Macroeconomic Planning

Roger Bowles, David Whynes

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317382812
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

This volume, originally published in 1979, examines systematically the nature of control in both capitalist and socialist economies, develops a theoretical and applied framework which can embrace both macroeconomics and plannng and demonstates the essential unity of all forms of macroeconomic planning by the consistent application of basic economic principles.

Firstly, the authors establish why societies feel a need for government control and examine the mechanisms by which such social decisions are reached. Next they examine the nature of economic data, the modelling of economic systems nad a review of practical policy goals and instruments. The book then reviews the basic theory of optimisation and elaborates it in the context of planning for growth, for stabilisation and under uncertainty. It closes with an analysis of practical planning based on French and Soviet experience.

CHAPTER 1

Macroeconomics and Planning

From the point of view of economic organisation, Robinson Crusoe must have been fairly happy on his desert island. His world was a simple agricultural one and was therefore, to a large extent, under the control of the elements and divine providence. Furthermore, at least until the arrival of Friday, he had only himself to please.

Compare this situation with that of present-day industrial society. First, whilst Crusoe’s economy was restricted to the output of corn and goats, modern economies are capable of producing an enormous variety of consumption and production goods and services. Secondly, with the establishment of legal systems and methods of economic policy, extensive facilities for the control of the economic system came into existence, independently of Crusoe’s more natural controls. Thirdly — and possibly of the greatest significance — societies now comprise, not one (or two) members, but many millions of individuals, each with their own particular views regarding the appropriate allocation of resources, distribution of rewards and so forth. The fundamental economic problem of relating commodity demands to supplies is therefore immeasurably more complex; in that the system is more complicated, it is also presumably more prone to chaos.

With the development of large-scale industrial societies, mankind has employed a number of organisational forms and economic techniques in an effort to ensure that order is maintained. In this book, we shall be concerned with just one particular method — macroeconomic planning — which we feel is of great relevance to the provision of a solution to the economic problems of the contemporary world. Starting from first principles, let us establish a few definitions.

We take the term ‘planning’ to refer to a purposive, means- ends process and we may define it as the deliberate manipulation of the parameters of a system in order to bring about a desired and specified alteration in the operation of the system.¹ The implications of this definition may be demonstrated by a simple, if slightly facetious, example.

Consider a mechanic on the forecourt of his garage; in front of him stands a motor-car (a mechanical system) with its engine running. Let us now persuade our mechanic to plan some action to influence the functioning of this system and follow his line of reasoning.

In the first place, to borrow some sociological terminology, the mechanic will ‘define the situation’; that is, he will observe the system as it currently functions. In our case, he will presumably say: ‘I observe a car with its engine running.’ The mechanic’s second step is to compare his observations of the prevailing situation with the way in which he would like to see it develop. Let us suppose that he now says: ‘I want the engine to stop,’ and we now have a state of affairs in which the operation of the system conflicts with the wishes of the mechanic. At this stage, our hero might well retire from the forecourt to engage in a spot of thinking. ‘What strategies could I pursue’, he might ask, ‘to influence the system according to my wishes? As an initial option, I could ignore the engine and hope it stops by itself, although experience suggests that this is unlikely to happen. Alternatively, I could drive the car into a brick wall. All things considered, I believe that the best approach, in terms of the highest probability of success, would be to throw a spanner into the works.’ Thus convinced, our mechanic returns to the car, wields his spanner and, lo and behold, the engine stops.

Let us summarise the main points of the mechanic’s approach. First, he observed and understood the situation confronting him and, secondly, decided that its likely progress did not accord with his wishes. Thirdly, he used his knowledge of the system’s functioning to design a strategy which could realise the state of affairs which he desired and, finally, he perpetrated the required action. These principles are, as we shall see, inherent in the planning of the macroeconomy.

Three complications may now be added to our simple model. In the first place, what could be inferred if the engine did not in fact stop? We should be forced to conclude that some unforeseen factor had come into play, or even remind ourselves that spanners do not necessarily have any effect when thrown into works. In other words, our mechanic either (1) had an inadequate knowledge of the operation of the system with which he was concerned or (2) the implement used to manipulate the parameters was innappropriate; the implications of both are the same. The plan was therefore unsuccessful but, given the ex ante specification of objectives and the deliberate perpetration of the action, we should still call it a plan per se. It is, incidentally, likely that the failure of this plan will contribute to the knowledge of the mechanic for use in future plans.

Secondly, suppose that the car’s owner now appears on the scene and remonstrates with our spanner-throwing mechanic regarding the mistreatment of his engine. The former makes it clear that all he really required was that the engine be slowed down and not actually stopped. We should therefore deduce that the mechanic had mis-specified the objective of the exercise; he had interpreted it as ‘stop the engine’ whereas the correct desire on the part of the owner was ‘slow the engine down’. In this case, that which succeeded was a plan, but it was the wrong plan!

Finally, we should note that the occurence of an action does not, of itself, constitute grounds for the belief that it was planned. In our case, we can only be sure that the violent insertion of the spanner was a planned action if our mechanic specified his objective ex ante and if he believed his deliberate actions to be potentially influential upon the attainment of his objectives. These two provisions clearly constitute the necessary conditions for ‘planning’.

Turning now to a consideration of ‘macroeconomics’, the economist’s conception is traditionally of the following form:

‘“Macroeconomics” is, of course, to be distinguished from “microeconomics”. Macroeconomics deals with economic affairs “in the large”. It concerns the overall dimensions of economic life. It looks at the total size and shape and functioning of the “elephant” of economic experience, rather than the working or articulation or dimensions of the individual parts. To alter the metaphor, it studies the character of the forest, independently of the trees which compose it.’ (Ackley, 1961)

Macroeconomics, in other words, is about aggregates. According to this definition, the macroeconomist is concerned, for example, with the economy’s, rather than the individual’s, consumption levels or with national, rather than individual, labour power.

Although this text will be dealing primarily with economic activities ‘in the large’, we should not lose sight of the means by which macrovariables are generated; as we shall see, this means is of great importance to the construction of economic plans. Macrovariables do not exist as autonomous entities; they are, in reality, the aggregation of all the economy’s microvariables. Whilst, in certain instances, we might find it expedient to consider these macrovariables as quasi-autonomous, on the justification of some ‘law of large numbers’, we must not forget that such an aggregate is really the net result of individual, microeconomic actions. If we were to devise a plan for the steel industry, for example, we should have to consider the output of steel both as an entity in itself and as the sum of the outputs of the individual steel plants — outputs which clearly influence the total. Given that causality runs from the micro- to the macroeconomy, we accordingly think of the latter as an inter-relationship of microeconomic elements. To borrow the Ackley metaphor, the felling of just one tree in the forest does not destroy the essential characteristic of ‘forestness’. However, it does make our forest a different forest, with the result that it will be necessary to treat the macroeconomy both as a ‘forest’ and as a ‘collection of individual trees’.

Having examined both components of our title, we are now in a position to produce a definition of ‘macroeconomic planning’, namely, the deliberate manipulation of the parameters of the economic system to bring about a desired alteration in the functioning of the economy. Our general discussion has also indicated the sorts of areas to which aspirant planners must pay attention. More specifically, the economic-planning process must come to terms with five basic requirements and, during the course of this book, we shall be dealing with each in some detail.

Intervention requirement. Can the desired alteration to the economy be brought about by the ‘natural’ or inherent processes within it, or is some external influence required to determine our result? Is there, in other words, a ‘need’ for planning?

Political requirement. How do we, as members of society, come to decide upon and specify the aims of the plan? To return to our earlier example, how do the car owner and the mechanic come to agree upon, and clarify, the objective of the exercise?

Technical requirement. How do we obtain the necessary knowledge of the economy in order to (1) observe the relevant features of the current situation, (2) understand the overall workings of the system, and (3) select the appropriate policy instrument or operational technique for the realisation of our objective? Again, in terms of our example, is a spanner the ‘best’ tool to use under the circumstances and, if so, where into the works should it be thrown? In the real world, this requirement will involve us in the theoretical simulation of practicable alternative strategies which describe a number of possible results, in order to provide us with an ex ante estimate of the likely outcomes of the planning decision. These may then be related to our stated aims to provide a guide to the appropriate choice of action.

Implementation requirement. How is the chosen theoretical strategy actually applied in practice? What institutional decisions are necessary for its implementation?

Feedback requirement. How does that which has been achieved relate to our original specified objective or, did the engine stop and, if not, why not?

In spite of the increasing attention currently being paid to the methods of economic planning, it is clearly untrue to say that the latter has always been at the forefront of man’s mundane activities. In reality, its importance has been dictated by historical circumstance, in terms of the particular epistomological views of the societies concerned. To illustrate this point, and in order to demonstrate the nature of the ideologies involved, a return to the Ancient World should prove instructive.

The writings of the Socratic School — essentially Plato and Aristotle — are amongst the earliest systematic views on economics with which history has endowed us. Economics for the Socratics was a ‘teleological’ process, in that it concerned itself equally with the means of attaining a particular end and also with the nature of that end itself. Plato’s Republic is amenable to interpretation in this way, for it consists of a discussion of the appropriate objective of society (‘justice’), followed by an analysis of the form of political and economic organisation necessary for the achievement of this end. Clearly, an approach of this kind could be construed as ‘planning’ in our sense of the word, and it is indeed Aristotle who first provides us with a clear and succinct planning methodology:

‘All men seek one goal: success or happiness. The only way to achieve true success is to express yourself completely in service to society. First, have a definite, clear, practical ideal — a goal, an objective. Second, have the necessary means to achieve your ends — wisdom, money, materials, and methods. Third, adjust your means to that end.’ (Quoted in Thomas, 1970)

As the student of the Socratic dialogues will recall, this school of thought did not possess a monopoly on interpretation in the Ancient World. Of its many rivals, the most interesting from our point of view is the Sophist school:

‘The manner in which economics was taught by the Sophists has a strong affinity with the approach which has come to be dominant in the twentieth century. In fact, their approach is much closer to that of the majority of modern professional economists than are those adopted by Plato, Aristotle and the Scholastics. For the Sophists, economics is a technology. Its techniques can be taught and mastered without reference to the desirability or lack of desirability attached to the ends or purposes which the technique can be made to serve. The discipline can be applied, for example, to increase the affluence of a particular household or a particular state. However, the question as to whether the form of affluence is worth acquiring is not a question with which economics is concerned.’ (Gordon, 1975)

An important distinction between these two methodologies clearly lies in the status of the objective function; in the former approach, the search for the appropriate objective is an integral part of economic analysis whilst, in the latter, this is not deemed to be a question to which the subject may legitimately address itself. As we shall see, these two opposing views are inherent in the planning debate of the present time.

With the eclipse of the Ancient World, political economy — the relationship between human society and its material wealth — began to develop in new directions, as a reaction to man’s changing perception of his social and economic environment. The actual causes and mechanisms of this evolution need not detain us here but, suffice it to say, we find that seventeenth-century Western philosophers such as Hobbes, Spinoza, Grotius and Locke, produced very different analyses from those developed by the Socratic school. At the risk of overgeneralisation, the orientation of these scholars was less towards ‘social man’ in the manner in which he had been conceived by Aristotle; rather, society was seen as an aggregation of individuals and existed solely to maximise the potential for personal liberty. In terms of the evolution of mainstream economics, the interpretations of Hume, Smith, the Mills, Bentham and the like, provided all that was necessary for a theoretical justification of the then-evolving capitalist system. In such an environment, the ideas behind the planning methodology were really nonstarters, as the famous ‘invisible hand’ was seen to be in perpetual operation to ensure that social welfare was maximised by individual behaviour.

The interest in economic planning which twentieth-century man now displays may be ascribed to two alternative causes, namely, (1) the view that planning is a logical corollary of increasing state intervention within the capitalist economy, and (2) the view that the capitalist system is inherently incapable of adequately meeting the requirements of social preferences. We shall now review each of these alternatives in turn.

Although the nineteenth-century socialist writers such as Marx generally regarded the United Kingdom as the most ‘capitalist’ of capitalist nations, a total reliance had never really been placed upon the free-market economy managed by its ‘invisible hand’. Indeed, throughout its history, the UK economy has been the subject of a variety of forms of state intervention, the purpose of which has been to modify or supplant the functioning of such markets. When wars became too expensive for the purse of the individual monarch for example, kings were obliged to raise funds in a number of ways, such as taxation and borrowing, and this is one of the reasons for Wilson’s reference to the seventeenth century as ‘an age of debts and taxes’ (Wilson, 1965). Regulations regarding the remuneration and employment of the labour force were certainly in existence long before our ‘capitalist’ theorists ever wrote, examples being the numerous Statutes of Labourers during the 1350s to 1370s which attempted to fix wages and restrict labour mobility. Even the nineteenth century, the so-called ‘Age of Laissez-Faire’ which supposedly represented a total divorce between political and economic activities, saw a considerable amount of intervention in, particularly, social matters on the part of the State (Taylor, 1972).

The degree of state intervention has progressively increased over time although, until the twentieth century, such growth had in fact been brought about by the accumulation of piecemeal legislation. Intervention took place on an ad hoc basis, when a particular emergency arose or when a particular interest group found itself threatened; examples of such forms of intervention include the introduction of the income tax in 1799 in order to finance the Napoleonic Wars, and the 1624 Monopolies Act which established the existence of patent rights to protect inventors. By and large, the other nations of the West were simultaneously experiencing similar forms of state intervention.

‘The defenders of competitive capitalism had always argued that by the rational pursuit of self-interest the general good would be most effectively attained; that the laws of supply and demand in a free-market world would ensure the maximum production of wealth.’ (Thomson, 1957)

This truth was taken to be self-evident, even allowing for state intervention to iron out the occasional market imperfection. By 1945, however, the faith of all but the most stalwart had been shattered as the capitalist world had by then been shaken by a number of crises of a far greater magnitude than had been previously experienced. First, the West had involved itself in two major wars which had necessitated the centralisation of command over resources to efficiently direct the war effort. These war-inspired interventions left their marks on the peacetime economies in many ways, including greatly enlarged public sectors and greater numbers of formal government controls. Secondly, it was clear that the free-market system had in no way prevented the serious interwar depression and, furthermore, might even have precipitated it; rather, it was only positive government action which seemed to provide any solutions to the obvious disequilibrium. As Thomson has concluded:

‘Trust could no longer be placed in the capacity of any providential mechanism to regulate itself. Deliberate acts of policy and assertion of moral purpose seemed the only alternatives to anarchy in politics and chaos in economic life.’ (ibid.)

To many observers, planning appeared to be the natural successor to interventionist capitalism; all that was necessary was a systematic rationalisation of the various ad hoc arrangements which the state had already made, arrangements which now existed in sufficient number and strength to serve as an effective f...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Dedication
• Table of Contents
• Preface
• 1 Macroeconomics and Planning
• 2 The Need for Planning
• 3 The Derivation of Planning Objectives
• 4 The Nature of the Economy
• 5 Optimisation
• 6 Planning in Practice
• 7 Conclusions
• Bibliography
• Index