The Soviet Nail Factory

A famous economic parable on the importance of incentives and rule setting. This tale highlights the importance of focusing on what the customer actually needs rather than what the rules say. Incentives should (but rarely are due to various public choice and political effects) aligned accordingly. From Making Great Decisions by David Henderson and Charles Looper:

The Soviets Make Nails

In the old Soviet Union, the government rewarded factory managers for production quantity, not quality. In addition to ignoring quality, factory managers ignored customer needs. The end result was more and more tractors produced, for instance, even though these tractors just sat unused. Managers of factories that produced nails optimized production by producing either fewer larger and heavier nails or more smaller nails.

“The fact that factories were judged by rough physical quotas rather than by their ability to satisfy customers – their customers were the state – had predictably bad results. If, to take a real case, a nail factory’s output was measured by number, factories produced large numbers of small pink-like nails. If output was measured by weight, the nail factories shifted to fewer, very heavy nails. 64”

The lesson here is that the Soviet’s didn’t, and, in fact, couldn’t, meet the needs of individual citizens and so had to rely on crude quotas. Producing according to these quotas was much less efficient than addressing the real needs of the citizens. The Soviet’s couldn’t align their production with the yardsticks that mattered. They couldn’t see what was important.

 

 

Footnote 64 refers to David R. Henderson, The Joy of Freedom: An Economist’s Odyssey, Prentice Hall, 2002, p. 37

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