In the heat of competition: Even as the Russians consolidate their entire aerospace industry into a single entity run by the government, the government has revealed that — due to the country’s recent economic troubles — the budget for space will have to be trimmed.

I found the juxtaposition of these two stories today quite revealing, and illustrates to me the fundamental problem with the Russian Soviet-style government-run approach. Under the competitive, capitalist system that the U.S. is finally beginning to adopt for its space program, when the economy forces budget cuts, competition naturally requires the different companies in the industry to lower costs and innovate. If they don’t, their competitors will get the business. This in turn keeps the industry vibrant, and actually acts to end the tough economic times.

In the Soviet-style system, there is no incentive to compete or innovate. There is only one company, no competition, and everything is decided by a single leadership on top. The government can demand innovation by command from above, but this is not the most effective way to make it happen. Some will obey the commands and try harder. Most however will simply hunker down during hard times, taking fewer risks to cover their asses so they won’t be a target for those budget cuts.

Moreover, with a single government entity running everything, if the economy goes sour the budget must be cut to the entire industry. And since the cuts are determined by a handful of powerful government officials at the top, using money they obtained by coercion (tax-dollars) and not from customers who voluntarily purchased the product, they have no guidance on what parts of the industry to cut. They are just as likely cut the best because it involves too much risk, or because their buddies in a poorly run agency bribed them more.

Capitalism, however, provides competing independent companies, some of which are going to have their own sources of income that might flow independent of a shrinking economy. And it is quality that determines who lives and who dies, not corrupt and powerful government officials. The better companies gain customers, while the less efficient companies naturally fall by the wayside. Thus, during hard economic times competitive capitalism actually works to increase an industry’s efficiency while simultaneously helping to reinvigorate the industry.

This all suggests to me once again that while the consolidation in Russia of its aerospace industry might provide them a short-term burst of success, in the long run they will find it difficult to keep up with America’s private companies.