Central Planning 2

Once again, how can the planners get the information they need?

One possibility is to ask the enterprise managers how much they can produce. Let's make the optimistic assumption that the enterprise managers will tell the truth -- either because they are nice guys or because the planning bureau has found some costless way of giving them an incentive to tell the truth. The planning bureau could start out by sending the enterprise managers a tentative list of outputs to produce, and ask the enterprise managers how much resources they would need to produce that list. Then add up the resource demands and compare them with the resources available. Adjust the tentative plan accordingly, and try again. Keep trying until the plan is (pretty close to) optimal. Each of these tentative lists of outputs is called an "iteration" of the plan.

Figure 4

Figure 4 shows one possible series of iterations of the plan. The bureau starts out optimistically with a tentative plan at A. Looking at the diagram, we know that A is infeasible. That means the enterprises' resource requirements will add up to more resources than are available. Adjusting, the planning bureau follows up with B. That doesn't really help -- B is infeasible, too -- but with the information they have gotten from the enterprises on these two attempts, the plan bureau is able to make its third iteration C. That is an improvement -- C is feasible -- but C is not efficient, since enterprises are capable of producing more than C with available resources. On the next round, then, the planning bureau scales up the production amounts to D. This is better still -- D is efficient, that is, on the production possibility frontier -- but it is not optimal. With the available resources, the planning bureau would prefer to see more machines and less food produced. By now, however, the planning bureau has gotten the information they need, and on the next iteration they move up the production possibility frontier to *, the optimal plan. This is the plan they direct the enterprises to carry out.

This is a very optimistic story. There are many pitfalls that could make it difficult to move to an optimal plan, and further problems in making the plan work even if it were optimal. Even if the enterprise managers tell the truth, it might take many costly iterations of the plan to get to the optimum at *. Worse, the enterprise managers have strong incentives to lie and distort their productive potential and resource needs. Suppose that I am an enterprise manager, and I guess wrong, thinking that I can produce 2000 with 500 of resources. In reality, I can only produce 1000. So the planners send me 500 of resources, and an order for 2000 olf output, and when I try to do it, I find I cannot produce what I have been ordered to produce. By the time I have found out, I'm in trouble. On the other hand, if I had lied, telling the planning bureau that I could only produce 500, then the 1000 actual production would leave me in very good shape. I would probably only send in 700 or 800 of my production, hiding the rest in case I should have some problems next year. On the other hand, the planning bureau may have other information. In most cases, they can take it for granted that the quantities produced in earlier years are feasible, and they may be able to use statistical, engineering and computational techniques to fill in the information they don't get from the enterprise managers.

Then again, even if the plan is optimal -- by the preferences of the planners -- the consumers may not be very happy with it. If the planning bureau tells the enterprises to produce one finger brush per person, the chances are that the consumers won't buy them all at any price, nor use them even if they are free.

Nevertheless, we cannot rule out the possibility that an optimal planning system might be set up, might be successful, and might improve human life from many points of view. The problems that would have to be overcome are difficult ones, and no-one knows now how to resolve them. But human beings are inventive, creative beings, and it may be that future generations will come up with solutions that we cannot now conceive.

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