Why is the Plan Incompatible With the Market?(1)

Larissa Popkova-Pijasheva

I do not presume to deny the possibility of planning the activities of a private or a state firm. Any entrepreneur calculates both his expected expenditures and his profits, which enables him to make strategic decisions with regard to investments, updating, rationalization, or production cuts. Neither do I underestimate the part the state plays in regulating economic life, leveling cyclical fluctuations and mitigating the consequences of crises, providing for insurance against unemployment, and other steps it takes that indirectly influence the economic process through a mechanism of credit monetary, tax, and social policy.

Neither do I claim that the state, under conditions of a market economy, is unable to plan its budget and distribute its revenue according to a plan approved and ratified by the Congress. Nor do I call into question the state's participation in private, mixed, or state-controlled long-term research projects of technological development. Neither do I rule out the possibility of indicative planning, of making up a plan-prognosis based on market analysis. All these forms of planning and state management coexist in the economic life of the market system and fulfill their stabilizing, regulating, or orienting function.

The present article deals with none of these forms of planning. It postulates that the idea of planning the entire economic process is incompatible either with the market institutions of property and power or with the market mechanism of regulating the economic processes.

The Incompatibility of Central Planning and the Market System

The main point is that the five-year plans of economic development either with monthly, quarterly, or yearly specification or without it, which are sent from the top to the bottom as binding directives, are incompatible with market-economy institutions.

It is either the State Planning Committee, the State Price-Control Committee, and the State Committee for Labor and Social Problems, or it is the stock exchange, the labor and capital markets, the joint-stock company, and so on. The two camps cannot actually coexist within the framework of a single mixed-management mechanism. Neither is it possible to solve specific socioeconomic problems under conditions of the existing centralization, which is treated as a rather abstract conception of society at large. And despite the fact that the planned character of the economy along with all-encompassing centralization have always been regarded as the primary virtues and advantages of socialism by our mainstream theorists, it is precisely the absence of a systematic character in activities, the disproportion in economic life, and the lack of centered effort in confronting such global issues as, for instance, ecology that can be thought of almost as inherent in the socialist system. Wherever environmental problems are put in care of society as a whole, whose noble aim is common well-being, the factory chimneys will emit more smoke and nuclear accidents will be more frequent than in a society of market "anarchy" and individual responsibility, in which there is a person responsible for any smoking chimney or any nuclear incident, a person who would pay for his or her carelessness both financially and juridically.

Reasons for Plan-Market Incompatibility

There are a number of reasons why the socialist planning system is incompatible with market institutions.


The central principle of distribution in a planned system is "according to labor performed": "From each according to his ability, to each according to his work." But the very concept of socially useful labor in a socialist economy is different in principle from that accepted by economic theory in general. Socially useful labor is not that which has been acknowledged by the market and paid for by the consumer, but that which has been performed to fulfill the plan.

In a planned economy, any labor aimed at fulfilling the plan is regarded as socially useful and has to be paid for. The usefulness of a manufactured product is recognized in advance by the very fact of entering it in a plan. Is the mechanism of determining the social usefulness of output beforehand compatible with the market system, which does not acknowledge the result of production until it is sold and paid for by the consumer? It certainly is not. Usefulness can be determined either by the very fact of entering a product in the plan in advance or after the realization of the output, but never in combination.

Why not? Primarily because the planned economy presupposes full employment; it guarantees remuneration of any work performed by anyone employed irrespective of the result of his or her labor, that is, of its social usefulness. If one has fulfilled the plan task, one receives one's wages in certain cases, even bonuses. If one has not, one receives only wages, which are guaranteed by law.

As soon as the system is restructured and wages are paid after the realization of output, a certain number of workers are inevitably left out of the production process, since the planned economy presupposes a good deal of low-quality commodities without demand. As soon as the market mechanism of evolution and selection starts working, all excess labor will be automatically released; this mechanism is only too well known to the Western reader. But this will inevitably run counter to the proclaimed basic principle of full employment and that of every worker having his or her place of work and minimum wages guaranteed. Where labor is remunerated according to its final results, and thus unprofitable enterprises lose their position on the market through bankruptcy, ruin, merger, and so forth, we inevitably face the problem of some alternative that is, outside the state sector uses of labor and capital. That would be tantamount to the elimination of the state's monopoly of property, which has always been regarded as one of the gains of socialism. This would raise the question of transition to some other pattern of property and power, namely, the market, or capitalist, pattern.

Command versus economic freedom

The second reason why the market economy principle is incompatible with the planned-economy principle is that the directives in the form of plan tasks have to be executed and fulfilled no matter whether they come down in the old way, as plan tasks, or in the new form, as state orders. In both cases they are subject to fulfillment, for in the USSR a plan is a law approved by the Council of Ministers. Besides this, quotas for raw materials, equipment, and machinery are adjusted to and come down together with these plans. The latter practice accounts for the fact that enterprises find it profitable to receive a 100 percent state order. This is so because the absence of an open market of wholesale trade and the actual impossibility of purchasing the needed raw materials and matériel either on the internal or on the external market, deprive the enterprises of the possibility to make up a portfolio of orders that they find profitable.

No entrepreneur, no firm under the conditions of a market economy, would submit to state planning. No proprietor would obey the directives as regards production and sale or would tolerate being told what range of goods he should manufacture and what their quality should be. The most he would do would be to include the order in his portfolio and avail himself of the advantages the customer would thereby give him. But he would never let any such customer interfere with the firm's financial matters, its commercial strategy, or its relations with other suppliers and customers. The producer reserves the right to turn down any state order if he finds it wasteful or simply unprofitable. The market economy, with its principle of private property, is beyond nationwide state planning, no matter how much the ruling circles wish it were under their control.

This is not the case with the planned economy where there is no private property in the means of production and where enterprises have the right neither to develop a commercial strategy of their own nor to have any commercial secrets, not even to appropriate their own profits. In the socialist economy, it is the state that plans the economic process for every five-year period with annual, quarterly, and monthly quotas and sends down the binding plan directives to all branches and ministries, which then distribute these directives among individual enterprises. The ministry reserves the right to correct the plan tasks: to raise plan norms for one enterprise and to lower the norms of another, that is, to make some transfers, so to speak, depending on the specific economic and financial situation. But no enterprise is allowed either to conclude a contract unless it is sanctioned by the ministry or to turn down a plan task. The forthcoming reform envisages a certain compromise in this respect. Not until the problem of a wholesale trade market is solved, however, can the problem be really solved.

In the absence of economic freedom of the right to dispose of one's own earnings, to determine one's own commercial strategy, to make up one's own portfolio of orders, to have a free choice of suppliers and customers, to purchase all that is needed on the domestic or foreign market, and to fix prices according to the state of the market there can only be such a form of self-supporting management self-financing that may be defined in terms of "it would be desirable . . ." or "we should . . ."

As long as an enterprise that does not have these freedoms which are inherent in the market economy is given binding state orders, or plans; as long as all normative indices the fixing of the wages fund, the rationing of employment and specification of rates of productivity growth, and even regulation of profitability level are centrally planned; and as long as the domestic wholesale commerce market is not open which means that enterprises are not allowed to buy raw materials, matériel, equipment, machinery, and all kinds of technological know-how on the foreign market a switch from plan-based administrative management to economic methods that could replace the former is impossible.

It is either the plan or the market. Just as a plan cannot be a little bit a market plan, a market cannot be a little bit planned or an enterprise a little bit free. Either prices call the tune that is, credits, taxes and monetary privileges, or sanctions are used by the state as levers of regulation or the State Planning Committee shapes our economic life according to its science-based conceptions, planning our needs and demands as well as bringing them into correlation with actual possibilities. There is no third way.

The plan is incompatible with the market system because there is no actual possibility of calculating the right prices and of correlating them with a science-based plan.

. . . There is a popular belief in our official circles including those of experts that, without any violation of socialist principles state property, controlled prices, full employment, and so on we can inject into our economy some elements of market relations as just a working tool that would in no way affect or change the institutional forms of the social system. The market cannot be a working tool, however, unless the economy is demonopolized. Wherever there is monopoly, there can be no market since there is neither competition nor "struggle" for the consumer. The principle is valid for any economic system.

The socialist economy, which has done away with private property and private enterprises or companies, freed all its enterprises from any competition. Certainly, if we give the situation a strictly scientific analysis, we have to admit that the planned socialist economy may be regarded as a particular case of market economy with underdeveloped institutions of commodity-money exchange, an entirely monopolized structure, a specific monopolized market with fixed prices, and a very peculiar fierce socialist competition for state limits, funds, state subsidies, and a characteristic socialist competitiveness of enterprises for diplomas, badges, and titles of shock workers.

This somehow blurs the distinction a very fundamental one between the two systems: one that is market liberal that is, capitalist, in Weber's view of capitalism as a society with free competition and private entrepreneurship and the other, totally monopolistic that is, socialist, in Marx's conception of socialism as a society with nationalized ownership, confining more and more the sphere of commodity-money relations, which are supposed to die out in the long run. I do not see any justification for such an identification.

The socialist market may be represented as a mirror image of the capitalist market. In the latter, goods are in search of consumers. In the former, the buyer seeks the goods. On the capitalist market, supply, as a rule, exceeds demand by far. On the socialist market, the very opposite is true demand nearly always exceeds supply, which accounts for shortages, deficits, long lines, and the black market.

In my opinion, free price formation is a sine qua non of any market system. The self-financing system will not be viable if the state reserves the right to fix prices, to dictate them to both producer and consumer, and if it goes out of its way to neutralize the black marketeers who play the part of regulator of what has always been spontaneously regulated on the market. Free pricing is the primary and most fundamental precondition for a switch to a new economy; prices must be determined on the market as a result of the interaction of demand and supply, which reflects any marketing and structural fluctuations in production and responds to any changes in consumer demand. But, clearly, all this runs counter to the interests of the State Planning Committee, which sees its function as the planning of production on the basis of calculated, stable prices. In other words, it is either the market or the State Planning Committee. We cannot get away from this dilemma.

State versus private capital

Another reason why the plan is incompatible with the market is that state capital can in no way successfully compete with private capital. The practice of both capitalist and socialist economies witnesses to the fact that private capital is more profitable and more efficient than state capital. Private capital has these qualities for the simple reason that it is more flexible and more mobile and because it admits of all kinds of risks as regards its investment. State capital and private capital can hardly coexist because the deployment of private entrepreneurship would inevitably exclude any state production from economic life, and a number of people would have not only to forgo their ideological principles but also to leave their cushy jobs in the hierarchical system of administrative power. Under conditions of fair competition that is, where the state and private investors are on an equal footing it is private capital that will inevitably call the tune. If we opt for this solution, all our socialist gains will fall into oblivion. Instead we shall have gains of other kinds: shop windows will be crammed with goods, all sorts of services will flourish, and food shortages will be a thing of the past, while our mode of life will become easier and more comfortable. The public health system will be much more adequate, young people will be interested in getting good training because many new channels and ways of social advancement will have been opened for them. But this general progress will have nothing to do with nationalized ownership, or with the socialist law of planned and proportional development, or with free public consumption funds, or even with other so-called achievements proclaimed by the socialist ideologists.

What makes our ideologists, who have always failed to plan the country's economic life, try so hard to develop a model of a mixed economy and thereby solve an extremely complicated economic problem? . . . The answer is simple. The plan the law is an expression of the omnipotence of our party, which exercises unlimited control over all economic life. Giving up centralized management and the planning system would be tantamount to giving up political power. That is why perestroika ideologists go out of their way to try and make the incompatible compatible: to leave intact the plan-based centralized principle and at the same time to open the market; to introduce freedom of trade, thereby attaining acceleration of rates of development, but not allow the private traders to enrich themselves. They are ready to grant the right of private enterprise and initiative to all, but not to permit any social differentiation or inequality in the distribution of earnings.

What is the main function performed by the market? It is that of distribution. By reflecting in prices supply-demand relations, the market constantly aims at a balance in which all output would meet its consumer and would thus be recognized by society. Under conditions of the planned economy this market function performed in the market system quite by itself and quite efficiently is performed by an inflated apparatus whose sole raison d'etre is to determine consumption norms and allocation quotas. A transition to the market system would entail the liquidation of this bureaucratic administrative apparatus, which distributes both material and spiritual goods according to standards that it considers to be the correct ones.

The plan is backed up by the party apparat, which has at its disposal the "common stock"; the market, for its part, plays into the hands of private traders: individuals, cooperators, craftsmen, traders, and entrepreneurs. Peaceful emulation or fair competition between the two is out of the question because the state holds full monopoly and state business has all priority rights, while individual traders and cooperators are in no way protected by any law ensured by the state and are, moreover, deprived of any organizational or political power. A peaceful coexistence of the two is unbelievable: like that of a wolf and a lamb. As the wolf grows hungry it will devour the lamb without a second's hesitation. Thus, once the private trader or cooperator has realized he is an owner, he will claim his right to power, a right that is, anyway, more justified and legal than that usurped by the party elite. The wolf will eat up the lamb. The horns and legs of the poor victim will be displayed as a reminder of the abortive second New Economic Policy abortive because the plan is incompatible with the market.

Either our society develops along some hypothetical lines devised by the mainstream socialist theorists as planned laws sanctified by socialist ideals even if it means being chronically hungry, cold, and badly organized, or it gives up all plan-oriented ideology and state-minded psychology and makes way for the power of the market, that is, the producer both economic and political power. For a system in which those who construct are different from the ones who enrich themselves and profit by running the economy is not viable. If the market, which entails economic liberalism and classical bourgeois pluralism as a basis of a democratic social structure, comes to power, there will be no question of calculating another five-year plan and of sending it down to the bottom. No proprietor-entrepreneur would put up with such an infringement of his economic freedom and his commercial initiative, which always presupposes certain individual risks and personal responsibility but which, however, promises profits in the long run.

Viewed in this light, the plan seems to be incompatible with the market. Economic liberalism and planned centralism would never form an intermingling homogeneous whole. Wherever the State Planning Committee is the manager and wherever the Council of Ministers approves the plan, which ipso facto becomes a law, market relations economic liberalism and freedom of enterprise simply cannot take root. For more than seventy years, we witnessed planned prices bringing unceasing anarchy into the economic process, thereby disturbing all economic proportions, making for a permanent imbalance in practically every link of the economic system, and resulting in an everlasting contradiction between the economic interests of both large and small enterprises in agriculture, industry, and services. Just as Diocletian's edict on prices or the decree on limited prices issued by the French revolutionaries resulted in severe punishment, confinement, and the death penalty, so the Soviet decrees on agricultural prices have cost us several million human lives.

That was the case wherever and whenever the state interfered in pricing, thereby forcing some people to sell and coercing other people to consume. For wherever price formation is done by centralization methods, commodity shortages, on the one hand, and overstocking, on the other, are closely associated.

Private Property, Initiative and Command

Surplus of goods coupled with acute shortage: such a state of affairs never resulted in anything positive. Due to the fact that the "correlation of social forces" in this country has made it possible to go on with what we started in 1917, it is only natural that we have come to a "purely collective ownership," which has been characterized by General Secretary M. Gorbachev as a property that "seems to have become no one's." Steps have been taken to restore to life private ownership and individual handicrafts, to broaden the sphere of small services and build a network of cooperatives that are based on both private ownership and private capital. Emancipation of prices that is, a switch to market pricing will be the sine qua non in implementing this program. If not, private commercial activities will be rather short-lived owing to several objective factors:

lack of freedom to sell raw materials, materials, equipment, and machinery as one thinks best;

lack of a right to free trade; and

lack of necessary stimuli and incentives for efficient and productive work owing to the chronic contradiction between prices and economic interests.

How is it possible to inject market competition into the planned economy? How does one make planned price formation compatible with market pricing? How does one realize the social-democratic principle "competition as far as possible; planning as far as necessary," which was designed for the market economy based on principles of budget planning introduced into it, an indicative form of planning that is in no way binding for any entrepreneur whatsoever? If, and only if, we give up state planning through directives, denationalize property, organize private enterprises as cooperatives or joint-stock companies, or firms, or any other form provided they enjoy complete autonomy and may stake their own real capital. If, and only if, we do away with centralized distribution of funds, the state monopoly over appropriation and distribution of earnings, the system of centralized public investments, and so forth. Until we come to realize that, as F. Hayek has said, "anarchic, separate, uncoordinated efforts of individuals are able to bring about a complicated ramified economic structure in the long run," any reforming steps will take us nowhere. Unless individual energy and initiative cast off the fetters of administrative management, we shall see no raising of economic well-being. We have no other way to ensure growth and solve the food problem.

Are we ripe for action? Private cooperative property, individual labor activity, family contracts, privately owned farms, joint-stock property, and some other items of the perestroika program are arguments in favor of the market model. Time will show whether the switch will be radical and consistent enough.

Environmental Protection and Economic Systems

In conclusion, there is one more question of paramount importance. Was it absolutely necessary for humankind to proceed along a path on which smoking chimneys and accident-prone nuclear power stations more and more disturb the ecological balance and damage the environment? I do not presume the liberty to judge, but it seems that humanity has had no other way of feeding itself. There is no alternative. We either limit the birthrate by the conditions of natural sustenance or introduce some new, ecologically harmful, self-reproducing technologies. The more complicated and the more ramified the economic process is, the higher are the expenses of reproduction. The planned system is both less efficient and less profitable than the market economy, and thus neither is it so well equipped for environmental protection. The ecological calamities for which our country is responsible cannot but corroborate my central thesis.