> To me, it goes back to the Living Standards index
> on the Penn world database: Resources were transfered from
> producers to consumers, helping them in the short run but damaging
> future consumption because of declining investment.
>The relevancy (and to a certain extent the meaning) of this sentence
>escapes me. Please rephrase.
Let me try it this way. Every nation has a finite amount of
resources, which economists classify in various ways -- The most
familiar of which is Labor and Capital. ( L & K are perhaps too
simplistic -- economists since the 19th century have used a five
factor model, but that is another story) Society (or in the case of
command economies, government) chooses to allocate these
resources in order to achieve some specific result: higher living
standards, (world domination, in the case of command economies) etc.
Follow me so far?
Now:
Economists have also broken down the "mix" of allocations any
ecomomy may transfer these resources _to_ We will use the classic
model for simplicity. The model is as follows:
All resources in the economy
= Government spending + Investment + Consumption
Y = G + I + C
Now, if you spend more on Government, the benefit is that you can
achieve your social goals-- That is, more economic equality,
artificially high levels of consumption spending on things like health,
and welfare, pensions, the conquest of western europe, stuff like
that. Spending on G does not expand the economy, as (I) does.
Rather, it is a form of almost pure consumption. Remember, because
resources are finite, every dollar spent here will be a dollar less
somewhere else.
If you spend more on investment, then you do a very borgeious thing:
you defer current pleasure for an anticipated reward in the future.
For instance, if you go to college, you are deferring current
consumption so that in the future you will (presumably) have a higher
income. In other words, more spending on I means that in the future,
"the pie" (Y) will be larger. Less spending, and the total pie will
eventually grow smaller. (For intensive growth only. Extensive
growth is a concept I will explain when someone asks why the SU and
Socialized countries grew at all) The trade off is that you have to
spend less on C and G
Consumption (C) has been covered fairly intesively in this thread,
but basically represents the amount of goods and services that "the
people" have to use.
In market economies, the only real control the state has over this
sectioning of resources is (G), and that is only as large as what "the
people" allow it to extort from them, so it stays fairly small. In
command economies, the State owns everything, whether de facto or
de jure. Thus, it can shift around the mix, spending more on G than
the "people" would want to do for themselves. Alternatively, "the
people" can decide to allow the government to extort more money
from them, and allow it's share of G to grow. The result is the same.
How does this concept relate to your question? Simple: the
command economies put more of their resources into G,
and neglected I and C. The predicatable result was that in the short
term, "the people" benefited, as the services provided by G made up
for the marginal loss of consumption goods and the major loss of
investment. Over time, as the lower share of I led to a shrinking of
total GDP, more resources had to be transferred from C and I in
order to maintain Government spending(G), which in turn led to less
investment and even more decline in Y.
To sum up in relation to your question:
Spending more on social improvements, when the nation could not
really afford them, was loosely analogous to a farmer eating his seed
corn. Less crops meant that he had to eat more of his seed every
year, until things could no longer go on. The result is a _very_
painful period of transition for the farmer.
In an ideal world (if resources were infinite), a country could
completely stamp out waste, tragedy, and human suffering &
ignorance immediately. However, in the real world (where resources
are limited) this is not a goal that can be attained on command - as
the command economies found out to their sorrow.
The above example is not the main reason why the former communist
countries fell, but was a pretty significant factor in their fall, and it
does explain why all of the more socialized W Euro countries are in
such trouble today.
--Hope this helps,
G