Figure 1: poster of Ernst Thälmann
(the KPD chairman, murdered by the fascists)
This column studies the efficiency of the planned economy by means of three books: Plan, Interessen and Aktivität der Werktätigen by R.A. Belousov, Plan - Markt - Demokratie by K. Steinitz and D. Walter, and Von Marx zu Markt by W. Brus and K. Laski1. The Leninist arguments in favour of central planning (also called command economy) are once more discussed. Next a sketch is presented of the real situation in the Soviet Union, the GDR and Hungary. The failure of these states is explained by means of the principal-agement problem. Finally, some proposals are made for a socialism with a market economy.
Your columnist feels motivated to study the former centrally planned economies, because they are a logical alternative for the capitalist economy. Unfortunately it is not easy to form a reliable notion of the experiences with the central planning. Western publications are suspect, because the authors were under a large ideological pressure due to the then competition between the systems, and therefore could not express themselves freely. The same problem naturally affects the publications from a Leninist origin, to an even worse degree. Nevertheless it may be expected from the Leninists, that they are able to justify their system with arguments. Thus they bring a nuance to the western criticism. Since more than ten years your columnist studies all kinds of Leninist publications, with an emphasis on economics. In previous columns some findings have been reported, and an effort has been made to make an independent judgement.
Already two years ago the portal H.G. de Wolff published the first column about the theme, with a particular emphasis on the price formation. That text is largely based on a publication from the former GDR. On paper the system appears logical and rational. But it is well known, that anything may be put on paper. Half a year ago a second column has been published, where complementary information is given. First, the model of the planned economy is presented, in the manner that was developed by the Polish economist Oskar Lange, in order to justify planning theoretically. Next several experiences are described, that the Soviet Unions has acquired with economic reforms. The aim of the reforms is to improve the efficiency of the production, and to reduce waste. This column is already much less positive than the first one.
The reports clearly show that the economic reforms break on the politics of Leninism. For, the Leninist party sees itself as the unique bearer of social improvement, and refuses to tolerate other political currents. Inevitably, a Leninist dictature develops, which can only withstand the rebellion by means of repression and all kinds of restrictions of freedom. Originally the dictature was just meant to be a temporary measure, which can be abolished as soon as the system has proven its superiority. It appeared gradually, that the true advantages of the system are less impressive than was hoped and expected beforehand. That makes the Leninist ideology vulnerable, and finally she can only survive and justify herself as a dogma. She becomes a religion2.
Reforms imply a change of the status quo, and can develop quickly into a threat for the dogma. This is especially true, because the proposals for reforms commonly result in the reduction of the universally present state interference. The various groups in the economy must obtain more freedom, and an autonomous position with regard to the state. This will inevitably diminish the influence of the Leninist party, and can eventually mean, that the autonomous groups establish their own political organs. The Leninist party would perish in a pluralist system. This is a dreadful vision for the Leninists, who have an unshakable belief in their own ideological superiority. The marginalization of their party would also eliminate the hope for a better society. That explains why the Leninist parties are never truly willing to give the reforms a fair chance.
Since the two mentioned columns consult Leninist sources, they still give a too optimistic picture of the centrally planned economy and her results. The official Leninist literature simply presents a caricature. Fortunately, your columnist has found complementary sources, that seem to be more reliable. Namely, during and after the collapse of the Leninist block various leading scientist have judged the economic performance of the central planning from within the then ruling system. It is naturally conceivable that in those publications the authors stand in a white sheet, in an effort to appease the western elite. But the mentioned publications give the impression of a matter-of-fact retrospection, and nevertheless present crushing conclusions with respect to the soundness of the central planning. This is important information, which deserves to be widely propagated.
To begin with, it is useful to sketch once more the picture, that the Leninists themselves cherish with regard to the centrally planned economy. In this column Plan, Interessen and Aktivität der Werktätigen by the Leninist economist R.A. Belousov is consulted. The author remains within the ideological limits of the system, but yet gives a fairly objective description of the situation and the occurring problems. In a previous column his work has been consulted in order to make plausible the need for public goods. The Russian edition appears in 1974, at the moment when the economic reforms of 1964 have already come to a dead end. This is apparent in the contents: several changes of the reform have been maintained, but the core is again the central command economy.
An essential part of the centrally planned economy is the Leninist image of man. The individual is not merely an egoistic homo economicus, but a homo politicus as well, strongly motivated by the general interest. In fact, in the Leninist society the homo politicus will become the dominant type. Incidentally similar ideas can be found in the western socialist movement, for instance in the PvdA report De weg naar vrijheid. The people ought to work voluntarily. The central plan must reconcile the needs of the various groups, so that the social conflicts soften. The central planning agency (CPA) is supposed to be the best judge of the general situation. Moreover, the CPA can make propaganda for healthy products. In short, the CPA has the right to develop a somewhat paternalistic plan. Opponents abhor this control by means of commands.
Belousov admists that the state enterprises produce in a rather wasteful manner. The production costs are high. He tries to solve the problem by the promulgation of norms by the CPA, which must force (!) the enterprises to behave in a rational manner. The norms are commonly technical regulations, without the interference of capital. Accounting is difficult, because the planned prices are not accurate. An important goal of the reforms was precisely to introduce a more realistic price system. But in 1974 the prices still do not stabilize the markets. On the other hand, the central plan is all-embracing, and it can adjust to the future needs such as more leisure. The present production factors are utilized completely, so that notably the unemployment is eliminated. An effort is made to match the western standard of living. This is somewhat surprising, since the planning is supposed to be superior to the operation of free markets.
The CPA must also control the innovation by means of plans. Science must energetically support the product development. The labour productivity must naturally be high, but that is not enough. For, the enterprises must also cover their costs and even make a profit. This last demand is again an idea, that has become engrained after the reforms. Belousov defines as the measure for the profitability (also called effectiveness) as
(1) ε = Y / (L + β × K)
In the formula 1, Y is the national income, L is the wage sum and K is the productive fund (say, the raw materials and the means of production)3. The coefficient β expresses the productivity of capital. Since ε is an aggregated quantity, she must be computed by means of the prices. In practice this is a problem, because the price system is unsound. On p.108 Belousov acknowledges, that the plan of 1968 has been computed with the prices of 1955! Sometimes the computations are done with labour time instead of money, but that is obviously awkward.
Because of the increasing complexity Belousov pleads in favour of more central planning! To an increasing extent, use is made of prognoses, again a remnant of the reforms. The prognoses can discover the future contradictions, and serve as the starting point for planning. Belousov points to the advantage of planning, that the enterprises operate in a stable environment. At the same time, he acknowledges, that the human behaviour is ill suited for modelling. Apparently he hopes for the best, and accepts this as a dialectic unavoidableness. Sometimes new production facilities are built, but sufficient transport is lacking (p.110). A problem remains the intensification of the production (say, produce smarter). The mechanization should already have been completed in 1965 (p.120), but this has failed. Planning should also relieve this problem. Since the economy becomes more intertwined, every ten years the amount of planning information doubles.
Figure 2: relief of Lenin
The managers complain, that their ministries interfere to much with the operation of the enterprise. But when the production problems would be decentralized, then the central plan would lose its meaning. Belousov asks for a sound disciplin with regard to the planned targets. The partial planning is functionally delegated to the branch ministries (a kind of public corporations, PBO) and to the republics. The ministries formulate norms for the effectiveness ε within their branch. The lowest level of planning is formed by the workers in the enterprises. Belousov wants to make their interests coincide with the ideology, so that they will act as a homo politicus. They ought to feel responsible. He is distressed to see, that the tractors are maintained poorly, and that during transport large quantities of raw material disappear (p.131). Or products taint in the warehouses (p.141).
Belousov sympathizes with the forming of worker's brigades, because they stimulate a loyal behaviour. The leader of the brigade must be politically reliable and gives a good example. The motivation is increased by a mix of material and moral incitations. Brigades must compete mutually, and be rewarded with extra bonuses. Moreover, the collective ought to participate in the plan process. But Belousov states, that sometimes the branch ministries reject the plan of the enterprise itself and replace it by their own ministrial plan (p.142). That is wrong. One must rely on the Leninist attitude towards labour (p.151). On the other hand, the tasks and norms must further a rational production, especially when the indirect incitations turn out to fail. A concerted production requires planning. Apparently Belousov pleads in favour of a system, that combines planning and the operation of markets in a dialetical manner. Bankruptcies remain unthinkable.
In the past it was expected, that the enterprises surpass their planned tasks. Unfortunately this has the consequence, that the enterprises enforce low planned tasks (p.171). Moreover, the production costs are also relevant, in addition to the productivity. In the past that point has been ignored sometimes. Another problem is the poor utilization of the production capacity, partly due to a shortage of materials and parts. Belousov wants to solve this problem by integrating the enterprises vertically in combinations (trusts). Care must be taken, that the combinations do not become too powerful. The continuous changes in the planned tasks are awkward, because they undermine the whole system of planning and material incitations (p.183).
Belousov advocates a wholesale trade for the means of production (p.189). This is a resolution, that was a part of the reform program in 1964. However, it was never realized. The goal is to introduce the operation of markets, so that the enterprises themselves become responsible for their investments. However, precisely these investments are an essential part of the central plan, because they contribute to the stabilization of the economic system. Therefore the CPA has always refused to give up the allocation of the means of production. In other words, the state dictates the allocation of the new means of production to the enterprises. It is obvious that this rigid rationing undermines the autonomy of the enterprises. To them the political connections become more important than the profitability.
Belousov concludes with an enumeration of the three pillars of the system: a Leninist attitude towards labour, the participation of the workers to the leadership, and obviously the collective property. The economic leaders must unlearn to control their subordinates as a command agency (p.215). They must show to the workers, that their interests coincide with the collective (state-)interest. It all sounds quite reasonable. However, at the same time many of the mentioned abuses are apparently structural and determined by the system. There is so much waste in the production process, that Leninism can not live up to its pretences.
After 1953 (the so-called New Course of Khrushchev) and again after 1964 reform programs were started in order to further the operation of markets. Both programs got bogged down in the interests of the Leninist elite. Notably, attempts to realize a wholesale trade in capital goods failed. Therefore the performances remain behind those of the capitalist west. Belousov continuously repeats the Leninist phrases (the rise of the homo politicus etcetera), and also the summary in this paragraph has mentioned some, but in view of the poor Leninist reality this mainly gives an impression of despair.
Recently the book Plan - Markt - Demokratie has been published, written by Steinitz and Walter, two plan-economists from the former GDR. A hallmark of the GDR is its tenacity with regard to central planning, more than in the other states of the Leninist block. Therefore it is interesting to study the restrospective view of Steinitz and Walter about the system, which engaged them for such a long time. Their argument begins in 1963, at the moment when the GDR starts with a program of economic reforms. That program is called the New Economic System (NES). Here the GDR follows the example of the Soviet Union, and also wants to increase the independency of the enterprises and the credibility of the prices. At the same time the planning is modernized by including so-called prognoses. The prognoses analyze the future developments for the long term (say, fifteen years), and serve as a guide for the central plans.
The Leninist system has the ambition to reconcile the macro-economic stability with the micro-economic efficiency. For, the desire for profit in itself does not take into account the general interest. Planning can further investments, where they are truly needed. Thanks to the state investments a policy of structure can be implemented. Therefore the GDR has forgone the establishment of a wholesale trade for the means of production. Yet at the outset the Leninist party expects or hopes, that the GDR will economically surpass the capitalist west. Indeed the price system is reformed, but the execution advances at a slow pace. Henceforth the prices must cover the costs, but their height is still dictated at the central level. Here the word central does not just refer to the planning committee of the state (that is to say, the CPA), but also to the heighest political leaders, such as the central committee of the Leninist party. Namely, the prices are a political instrument for the preservation of some support among the people.
Even when the question of the superiority of the performance of the central plan with respect to the free markets is side-stepped, it must still be checked that the goals are realistic. Notably in the GDR this was not really the case, because the state is determined to surpass the performance of the GFR. For ideological reasons it was assumed in anticipation, that planning leads to a superior growth. Therefore the plan is based on the standard of living in the GFR. In practice it turned out, that this level is not realizable. Therefore the plans are also faulty. In 1971 the suppreme leadership ends the NES. Henceforth priority is given to the realization of a high level of consumption. Thus the import is increased, so that extra foreign debts must be incurred. Moreover, the volume of investments is decreased, so that the policy of structure also languishes. More than ever the economy is based on a hierarchy of commands. In 1972 even the last remaining private enterprises are nationalized.
Steinitz and Walter believe, that in the seventies and eighties the GDR has invested insufficiently. There was actually a spending of the pool for a treat to all, so that the equipment and infrastructure begin to decay. The enterprises do not really increase their austerity and efficiency. In this period both the decentralization and the operation of markets are a taboo (p.66). The consequence is that at the collapse of the GDR in 1990 its labour productivity is already 50% less than in the GFR. According to the authors this is partly caused by the full employment and the paternalism (p.109). After the abolishment of the NES the interest in prognoses wanes, perhaps because the true development is clearly less favourable. Indeed the initial enthusiasm looks a bit overdone, with an impressive 2400 workers just for the prognosis-department. Incidentally, the regime kept these prognoses a secret from the people.
Nevertheless, the authors pay much attention to the prognoses, perhaps because they have contributed to them. Such long-term prognoses are obviously highly speculative, and besides the system creates additional obstacles. Due to the capricious price policy of the party leadership the prognosis can not predict the development of the value structure. For ideological reasons Leninism does not take into account services such as health care, education and science in the computation of added value. Since 1980 it becomes clear, that the centrally planned economy has got stuck. The level of consumption develops reasonably well, but at the cost of the economy as a whole. The secret long-term goals are adapted rigorously. The terms of trade in the foreign trade worsen. An additional problem is the lack of foreign trade partners, among others due to capitalist boycots.
The argument of Steinitz and Walter clearly shows the disadvantates of the central planning. Politics gives arbitrary commands to the productive sector, that are based on an ideological wishful thinking. In the short term the support of the people is bought, and the general interest in the long run is sacrificed. This book has certainly adversely affected the opinion of your columnist about the sense of central planning at the micro-level. Namely, the text clearly shows, that the two authors still support the extreme left pole of the political spectrum. When the possibility of bottled up feelings of guilt is ignored, then one expects that they cherish a positive attitude towards the Leninist system. Therefore it seems reasonable to assume, that their harsh judgement is truly caused by the defectiveness of the former GDR state4.
The book Von Marx zu Markt by Brus and Laski is the best, that your columnist knows in this field. It highlights all facets of the planned economy in a way, that gives proof of a diep insight. These authors stress also, that the planned economy is based on the anthropological optimism of marxism5. The economic competition is replaced by cooperation. Therefore marxism is actually irreconcilable with the operation of markets. It is obvious, that Marx adheres to socialist humanism, and furnishes it with a scientific justification. Indeed the planned economy is a rational system, that can be refuted only by tests in real life. In the introduction of this column it has already been sketched, that the Leninists fall into a trap, because the dictature makes them blind for the negative signals from the society.
Brus and Laski explain the dilemma of the centrally planned economy by means of the principal-agent model. That is an abstaction of the hierarchy in the organization, where the leader (the "principal") gives commands to his subordinate (the "agent"). The subordinate has the human inclination to perform his task with the least possible effort. Humans are by nature "lazy" beings. Here the subordinate has some latitude thanks to his preponderance in information with regard to the execution. The leader is informed by means of a selective transfer of information, that an optimal effort is made. Leninism (and many other ideologies as well) want to combat the principal-agent problem by motivating the people by means of the general interest. Unfortunately this altruistic incitation is less strong than the incentive of egoism. And it is simply impossible to satisfy all group interests.
The command economy of Leninism is meant mainly for the development of a backward state. In the Leninist jargon: the Leninists first change the relations of production, and hope that the productive forces will follow suit (p.42). Brus and Laski stress, that according to Marx socialism is only viable in a highly developed capitalism. The altruism must already in capitalism begin to gradually expel egoism. Leninism tries to rapidly realize the coveted socialism by means of an indirection. But after the Second Worldwar capitalism exhibits a higher vitality than the marxists and Leninists had expected. If there is indeed a tendency towards socialism, then she requires a subtle detour.
The unsolved principal-agent problem is one reason, that explains the uncontrolable costs of production in the Leninist block. Brus and Laski, just like Belousov, Steinitz and Walter state, that a more efficient use of the available means fails. The innovation is mainly an imitiation of capitalist finds. The capricious dictature of the Leninist party stifles the personal development, and there is an ideological coercion everywhere. Innovators run the risk to be prosecuted for criminal behaviour. The rationing of products is omnipresent. Thus Brus and Laski confirm the type of problems, that has also been mentioned by Belousov, Steinitz and Walter. Even your columnist must believe it - this can not be ideological slander any more.
Notably, the enterprises are mainly stimulated to deliver quantity, and quality and differentiation of the products are less important. According to the minimax principle the enterprises try to lower the planned performance, and to increase the allocation of production factors. In a situation with so many abuses it is not surprising, that the plea for the operation of markets keeps surfacing. In this column the repeated failures of the attempts to reform are described. However, according to Brus and Laski in 1968 Hungary has introduced the New Economic Mechanism (NEM), and this has been maintained later6. The NEM actually realizes the now familiar goals: a private sector is formed, the state enterprises must make profits, and the planned performance is abolished. Indeed this stimulates the stability of the markets.
Nevertheless, Brus and Laski conclude, that the Hungarian economy does not grow faster than those of the surrounding command economies. In their search for an explanation they address the financial system. Namely, the state continues to fix the wage level, the price level, and the credits to enterprises. It is not really surprising, that the state wants to control the credits, and thus the investments. For, these determine the stability of the economic system. In the Netherlands a similar policy has been applied during the reconstruction immediately after the Second Worldwar. But the Hungarian regime applies political criteria for the credits to the enterprises, instead of economic criteria. The political connections remain more important for the enterprises than the economic performances. The state wants to develop a policy of structure, and does not give freedom to the entrepreneur. This implies that in fact again a wholesale trade of the means of production is thwarted.
The Hungarian regime has also in other aspects stuck to centralization. For instance, the research and development is still done by the branch ministries. A similar model can be found in the Dutch PBO and in large research organizations such as TNO, which incidentally was privatized in the nineties. Apparently the degree of state intervention is essential. When the stat intervenes too rigorously, then he hurts the capital market. Brus and Laski call such interventions a fundamental mistake. Due to the failing capital market (wholesale trade in capital goods) competition between the enterprises becomes impossible. Therefore the enterprises have merely a weak incentive to maintain a budget discipline. It is a hopeless affair!
Next Brus and Laski try to find a form of market socialism, which does compete with capitalism. The analysis of the Hungarian NEM induces them to make the general conclusion, that a socialist operation of markets definitely requires a free market for capital goods. An enterprise can only truly exert a budget discipline, finance itself, and compete with others, when he controls its own investments. That is to say, the banks must also be independent, so that they give credits based on purely economic considerations. This is an appreciable restriction of the state intervention, because it means that most of the speculative decisions are decentralized. Then the state can merely steer with macro-economic instruments, such as taxes, state expenditures, and the height of the interest rate. Incidentally, this last point belongs to the policy domain of the central bank.
In such a market socialism there exists inevitably a conjuncture, and consequentially the employment is continuously in danger. And the notion of a clear general interest is abandoned. The cooperation diminishes in favour of competition. In exchange for these concessions the state can boast of a domestic industry with more awareness of costs. Since this market form is combined with socialism, the enterprises remain a property of the state. Brus and Laski wonder whether these enterprises will become truly entrepreneurial. They have their doubts. According to many economists and sociologists the Fordism of the twentieth century has transferred the role of the entrepreneur from the owners to the so-called managers in the enterprises. However, the income of the managers consists of wages, so that in the principal-agent model they have the role of the subordinate. The owner must as principal guard over his proper interests, and thus continue to undertake.
Now, in market socialism the state is the ultimate owner of all enterprises. So the state must as the dominant shareholder continuously stimulate the managers of its enterprises to realize growth and a higher profitability. Such a supervision must come from the ministry of finance or from the various branch ministries. Thus it must be feared, that both the managers in the enterprises and the managers in the public administration will defend their individual interests, and not the interest of the principal. In other words, nobody can obviously be identified as the principal, who is the warrantor for possible losses in the economic system, by means of his property. Thus the market socialism also turns out to be an illusion.
A possible solution is the expansion of the operation of markets. The state could lease the land and all its means of production to private entrepreneurs. Then the entrepreneurs can act freely with those means of production, as long as they return the property at the end of the lease period in a state, that has been laid down in a contract. This is called entrepreneurial socialism. In fact it is similar to capitalism. Indeed Brus and Laski wonder, why in such a system the state property of the means of production should be maintained. For, in the end the nationalization of enterprises is just a political instrument. For instance, the capitalist Sweden is in many respects more equal than the former Leninist planned economies. The realization of the socialist ideals depends more on the national culture and morals than on the property form. It is essential, that the presence of a general interest is acknowledged universally.
The previous arguments evidently do not imply, that nationalizations and central planning are always harmful at the micro-level. For, sometimes the principal-agent problem is the lesser of two evils. In the column about the program of Bad Godesberg it is explained, that the advantages and harms must be evaluated for each case. In a sound social culture the grave excesses of the principal-agent problem will remain absent. Nevertheless, it is clear, that a complete nationalization of the means of production creates a real chance, that the waste in the production increases. It must be remembered, that thrift is also a general interest. Perhaps the shareholder capitalism has become popular, precisely because their is a need for an enterprising owner.
The globalization also decreases the attractiveness of the nationalizations and the central planning. For, she introduces a global conjuncture, that thwarts the national planning. That would only change, when planning also occurs at the global level. This requires a world government, but at the moment the World Trade Organization clearly does not resemble this ideal. And even when state enterprises would become competing and economical, then it is still doubtful that they will truly offer differentiated products, in the way that capitalism does. The modern consumer demands for a differentiated and pluriform product assortment, so that he can distinguish himself and display his identity. Therefore a private sector with private property is indispensable, especially for the shopkeepers and small entrepreneurs. There is at most a need for branch-organizations.
In conclusion, your columnist wants to briefly recall the experiencies, that were made during the Russian period of perestroika (1985-1992). One wonders whether anything can be learned from it. For the time being, your columnist has the impression, that the period is mainly characterized by the collapse of the government and by the transition to a kind of western society, where the right of the strongest prevails. The public administration and the party organization are viewed as the primary enemy, that must be destroyed. This is rather bizarre, because at that moment there is no alternative government. The period resembles mainly a dreadful vision of what reform must not be. So the chance of a separate column about perestroika is not very large.