Planned Economy

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From the Wikipedia:

"A planned economy combines public ownership of the means of production with centralised state planning. This model is usually associated with the centralised Soviet-style command economy. In a centrally planned economy, decisions regarding the quantity of goods and services to be produced are planned in advance by a planning agency. This type of economic system was often combined with a single-party political system, and is thus associated with the Communist states of the 20th century.

In the economy of the Soviet Union, state ownership of the means of production was combined with central planning, in relation to which goods and services were to be provided, how they were to be produced, the quantities, and the sale prices. Soviet economic planning was an alternative to allowing the market (supply and demand) to determine prices for producer and consumer goods. The Soviet economy utilized material balance accounting in order to balance the supply of available inputs with output targets, although this never totally replaced financial accounting. Although the Soviet economy was nominally a centrally-planned economy, in practice the plan was formulated on-the-go as information was collected and relayed from enterprises to planning ministries.

Socialist economists and political theorists have criticised the notion that the Soviet-style planned economies were socialist economies. They argue that the Soviet economy was structured upon the accumulation of capital and the extraction of surplus value from the working class by the planning agency in order to reinvest this surplus in new production – or to distribute to managers and senior officials, indicating the Soviet Union (and other Soviet-style economies) were state capitalist economies.[23] Other socialists have focused on the lack of self-management, the existence of financial calculation and a bureaucratic elite based on hierarchical and centralized powers of authority in the Soviet model, leading them to conclude that they were not socialist but either bureaucratic collectivism, state capitalism or deformed workers' states."



From the Wikipedia:

"In the Hellenistic and post-Hellenistic world, "compulsory state planning was the most characteristic trade condition for the Egyptian countryside, for Hellenistic India, and to a lesser degree the more barbaric regions of the Seleucid, the Pergamenian, the southern Arabian, and the Parthian empires".[11] Scholars have argued that the Incan economy was a flexible type of command economy, centered around the movement and utilization of labor instead of goods.[12] One view of mercantilism sees it as involving planned economies.[

The Soviet-style planned economy in Soviet Russia evolved in the wake of a continuing existing World War I war-economy as well as other policies, known as war communism (1918–1921), shaped to the requirements of the Russian Civil War of 1917–1923. These policies began their formal consolidation under an official organ of government in 1921, when the Soviet government founded Gosplan. However, the period of the New Economic Policy (c. 1921 to c. 1928 intervened before the planned system of regular five-year plans started in 1928.

After World War II (1939–1945) France and Great Britain practised dirigisme - government direction of the economy through non-coercive means. The Swedish government planned public-housing models in a similar fashion as urban planning in a project called Million Programme, implemented from 1965 to 1974. Some decentralized participation in economic planning occurred across Revolutionary Spain, most notably in Catalonia, during the Spanish Revolution of 1936."



Soviet Central Planning

Max Grunberg:

"Classical Soviet command planning8 consisted of three levels: at the top reigned Gosplan, responsible for implementing the political goals of the Politburo regarding plan targets for key industries and ensuring the consistency of the national production plan for highly aggregated key goods. Immediately below Gosplan were the industrial ministries, in charge of linking centre and periphery by breaking down the aggregated instructions that were passed down by the central planning commission to distribute the output target to the branches of industry under their auspices, and for aggregating the reports by the enterprises on the way up. At the bottom were the individual enterprises responsible for the fulfilment of the obligatory plan targets. In certain periods, different intermediate bodies – from Sovnarkhozy to associations (see Gorlin, 1974) – were called into existence, which were located between the enterprises and ministries in the planning hierarchy.

Despite the hierarchical nature of this planning process, it is Gosplan that drafted the national production and distribution plan while ensuring the material balance between inputs and outputs, enterprises could still influence the plan by sending counter-proposals up the chain of command. With the centre digesting this information provided from below, the planning procedure would then go through several rounds of iteration. Yet, either way the enterprises were subject to the binding instructions of planning bureaucrats and had little scope for self-direction, as their superiors held sway over both what they should produce and with what materials they should achieve their production targets, as producers also did not have much influence over choosing their suppliers. Led by party-appointed managers, the internal organisation of the workplace mirrored the pyramidal form of the Soviet planning apparatus. Democracy at the workplace or within the wider economy was de facto non-existent.

While competitive structure of the market tends to overproduction, resulting in a buyer’s market, where customers are ideally in the beneficial situation to choose between suppliers, the Soviet economy was an economy of shortage (Kornai, 1980), a dictatorship of the supplier, where customers only had the Hobson’s Choice to take what they were allocated or leave it. Although there were no official horizontal links between enterprises without the mediation of bureaucratic superiors, the result of chronic misallocations was that an informal grey zone emerged, tolerated by the officials, where enterprise supply agents haggled directly with each other using the allocated resources they had no use for to secure the necessary inputs for their production unit. In this system, most economic calculations and allocations of resources were realised predominantly in physical terms. Although prices existed, they were determined not through market forces but by the central authorities. Thus, value indices had less of an allocative purpose rather than a ‘control and evaluation function’ (Bornstein, 1962: 66). Yet, even the latter function had hardly any consequences for the wider economy, as the inefficiency of the system was further intensified due to a lack of any mechanisms for weeding out unproductive or superfluous producers through bankruptcy: Soviet enterprises were running with a ‘soft budget constraint’, which meant that individual enterprise losses were ‘paid by some other institution, typically by the State’ (Kornai, 1986: 4) and the responsible managers usually retained their positions regardless of performance.

The systemic problem of shortages was only exacerbated by the endemic overinvestment inherent to the Soviet economy, an investment hunger that was caused by the overambitious plan targets of the political leadership, the unsustainable prioritisation of military and industry over consumer needs, as well as the empire-building of sectorial and regional ministries, which all led to the fragmentation of investments and long delays in the finalisation of projects. This critical defect of chronic shortages not only had quantitative effects such as unplanned downtime in manufacture due to ‘unproductive slack’ (Kornai, 1980: 103) but also reduced the overall quality of available goods. There were hardly any consequences for producers for providing inferior quality goods or products with specifications for which there was no demand. Furthermore, long-term thinking was disincentivised, and what mattered instead was the short-termist fulfilment of quarterly plan targets. Overall consumer feedback was highly dysfunctional in the Soviet Union, particularly for end consumers. A production seemingly detached from consumer needs together with a dysfunctional pricing system led to an economic reality of large stockpiles of overpriced goods and long queues with black markets when they were under-priced.

Another serious problem of the system was that the centre was not able to process disaggregated information, thus requiring the mid-level ministries as an interface. One of the better-known consequences of this were the aggregated target indicators that were passed down to the enterprises, which created perverse incentives. In the absence of functional feedback channels and without further specifications, physical output targets created curious distortions from consumer needs due to the strategic manipulation of factory managers at gaming the system. Among countless such stories, a popular anecdote is the manufacture of Soviet nails, which were either tiny in size when the plan target was expressed by a certain quantity of pieces demanded or enormous when it was articulated in tons. Another incentive problem was that producers disguised their productive capacities to easier fulfil their plan targets, and also inflated their input requirements to ensure that they were allocated the necessary amounts. The overall supply uncertainty for producers led to further inefficiencies such as the hoarding of large stockpiles as well as the in-house production of critical components, leading to less specialised factories and a decrease in overall efficiency.

Ultimately, Soviet planning was built on the idea of material balances to ensure plan consistency. For a plan to be ‘feasible’ meant merely, first, that the resources used in the plan were actually available, and second, that the output of suppliers needed to match the input of other producers, that is, consistency of input and output throughout the economy. In theory, this was achieved with material balance sheets, yet in practice the centre was overwhelmed by the task, because the data provided was not very reliable, it lacked the crucial information of the availability of resources, and the central planners were often lagging behind, unable to process the available data fast enough due to its bureaucratic limitations grounded in the overwhelmingly analogue state of the planning infrastructure. This is why the central organs had to formulate their plans using coarse categories, which led to troublesome aggregation errors: While the national production and distribution plan might be balanced in aggregate terms, it was inconsistent on the disaggregated level, so that the plan had to be amended regularly to correct the consequential errors throughout the year. But even if the centre could have been able to formulate a feasible plan in disaggregated terms for the national economy by means of material balances, this would not have allowed them to determine whether it might be a good or even the best one.

It is in this environment, wherein certain Soviet scientists hoped to enhance this planning process through mathematical optimisation methods, sometimes also referred to as ‘economic cybernetics’ or ‘planometrics’ (Zauberman, 1962), whose application Kantorovich framed the following:

- the system of optimal planning by no means presupposes the full centralisation of economic decisions. On the contrary, thanks to the fact that together with the national economic plan a system of prices and valuations (output/capital norms, rent for land and natural resources, investment efficiency norms and so on) consistent with it is compiled, the possibility arises of taking decisions maximally consistent with the interests of the national economy locally. This is conducive to the wide utilisation of the initiatives of economic collectives, the possibility of mobilising resources and uncovering reserves locally, allows the expansion of the rights of separate economic units, and the construction of a system of valuations and stimulation of the work of separate units, such that, that which is profitable for society as a whole is profitable also for every enterprise. In other words, such a system creates the theoretical basis for the solution of the problem of the combination of centralized management of the economy with wide rights and initiative locally on the basis of economic methods of control. (As quoted by Ellman, 1968: 117)

While mathematical programming would necessarily take on a central role in this procedure its advocates well understood that such algorithms would not solve all of the problems mentioned above and would instead have to be introduced alongside market mechanisms and other reforms that democratise the planning process. So despite the perceived technocratic rule of applied mathematics over economic matters, these planning theorists in fact believed that their approach would ultimately allow for an increase in the autonomy of the periphery.

This discursive upheaval of optimal planning from operations research on the enterprise level emerged in the wake of the Soviet cybernetic movement, which provided a wider philosophical language but also a material push towards the networking of the country. Cybernetics, which had initially been shunned as a reactionary pseudoscience by Stalin, was rehabilitated after his death through influential figures such as cybernetician pioneer Anatoly Kitov and soon became state doctrine under Nikita Khrushchev’s vision of automating the economy. Yet, ambitions to network the planning apparatus through information-technological infrastructure (hardware) and to apply mathematical models as well as necessary reforms (software) on the national level ultimately failed due to the lack of political will. There was a surge in the popularity of economic cybernetics from the late 1950s to the early 1970s spearheaded by the ‘System for Optimal Functioning Economy’ (SOFE) research program led by Nikolai Federenko and Vasily Nemchinov, including several attempts to build national information networks, most notably the ‘All State Automated System’ (OGAS) envisioned by cybernetician Victor Glushkov.9 However, all of these attempts were met with heavy resistance from both market reformers as well conservative forces amongst self-interested administrators committed to the status quo, who well understood that a successful introduction of such technology will result in a loss of their power or might even make them obsolete. Many local projects by ambitious optimal planners failed because the ministries simply did not provide the relevant statistical data. Already in 1961 Polish economist Oskar Lange would compare the situation of the Soviet planometrician to ‘a chemist who is denied access to his laboratory or an astronomer prevented from observing the sky’ (As quoted in Smolinski, 1973: 1190). Another important factor influencing why optimal planning was never implemented on a larger scale in the Soviet Union was the justified scepticism concerning the viability of the available computational power at the time, linked to the astronomical investment costs attached to realising this vision. The risk of failure was simply too high, and liberal market reforms came with the promise of being the less risky option.

The widest application of optimal planning in the Soviet Union was realised by Kantorovich himself in 1970, in optimising the production scheduling of the steel industry, addressing about ‘1,000,000 orders, involving 60,000 users, more than 500 producers and tens of thousands of products’. After collecting the necessary data for six years, Kantorovich formulated the optimisation of production schedules and attachment plans as a linear program with ‘more than a million unknowns and 30,000 constraints’ with actual savings in steel after implementation of ‘only 108,000 tons, although the calculated saving was 200,000 tons’ due to imperfect information. Nevertheless, it turned out that the use of computers in planning the steel industry had a major advantage in addition to enlarging output by making better use of productive capacity. It enabled the degree of aggregation of requirements during the planning process to be reduced, and hence reduced the divergence between output and requirements (Ellman, 1973: 72–75).

Prior to the collapse of the Soviet Union there have been a variety of such projects, yet hardly any of their advocates have gone so far as to optimise the economy within a single model, a hope that was ‘dubbed computomania by its opponents’ (Gardner, 1990: 646). János Kornai, for instance, who developed and applied methods of optimal planning on behalf of Hungary’s socialist government and gradually became disillusioned with the prospect of efficient economic planning through his experience in the trenches of the Soviet-style planning system, stated already in 1970 that it is ‘a science-fiction idea to cover all relevant problems of an economic system in a single model’ due to the sheer number of variables and equations, calling instead for ‘a united system of models’ (Kornai, 1970: 14–15).10 Similarly, in a last gasp before he died in 1986, also for Leonid Kantorovich the final goal of his vision remained not the formalisation of a single model but the creation of a single complex of interconnected models encompassing the entire national economy, as well as systems of forecasting, planning, and centralized and decentralized management of the national economy that provide working people and managers of individual levels and sectors of the economy broad opportunities to display their initiative. (Kantorovich et al., 1987: 17)

In addition to the complexity and enormity of the problem in terms of the amount of variables that speak against a singular model, it also proved difficult to derive an objective function for the economy as a whole. Maximising the output of a plywood trust in the right proportions or minimising the material consumption in the steel industry is one thing, but by which means should the entire economy be optimised? What would be the criterion of such optimality?

There has been an intense debate on this question in the Soviet literature, which Alec Nove summarises in the following terms:

- The party’s general economic policy objectives are too general, too diffuse, to serve as an operational criterion. If asked by the leadership to produce a programme which contains optimal targets for the year 2000, the economic profession cannot escape the problem by taking the targets adopted by the leadership as its optimisation criterion. After all, the leadership asks the advice of the economic profession about what these targets should be! How is one to distinguish means from ends? Various proposals are mooted: maximise the national income; maximise labour productivity; minimise costs for a given set of outputs; and so on. To maximise human welfare is altogether too vague, and the more intelligent Soviet specialists never forget that some aspects of welfare (leisure, quality of life, environment, etc.) do not figure in national income statistics. But in the Soviet case even the purely material part of welfare is poorly reflected in aggregate statistics. […] The whole notion of somebody defining an objective function rests on the incorrect assumption that there is only one actor. (Nove, 1991: 101)

Initiated by the Liberman Reforms in 1965, the victory of decentralising market reforms was deemed complete when Gorbachev’s perestroika put the final nail in the coffin of any attempt at nationwide algorithmic coordination. And with the ensuing collapse of the Soviet Union, further research on optimal planning came to an abrupt halt. Yet, as it was never fully implemented in the Soviet Union the question remains open as to whether the assessment would be different with contemporary technology at hand. But are our technical means today sufficient to allow the centre to plan in disaggregated terms and to realise a mathematically optimised production and distribution plan, and if so, would this solve the shortcomings of the Soviet system mentioned above, especially in regard to consumer satisfaction and workers’ autonomy?"



Advantages and Disadvantages of Central Planning

From the Wikipedia:


"The government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. In international comparisons, state-socialist nations compared favorably with capitalist nations in health indicators such as infant mortality and life expectancy.[22] However, the reality of this, at least regarding infant mortality, varied depending on whether official Soviet statistics or WHO definitions were used.

The state can begin building massive heavy industries at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry and without reliance on external financing. This is what happened in the Soviet Union during the 1930s when the government forced the share of gross national income dedicated to private consumption down from 80% to 50%. As a result of this development, the Soviet Union experienced massive growth in heavy industry, with a concurrent massive contraction of its agricultural sector due to the labor shortage.


* Economic instability

Studies of command economies of the Eastern Bloc in the 1950s and 1960s by both American and Eastern European economists found that contrary to the expectations of both groups they showed greater fluctuations in output than market economies during the same period.

* Inefficient resource distribution

Critics of planned economies argue that planners cannot detect consumer preferences, shortages and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). This difficulty was notably written about by economists Ludwig von Mises and Friedrich Hayek, who referred to subtly distinct aspects of the problem as the economic calculation problem and local knowledge problem, respectively. These distinct aspects were also present in the economic thought of Michael Polanyi.

Whereas the former stressed the theoretical underpinnings of a market economy to subjective value theory while attacking the labor theory of value, the latter argued that the only way to satisfy individuals who have a constantly changing hierarchy of needs and are the only ones to possess their particular individual's circumstances is by allowing those with the most knowledge of their needs to have it in their power to use their resources in a competing marketplace to meet the needs of the most consumers most efficiently. This phenomenon is recognized as spontaneous order. Additionally, misallocation of resources would naturally ensue by redirecting capital away from individuals with direct knowledge and circumventing it into markets where a coercive monopoly influences behavior, ignoring market signals. According to Tibor Machan, "[w]ithout a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals".

* Suppression of economic democracy and self-management

Economist Robin Hahnel, who supports participatory economics, a form of socialist decentralized planned economy, notes that even if central planning overcame its inherent inhibitions of incentives and innovation, it would nevertheless be unable to maximize economic democracy and self-management, which he believes are concepts that are more intellectually coherent, consistent and just than mainstream notions of economic freedom.

Furthermore, Hahnel states:

- Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they would always have been slow to innovate as apathy and frustration took their inevitable toll, and they would always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impeding markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power."


More Information

  1. Decentrally_Planned_Economy
  2. Self-Managed Economy
  3. Computational Economic Planning