CHAPTER 18: OPTIMALITY AND ECONOMIC PLANNING
In this chapter we want to raise the question of economic -- as well as general -- planning in an optimal system. The first issue is whether at all there is scope for such planning in an optimal economy. Second, if there is need for planning, what kind and what forms should it assume?
Let us begin by recalling that the optimal economy by our definition is a market economy, composed of a large number of sellers (firms) and buyers. Each firm is subject to the optimality principles, that is, democratically managed, obtaining its capital in a competitive capital market whether from its own members, the supporting structure or the general public. As we will show in the subsequent chapter, that economy, when conceived of as an abstract theoretical model, should produce an optimal solution in the sense that given its resources it will produce the maximum attainable satisfaction for its members, workers and consumers.
However, the ideal assumptions of such market economies, whether the democratic or the capitalistic, are subject to a number of imperfections or market failures, even though there is reason to believe that such failures will be less significant in the optimal democratic case. The main categories of such failures are: external economies, external diseconomies, monopolistic tendencies of various kinds, and last but for the purpose of this chapter not least, a number of frictional rigidities resulting from imperfect information in time and space which do not allow the economy to adjust to changing structural conditions promptly and without fault.
These imperfections or market failures can at least in part be mitigated by what we will refer to as economic planning, through deliberate and intelligent action by those involved. The involved of course are all members of the society, or nation, or region who are involved directly if not vitally (since major failures could even lead to vital disasters) and involved with equal intensity. Thus they all ought to participate with equal power in the mitigation of failures and imperfections. And they will do so, depending on the efficacy and feasibility of such action, either directly or indirectly through appropriate experts, institutions or organizations.
As we noted already, the support organization is one such institution, and probably the most significant. In its work as supplier of capital and mitigator of entrepreneurial risks it can and must serve many of the planning functions noted above. But on the national level it is the government in general which must be responsible for the carrying out of the planning functions as one of the aspects of democratic government. Beyond this point, we will not make much reference to the specific institutions of planning but rather concentrate on the planning functions themselves.
There is one significant finding stemming from formal economic analysis, both theoretical and empirical, that strengthens the case for planning in optimal systems, and also provides us with the point of departure for our more detailed discussion. The optimal democratic economy by its very nature tends to be subject to low short-term elasticities -- that is, in more common language, subject to a certain slowness of adjustment to changing conditions, sectoral growth, structural change, and so forth. Some neoclassical economists think that this is because of some formal results of analysis (the Ward paradox). [1] But rather, it flows from the human-centered and humanistic character of the individual firms' behavior, which precludes rapid and humanly undesirable change in employment and size of the working community. It is precisely the disappearance of the Minus Sign Syndrome in a democratic firm -- as compared to the capitalist alternative -- that precludes instantaneous firing of working people and thus high neoclassical short-term elasticities.
This being so, there is a good deal of scope for planning activity of two major types. First of all there is need for good forecasting based on analysis of present trends of the economy and its structure so as to give the actual and potential (entering) firms sufficient indication of what is expected for the near and intermediate future in the economy and in their sector. With such information, these firms can plan in advance, prepare for upcoming changes, and introduce the adjustments in a timely manner, without waiting for the signaling of the markets and ex-post adjustment.
The second type of activity concerns the potential firms through the activity of the support structure -- its feasibility analysis and allocation of resources for the entry of new firms. With the relative inelasticity of adjustment of existing firms, the main burden of adjustment in a democratic economy is on the entry of new firms. If for example the demand in some specific sector is expected to grow much more rapidly than the national product in the next five years, the support structure can allocate appropriately increased funds and support the "entrance" activity in that sector. It can do so by offering funds to existing firms, or responding more favorably to potential entrants, or as a last resort, by creating new democratic firms in the area. It will be noted that this activity emanating from the relative rigidity of existing firms has one great advantage; that is, preservation and strengthening of the competitive character of the sector or economy. Compare this with the intrinsic nature of the capitalist economy where growth not only tends to occur through monopolistic or oligopolistic expansion of existing firms, but is often fostered, quite unnaturally, through advertising and other non-optimal and oppressive techniques.
The society through its government or through the support structure can also cope with other types of market failure, such as ecological distortions or external economies or diseconomies. In the first category a good example is the promotion of solar and other renewable energy as compared to nonrenewable and polluting fossil-fuel based energy. Preferential treatment in lending can be offered to the non-polluting sources of energy through lower interest rates, granting of licenses and by other means.
The participatory process can even be applied in democratic determination of some socially optimal "price" or benefit related to the renewable sources of energy as compared to the polluting ones. For example, a kilowatt-hour of solar electricity or mechanical power can be offered a five cent subsidy, to sell in a competitive market at ten cents. In this case the production of fossil energy must occur at around ten cents to equal the price of solar energy produced at around fifteen cents, thus fostering expansion of the latter and reduction of the former.
It is immediately apparent that the ecological rectification can thus become the result of both optimal participation according to quality of involvement and the dynamic process of dialogical consciousness formation within the optimal society. In capitalist private and state economies the ecological solutions can often be nonexistent or insufficient for either or both the absence of an optimal participatory process and the dialogical learning through praxis progression. This proposition can be generalized: we may say that all departures from optimum for any kind of market failure can best be solved in the optimal participatory societies because of the participatory process applied to all problem solving, and because of the inherent educational and conscientizing process belonging to optimality.
The policy maker, government planning office or support structure have a very powerful tool in their planning and efficiency-seeking activity, which will satisfy the economist as much as the sociologist and even the moral philosopher. The beauty of this instrument is that it can work even without forecasting or planning prediction of the type noted earlier. This instrument, present in the democratic economy, has no parallel in other market economies.
We recall that the economic structure of the democratic economy, because of its humane nature, is likely to be subject to relative inelasticity and slower transformation when structural demand conditions are changing. We also recall that to deal with this situation the planner of the optimal economy should engage in precise study of trends and forecasting and try to produce the expected structural changes through stimulation of entry (or as the case may be, exit or contraction) or efficient expansion of existing firms. But the point we want to make is that even without such planning and forecasting, the plan implementors merely have to study the evolution of labor incomes and structural income changes of comparable jobs in various sectors, and promote entry and expansion where such incomes are relatively high and retardation where they are low. This will simultaneously tend to produce an efficient operation of the economy -- Pareto-optimality as the neoclassical economist calls it -- and distributive justice. Thus the moral philosopher will be satisfied also.
St. Thomas Aquinas, moral philosopher and theologian will also be satisfied. Given the nature of price formation in competitive democratic economies, coupled with the equalization of incomes of similar skills (produced by the market and/or the efficiency-seeking planner) the prices thus formed at all times will also be just prices in the Thomistic sense. Thus in the case of the optimal democratic economy we also attain another optimality dear to many (including this writer) of a marriage between socioeconomic efficiency and optimality, and theological or moral desirability.
So far we have dealt with planning and plan implementation through governmental or similar institutions where democratically selected worker-experts carry out certain overall instructions of optimality for the benefit of the nation. But there are other means through which members of the fully democratic society can participate directly in grinding out the socially most desirable solutions. As they do so they can eliminate many of the pathologies encountered in the capitalist oligopolistic world we live in, discussed in Part II of this study.
We may begin our analysis precisely by dissecting one such major pathology. Cigarettes -- their production, sale and pushing through advertising -- are an extreme example but one representing in many respects a very significant class of oligopolistic products. The involvement of those who run this sinister (given the addictive and cancer-causing properties of the product) activity, that is the capital owners, is remote and indirect: the owners are trying to maximize their profits. The workers in the cigarette industry, who are directly involved yet have no say, are to a degree absolved of the moral dimensions of the case, precisely because of their non-participation in decisions.
But in the cigarette industry and many other differentiated oligopolies there is the intermediary advertising industry, which is called on to maximize both its own profits and those of the manufacturers. Here also the involvement of the capitalist decision makers is indirect, yet it is these people who hold all the power -- and in fact in the capitalist society they enjoy a good deal of respect, promoting their own reputation together with the products they advertise.
The most involved, not only directly but in a profound manner VITALLY are the consumers -- smokers of the products. In spite of such vital involvement, they have no say. I have witnessed or am aware of the death of several friends, heavy smokers, some with vents dug into their chests to admit oxygen in the last stages of their life. Some, after death are "vindicated" or "compensated" not because they have suffered enormously, but because the American states or politicians try to recuperate moneys spent on medical treatment from the cigarette producers.
In varying degrees, from our point of view, much of the production in our "advanced" economies is of similar type, producing and pushing products ranging from unneeded to deadly. Those who consume them, who are directly and in varying degrees vitally involved, have no say; save of course for the work of institutions like that of Ralph Nader in the USA. The governments' interference is minimal and only in extreme cases such as cigarettes. Why? Probably because the governments themselves and their selection processes come very close to a money-based deception similar to advertising. In fact many of the techniques used in selling candidates for political office are taken from the advertising industry. Where the efforts of the government or governments becomes more pronounced, as in the United States in the late 1990's, not only is the suffering of the victims not alleviated, but a lot of the monetary penalties imposed on the cigarette producers go to the legal profession.
This being said, we can return to our subject of direct planning according to the quality of involvement. First of all, some elected representatives of the consumers should sit on the decision-making boards of the advertisers with decisive veto power protecting the consumer -- not only from killing as in the case of cigarettes, but also from the many lesser dangers of consumerism, including the not lesser danger of losing one's humaneness and one's soul.
On the positive side, consumers could participate directly, industry by industry, through consultations between the retailers on the one side and the consumers on the other. Why could not a mother purchasing shoes for her child be consulted from time to time on her preferences, acceptability of design, even suggesting design, price, quality and so forth? Such information could usefully be provided to all in a given industry.
This type of participation and information flow could prevent many of the ills of the present-day oligopolistic economies. It could avoid a lot of planned obsolescence, incompatibility of designs of various producers, unnecessary use of resources, and torturing the minds of the consumer who must adjust every six months to new computers, techniques, programs and so on. Also the unnecessary growth of GNP and the use of scarce resources could be avoided, and what is more important, a better balance reached between the material and the non-material aspects of human existence. People could be spared the destiny of gradually turning into a subhuman species.
A significant aspect of public interference with market failure is that related to monopolistic and oligopolistic tendencies. In capitalist economies this type of failure is quite significant, even though in countries such as the United States considerable effort has been made by the legislators to deter monopolistic tendencies. In the optimal democratic economy, as we will see more carefully in the next chapter, such tendencies are likely to be significantly lessened, but there is no guarantee that they would be entirely avoided. Thence the need to cope with such monopolistic tendencies.
There are several levers or instruments that the democratic economy can use. First of all we must realize that bigness is primarily the child of capital accumulation and the profit motive: democratic firms do not relish bigness for its own sake. Just the opposite: if efficiency can be preserved, smaller is superior to larger for any participating human group. Moreover, the support structure which already is given the task, for other reasons, to generate entry of new firms, can find in the prevention of monopoly another important justification.
Then there is the classical instrument of controlling monopolies or oligopolies through the imposition of price ceilings. These tend to force the affected democratic firms to produce more efficiently, while reducing exorbitant member incomes imputable to monopoly. If even with a price ceiling the structural efficiency of a monopolistic industry is not reached, then there is the other classical instrument -- taxing the monopolist in one manner or another.
In concluding this chapter, it can be said that the modern capitalist oligopoly-market system is one gigantic market failure leading to totally un-ecological, excessive and subhuman use of resources. By contrast and by the very nature of optimal participation and optimal dynamics of the democratic economy, far more sane and ecologically balanced solutions are likely to emerge. Most of the activities broadly defined as planning are replaced by the natural participation of members of society according to principles of the nature and intensity of involvement. Perhaps the one significant aspect of planning that remains in a world of uncertainty about the future, is the competent study of trends, prediction on the national (aggregate) level and dissemination of corresponding information to all, but especially to the support structure or support structures of the economy.
In a human-oriented society, this long-range planning forecasting should bear the best fruits in assisting young people in choosing their life's vocation in harmony with the long-range needs of the economy. To leave the educational and vocation-oriented period/phase of life -- with gestation periods of some ten years -- to present-day market forces would be sheer folly. Only systems which take humanity to be human capital, or human resources to be marketable slaves, are likely to adhere to it.
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