Economics 5150 Comparative Economic Systems

1. 論語：「有國有家者，不患寡而患不均；不患貧而患不安。」論語：「有國有家者，不患寡而患不均；不患貧而患不安。」 Economics 5150 Comparative Economic Systems Lecture 5 Theories of Planned and Market Socialism Readings: Ch. 6 & 7 Gregory & Stuart, Comparing Economic Systems in the Twenty-First Century, 7th Ed http://college.cengage.com/economics/gregory/compare/7e/students/index.html

2. CHAPTER 6 - Theory of Planned Socialism • The Socialist Economy • The Marxist-Leninist View of Socialism • The Socialist Controversy: The Feasibility of Socialism • Barone: A Theoretical Framework • The Challenge of Mises and Hayek • The Planned Economy • Administration of a Planned Socialist Economy • Horizontal Versus Vertical Transactions • Resource Allocation Under Planned Socialism • Origins: Soviet Union in the 1920’s • Economic Planning: A Paradigm for Planned Socialism • Material Balance Planning • The Input-Output Model • Optimization and Economic Planning • Coordination: How Much Market? How Much Plan? • The Performance of Planned Socialism: Hypotheses • Income Distribution • Efficiency • Economic Growth • Stability http://www.youtube.com/watch?v=EpATNp5DjYI&feature=related (Liberty and Economics; Ludwig von Mises ) http://www.youtube.com/watch?v=-WrAQKP7VPs&feature=related (USSR Red Army/ Soviet Power! [Under Stalin's Government]

3. The Theory of Marxism Marxism is a particular political philosophy, economic and sociological worldview based upon a materialist interpretation of history, a Marxist analysis of capitalism, a theory of social change, and a view of human liberation derived from the work of Karl Marx and Friedrich Engels. • The three primary aspects of Marxism are: • The dialectical and materialist concept of history — Humankind's history fundamentally is a struggle between social classes. • The critique of capitalism — Marx argues that in capitalist society, an economic minority (the bourgeoisie) dominate and exploit an economic majority (the proletariat). • Advocacy of proletarian revolution — In order to overcome the fetters of private property the working class must seize political power internationally through a social revolution and expropriate the capitalist classes around the world and place the productive capacities of society into collective ownership. Karl Marx (1818-1883)‏ http://en.wikipedia.org/wiki/Marxism http://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm

4. The Theory of Leninism Leninism is a political theory and practice of the dictatorship of the proletariat, led by a revolutionary vanguard party. Lenin emphasized that inequalities and vestiges of capitalism would still exist under socialism and that, accordingly, coercive actions by the state would be necessary. There was no need, Lenin argued, for specialists, because the tasks of management were quite routine. Vladimir Illich Lenin (1870-1924) “. . . the dictatorship of the proletariat — i.e. the organisation of the vanguard of the oppressed as the ruling class for the purpose of crushing the oppressors. . . . An immense expansion of democracy, which for the first time becomes democracy for the poor, democracy for the people, and not democracy for the rich: . . . and suppression by force, i.e. exclusion from democracy, for the exploiters and oppressors of the people — this is the change which democracy undergoes during the transition from capitalism to communism.” http://en.wikipedia.org/wiki/Leninism Communism, the highest stage of social and economic development, would be characterized by the absence of markets and money and by abundance, distribution according to need, and the withering away of the state.

5. The Socialist Controversy : The Feasibility of Socialism? In their writings, Marx, Engels, and Lenin did notdealt with the fundamental question of how scarce resources were to be allocated during the socialist phase. • At the beginning of the 20th century, Barone demonstrated the theoretical feasibility of socialist resource allocation but failed to develop a realistic scheme. • Critics of socialism focus on inefficient because of difficulties in computation and evaluation and a lack of incentives. The Austrian economists Mises and Hayek argued that rational economic decisions regarding resource allocation would be impossible because of the absence of market-determined prices. Socialist economic theory must explain how resources are to be allocated under socialism. If the socialist economy is planned, how will planners make rational decisions about the use of scare resources? Is private ownership necessary for the proper functioning of markets?

6. In the view of Marx and Lenin, socialism is the inevitable outcome of social and economic progress. Socialism emphasizes central planning as a mechanism to organize resources allocation. Socialism typically combines a strong state with public ownership and a set of policies designed to change economic outcomes. In the socialist system, the primary source of income is labor, socialization of consumption is an objective, and egalitarian (equal) distribution of output is pursued. The state exercises substantial control over economic growth and industrial expansion. Characteristics of socialist economy http://news.bbc.co.uk/2/shared/spl/hi/in_depth/china_politics/government/html/4.stm

7. The Planned Economy : Formal Organization Planned economy (or command economy) is an economic system in which the state directs the economy. It is an economic system in which the central government controls industry such that it makes all decisions regarding the production and distribution of goods and services. http://en.wikipedia.org/wiki/Planned_economy • A national economic plan is used to allocate resources within the central planning framework in socialist economies. • Socialist economies are normally organized in hierarchical fashion with a central planning board (CPB) that is responsible for directing enterprise in using inputs to produce goods and services. • Socialist systems use a system of balances (material balance planning) even through input-output analysis is the theoretical basis for planning. • Two different concept of planning: • Indicative planning– targets are set in the hope of affecting economic outcomes • Directive planning– targets are set with legal binding on enterprises http://www.answers.com/topic/material-balances

8. Hypothesis on the performance of planned socialism economic system

9. CHAPTER 7 -Theory of Market Socialism The appeal of market socialism is its attempt to combine efficiency of markets (capitalism) with more equitable distribution of income (socialism). Economic theorists who try to determine whether socialism might be feasible consider both the negative and the positive aspects of socialism in the absence of a paradigm of market socialism. • Market Socialism: Theoretical Foundations • The Lange Model • Critics of the Lange Model • Market Socialism: The Cooperative Variant • Criticism of the Cooperative Model • Advantages of the Cooperative Model • The Participatory Economy in the Twenty-First Century • Democratic Socialism? • The Performance of Market Socialism: Hypotheses • Income Distribution • Economic Growth • Efficiency • Stability

10. Central Planning Board (CPB) Functions: 1. Set prices of producer goods 2. Allocate social dividends Industrial Authorities Functions: Determine sectoral expansion of industry • Firms • Functions: Generate output given existing production functions and these rules: • P = MC • Minimize cost • Households • Functions: • Choose work vs. leisure • Allocate income The Organization of Market Socialism in the Lange Framework Market socialism is a system that combines social ownership of capital with market allocation. The Lange model, named after Polish economist Oskar Lange, combines public ownership and a trial-and-error approach to determining output and equilibrium. Individual enterprises are expected to follow market-type rules, minimizing cost and producing where price equal to marginal cost. http://en.wikipedia.org/wiki/Lange_Model

11. Basic Principles of the Lange Model • The main Austrian (Mises and Hayek) critique relevant here is the idea that socialism cannot be efficient because efficiency requires rational economic calculations based on prices that reflect true economic scarcity (rational prices). Since prices do not reflect scarcity unless they are determined by the forces of supply and demand in competitive markets, socialist planners cannot determine rational prices; hence, socialism cannot be efficient. • Lange’s theory of trial and error required that managers, in effect, imitate the market. The model assumes three levels of decision making, with firms and households at the lowest level, industrial authorities at the intermediate level, and a CPB (central planning board) at the highest level. The state owns the means of production, other than labor. The CPB would set the prices of producer goods, and producers would be instructed to (1) produce the level of output at which price equals marginal cost (economic efficiency criterion), and (2) minimize the cost of producing that output. Households would make private decisions regarding labor supply. • After initially setting the price, the CPB would adjust the prices of producer goods upward if there was a surplus of the product, and would adjust the price downward if there was a shortage, eventually settling at the market equilibrium price. The state would also distribute the social dividend earned from the resources owned by the state, and could determine the magnitude and direction of investment.

12. Critiques of Lange Model • Lange himself recognized that the many tasks assigned to the CPB could lead to a large bureaucracy, long considered a negative features of socialism. • Frederick Hayek suggested that although the task set for the CPB might be manageable in theory, it would probably be unmanageable in practice. • Abram Bergson and other have pointed out the key problem of the Lange model that of ensuring appropriate managerial motivation and establishing a workable incentive structure. Bergson also pointed out the possibility of monopolistic behavior in the Lange framework – if not at the enterprise level, then at the intermediate level. • Recently Joseph Stiglitz has criticized the theorem for replicating many of the alleged errors of neoclassical economics. He suggests that because of economic problems resulting from costs of information and missing markets, market economies solve problems in a manner different from that described by the neoclassical analysis. Therefore, according to Stiglitz, the Lange Model is a poor description of how the price mechanism will work in a market socialist economy to the same extent that neoclassical economics is a poor description of market capitalism. • Don Lavoie and Israel Kirzner claim that Lange proposed an illegitimate simulation of markets. Markets cannot function without genuine rivalry in real markets, and between actual entrepreneurs. Simulated markets cannot match real markets.

13. Market Socialism : The Cooperative Variant “The quest of men to participate in the determination and decision-making of the activities in which they are personally and directly involved is one of the most important sociopolitical phenomenon of out times. It is very likely to be the dominant force of social evolution in the last third of the twentieth century.” (Jaroslav Vanek, a early advocate of the participatory economy) • Firm will be managed in participatory fashion by the people working in them. • Income sharing will prevail and is to be equitable. • Although the workers may enjoy the fruits of the operation, they do not own, and must therefore pay for the use of, productive resources. • The economy must always be a market economic. Economic planning may be used through indirect mechanisms, but “never through a direct order to a firm or group of firm. • There is freedom of choice in employment.

14. Criticism of the Cooperative Model • One problem with producer cooperatives, according to Benjamin Ward, is the possibility of negatively sloped supply curves. • Democratic Socialism? • In his 1944 book, The Road to Serfdom, F. A. Hayek argued that socialism (state ownership) and democracy were incompatible.

15. Hypothesis on the performance of market socialism economic system