Plan and Market   Marx and Mechanism



Today market does not function solely in an ex post manner. It did not even in the first half of the nineteenth century and all the more so now. Almost no producer works completely "in the dark". He always has some information, albeit incomplete, that allows him to anticipate demand and thus determine what is to be produced. This anticipation, of course, does not have to be entirely correct and in fact very often is not. To what extent it was correct is tested by the market. The market thus functions ex post, but not entirely or uniquely. Even in a pure market economy the producer makes decisions about production ax ante according to the anticipated future. In this sense perhaps the term planning can be used. But in a pure market economy this ex ante decision-making is entirely decentralized. That is to say the individual producers, in an atomized economy, are those who plan, though the economy as a whole is not planned. The ex post actions of the market can thus be understood as ex post corrections in those situations where demand has not been correctly anticipated.

The term market mechanism cannot be reduced to mean only those processes that take place in the marketplace itself. By market mechanism we mean three types of processes mutually interrelated by channels of information.
Production decisions within firms (described by the theory of the firm).
Decisions about consumption (described by the theory or consumer behavior).
Pricing according to supply and demand on the market (described by the theory of market equilibrium).
If we have this understanding of the market mechanism, then it follows from what has been said above that market always contains certain combination of ex ante decision making and ex post corrections: Planned decision-making about production on the basis of anticipated demand is later corrected by the market

All this leads to an important conclusion: The quality of the coordination done by the market does not depend solely on the fact that the market form exists, it depends also on how good is the anticipation of future demand. If in fact actual demand comes close to what had bean expected, the ex post corrections are very small in size and the economy functions smoothly, without larger fluctuation and disturbances. If however the difference between expected and real demand is larger, then economic equilibrium is disturbed and this disturbance is multiplied by the feed-back loop and transferred from industry to industry until the whole economy is subjugated to cyclical fluctuations.


On what factors does the quality of anticipating future demand depend?

  1. First of all on the stability of conditions. If long-term changes in demand are small, then it is possible to estimate future demand from experience with a fair amount of accuracy. Under such conditions the market mechanism is able to ensure good coordination.

  2. On the length of time for which predictions have to be made. Where the production cycle is very short, it is sufficient to anticipate demand for only a few days or weeks in advance. In such cases again the market mechanism alone is able to match supply and demand very well. In branches where the production cycle is very long, or where investments take a long time to complete, it is necessary to estimate demand several years in advance, which makes the risk of incorrect decisions much greeter.

  3. How correct estimates of future demand are depends on the quantity and quality of the available information. Therefore any measures which improve the information firms receive about the development of future demand, reduce the necessity of ex post corrections.

  4. How correct anticipations are also depends on how good are the methods for estimation of future demand . Thus the improvement of these methods also lessens the size of the necessary corrections made ex post by the market.

It follows from conditions a) and b) that the quality of economic coordination provided by the market mechanism is not always the same, but depends on specific circumstances. In periods of slow change the market mechanism functions fairly well, while during periods of rapid and large changes (such as natural disasters or great waves of innovations) it functions rather poorly. From another point of view it may be said, that the coordination provided by the market mechanism can be very good in some branches of the economy and insufficient in others.

It follows from conditions c) and d) that the function of the market mechanism can be improved by better information systems and more reliable methods of prediction. Especially in this area there have bean important developments during the past century. The channels of information connecting various segments of the economy have been greatly improved. A much greater volume of information of a much higher quality is gathered and passed on to firms. The speed with which this information is passed has also increased. A very important role in this connection is played by the improvements in central statistical services and by analytical work of diverse market research organizations.



The development of modern industry has been accompanied by formation of huge, concentrated units, whose production is not dependent on the momentary signals of the market, but is planned far in advance, on the basis of contracts and agreements made for long periods of time. A number of institutions, which "organize" the market and prepare systems of "future markets" emerged. All this has lead to the fact that firms, especially in those branches where this is necessary, have qualified information about future demand, so that they can make ax ante decisions with relatively small risk.

In the XXth century forecasting methods have undergone fast development. This is related to the development of mathematical methods and computers. Methods of demand analysis using estimated elasticity coefficients, make it possible to predict changes in demand for individual types of commodities. Another improvement is due to input-output analysis, that make it possible to project expected changes in final demand and changes in technology into the demand for various types of intermediate products. Finally it is the system of central "indicative" planning that is a central prognosis of the growth of national income and other essential macroeconomic indicators (as in France and the Netherlands). Indicative planning is an advanced phase of improvements in quality of information about probable future demand that firms have at their disposal. Through the central plan firms are able to obtain information to which they would otherwise never had access.

The above mentioned processes can all lead to a great improvements in ex ante decision-making of firms and thus limit necessary corrections which the market must make ex post. We thus see that without eliminating market mechanism the planned coordination and development of the individual parts of the national economy can be strengthened. So the concept according to which the market mechanism acts only blindly, on an ex post basis and leads to spontaneous and unintended development of the national economy, is becoming less and less true.





















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