oldfart
Older than dirt
Without realizing it, most folks treat central planning and command economies as the same thing when they are not. This sloppy thinking leads to a lot of epic fails.
Ill start with the terms. Central planning is system where organizations like a government, industry, or firm tries to gauge economic conditions that pertain to it, and adjust its behavior to achieve its objectives. The bigger the entity, the more central the planning will be. At the smaller end is your average firm with a business plan and projections (which we normally dont think of as central planning, but its just a matter of degree) and the other end are entire governments/economies such as the US government or the old Soviet Union. In this broader sense, all governments and trade associations in developed economies engage in central planning; they gather statistics, generate reports, plan future actions and budgets, and try to forecast the future. Thats central planning.
The key to microeconomics is how information is transmitted to households and firms that they use to make economic decisions. There are a few methods that work for very small economies like a village (barter, village communalism, and so forth) but for larger economies there are basically two mechanism, commands and markets. You can be for one or the other mechanism in any given situation, but you cant be against both.
Command mechanisms take a number of forms. One form is direct orders, as in Soviet style War Communism. In that case a factory was told what inputs it would receive and given a quota it was expected to meet. People who met quotas generally got a Hero of Labor medal and depending on the times an extra ration of vodka or two weeks at a Black Sea resort. People who failed in the early days were shot as saboteurs, later they merely were transferred to Siberia. This system works pretty well in desperate times during war, and not so well all other times. But the significant fact is that information is not being transmitted through prices, it is transmitted through orders.
In one sense, regulations and laws regulating commerce are commands. We pass a law saying that it is illegal to use false weights and measures in commerce, and this is a command. Without it, much of commerce would be very dicey, so it is to almost everyones benefit to enforce such commands. Regulations can command that anyone using the term organic must spend thousands of dollars on testing to prove no non-organic method was used. This kind of regulation functions primarily as a barrier to entry and is useful mainly to large agribusiness as a way to create and maintain monopoly power.
Of course the second method of transmitting information, markets, does so by utilizing prices. In one sense commands and markets are complementary. It is hard to argue that markets are not more efficient with good regulation of things like weights and measures, a system of commercial law, defined property rights, and so forth; as argued by Milton Friedman. But on a more detailed level command solutions and market solutions often compete. Is it better to control pollution with direct commands (regulations setting absolute limits) or a market for pollution credits? Can we reduce the personal and social costs of drug abuse better by criminalizing drug use (command solution) or by economic disincentives like taxes? Obviously society needs to use both and adjust the mix based on objectives and experience situation by situation.
So the choices are commands vs prices, and the proper mix of the two. Where does central planning come in? It doesnt. By historical accident, central planning and extreme command methods came together in the Soviet period and became linked in the minds of many people. In the 60s the French developed a system of indicative planning which was a method whereby the government gathered statistics and made predictions based on them without any extraordinary measures to intervene in the economy. The idea was that if there model worked well, households and industry would rely on their predictions, uncertainty would be reduced, decisions of constituent business would automatically be coordinated, and the predictions would become self-fulfilling. It sounds quaint now only because everybody does it. Markets rise and fall on publication of the Fed OMC minutes and CBO forecasts.
The purpose of this little exercise is to demonstrate that everybody uses central planning; that is not the issue. The issue is what combination of price and command mechanisms will work best in a given situation, and that is going to vary from one situation to another.
All of the ideologues are now free to go back to debating capitalism and socialism (terms you will note I have not used) and hopefully a few have learned something and will be less sloppy in their language and reasoning on economic matters.
All the best, Jamie
Ill start with the terms. Central planning is system where organizations like a government, industry, or firm tries to gauge economic conditions that pertain to it, and adjust its behavior to achieve its objectives. The bigger the entity, the more central the planning will be. At the smaller end is your average firm with a business plan and projections (which we normally dont think of as central planning, but its just a matter of degree) and the other end are entire governments/economies such as the US government or the old Soviet Union. In this broader sense, all governments and trade associations in developed economies engage in central planning; they gather statistics, generate reports, plan future actions and budgets, and try to forecast the future. Thats central planning.
The key to microeconomics is how information is transmitted to households and firms that they use to make economic decisions. There are a few methods that work for very small economies like a village (barter, village communalism, and so forth) but for larger economies there are basically two mechanism, commands and markets. You can be for one or the other mechanism in any given situation, but you cant be against both.
Command mechanisms take a number of forms. One form is direct orders, as in Soviet style War Communism. In that case a factory was told what inputs it would receive and given a quota it was expected to meet. People who met quotas generally got a Hero of Labor medal and depending on the times an extra ration of vodka or two weeks at a Black Sea resort. People who failed in the early days were shot as saboteurs, later they merely were transferred to Siberia. This system works pretty well in desperate times during war, and not so well all other times. But the significant fact is that information is not being transmitted through prices, it is transmitted through orders.
In one sense, regulations and laws regulating commerce are commands. We pass a law saying that it is illegal to use false weights and measures in commerce, and this is a command. Without it, much of commerce would be very dicey, so it is to almost everyones benefit to enforce such commands. Regulations can command that anyone using the term organic must spend thousands of dollars on testing to prove no non-organic method was used. This kind of regulation functions primarily as a barrier to entry and is useful mainly to large agribusiness as a way to create and maintain monopoly power.
Of course the second method of transmitting information, markets, does so by utilizing prices. In one sense commands and markets are complementary. It is hard to argue that markets are not more efficient with good regulation of things like weights and measures, a system of commercial law, defined property rights, and so forth; as argued by Milton Friedman. But on a more detailed level command solutions and market solutions often compete. Is it better to control pollution with direct commands (regulations setting absolute limits) or a market for pollution credits? Can we reduce the personal and social costs of drug abuse better by criminalizing drug use (command solution) or by economic disincentives like taxes? Obviously society needs to use both and adjust the mix based on objectives and experience situation by situation.
So the choices are commands vs prices, and the proper mix of the two. Where does central planning come in? It doesnt. By historical accident, central planning and extreme command methods came together in the Soviet period and became linked in the minds of many people. In the 60s the French developed a system of indicative planning which was a method whereby the government gathered statistics and made predictions based on them without any extraordinary measures to intervene in the economy. The idea was that if there model worked well, households and industry would rely on their predictions, uncertainty would be reduced, decisions of constituent business would automatically be coordinated, and the predictions would become self-fulfilling. It sounds quaint now only because everybody does it. Markets rise and fall on publication of the Fed OMC minutes and CBO forecasts.
The purpose of this little exercise is to demonstrate that everybody uses central planning; that is not the issue. The issue is what combination of price and command mechanisms will work best in a given situation, and that is going to vary from one situation to another.
All of the ideologues are now free to go back to debating capitalism and socialism (terms you will note I have not used) and hopefully a few have learned something and will be less sloppy in their language and reasoning on economic matters.
All the best, Jamie
