Economic Planning in Market Economies: Scope, Instruments, Institutions

Abstract

The appropriate balance between 'plan' and 'market' has been debated ad nauseam in relation to the USSR, Eastern Europe and China, while for capitalism it is the only question still debated today when capitalist planning is discussed at all. Yet the answer to this question is relatively easy. The experience of Soviet-type economies shows that the most determined attempts at centralised control of the whole economy through direct command and detailed physical allocation lead to elemental spontaneous processes which can be no less anarchic than those of pure capitalism. Instead of establishing social control over accumulation, Soviet-type economic and political centralisation leads to an overaccumulation bias, which at first yields fast growth but then persists well past the exhaustion of labour reserves and causes falling utilisation of plant and excess demand for labour and intermediate inputs. Systemic commitment to price stability prevents excess demand for labour and goods being translated into higher (or high enough) prices; shortages and queues ensue, disrupting the supply system and aggravating the built-in microeconomic inefficiency of the centralised system; cycles appear, as retrenchment from over-accumulation is forced upon central powers by domestic and external constraints, or as popular dissatisfaction with economic performance is dealt with by alternate bouts of liberalisation or further centralisation. It is clear that economic planning should go no further than major macroeconomic variables while markets should be allowed to determine detailed output structure and relative prices by the actions of competing firms unencumbered by central controls, while taxes and subsidies can be used to convey to firms public choices about environmental protection, desirable patterns of income distribution and any other relevant factor neglected by markets.