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The Information Effect of Economic Planning*

Published online by Cambridge University Press:  07 November 2014

Fernand Martin
Fernand Martin*
Affiliation:
Université de Montréal
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Extract

In the Western world economic planning refers to various forms of programming the economic activity of a country under government initiative and supervision. Economic planning is thus more than government intervention; it requires the participation, on a voluntary basis, of private economic agents and governments at various levels. It works more or less through market mechanisms and essentially implies an interaction in the formulation of plans between individual economic agents on the one hand, and governments on the other.

Economic planning has two major economic effects:

1. It reduces uncertainty by making forecasts about economic conditions and by providing market information (market conditions, prospects, expected behaviour of economic agents, etc.). These forecasts are more or less detailed and are made public. This aspect of planning we call the information effect.

2. It modifies the content of economic decisions both in private and public sectors either because new goals of economic policy are formulated and accepted, or because government intervention acquires a new dimension. The result is a change in the economic structure of the country. This aspect of planning, the intervention effect, is not discussed in the present paper.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 30 , Issue 3 , August 1964 , pp. 328 - 342
Copyright
Copyright © Canadian Political Science Association 1964

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Footnotes

*

The basic research for this paper was done during my tenure of a fellowship at the Queen's Institute for Economic Research, Kingston, Ontario. Besides the help from the Staff and Fellows of the Institute, I must acknowledge the comments of Professor Roger Dehem of the Université Laval, and the detailed criticisms of my colleagues M. Dagenais and T. Matuszewski.

References

1 Economic planning must be distinguished both from government intervention undertaken on the basis of ad hoc models and from government planning where government decisions are taken on the basis of a comprehensive plan relating exclusively to government operations. Economic planning, in the sense the term is used here, resembles what is called in France either the concerted economy or democratic planning.

2 We should add that the costs of getting additional information beyond that normally available in unplanned systems must also be considered a cost of planning. This point is ignored in the present paper, but would have to be taken into account in any quantitative analysis ( in terms of benefits and costs ) of the information effect of planning.

3 The adjective “relevant” has here the rigorous sense given by Modigliani and Cohen, namely that “an aspect of the future … is irrelevant as of date zero, if the optimum value of the first move is the same, no matter what might be the specific form of the constraint. …” Modigliani, F. and Cohen, K. J., “The Role of Anticipations and Plans in Economic Behaviour and their Use in Economic Analysis and Forecasting,” University of Illinois Bulletin, vol. 58, no. 38, 1961, 22.Google Scholar

4 Uncertainty presents itself to firms in two main forms:

1. Primary uncertainty, related to the lack of complete knowledge regarding present “production possibilities created by the existing state of technology” ( Richardson, G. B., Information and Investment [London, New York, 1960], 29 Google Scholar), present market conditions (i.e., the going price, the quantities offered and demanded), and the effect of random acts of nature.

2. Secondary uncertainty, related to the actions of others, either in the present or in the future. Paraphrasing Koopmans, two subtypes of secondary uncertainty can be distinguished: the first is linked with the difficulty of picturing both the techniques of production that will be available in the future (due to innovation, etc.) and the future preferences of consumers ( Koopmans, T. C., Three Essays on the State of Economic Science [New York, 1957], 105 Google Scholar); the second arises from “lack of communication; that is from one decision maker having no way of finding out the concurrent decisions and plans made by others,” i.e., rivals, suppliers, complementary producers and governments “or merely of knowing suitable aggregate measures of such decisions or plans.” Ibid., 163.

5 McDonough, A. M., Information Economics and Management Systems (New York, 1963), 169.Google Scholar

6 Massé, P., “French Methods of Planning,” Journal of Industrial Economics, 11 1962, 7.Google Scholar See also Leontief, W., “The Anatomy of Planning,” CMA News Release (Toronto, 06 3, 1963), 5.Google Scholar

7 Massé, , “French Methods of Planning,” 7.Google Scholar

8 Gruson, C., “La Prévision aux Etats-Unis,” Cahiers de l'ISEA (série K, no 2, 1957), 1 and 21ff.Google Scholar

9 Tinbergen, Jan, The Design of Development (Baltimore, 1958), 56.Google Scholar

10 The rule can be expressed as follows: “The only choice that must be made at a given point of time and which cannot be postponed is the choice of the first move.” Modigliani, and Cohen, , “Role of Anticipations,” 20.Google Scholar See also Arrow, K., “La Statistique et la politique économique,” Economie Appliquée, tome XIII, no 1, 1960, 16–17.Google Scholar

11 This is not the same thing as saying that any information pertaining to other periods is redundant. Before reaching decisions, the entrepreneur must plan, and “plans should preferably be regarded as representing the best forecast that can be made by the firm at the date zero as to the values that certain components of future moves will eventually take.” Modigliani, and Cohen, , “Role of Anticipations,” 26.Google Scholar However, with the rule of the first move the entrepreneur's problem is not that of selecting the best possible plan of operations over the horizon, “but rather that of selecting the best possible first move only.” Ibid., 20. The two approaches (deciding a sequence of moves and deciding the first move only) may differ in the amount of information required at the outset. This is illustrated by the case where the same first move might be a component in two different plans.

12 Holt, Charles C., “Forecasting Requirements from the Business Standpoint,” The Quality and Significance of Anticipations (New York, 1960), 22–34.Google Scholar

13 A survey of management practices seems to be in agreement with this point. See Eisner, R., “Determinants of Capital Expenditures,” University of Illinois Bulletin, vol. 53, no. 43, 1956, 16–18.Google Scholar

14 See Gruson, , “La Prévision aux Etats-Unis,” 14–16.Google Scholar

15 See for instance the model used by Steigmann, A. J., “Forecasting Telephone Demand,” Science and Management, Part II, Proceedings of the 1962 Conference, Administrative Applications Division (American Society for Quality Control, 03 29–30, 1962).Google Scholar However, this forecasting method may not be adequate in the case of government utility projects and enterprises, such as those in the fields of electricity, canals, etc., which require long-term forecasts about the general level of economic activity.

16 The trade association plays a key (but sometimes illegal) role in bringing about, through suggestions or other means, common practices in pricing and in other areas.

17 See Tinbergen, , The Design of Development, 12–13.Google Scholar

18 Modigliani, and Cohen, , “Role of Anticipations,” 83–4.Google Scholar

19 This is based on the notion of the autonomy of a relation as stated by Frisch. It materializes in an advanced country because there even if “the effects of an investment project depend upon the total pattern of change the environment of a project often changes slowly enough, to be taken as given, even though the pattern of the economy seems to change a great deal.” Rosenstein-Rodan, P., “Programming in Theory and in Italian Practice,” Investment Criteria and Economic Growth (New York, 1961), 24.Google Scholar In practice this means that a firm does not have to integrate itself into a gigantic model of the economy to take optimum decisions, i.e., it does not have to know everything. This seems to be corroborated by Dorfman who has shown recently that the objective of a long-term plan is best attained when the profit-oriented entrepreneurs use their own figures of profitability as a guide to their investments. (See Dorfman, R., “Regional Allocation of Investment-Comment,” Quarterly Journal of Economics, 02 1963, 165.Google Scholar)

20 Let us note that it is also far from easy to incorporate changes such as the adoption of new production techniques, the introduction of new products, changes in quality, etc., into input-output tables. See Delange, G., “Collection and Organization of Data for Inter-industry study in France” in Barna, T., ed., Structural Interdependence and Economic Development (London, 1963).Google Scholar

21 Skeoch, L. A. and Smith, D. C., “Economic Pknning: The Relevance of West European Experience for Canada (Private Planning Association of Canada, 1963), 83.Google Scholar

22 Another feature of planning may be mentioned, namely, its effect on the business cycle. According to Professor Marczewski there is an effect but mainly in the long period, because the plan can take into account those structural modifications of the economy that it can convince the government to undertake. The action of the plan is limited and less clear on the medium-term cycle. Finally, it can hardly prevent short-term business cycles. See Marczewski, J., “Conjoncture et développement planifié,” Economie appliquée, nos 1 et 2, 1962, 125, 176, 181.Google Scholar

23 The French, British, and Swedish methods of collecting anticipatory data (through modernization commissions or otherwise) are basically similar to the approach of American surveys of intentions. They are thus liable to the same methodological difficulties.

24 Tinbergen, , The Design of Development, 39–40.Google Scholar

25 Ibid., 37.

26 Stolper, W. F., “External Economies from a Planning Standpoint,” Zeitschrift für Die Gesamte Staatswissenschaft, vol. 119, 04, 1963, no. 2, 215.Google Scholar

27 Ibid., 216.

28 This last point raises important theoretical considerations, many of them still discussed in the literature. One of them pertains to the fact that it is not at all sure that a long-run goal is best attained through a series of short-run or medium-term equilibrium situations ( see Dorfman, , “Regional Allocation of Investment,” 164 Google Scholar). The turnpike theorem in a different context also suggests that such a policy might not be optimal. However, the recourse to the turnpike approach (which requires planning) is not easily justified. An examination of the various hypotheses required for the use of the turnpike theorem shows that many of them are unlikely to be present in real situations.

29 See Cazes, B., “Logique et finalité d'un plan indicatif,” in Techniques françaises de planification et méthodes de développement, ASTEF, fév. juillet (Paris, 1963), 3.Google Scholar

30 We may include small firms in the argument by supposing either that they connect their forecasting models with the activities of the leading big firms of their sector, e.g., if they are of the sub-contractor type, or that they build forecasting models based on marketing data, i.e., that they try to evaluate the reactions of their rivals, suppliers, and those of consumers.

31 Stolper, , “External Economies,” 210.Google Scholar

32 Scitovsky, T., “Two Concepts of External Economies,” Journal of Political Economy, 1954, 145–6.Google Scholar

33 Stockfish, J. A., “External Economies, Investment and Foresight,” Journal of Political Economy, 1955, 447.Google Scholar

34 de Wolff, P., “The Scope, Methods and Tools of Planning,” Planning, Business Economists Conference (Oxford, 1962), 5.Google Scholar

35 Stolper, , “External Economies,” 202.Google Scholar See also Downs, A., An Economic Theory of Democracy (New York, 1956), 79.Google Scholar

36 Scitovsky, T., “A Reply,” Journal of Political Economy, 1955, 450.CrossRefGoogle Scholar

37 Strategy is taken here in the game theory sense. According to Massé, a strategy is a conditional plan, i.e., a plan that specifies the choice to be made in each possible situation and for each possible set of actual information which can be possessed at that moment in conformity with the norms of the game. See Massé, P., Le Choix des investissements (Paris, 1959), 244.Google Scholar

38 Massé, , “French Methods of Planning,” 9.Google Scholar

39 Shubik, M., “Information, Theories of Competition, and the Theory of Games,” Journal of Political Economy, 1952, 149.Google Scholar

40 Schelling, T. C., The Strategy of Conflict (Cambridge, Mass., 1960), 29.Google Scholar

41 The theory is explicit here: “The more information there is in a market the more likely it is that combinations will result.” Shubik, M., Strategy and Market Structures (New York, 1959), 171.Google Scholar But this does does not disturb the planners. Either they subscribe to cartels as a form of economic organization or they are fatalists in the sense that they do not think that collusion can be eradicated. So they prefer to have them operate in the “open.” A discussion raised by these attitudes would draw us outside our frame of reference.

42 See Downs, , An Economic Theory of Democracy, 62.Google Scholar

43 The economic model breaks down if perfect knowledge means that all competitors not only know all prices, cost functions, and other facts in the economy, but also what everyone else is going to do. Here Shubik (Strategy and Market Structures, 170) has shown that a monopoly price will ensue. Even if knowledge is restricted to the knowledge of pay-offs, this is a game situation where “unless the costs of combining were prohibitive, combinations would be formed” (ibid., 171). For the political model, Downs has shown “that democracy cannot function in a certain world unless consensus among voters is almost complete on all issues. In the real world, uncertainty masks the dilemmas which society would face if it had to confront its diversity squarely.” An Economic Theory of Democracy, 62.

44 Adelman, M. A., “Effective Competition and Anti-Trust Laws,” Harvard Law Review, vol. LXI, no. 8, 09, 1948, 1299.Google Scholar

45 Greniewski, Henryk, “Logique et cybernétique de la planification,” Cahiers du Séminaire d'Econométrie no 6 (Paris, 1962), 137ff.Google Scholar

46 See Bauchet, P., L'Expérience française de planification (Paris, 1958), 173.Google Scholar

47 However, it is possible that after some years the planners will succeed in building a reputation for integrity and soundness. This, of course, will reduce uncertainty. A lengthening and a widening of the horizon of the firms will follow and help to combat the perennial tendency of entrepreneurs to underestimate change. It should be noted however that planners have themselves a tendency to underestimate change, so that in the end there may be no net gain.

48 This does not mean that the planning bureau will not be able to detect gross falsification of the information furnished by the private firms. But no precaution will prevent firms, which for one reason or another do not want to undertake certain investment or production projects, from relying on the effect of a distress signal properly sent through the right channel. Bauchet, P. (L'Expérience française de phnification, 166 and 169 Google Scholar) mentions that in France the big firms begin by agreeing with the production and investment targets of the plan, knowing that they are not likely to be attained. Later they use this situation to obtain favourable credit terms and levels of prices which have the effect of creating inflationary pressures that are hard to keep from spreading.

49 At the moment, maximum goals are not likely to be proposed because current plans are not established through mathematical programming techniques. (See Chenery, H. “The Use of Inter-industry Analysis in Development Programming” in Barna, , ed., Structural Interdependence and Economic Development, 11ffGoogle Scholar). In such a case, a highly competitive system (if such an arrangement is possible) may have a better chance of making the most out of available resources.

50 See Tobin, James, “Comments.” Economic Planning in a Democratic Society, 9th CIPA Winter Conference (Toronto, 1963), 22.Google Scholar

51 Fishlow, A. and David, P., “Optimal Resource Allocation in an Imperfect Market Setting,” Journal of Political Economy, 12, 1961, 539.Google Scholar

52 Johnson, H. G., “Comments,” Economic Pfenning in a Democratic Society, 38.Google Scholar

53 de la Perrière, Gilles, “L'Exécution du plan,” Techniques françaises de h planification et méthodes de développement (Paris, 1963), 17.Google Scholar

54 Hirschman, A. O., The Strategy of Economie Development (New Haven, 1958), 54.Google Scholar

55 See n. 1.

56 Perroux, F., “Le IVe Plan français (1962–1965),” Economie appliquée, nos 1 et 2, 1962, 45.Google Scholar

57 For a description of the rule of the first move see ns. 10 and 11.

58 However, if the apparatus does not go farther than accounting and forecasting, it cannot be called planning, since another essential component, intervention, is missing.

59 See n. 37 for our definition of a strategy.