up, governments are led by political parties that want to stay in power for long period, which is hard to sustain with economic development measures. Voters value immediate actions from government, like decrease of unemployment rates, increase of wages and pensions, or hearing more economically outstanding growth numbers rather than long-lasting consequences of economic development measures. It is highly risky for governments to invest in quality measures rather than quantity because they are involving higher costs and long term results, which may finish with the loss of elections.

Who is Batman for Market Economy?


There are enormous obstacles for economics in order to sustain the price stability, lower unemployment rates, quality production, the variety of consumer choice and research and development (R&D). I have found a “Batman” to deal with these and other else types of economic problems, who can successfully cope with the significant majority of such problem, which is called “competition”.  

My argument is that competition as an instrument has unique and great power to help economic policymakers to solve the problems such as higher price volatility, higher or abnormal unemployment rates, low quality of goods and services, low consumer choice and ineffective R&D. I want to begin with the effects of competition on the higher price volatility problem first, and then I will briefly go through the others. Price volatility or instability mainly occurs in the monopolistic, oligopolistic or other types of less competitive markets. These groups can manipulate market and prices, which make hard to enter the market for small and medium entrepreneurs, where the only price setters are those who dominate the market. Strong competition will give equal powers to suppliers, and one’s price manipulation will be impossible, that in the end, this manipulator may lose its market share. So, it is nearly impossible to set prices which are above the market equilibrium price in the highly competitive markets, thus competitors will follow different ways to get more income, such as quality amplifications or R&D engagement measures. This market chain will automatically increase the quality of production and R&D activities.

If the market is less competitive or monopolistic, which means producer surplus or profit is great and the demand is inelastic, so for producers, the quality is not a big concern, because they have obtained their intended earnings and do not have competitors. In contrast, in highly competitive markets, the producers cannot easily increase prices without quality contribution, and the quality issue can be the main source of profit. Moreover, the quality is first priority not only for current producers but also more vital for the new market entrants as well, since they do not have market share and reputation as others have. Sustainable quality in the competition requires more R&D activities in order to keep or increase the market share for companies.

As the quality of goods and services in the competitive market is the only determinant of income for companies, the R&D is one of the primary ways to compete and increase market shares. Because, through R&D it is possible to attract new customers, by using several types of developments such as cost reduction, quality improvement, new design or augmentation of customer satisfaction. By the way, the R&D activities entail high skilled human and physical capital, which have positive impacts on education, research institutes, overall exports and eventually on the whole economy. According to the latest Global Innovation Index report in 2018 (Figure 1), it is possible to see that more innovative countries, in other words, countries that are very effective in R&D are only high-income countries.

Figure 1: Global Innovation Index rankings,  2018


Source: Cornell University, INSEAD, and the World Intellectual Property Organization, 2018
Note: World Bank Income Group Classification (July 2017): HI = high-income, UM = upper-middle-income


It can be interesting for us, whether R&D is the outcome of the competition or not. In the recent Global Competitiveness Index (GCI) report of World Economic Forum in October 2018 (Figure 2), we can explicitly notice that there is a positive relationship between per capita Gross National Income (GNI) and GCI. That can be interpreted as, competition fosters R&D activities, which has a huge contribution to the income level of nations.

Figure 2: Global Competitiveness Index, 2018



Sources: World Economic Forum analysis; World Bank 2018; national sources.
Note: GNI = gross national income (Atlas method), natural log transformation. 2014 data is presented for Venezuela, and 2016 data is presented for Taiwan (China). N=140, R2 = 0.82.

Appreciated level of domestic competition creates many types of producers who want to compete and increase their customer satisfaction. Many producers in the market mean greater availability of consumer choice. Namely, consumers can have access to several types of goods and services, which is hard to achieve in the monopoly or in other types of market imperfections.

An effective level of competition gives an opportunity to the domestic company to catch up with international competitors and increase the level of production, what we can easily observe in today’s global economy. Competition helps domestic companies to achieve high quality, internationally competitive and low-cost production, which can boost exports, and logically, decrease the unemployment rates. In more details, if a company wins the domestic competition with both domestic and foreign competitors, then there is a good potential for that company to reach to the global market. Eventually, global market access for companies creates extra employment and as a result, unemployment level decreases. Since in monopolistic economy, there are very few market entrants and very low level of competition, and logically higher prices, which decreases the potential level of production and employment.

Consequently, my argument is that lack of competition has negative impacts on both domestic production, consumers and exports of the economy. Briefly saying, less competitive market is more prone to have volatile prices, lower quality of goods and services, less R&D, lower consumer choices and higher unemployment rates. This trend is also possible to observe in today’s economies as well, where more competitive economies are wealthier and innovative than those who are less. Therefore, I consider the sense of competition as a “Batman” for economies, like an invisible hand, which must be supported by the policymakers and markets.

References

  1. Global Innovation Index, 11th Edition, Cornell University, INSEAD, and the World Intellectual Property Organization, 2018 Available on:
    https://www.globalinnovationindex.org/Home
  2. Global Competitiveness Index, World Economic Forum analysis; World Bank 2018, Available on: https://www.weforum.org/reports/the-global-competitveness-report-2018 )