Today, an economic wonder. The University of Houston’s College of Engineering presents this series about the machines that make our civilization run, and the people whose ingenuity created them.
The conceptual foundation of communism stems from the philosophy of Karl Marx. But it was Vladimir Lenin who was first responsible for bringing it to life. Yet on the eve of the October Revolution it was clear Lenin hadn’t worked out all the details. “The point of the uprising is the seizure of power,” he wrote. “Afterwards we will see what we can do with it.”
Soviet mathematician and economist Leonid Kantorovich was among those entrusted with figuring out how to run the Soviet economy. Reflecting on the task a half century later, Kantorovich wrote “For the first time in history all the means of production passed into the possession of the people and there arose the need for centralized ... control of the economy ...” In other words, someone, somewhere in the Soviet hierarchy had to decide what got made.
It was a huge departure from free market economies, where price and money are central to what gets made and who gets the goods. Kantorovich was faced with the problem of how to optimally produce and distribute goods without the aid of prices. How many cars should be produced? Kitchen tables? Rolls of tissue?
He proceeded by developing mathematical methods for solving central planning problems. And in the process he discovered something quite astonishing at the time. Finding the best mix of things to produce required finding prices. Prices were deeply, fundamentally intertwined with production.
Kantorovich was aware of the politically sensitive ramifications of his discovery. His early papers never used the word “price,” but instead terms like “objectively determined valuation.” The initial reaction by Soviet economists was quite guarded, but over the years perspectives changed. Kantorovich’s work was just too significant to ignore, even if the corrupt, bureaucracy laden Soviet economy couldn’t make proper use of it. In 1965 Kantorovich was honored — somewhat ironically — with the highly prestigious Lenin prize. And ten years later — still fifteen years before the fall of the Berlin Wall — Kantorovich received the Nobel Prize in Economics. The prize committee praised him for demonstrating “the connection between the allocation of resources and the price system.”
The mathematical methods developed by Kantorovich and others live on, generating prices just as surely as they produce production plans. Today’s students learn how to apply the methods in business, economics, and engineering classes. Not for controlling economies, but for solving a breadth of problems like routing signals through a phone network or delivering food to the needy. The methods save the world economy hundreds of billions of dollars every year. But just as importantly, the work by the Soviet Kantorovich, performed in the cradle of communism, has given us penetrating insights into price and the working of free markets.
I’m Andy Boyd at the University of Houston, where we’re interested in the way inventive minds work.
Notes and references:
For a related episode, see 2327, GEORGE DANTZIG.
Kantorovich shared the Nobel Prize with Tjalling Koopmans, who years later arrived at similar results independently.
For more on the method of solving planning problems and their relationship to price, see the Wikipedia entries for LINEAR PROGRAMMING and SHADOW PRICE.
Award Ceremony Speech for the 1975 Nobel Prize in Economics. From the Nobel Prize website: http://www.nobelprize.org/nobel_prizes/economics/laureates/1975/presentation-speech.html.
E. A. Boyd. The Future of Pricing: How Airline Ticket Pricing has Inspired a Revolution. New York: Palgrave Macmillan, 2007.
Mathematics in Economics: Achievements, Difficulties, Perspectives. Nobel Prize lecture by Leonid Kantorovich taken from the Nobel Prize website: http://www.nobelprize.org/nobel_prizes/economics/laureates/1975/kantorovich-lecture.html.
B. Wolfe. Three Men Who Made a Revolution. Fourth revised edition. New York: Dell, 1964.
All pictures are from Wikimedia Commons.
This episode was first aired on January 30, 2013.
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Copyright © 1988-2013 by John H. Lienhard.