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


We shall turn our attention to the central long-term plan and forecast (prognosis) as the instruments of central control. First of all we must define the following two concepts:

By prognosis we understand "prediction" of all feasible variants of economic development, based on the probable development of economic factors, which are, for central control exogenous, i.e. they cannot be directly influenced by the central control.

By plan we understand one variant selected from many possible variants of development. An optimal plan is the best variant with regard to a given criterion.

All the possible variants form therefore a set of paths of economic growth, that are feasible, i.e. they proceed from the present state and obey the objective laws of development. Any feasible path must also respect the probable changes in the factors of production and the probable development of science and technology. It is important to note that all these circumstances do not unequally predetermine the future development of the economy, and that an organized human society may, with a certain purpose in mind form its own future. Moreover, at the foundation of planning there is "An element of belief in reason as an independent force in history and freedom of choice by which man can change reality according to his design..." 9

Suppose that we are in the position of the center running the economic macrosystem. We shall denote what are the subjects and what are the objects from this point of view. If we, for a moment step down to the microlevel, the definition of the subject and object will change. What is from the viewpoint of the center a law of development of consumers' demand, appears at the micro-level as a subjective decision of the consumer based on his personal preferences. We are interested in two problems. The first is how to make sure that the economy fully and reliably satisfies these individual and subjective demands of consumers. Our experience so far has shown that "consumers' sovereignty" cannot be achieved by central control, but with  appropriate rules of the game it can be achieved by a direct interaction between demand and supply through the market. This means that the center must endow the economic system with an automatic regulation of production according to demand. Thereby the macrosystem, i.e. the object, is furnished with further laws of development, that will direct production, and which the center will have to respect.10



The second problem is how are these laws to manifest themselves in a long-term prognosis. We may formulate it as follows: supply created by production, is dependent on demand, and demand in turn depends, among other things, on the distribution policy of the center which at this level can be thought of as independent. These laws can be included in the long-term prognosis either in a form of a simultaneous-equation system, or in the form of a set of paths with various characteristics corresponding to distinct policies of the center.

The set of feasible paths is of course constrained by laws, which are not only of economic character. In their construction it is necessary to consider, for example, what we know of medicine, biology, demography, and socio­logy. We must then formulate how the variants of economic growth depend on non-economic factors.

Click to display the graph in

this window

new window

The set of feasible paths can be shown in a simple way on the graph with a two dimensional co-ordinate system to which we add time. To make it more simple, let us assume that the state of the economy is characterized by two numbers (x1, x2), which denote for example, the annual production of producer goods and consumer goods. In reality the number of important variables which characterize the economy, is far greater. There are among them variables of non-economic character, as for instance, the probable number of people threatened with diseases caused by polluted atmosphere, the total length of polluted rivers, the probable number of families without suitable housing, possibly also an estimated drop in divorce suits. We can then show the state of the economy by a point on the graph, to which we add the time element measured by the number of years elapsing from the present day. The point 0 denotes the present state of the economy.

After 10 years of efficient growth, the economy may reach any point on the curve; it depends on decisions and activity of the center which of these points will be reached. On the graph we see three such efficient paths, while the one marked by an dashed line, is an inefficient path. Its inefficiency is caused by an badly designed and unstable economic policy of the center. As long as we do not know anything about the decisions of the center, we cannot consider any of the efficient paths as more probable than the other. However, each efficient path contains an element of uncertainty, because it is based on some, more or less, probable assumptions, (e. g. weather). A change in these assumptions may only move the whole double line closer to or further away from the origin but the center’s freedom of choice is not seriously changed.


Under conditions of perfectly competitive market, nondecreasing costs and no external economies and diseconomies in production and consumption a feasible path is a sequence of equilibria.11 Each of them shows two important properties:


 Production resources are used efficiently, i.e. they are distributed within the framework of the economy among individual productive activities in such a way- that the output of any product can be increased only at the cost of a decrease in the output of another.


 Under certain conditions concerning the redistribution of income this equilibrium is at the same time a Pareto optimum.12

Pareto optimum defines a situation when “it is impossible by any re-allocation of resources to enhance the welfare of one household without reducing that of another. If a reallocation which would lead to this result were possible... the resources of the community could be used to better advantage by making it; in the optimum such opportunities already must have been completely exploited"13

According to Pareto optimum, each household is relatively best satisfied according to its own individual preferences with regard to the given variant of the distribution of income and with regard to the resources at the disposal of society.

The above relation between the Pareto optimum and economic equilibrium under the conditions of a competitive market, belongs to the fundamental theorems of the theory of welfare economics. One of its founders, Oscar Lange, stressed its importance, as well as that of the whole equilibrium theory for the economics of the decentralized model of socialism.

“The formal analogy, however, between the principles of distribution of resources in a socialist and in a competitive regime of private enterprise, makes the scientific technique of the theory of economic equilibrium, which has been worked out for the latter, also applicable to the former.”Footnotes and references14



These sequences of Pareto optima are not, however, fully determined, because at each point of time there exist multiple Pareto optima. This is so because every initial distribution of income in society corresponds to a certain Pareto optimum, and there are at least as many Pareto optima as there are initial distributions. Only after we have assumed that there exists a certain evaluating, moral and political, principle, according to which distribution of income takes place, the sequences of optima become synonymous.15

It is possible, for instance, as O. Lange wrote, to accept “an equalitarian social ideal” when “each individual has to get the same income.” “This does not imply, that each individual’s money earnings must be the same. Among the goods... there are included leisure, safety and attractiveness of the different occupations, social prestige, etc., and prices have to be assigned to them... Thus differences in money earning which correspond to the individual’s preferences for the various occupations are not in contradiction with the equality of incomes discussed.16

On the basis of this assumption, Lange’s concept of Pareto optimum leads to unique solution, which Lange apparently considers as a national economic optimum.

We suppose that there is still another reason why Pareto’s optimum is not unique even when the original allocation of income is given. The model of Pareto optimum which we discussed is essentially static. If we extend it by adding another dimension, that of time, we shall include in it also decisions concerning the rate of economic growth and those concerning the shares of investment and consumption.

A simple model of Pareto optimum under the conditions of free competition, corresponding historically to the early stages of capitalism, can be easily extended also to cover investment activity, provided individual savings are identical with invested capital. This problem is still under discussion.17 However, under the present conditions in socialist states, we consider this last step as undesirable. Investment is not the only source of economic growth. On the contrary, there are other, significant factors, such as technical progress, general cultural level of workers, and general efficiency of the economic system.

We may further say, that the major part of investment is financed from sources other than individual savings.18 Consumers’ preferences for saving have therefore little influence on the volume of net, and even less, gross investment. Economic growth depends therefore, not on individual propensities to save, but above all on decisions concerning the type and sources of economic growth. Such decisions have plainly social and political character. Thus from the center’s stand­point they are not given by objective laws of economic growth. We believe then that we may leave out the dynamic aspect of individual saving and consider the conception of Pareto optimum as static. Pareto optimum depends then also on the centrally decided growth policy of the state.

Pareto optimum is not unique, because individual preferences as shown in the market, do not cover the whole area of economic decision-making, and the society may therefore choose from the great number of Pareto optima, according to its social preferences.19

Besides, society may also choose another balanced path, which is not a Pareto optimum. or it may choose a completely unbalanced path. Obviously we do not favor this last alternative, yet we cannot eliminate it from the great number of eligible and valid alternatives.20 However, the choice of a system with competitive market already more or less implicitly contains the idea to eliminate the unbalanced paths.



The second starting point of the process of optimal plan’s formation is the criterion of optimality, according to which optimal paths are selected out of a feasible set. The criterion of optimality is an expression of subject — a man’s conscious acting on an economic macrosystem by means of an active economic policy of the center.

The criterion of optimality is an expression of what we called in our diagram (Figure 1) as social preferences. The starting point to the formulation of social preferences are long-term social aims. We tried to outline them partially in the second section of this article. However, it is necessary to stress that these preferences cannot be derived from a scientific analysis. They are in the nature of a value judgment, which is a subjective matter, and an indisputable right of every citizen of a democratic state. It is a matter of practical policy, how to ascertain and consolidate all the preferences of all the citizens. We shall not be concerned with this, for our discussion it is important to know that the criterion for the choice of an optimal plan cannot be derived from economic theory alone, but that it must be brought into the process of planning from outside, in the form of a political decision. In order to avoid misunderstanding we further want to emphasize that this political decision must be well qualified and democratic. By a well qualified decision we understand one that is based on detailed know­ledge of the matter, including the knowledge of all the important consequences of such a decision for the economy and society. For instance a choice of one out of a set of feasible paths, thoroughly analysed down to all the social consequences, can be characterized as a well qualified political decision. By a democratic decision we understand one which is constantly subject to democratic control of the public.

The formulation of social preferences itself is unusually complicated. A number of difficult problems arise, such as: What are the social interests and what is their relation to individual interests? Are social interests merely an aggregation of individual interests, or their transformation, or are they in the final analysis independent of individual interests? In agreement with the generally accepted principles of our society, we consider the democratic way to be the most suitable one, i. e. we assume that we may derive the interests of society from individual interests by way of open public debates.21


The criterion of optimum should be as stable as possible. When it changes economic growth becomes inefficient, the more so, the greater basic changes occur in the criterion.22 It seems reasonable to demand that optimal plan should be efficient in this sense, i. e. that it requires stability of criteria.

However, this technical demand will turn again into a political one for it may be expected that on the one hand the set of criteria will be the more stable, the better it will reflect the preferences of the majority of citizens, and on the other, it collides with the reality that a long-term, say fifteen years long path can now be evaluated only from the standpoint of the present which necessarily changes in time, just as its holders do. The stability of criteria may, to a certain extent, be aided by social sciences which may sharpen the society’s sense of the future, and its ability to foresee. It is therefore necessary for the center to investigate regularly and straighten out the selected optimal paths, i.e. to plan in a sliding way.23

To sum up briefly we may say that in an economic system with a competitive market, the optimal national economic plan is a certain sequence of the Pareto optima, one of which the center selects from the many admissible sequences.


Here, of course, we are facing a certain contradiction which is of a more general character. In the second section of this essay we have outlined the perspective framework of socialist society’s aims — communist liberation of man, and further we considered this goal to be the starting point for the formulation of social preferences, and furthermore for the definition of the criteria for the choice of optimal plan.

On the other hand we want to stress that the criterion of optimality is essentially in the nature of a subjective evaluation, which cannot be scientifically proved, and which becomes objective only when it represents the opinions of the majority of democratic society.

We think that this contradiction arises from the fact that we are looking at the Center’s political decisions from two viewpoints at the same time. When we look at if from the viewpoint of a technical planning organ, we must regard the formulation of the criterion of optimality and thus also the choice of optimal path as an act of free and independent decision by the center. As long as we look at this decision-making from a higher level, and we regard the ruling center as an essential part of the macrosystem, only as an element influencing the behavior of the investigated objective reality, and if we try to trace the tendencies and laws of historical development, then we shall find certain long-term tendencies in the conduct of this broadly defined macrosystem.


From the similar standpoint of historical development we can watch not only the economic macrosystem, but also the social macrosystem — human society — and look for a long-term laws of development. The results are the social projections such as one made by Marx, or such that are contemporary.24 Such social projections cannot be used, however, for evaluation of the plan’s variants; they are just a hypothesis which can be proved only by real development. A technocratic plan based on such hypothetical projections, could get into conflict with the actual development of democratic society and slow down its progress. 

Above all, however, such social projections, expressing developmental laws, have a meaning only on a high level of abstraction, when we look upon human society from the view of historical evolution, and when the possibility an actual effect on practical planning is limited. It may serve only as a guidance and as such it is useful and necessary. However, it must be complemented by concrete political decisions based not on the ideas of scientists and experts, but on the will of the majority of people, ascertained by democratic procedures.




OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses: ---

This website contains the following sections:

General  Economics:

Economic Systems:

Money and Banking:

Past students:

Czech Republic

Kyn’s Publications

 American education

free hit counters
Nutrisystem Diet Coupons