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July 16, 2020

Is economic planning viable?

Opinion

July 16, 2020

Planning, both short- and long-term, is an essential part of modern economic management.

In order to delve into the arguments concerning their utility and usefulness, it’s prudent to briefly deliberate over its antecedents, which can be traced to the writers of Lausanne School of Economics, especially Leon Walras. He is considered one of the pioneers of applying math to economic theory (the other being Antoine Augustine Cournot).

In short, he wrote down a complex series of mathematical equations which, he thought, would result in an ideal economic equilibrium. An important implication of his equilibrium model was that one could derive an optimal level of prices that could serve as a guide to pricing final products, and that the use of these prices would be welfare maximizing.

This implication was carried further by writers like Wilfredo Pareto and Enrico Barone, whose 1908 article (‘Ministry of Production in a Collectivist State’) argued that the real problem was to choose the right prices for welfare maximization. These prices can be calculated from Walrasian equations, and it does not matter whether it is the state or the private sector that comes up with that specific price through calculation.

The idea of planned economies got further impetus after the First World War, when various writers eulogized the planned, government-run ‘war economies’. They opined that running an economy through planning is superior because ‘profit motive’ is not a government priority. Thus a government, through collective control, can solely concentrate upon increasing people’s welfare by making use of available resources.

The success of Nazi Germany in pulling its economy out of the economic woes left by the WWI and Weimar era, and the initial success of economic management through central control in the USSR gave further vent to those advocating central planning.

But the concept had its detractors, the most formidable coming in the shape of the Austrian school of economics. Two of its leading lights, Von Mises and Friedrich Hayek, were at the forefront in this attack on central planning.

Hayek attacked the very basis of the central planning hypothesis, the Walrasian equations. He argued that the equations that would help retrieve welfare maximizing prices need a substantial amount of information which is never in the grasp of a central planner (a more detailed discussion of these issues is present in the ‘socialist calculation debate’). Similarly, reproducing or replicating ‘incentives’ (like the private sector) to augur production is impossible.

Even Leon Trotsky, an avowed communist and a close aide of Lenin, took issue with the fact that planning did not involve the participation of commoners. Later events in the USSR bore witness to the fears expressed by people like Trotsky and Hayek. Lack of basic commodities was persistent, and many a times the USSR had to barter oil and gas in order to get essentials like grain in return.

In the days leading up to the breakup of the Soviet Union, long queues of commoners standing for hours to get their hands on necessities like bread and toothpaste was a common sight. When the USSR finally dismembered, the only legacy left of its central plans was the oversupply of technically proficient people and the colossal amount of military hardware that is still gathering rust and decay in many of the former USSR’s military bases.

The USSR’s eventual demise might have led to substantial weakening of the communist ideology, but not central planning. As an economic disaster was unfolding there, a remarkable transformation was taking place in its neighbourhood (China) where economic management was run along goals and targets set through long-term plans. After Mao’s disastrous ‘Great Leap’, Deng Xiaoping realized that such management without reforms is nothing short of disaster. A careful analysis of his reforms will show that these were along capitalist lines, with the state’s role envisaged as a facilitator rather than an enforcer.

The late 1970s saw the first forays of ‘capitalist’ multinationals like Coca Cola and Boeing into China. By 1984, a patent law was approved in order to lure further foreign investment to China. Any individual with the slightest idea of capitalism would recognize these steps not as communist or socialist policies, but rather a reflection of the economic system based on capitalism. Therefore, it should not come as a surprise when many commentators dub the Chinese economic model as ‘state-run capitalism’.

Given the above, what should one conclude about the role of central planning? One lesson is crystal clear: without the political will to carry out reforms, central plans mean little (if anything) in terms of improving the economic conditions. A country can have the best brains who design an excellent plan, but what if the implementers (the leadership) are not interested?

A complimentary, and equally important, lesson is that a country needs to have the resources (physical, financial, human capital, etc) in order to carry out the envisaged steps in a plan. And third, there is a need for an efficient monitoring and coordination system to implement and coordinate the undertakings as per the plans. Otherwise, even the best of plans will only gather dust, as so many do in the Planning Commission.

Since Pakistan lacks all three of the successful ingredients described above, its short and long-term plans rarely meet with much success. Therefore, in our case, a more practical and reasonable approach would be to first get our house in order and set our priorities right. The part about dreaming long term comes afterwards.

Of course, somebody will still have to derive those welfare-maximizing prices from Walrasian equations!

The writer is an economist, and a research fellow at PIDE.

Email: [email protected]

Twitter: @ShahidMohmand79