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  Plan&Market   Ludek Rychetnik and Oldrich Kyn: Optimal Central Planning  in "Competitive Solution”

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I

This essay originated from the discussions of the role of the central plan in an economic system with a functioning market mechanism.

    Such discussions are now taking place among Czech economists, particularly because of the current implementation of the new economic system.1 Under the old system, the role of the plan was considered clear and well defined. The introduction of the new system reopened controversies that had been discussed years ago.2   Can central planning be combined with market mechanism? Should the market be subordinated to the plan or vice versa? What is the relation between conscious activity and spontaneity in the process of economic evolution?                                                                                                                        

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II

In the first place, we would like to outline roughly our view of the interdependence between economic development and the general goals of the socialist society.

Socialism has always been associated with some long-term social goals. However, these presumed social goals were quite different not only at distinct points of time but also among the different currents of the socialist movement. The idea of socialism originated in the nineteenth century as a reaction to living and social conditions in the capitalist society of that time. Socialism was supposed to overcome twofold determination of man's life:

a)

determination by natural economy, i. e. eliminate the direct dependence of human life on nature and production; such a determination reduces labor to nothing else than means for obtaining the most necessary needs of life, means of preserving bare existence;

b)

determination by a social economy i. e. eliminate dependence of one group of people on another, leading to alienation, and to one group manipulating the other.

In other words, the aim of socialism was to give people truly humane living conditions, to suppress poverty and destitution, to attain a significant growth of living standards for all, and to create a society in which mutual relations among people would be humane and fully democratic.3

At different stages of development, socialist countries naturally emphasized distinct aspects of these general goals. With the exception of Czechoslovakia and East Germany, socialist states emerged in underdeveloped parts of Europe, and at the time, when their economies were disrupted by war. Clearly the immediate task had to be a restoration of their economies to prewar levels. In the longer run it was thought desirable to increase production to the level comparable to more developed parts of Europe. Concentration on fast quantitative growth of industrial output was accentuated by cold war, by the dogmatic interpretation of socialism, and by the mechanical acceptance of Stalinist economic and political ideas. Under those circumstances the focus moved in favor of maximum rates of growth, even at the price of slowing down the growth of living standards and of dehumanizing consequences of that fast growth.

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In recent years, however, much more satisfactory level o economic development was attained in majority of socialist countries of Eastern Europe. At the same time, the meaning of socialism is becoming more profound and far-reaching. It is obvious that economic growth serves no purpose, unless it is reflected in the living standard of people. The increase in the level of consumption and affluence are now the central interest of socialist society.

  At this stage in connection with the renaissance of Marxist ideas, a belief is beginning to assert itself, that the true sense of development of society cannot be seen only in further increase of consumption. The principal aim must be liquidation of alienation, abolition of exploitation of man by man, and true democratization and humanization of society.

 

When starting the work on the long-term national economic plan in Czechoslovakia planners should keep the above in mind. Economic growth cannot be re­garded as the sole goal! It is, of course, a necessary precondition for a rich and full life of all people, but it is only one of several social goals. All of them can be summarized in the following formulation: “general liberation of man from natural and social dependence”.4

In order to enable people to develop their personalities and to make full use of their faculties and talents, they must have sufficient food, clothing, and a place to live, There must be well functioning services at their disposal, and they must have enough free time. These, however, are not the only prerequisites. Just as important is personal freedom, ability to decide one's own fate, and having a share in deciding public matters, i.e. a sufficient measure of democracy, and human living conditions. There should be civilized and cultural milieu in people’s daily work, and well-kept open spaces for their leisure time.

Because at the current historical stage, the focal point is on democratization and humanization of society, only such methods of pursuing economic growth--i.e. such forms of central economic control and planning--should be chosen, that would not be in conflict with these aims.

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 III

 

Central economic control may play two distinct roles:

1)

    The first role has a purely economic character. Economic decisions must be somewhat allocated between the center and the individual economic agents (enterprises, consumers, etc.). The role of the central control should be to improve economic co-ordination where decentralized decisions alone are unable to ensure the dynamic equilibrium of the economy.

2)

     The second role of central control is not purely economic, but rather of a social and political character. Central control may direct the development of the economy in agreement with the goals of the whole society. It may “humanize" the course taken by the economy and adapt it to non-economic demands.

Depending on which of these two roles central control will focus, we can talk of the economic conception (which emphasizes economic coordination), or the humanistic conception (adaptation of the economic development to the needs of a full development of the man).

In the area of economic control we may distinguish between short-run management and planning. In short-run management we include those decisions, that provide day to day coordination of economic processes. By planning, on the contrary, we understand decisions that have a long-term character and aid in directing the development of the economy. These two sides of central control, i. e. short-run management and planning should be carefully distinguished; they are two different functions, which need not be directly dependent on each other. In the past, these two different functions used to be regarded as identical or mistaken one for the other.5

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According to the type of short-run management, we may roughly differentiate between

a)

an economy, in which current coordination is attained by predominantly centralized short-run management, and

b)

economy, in which current coordination is achieved by the operation of market mechanism.

According to the use of planning, we may again make a rough distinction between:

a)

centrally-planned economy,

b)

 an economy not centrally planned.

  By combining these two criteria we can obtain four basic types of economic mechanisms

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1)  market mechanism without central planning,
2) short-run central control without planning,
3) short-run central control with planning,
4) market mechanism with central planning.

Evaluating these four variants from the standpoint of the above mentioned functions of central control, and of the goals of socialist society, we may say that:

in the first type (market without planning), the central organ plays no part, and cannot, therefore, perform either its economic, or its humanistic functions. In such an economy, it is impossible to carry out consciously any long-term social goals.

In the second type (central control without planning), the central organ may interfere, on the condition, however, of restricting itself only to its economic functions. Concentration of the current economic decisions exhausts the information and decision-making capacity of the center to such an extent, that the role of current economic coordination predominates in the central control system.

A similar situation exists in the third type. Here the existence of planning makes it possible to direct the long-term development of economy with an eye on the common goals of society, but the large amount of work, related to the current administration, prevents it from paying sufficient attention to long-term planning.

In the fourth type (i.e. planning and market mechanism), the major part of current economic coordination is done by market mechanism, and thus the center can concentrate on long term planning, and, at the same time, shift its attention from economic to the humanistic role.

These reflections lead us to the conviction that only an economic mechanism, based on a combination of long term planning and market mechanism, is adequate for the needs of a developed socialist society, With the aid of such a mechanism it is possible to implement all the specific humanistic aims of socialism. The economic role of the central office is limited only to cases, where automatism of the market alone does not suffice. That concerns, in the first place, decisions of a long-term character that are closely related to the macrostructure of the economy. The center helps, for instance, to ensure a permanent equilibrium between resources and demands and helps the economy to keep long-term scientific trends.

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The other tasks of the day to day coordination of the economy, i.e. its equilibrium, choice of technology and the most effective utilization of given resources, are usually much better done by the automatism of the market.

Finally, we may state that from the laws of collection, transfer and processing of information it follows, that these tasks cannot be, to the fullest extent, solved from the center. Besides, the results of such central decisions and compulsory methods of their implementation would conflict with non-economic task of a complete liberation of man. The center should therefore limit its interference with current operation of economy only to special cases.

On the other hand, we may as well say, that from the viewpoint of the humanistic conception of central control, it is absolutely necessary to make sure that economic automatism guarantees a smooth, balanced growth of the economy. As long as this condition is not fulfilled, the center will be overburdened with tasks of short-run administration, with no time left for more fundamental tasks. It is a cruel paradox that because of an excessive degree of centralization it was in recent past almost impossible to guide the economy by a real plan with long-term targets. Also it was difficult and often impossible to try to bring in truly social goals.

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IV

These general conclusions regarding the relation of central control to market mechanism, are in agreement with the ideas of the new economic system, which is now being implemented in Czechoslovakia. According to the blueprint of this system, the center must,

first,

 create a suitable system of rules of the game6, that would enable reasonable decentralized economic decisions and guarantee their implementation,

second,

 be responsible for stimulation of economic growth and maintenance of macroeconomic equilibrium7.

 

Now we shall try to delineate more concretely the role of centralized and decentralized decisions. This needs to postulate which types of decision-making processes should be centralized and which should be decentralized.

To simplify somewhat we can classify all decision-making processes in the economy into four basic types:

1)

choice of production (i.e. decide the assortment and volume of output);

2) choice of technology (i.e. decide which technology and raw materials should be used);
3) choice of consumption (i.e. decide which commodities will consumers buy);

4)

distribution of national income.8

              Under the first item we may further make a distinction between

 

problems of microstructure (which particular commodities and what quantities),

  problems of macrostructure (what volumes of production in the branches of the national economy).

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The following information is necessary for deciding the above mentioned problems at either level:

 

1)

 

2)

 

 

3)

4)

 State of the primary factors of production; i.e. labor force, natural resources and the initial state of assets (buildings, productive equipment, productive stocks, etc.).
 State of the applied sciences and technology available for production. We have in mind not only the new methods of production, new techniques and modern organization of production, but also new products as well as the entirly new directions of production such as nuclear power, automation, etc.
Consumers' preferences.
Social preferences and long term social goals.

In different economic systems the above named decision-making processes are allocated in different ways, and as a result distinct kinds of information are used. Thus for instance, in the system based only on the market without central administration, decisions on problems under items 1) and 2) should be made by firms, problem 3) by consumers, and problem 4) will be solved as a result of spontaneous interaction between agents of the market economy. On the other hand, in a system which we might call ‘ultracentralistic’ (and which in its purest form practically cannot even exist), all types of decisions would be concentrated in the economic center. As far as the use of information is concerned, in a system without central control economic decisions would not be made with regard to social preferences, and in an ‘ultracentralistic’ system decisions would hardly respect individual preferences of consumers.

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The question now is, how should be the decision-making distributed and how should be the specific types of information used in a system which combines central planning with the function of market mechanism.

The best way to present our problem will be to use a box diagram, in which the boxes show the various types of economic decision-making and the different types of utilized information. Arrows mark the communication of information and decisions. 

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Obviously the arrow from the box ''demand'' leads to the box “microstructure", which means that it must be primarily consumers’ preferences that decide what commodities and in what quantities should be produced. The arrow, leading from the "primary  factors of production" to "microstructure” shows that production must, at the same time, submit to the limiting influence of production factors. Where there is a conflict between demand and the potential of the primary production factors, it is solved by the microstructure of production influencing the choice of consumption by movement of prices, thus leading to the adjustment of demand to the possibilities of production. Another arrow leads from "microstructure" across the box "choice of technology" to the box "macrostructure", which means that the development of national economy must be governed by the development of microstructure of production and by the chosen technology of production. In this way conditions are created for the supply of goods and services, to correspond to the demand resulting from the choice of consumption. Of course, macrostructure is not determined entirely by the development of microstructure. Even here there is a feedback and besides that, macrostructure and the choice of technology are influenced by other factors.

We shall not go into detail by describing all the structures of this model. They are illustrated in the diagram and can be regarded as flows of information necessary for a smooth and balanced functioning of the system in question. We assume that there can be a suitable way of guarantying that the system and its elements (producers and consumers, etc.) will act in harmony with this information.

This may be ensured
     by orders and directives, which, if disregarded would result in sanctions,
     by creating an economic situation in which all partakers would find it advantageous to comply and act as requested;
     by combining these two possibilities.

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We shall not complicate our diagram with this. Instead we shall introduce a medium of information, an intermediary between the individual boxes of the diagram. We shall consider the market mechanism and central management. For this purpose we can look at the market as a medium transferring signals of demand and supply enabling automatic regulation of economic processes not requiring the intervention of the center. The system endowed with such automatic regulation acts in the same way as a living organism in which a number of processes necessary for life, such as breathing, thermal regulation, renovation of tissue etc., works fully or partly without the central organ's interference. On the other hand, central control represents a conscious intervention of the center into the working of the system.

 Let us show on the diagram the extent of operation of the central control as it should appear in pursuing the aim of our system of economy (see Figure 1).

Central control bases itself on trends of development as they appear in the macrostructure and in distribution, on the primary resources, on the main trends of science, technology and organization, and on preferences of society as a whole. It influences the whole system by:

a)

directly deciding the volume and structure of social consumption, which means that by regulating significant parts of total demand, it indirectly influences the structure of production,

b)

 influencing distribution and the use of national income (primarily the share of investments, social and individual consumption), but also, what might be called microdistribution, as for instance, children allowances, direct and indirect taxes, whereby it influences the allocation of resources.

c)

In macrostructure of  production it exercises its influence on the allocation of investments. The influence of the center on the macrostructure of production does not necessarily mean a direct distribution of all or even the major part of investment resources. Macrostructure can be influenced also by indirect economic instruments by the financial and banking system, and by giving enterprises information as to which branches of production it would be advisable to invest.

d)

 By encouraging scientific and research work. This may be of an advisory and stimulating character.

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