The Economics of Planning

Transcription

1 The Economics of Planning

2 Introduction to Planning It is common for economists to conclude (too quickly) that the experience of the old USSR has shown that planning generated poor economic results. But at the same time we point to some large corporations as efficient institutions. But large corporations are run by plans.

3 Islands in a Sea of Markets Think of the boundaries of a corporation as the external markets where it buys its labor, materials, and sells its output. The corporation is a plan that allocates this labor & materials to produce an output for sale to the outside market. Labor Market Sea CEO Finance Dept Personel Production Marketing Dept. Output Market Ocean Purchasing The Sea of Capital Markets The Bay Of Materials

4 Islands in a Sea of Markets Dr. H. thinks of Singapore as a large corporation (one with strong penalties for bad behavior). What are the differences between a planned economy and a large corporation? Performance Measures Mechanisms for replacing management Ownership Incentives Bankruptcy

5 Planning in the Old USSR and PRC According to Marxist/Leninist Thought: No market prices No financial markets No trade with capitalist countries No private property How is it decided what will be produced without the guidance of prices? What production methods will be used? How is it decided which consumers get the output?

6 The Plan ~ Input Output Tables TECHNICAL COEFFICIENTS: For every sector of the economy it is determined how much of each input is needed to produce one unit of output. In the example below, it takes.7 units of labor to produce one unit of Agric., and it takes.1 units of Services to produce one unit of Heavy Ind. Agric Heavy Ind. Light Ind. Services Agric Heavy Ind Light Ind Services Labor

7 Output Targets Planners set target output levels for each sector. Unlike the example below, it was common for planners to emphasize high output targets for the Heavy Industry sector. According to the goals of the planners, the development of heavy industry in the urban sector was viewed as a first step toward rapid economic growth. Very large steel factories were often observed in planned economies. Agri Heavy Ind. Light Ind. Service Target Output

8 Material Balance With these data, the planner can then allocate inputs to each sector of the economy. The target for the Agri sector is 250 units of output, it takes.1 units of Heavy Ind inputs to produce one unit of Agri, and so.1x250=25 units of Heavy Ind. Is sent to the Agri sector. Agri Heavy Light Ind. Service Cons. Total Use Ind. Agri Heavy Ind Light Ind Services Labor Total Output

9 Note that while this is a simple calculation, the result was often the mass, forced relocation of people. Material Balance How much labor will be sent to the Agri. sector? Agri Heavy Light Ind. Service Cons. Total Use Ind. Agri Heavy Ind Light Ind Services Labor Total Output How much labor will be sent to the Light Industry sector?

10 Material Balance To get the amount available for consumers from each sector, we take the output target and subtract the amount that has been used up as inputs in the other sectors. 250 units of Agri were produced, but 145 ( ) were used as inputs in other sectors, so 105 units of Agri were left over for consumers. Agri Heavy Light Ind. Service Cons. Total Use Ind. Agri Heavy Ind Light Ind Services Labor Total Output

11 GDP Accounting The size of the economy was measured differently in the planned economies than in the West. Using this example, GDP according to the Western concept would be 525, the amount of final goods available for consumers. Under the Soviet system, GDP was recorded as 1000 which includes output used up in the process of production. Agri Heavy Ind. Light Ind. Service Cons. Total Use Agri Heavy Ind Light Ind Services Labor Total Output

12 Planning and the Labor Theory of Value First note the total quantity of labor we have in this economy; 525 units of labor. Second, notice the total amount of goods available for consumption: 525. Finally, smile since the planning document is consistent with Marxist thought! Agri Heavy Ind. Light Ind. Service Cons. Total Use Agri Heavy Ind Light Ind Services Labor Total Output

13 Planning Successes Compared to market processes, planning has the potential to move resources more quickly to attain social goals. (The planners chose the goals.) Provision of public goods like clean water and mosquito abatement. Building a steel industry and other large scale projects. Giganticism was a noted feature of planned economies. Provision of certain kinds of scientific research which private market firms could not profitably supply. Military action

14 Planning Failures Asymmetric Information Suppose the central planner has honest intentions to serve society. She needs information from factory managers to help her set the technical coefficients, output targets, and input allocations for next year s plan. But she cannot tell which of the factory managers are telling her the truth.

15 Planning Failures Asymmetric Information Factory managers have an incentive to provide inaccurate information to the planners. They provide higher estimates for the technical coefficients in an effort to get more inputs. They produce less than their quota noting that their quota needs to be lowered for next years plan. They produce their quota of 100 kilos of bricks, but the bricks are of a quality that is difficult to observe by the planners (The bricks are too large.)

16 Planning Failures ~ Game Problems The factory managers thinks about the planners response to the failure of his factory to meet their output quota. The planners could close the factory or the planner could give the factory more inputs (or lower the output quota). The Nash Equilibrium was often that the manager would not reach the quota and the planner would give them more resources. This result has been called the Soft Budget Constraint (Kornai).

17 Games concerning soft budget constraints are not just a feature of planned economies. Children overspend their weekly allowance knowing that Mom will give them movie money to get them out of the house on Saturday afternoon. Contractors have cost overruns knowing that once started, the payer will have high switching costs to terminate this contract and start with another. Governments sometimes provide bailouts for failing firms.

18 Planning Failures ~ Shortages Planned economies are often noted for shortages, especially for consumer goods. As noted, the factory managers had the incentive to produce as little as possible with as many resources as possible. Due to the soft budget constraint demand for resources was high, but the supply of goods was low.

19 Planning Failures ~ Shortages Planners set prices for accounting reasons. Price 600 Supply (from plan) They had an incentive to set prices below the market equilibrium price Shortage Black Market Price Planner were then in a position to profit 100 personally from the black market Planners' Price Demand Quantity

20 Planning Failures ~ Technological Change Factory managers were often in a position to note changes in technique which would increase efficiency. If the technological change was one that would require less labor, the factory manager would lose workers in next year s plan. If the technological change required more capital, the manager may be rewarded with new machines in next year s plan. The incentive structure biased the direction of technological change.

21 Planning Failures ~ The Allocation of New Investment The rate of savings in the former USSR was very high (>40%). Planners were in the position to allocate these substantial savings to new investment. How did planners decide on which new investment to undertake? (Note: in markets this is done by private investors searching for new profit opportunities.)

22 Planning Failures Restricted Rights to Exit from Chinese Collectives Before 1956 farmers could chose to join a collective. If dissatisfied with the outcome, the farmer could exit the collective and farm independently Starting around 1957 collective participation was mandatory and exit was not allowed. How would this change the incentives for the cooperative managers?