Planning

1
Planning
2
Marxs View of Planning

• Replaces anarchy of markets
• resources no longer chasing the latest fad
• Relatively simple process
• determining peoples needs not hard to do

3
Real-World Planning

• There are typically several plans covering
  different time periods
• quarterly
• annual
• medium term
• usually five-year
• expression of goals
• annual plans, especially in terms of investment,
  supposed to be consistent with five-year plan
• Annual plan typically most important and by far
  the most detailed
• what is normally being referred to by the plan
• Long-term plans covering up to 20 years occur
  occasionally
• usually cover special projects like rural
  electrification

4
Plan Elaboration

• Planning normally coordinated by a special
  planning ministry
• Gosplan in the Soviet Union
• Involves several other specialized planning
  agencies
• In the Soviet Union, Gosnab (for material
  supply), the Finance Ministry, the State Bank,
  KGB, and others
• Involves dozens of sectoral ministries
• over fifty in the Soviet Union
• Each ministry has many regional departments

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• Final plan endorsed by Central Committee and the
  Council of Ministers and then passed by
  parliament
• Plan covers every aspect of the economy
• output
• material supply
• labor
• investment
• financial
• pricing

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• First part specifies what will be produced
• At national level, it is highly aggregated but
  hundreds and sometimes thousands of priority
  products are specified
• listed in physical units
• tons of steel, numbers of cars, bushels of wheat
• Next part deals with the uses of these outputs
• especially important is how outputs of materials
  and semi-processed goods will be used in
  production
• These uses have to be balanced with their sources
• sources include production, imports, and
  reduction of stocks
• uses include inputs in production, exports,
  consumption, and additions to stocks

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• Materials balancing enormously important
• plans that do not balance are useless
• In Soviet Union, Gosplan would prepare around two
  thousand balances and Gosnab and ministries would
  produce tens of thousands more
• Balancing enormously difficult and time-consuming
• a change in output of any one good could have
  repercussions throughout the plan
• consider an increase in output of cars, for
  instance
• in principle, could be balanced by computer as
  solution to a system of simultaneous equations
• no computer powerful enough exists
• in reality, a process of iteration and
  negotiation used to inch toward a solution

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Annual Planning Timetable in Soviet Union

• Spring -- Directives
• Council of Ministers and Communist Party set
  aggregate growth targets
• Targets reflect
• goals of current five-year plan
• Gosplans assessment of feasibility
• Directives (tentative plan assignments at highly
  aggregated level) sent to each ministry

• Spring -- Directives
• Council of Ministers and Communist Party set
  aggregate growth targets
• Targets reflect
• goals of current five-year plan
• Gosplans assessment of feasibility
• Directives (tentative plan assignments at highly
  aggregated level) sent to each ministry

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• Summer -- Input claims and bargaining
• each ministry makes up separate tentative output
  assignments for each of its departments
• each department makes tentative output assignment
  for each of its enterprises
• each enterprise then requests inputs from its
  department
• each department aggregates input claims and
  requests total from ministry
• each ministry makes its requests from Gosplan
• intense bargaining at each step as lower level
  attempts to bargain with higher level for easier
  output and input assignments

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• Fall -- Balancing
• Gosplan and other planning agencies balance
  revised aggregate assignments into a consistent
  national plan
• November and December -- Approval
• Plan submitted to Council of Ministers in
  November and ratified by Supreme Soviet in
  December

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• December -- Disaggregation
• Gosplan sends each ministry its plan
• each ministry sends each department its plan
• each department sends each enterprise its plan
• process often bled into January
• After plan approval, State Committee for Material
  and Technical Supply (Gossnab) matches up
  supplying and customer enterprises

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Evaluation of Planning Process

• Ideal plan would have to be
• consistent
• achieves balance between sources and uses of all
  resources and commodities
• castings from the steel industry to be used in
  the production of machinery must be same in steel
  plan (where it appears as a use) as in machinery
  plan (where it appears as a source)
• feasible
• both consistent and possible
• resources and technologies actually exist to do
  what the plan requires

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• efficient
• must be feasible
• plan efficient if planners cannot reallocate
  resources so as to increase one output without
  having to reduce others
• infinite number of efficient plans
• optimal
• the one efficient plan most desirable from
  planners perspective

14

• Actual planning process so cumbersome consistency
  never achieved for overall plan
• Those parts that were consistent often turned out
  to be infeasible
• Inconsistent and infeasible plans cannot be
  efficient
• Even if efficiency could be achieved there would
  be no way to try out different efficient plans to
  choose the most desirable

15
Planning and Enterprise Management

• Enterprise management expected to implement the
  enterprise plan fully
• the plan is a command
• management given various material and moral
  incentives to follow orders
• bonus
• prospect of promotion/demotion
• prosecution for sabotage

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• Enterprise not free to implement plan on its own
• superior unit intervenes daily in every detail of
  enterprise activity
• not really centrally planned but centrally
  managed
• This system of central management gets the job
  done
• the economy produces stuff
• resources get allocated
• households consume things
• high-priority projects accomplished
• space and arms races in Soviet Union
• literacy campaign in Cuba

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• The system is hugely inefficient and rigid
• cannot adapt fast enough to changes in economic
  realities
• unplanned shortages or surpluses accumulate
• new technologies ignored or avoided
• ephemeral opportunities missed
• outside world ignored
• no incentives for initiative, entrepreneurial
  spirit, innovation
• Schumpeters process of creative destruction
  absent

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Motivation of Leaders (Anyone Who Has
Subordinates)

• Political and moral conviction
• motivating to extent leaders have bought into
  socialist ideology
• what happens when this conviction diminishes?
• Identification with job
• most people want to be good at what they do
• Power
• most leaders love power and those who dont avoid
  leadership positions

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• Prestige
• unlike the case with capitalism, position in the
  state-party apparatus the only source of prestige
• Material rewards
• salary
• salary rises as ones position in hierarchy rises
• bonus for plan fulfillment
• in-kind benefits
• recreation facilities
• vacation facilities
• superior health-care facilities
• superior educational facilities
• superior access to goods and services
• special stores for the nomenklatura

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• The quiet life
• leaders motivated by opportunities to avoid
  conflict with superiors, suppliers, customers
• Punishment
• all the way from a rebuke from a superior to
  execution
• Proprietorial motivation absent
• leader gets no residual income
• evaluated on basis of how well he implements
  specific orders
• leads to risk avoidance
• innovation is risky
• initiative is risky
• introduction of new technology is risky
• all actions taken by a leader constantly being
  interfered with by superior levels
• leader smart to keep his head down and not rock
  the boat

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Bargaining And Dysfunctional Behaviors

• A leaders job is to implement orders
• A leader is evaluated and rewarded according to
  how well he or she implements orders
• Orders are often difficult or even impossible to
  implement
• Leaders are therefore motivated to resolve this
  chronic bind that they find themselves in

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• Leaders engage in vertical bargaining
• as opposed o the horizontal bargaining of market
  participants trying to strike the most profitable
  deal
• each leader is constantly engaged in bargaining
  with superiors and subordinates
• superior depends on subordinate for information
  on which to base orders
• subordinate has an incentive to provide distorted
  information so as to get easier orders
• enterprise directors complain of obsolete
  machinery, long repair times, unreliable
  suppliers, etc.
• superiors know the game and initially demand more
  than they think is realistic

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• superiors have an incentive not to be too
  demanding of their subordinates, however
• superiors are at the same time subordinates at
  the next level and depend on their own
  subordinates to help make the case for easier
  plan assignments for them
• the more superiors demand of their subordinates,
  the harder their own assignments are
• superiors have to expect at least what their
  subordinates delivered the previous period
• referred to as planning in the previous
  periods results
• a ratcheting effect

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• subordinates respond by avoiding over-fulfilling
  targets
• as plan fulfillment approaches, enterprise
  responds by slowing production so that plan will
  not be over-fulfilled
• enterprise will also try to conceal extra output
  to apply to following years production
• enterprises that cannot meet planned targets will
  slow down production in order to plan in a lower
  level for the next year
• known as lethargy
• enterprises that can realistically meet targets
  but have fallen behind tend to ramp up production
  at end of year
• storming
• not an efficient way to time production

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• therefore, output planning and plan
  implementation generate dysfunctional behaviors
• underestimation of capacities
• withholding performance
• inefficient output surges
• input planning and implementation also generates
  dysfunctional behavior
• inputs are a free good from perspective of
  subordinate
• more is always better as long as the extra input
  does not result in an increase in output
  assignments
• always excess demand for inputs and enterprises
  have no reason to be frugal in use of inputs

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Merger of Economic and Political Spheres

• Every leader expected to contribute to all the
  goals of the system
• economic considerations but one of many
  ideological, domestic policy, foreign policy
  considerations
• weighting of these considerations under constant
  flux
• political events or changes in political goals
  force changes in plan and plan implementation
• all things economic subordinate to the political
• the economic merely a component of the political

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Conflicts of Interest and Ambiguous Motivations

• Leaders always face conflicts of interest and
  uncertainties on how to resolve them
• For instance, plans specify output quantity and
  quality targets
• But there is a strong bias in favor of quantity
  targets
• quantity drive
• rapid growth a central goal of socialism
• superiors constantly pushing subordinates to
  produce more
• users constantly pushing for more, as well

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• Bias in favor of quantity usually comes at
  expense of quality
• Enterprises can generally get away with poor
  quality as long as quantity targets are achieved
• Impossible to satisfy all aspects of the plan
• hierarchy of importance develops concerning plan
  implementation
• dysfunctional behavior results
• substitution of lower-quality inputs for inputs
  specified in the plan
• results in flimsier outputs that have shorter
  useful life
• not obvious until later
• Never complete assurance that this informal
  hierarchy of importance will not change and get
  leader in trouble

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The Problem of Information Proliferation

• The sheer quantity of information, even in the
  absence of incentives to distort it, is a cause
  of breakdown
• collecting, organizing, and using it to
  coordinate decision making is too much
• the task never gets done
• the result is planning mistakes and incomplete
  plans
• low-priority sectors take the brunt
• when errors reveal themselves during the year,
  the bureaucracy is usually too rigid to respond
• any change would have repercussions throughout
  plan

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• The situation tends to worsen over time as
  planning becomes increasingly complex
• Planners respond to tendency of enterprises to
  interpret plans in ways that are easier for the
  enterprise to implement but not what was intended
  by planners
• plans become increasingly specific
• have to avoid the one-ton nail
• No matter how specific and complex, the
  information does not exist for a single mind or
  group to achieve an efficient outcome
• this is Hayeks point