Plan-driven economic system

Chapter 2 - Society

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Welcome to the Plan-driven economic system page

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The more planned economic system is an intermediate period in the 19th and 20th centuries in the economic evolution towards current neoliberal thinking.

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Core ideas

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The assumptions of the plan economic model

Macro-economics

• Central planning allows the government to marshal society's resources for goals that might not be achieved by market forces alone
• The planning authority has more resources than any single company or business, government projects can also benefit from economies of scale that make government projects more productive in the long run

Meso-economics

• Meso-economics is obsolete because it is swallowed by the Macro-economic instances

Micro-economics

• A competitive offer leads to choice stress, which is resolved when the government determines which products and services are available.

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Dive deeper

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A state driven economy

A planned economy is an economic system in which the state controls and directs all economic activity. It is characterised by long-term plans and politically motivated aims, leading to standardisation and mass production. An alternative term is a 'command economy', in which the allocation of resources and investments is decided by the hierarchically organised decision-making system, with the main power held by the central administration.

State Socialism is a societal system characterised by the common ownership of the means of production and the administrative allocation of resources. Because of the totalitarian nature of communist regimes, the term 'socialism' is sometimes replaced by the terms state socialism or communism.

It makes almost all productive enterprises subordinate to administrative organs. To a large extent, this neglects the economic independence of the enterprises and thereby leads to the neglect of their material interests and responsibilities, blunting levels of initiative and enthusiasm. Secondly, the system involves excessive command planning from above and is overly rigid. So long as the enterprises meet their stipulated targets, they are considered to have performed satisfactorily – regardless of whether or not their products satisfy society's needs.

Throughout the twentieth century, economic planning has been an important response to capitalism's perceived moral failings and practical defects in Europe and North America. Before the 1980s, the governments of the former USSR and its Eastern European satellites attempted economic planning on a grand scale, seeking to control all means of production (as well as consumption patterns) directly through centralised decision-making.

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At the originː historical materialism

It is a dialectic theory resulting in a politics of socialism, meaning collective social control over the economy. Karl Marx (1818- 1883) and Friedrich Engels (1820 - 1895) believed in social progress and the perfectability of the world. They saw science as a transformative power and used the term accumulation of capital to designate the economy's growth. As capital is privately owned, it also means private control over society's direction.

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In contrast toː Hegelian idealism

Idealism is the belief that ideas are the leading cause of life's events. Hegel (1770 - 1831) postulated a kind of rationality in the world. This 'world spirit' uses humans and common practices to work out the contradictions we experience. The best combination of thesis and antithesis results in a synthesis by human rationality, creating an ever new version of the 'world spirit'.

Marx and Engels opposed this 'world spirit' by the real praxis of actual women and men in society, turning spiritual belief back on its material base.

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Keynesian thinking

Although, to be frank, 'Keynesian economics' does not fall under neoliberalism nor plan-driven economics, it cannot be denied that this latter thinking has overshadowed history of the last hundreds of years.

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Definitions of knowledge

There are two types of knowledgeː

• codified knowledge, which can be written down
• tacit knowledge, learned from experience and less easy to transfer

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(New) growth theory

• Economic strategies should focus on creating new knowledge
• States or not powerless
• Path-dependent growth relies on the current local base of knowledge
• Ideas of all kinds play a role in economic growth
• Knowledge can be a self-reinforcing cycle

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History of the philosophical evolution in Plan-driven economic thinking

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Social economic thinkers

Karl Marx (1818 - 1883)

• Marx’s (early) writings are dominated by an understanding of alienation, a distinct type of social ill whose diagnosis looks to rest on a controversial account of human nature and its flourishing. He subsequently developed an influential theory of history—often called historical materialism—centred around the idea that forms of society rise and fall as they further and then impede the development of human productive power.. His labour theory of value asserts that the value of a commodity is determined by the quantity of socially necessary labour time required to produce it. Capitalism can be distinguished from other forms of commodity exchange, Marx argues, in that it involves not merely the exchange of commodities, but the advancement of capital, in the form of money, with the purpose of generating profit through the purchase of commodities and their transformation into other commodities which can command a higher price, and thus yield a profit.
  • Karl Marx's assumptionsː
    • Labour-intensive industries ought to have a higher rate of profit than those which use less labour
    • Exploitation is defined as the unequal exchange of labor for goods: the exchange is unequal when the amount of labor embodied in the goods which the worker can purchase with his income is less than the amount of labor he expended to earn that income
    • All capitalist profit is ultimately derived from the exploitation of the worker

Content source
Stanford Encyclopedia of Philosophy

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Friedrich Engels (1820 - 1895)

• Friedrich Engels was a theoretical giant. He was the most broadly educated man of his time, with an encyclopedic mind. He had a deep knowledge of economics and history and a passionate interest in philosophy, science, literature and even military tactics. He explained that socialism is not an ahistorical blueprint for society but a system of socio-economic relations. This system, in turn, requires certain material conditions—the development of large-scale industry and monopolies, a strong working class, and the interconnectedness of the world market—in order to rise and flourish. Engels was far ahead of his time, especially regarding scientific questions. He saw in the processes of nature a confirmation of the laws of dialectics. "It was not a question of imposing the dialectical laws on nature from without, but of discovering them in her and developing them out of her."
  • Friedrich Engels' assumptionsː
    • Early humans were able to form complex thought processes and achieve higher levels of consciousness, which included abstraction, generalization, and future planning
    • Capitalism is an exploitative system, it creates a class struggle between the bourgeoisie (business owners) and the proletariat (working class)
    • The competitive nature of capitalism forces the bourgeoisie to constantly innovate and reduce costs, ultimately leading to overproduction and economic crises

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Thorstein Veblen (1857 - 1929)

• 'Technical servicability' produces useful products that satisfies needs and 'Business entereprises' procuce products that would easily break, leading to frequent replacementand greater profit for business
  • Thorstein Veblen's assumptionsː
    • Short term persuit of maximum gains often causes unenployment, higher prices and costs and delayed innovation
    • Conflict among three cultural tendencies
      • The machine process
      • Business enterprise
      • Pedator beliefs

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History of the philosophical evolution in Keynesian economic thinking

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Keynesian economic thinkers

Alfred Marshall (1842 – 1924)

• 'Principles of Economics' established Marshall's worldwide reputation.
• For Marshall, the market value of a product depends largely on demand because, in the short run, supply cannot be changed. In the medium run, production can be expanded without modifying existing facilities such as buildings and machinery; since buildings and machinery do not need to be replaced in this period, their costs (called fixed, overhead, or ancillary costs) have little effect on the selling price of the product. Marshall pointed out that continuously recurring variable costs most affect the selling price in this period. In the long run, machinery and buildings wear out and must be replaced. This means that the selling price of a product must be high enough to cover such replacement costs. This classification of costs into fixed and variable costs and emphasis on the time element represent Marshall's most important contributions to economic theory.
  • Alfred Marshalls assumptions
    • He recognised that economic life is deeply connected to ethical, social, and political currents in the real world, which Marshall believed economists should not ignore. Marshall envisioned dramatic social change. He envisioned the eradication of poverty and a dramatic reduction in inequality. He saw it as the duty of economics to improve material conditions, but such improvement, Marshall believed, could only occur in conjunction with social and political forces. His interest in liberalism, socialism, labour unions, women's education, poverty, and progress reflects the influence of his early social philosophy on his later activities and writings.

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John Maynard Keynes (1883 - 1946)

• The demand and supply cycle can occur at any (employment) level of the economy. The aggregated demand for goods determines employment. Consumers buy goods, and investors buy product equipment. Investments made by entrepreneurs under risk conditions expand the whole economy.
  • John Maynard Keynes' assumptionsː
    • The decision to invest depends on
      • comparison between the expected profits and the prevailing rate of interests
      • expectations about the future
    • The state has to intervene through monetary and fiscal policiesː
      • low interest rates encourage businesses and consumers to borrow and spend money
      • governement spendings boosts the economy

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Recent Keynesian history

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Bretton Woods (1944 - 1971)

The  Bretton Woods System is a set of unified rules and policies that provided the framework necessary to create fixed international currency exchange rates. Essentially, the agreement called for the newly created IMF to determine the fixed rate of exchange for currencies around the world. Backing currency by the gold standard started to become a serious problem throughout the late 1960s. By 1971, the issue was so bad that US President Richard Nixon gave notification that the ability to convert the dollar to gold was being suspended “temporarily.” The move was inevitably the final straw for the system and the agreement that outlined it. Despite falling apart, the Bretton Woods summit and agreement are responsible for several notably essential aspects of the financial world. First and foremost is the creation of the IMF and the World Bank. Both institutions remain vital to the global economy to this day.

Wikipedia

Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial relations among the United States, Canada, Western European countries, and Australia and other countries, a total of 44 countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar). It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.
https://en.wikipedia.org/wiki/Bretton_Woods_system

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The Nixon Shock (1971)

The Nixon Shock was a series of economic measures taken by US President Richard Nixon in 1971, in which he unilaterally abolished the exchange of gold for US dollars. This effectively paralyzed the Bretton Woods system; two years later, it was officially dissolved.

To prevent a run on the dollar, stabilize the economy, and reduce unemployment and inflation, Nixon issued Executive Order 11615 on August 15, 1971, pursuant to the Economic Stabilization Act of 1970. This plan, dubbed The New Economic Policy by the president, provided for a 90-day maximum wage and price level, a 10% import tariff, and, most importantly, the end of dollar-gold convertibility. The dollar was no longer pegged to or backed by gold, and gold ceased to be a valid currency. The president and fifteen of his advisors made this decision without consulting members of the international monetary system, leading the international community to informally refer to this event as the Nixon Shock.

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