The Mystery of Growth Mechanism in a Centrally Planned Economy: Planning Process and Economics of Shortages

Abstract

Since the economic calculation debate of the 1920-30s, it is known that it is impossible to create a coherent balanced plan that equates supply and demand of millions of goods and services in the national economy, not to speak about the optimal plan. It is not well understood, though, how the centrally planned economy (CPE) really functioned and what were the real determinants of their growth rates, if not the planned indicators. It was shown that forecasts of growth rates based on the extrapolation of past trends were better correlated with actual performance than planned indicators, but it is still unclear what was the real mechanism of growth of CPE and what was the role of the planning process in it. The hypothesis in this paper is that the drivers of growth in the CPE were the major investment projects initiated by the planners. They led to shortages of supplies, which triggered creeping price increases for scarce goods, which in turn boosted profitability in respective industries allowing them to increase output. De facto it was a market economy multiplier process – fiscal and monetary expansion leading to the price and output increases that eventually balanced supply and demand.