ousted across the Soviet bloc, following the fall of the Berlin Wall. Even countries such as China and Vietnam, which ostensibly maintained communism, have gradually abandoned central planning, although their states still hold high degrees of control over the economy. So, we all now live in market economies (well, unless you live in North Korea or Cuba). Planning is gone. Or is it?
The fact that communism has disappeared for all practical purposes does not mean that planning has ceased to exist. Governments in capitalist economies also plan, albeit not in the same comprehensive way that the central planning authorities in communist countries did.
Even in a capitalist economy, there are situations – a war, for example – in which central planning is more effective. For example, during the Second World War, the economies of the major capitalist belligerents, the US, the UK and Germany, were all centrally planned in everything but name.
But, more importantly, many capitalist countries have successfully used what is known as ‘indicative planning’. This is planning that involves the government in a capitalist country setting some broad targets concerning key economic variables (e.g., investments in strategic industries, infrastructure development, exports) and working with, not against, the private sector to achieve them. Unlike under central planning, these targets are not legally binding; hence the adjective ‘indicative’. However, the government will do its best to achieve them by mobilizing various carrots (e.g., subsidies, granting of monopoly rights) and sticks (e.g., regulations, influence through state-owned banks) at its disposal.
France had great success in promoting investment and technological innovation through indicative planning in the 1950s and 60s, thereby overtaking the British economy as Europe’s second industrial power. Other European countries, such as Finland, Norway and Austria, also successfully used indicative planning to upgrade their economies between the 1950s and the 1970s. The East Asian miracle economies of Japan, Korea and Taiwan used indicative planning too between the 1950s and the 1980s. This is not to say that all indicative planning exercises have been successful; in India, for example, it has not. Nevertheless, the European and East Asian examples show that planning in certain forms is not incompatible with capitalism and may even promote capitalist development very well.
Moreover, even when they do not explicitly plan the entire economy, even in an indicative way, governments in most capitalist economies make and implement plans for certain key activities, which can have economy-wide implications (
Most capitalist governments plan and shape the future of some key industries through what is known as ‘sectoral industrial policy’. The European and East Asian countries which practised indicative planning all also practised active sectoral industrial policy. Even countries that have not practised indicative planning, such as Sweden and Germany, have practised sectoral industrial policy.
In most capitalist countries, the government owns, and often also operates, a sizeable chunk of the national economy through state-owned enterprises (SOEs). SOEs are frequently found in the key infrastructure sectors (e.g., railways, roads, ports, airports) or essential services (e.g., water, electricity, postal service), but also exist in manufacturing or finance (more stories about SOEs can be found in the chapter ‘Man Exploits Man’ of my book
Moreover, in all capitalist economies, the government plans the national technological future by funding a very high proportion (20–50 per cent) of research and development. Interestingly, the US is one of the most planned capitalist economies in this regard. Between the 1950s and the 1980s, the share of government funding in total R&D in the supposedly free-market US accounted for, depending on the year, between 47 per cent and 65 per cent, as against around 20 per cent in Japan and Korea and less than 40 per cent in several European countries (e.g., Belgium, Finland, Germany, Sweden).[1] The ratio has come down since the 1990s, as military R&D funding was reduced with the end of the Cold War. However, even so, the share of government in R&D in the US is still higher than in many other capitalist economies. It is notable that most of the industries where the US has an international technological lead are the industries that have been receiving major government R&D funding through military programmes (e.g., computers, semiconductors, aircraft) and health projects (e.g., pharmaceuticals, biotechnology).
Of course, since the 1980s the extent of government planning in most capitalist economies has declined, not least because of the rise of pro-market ideology during this period. Indicative planning has been phased out in most countries, including in the ones where it had been successful. In many, although not all, countries, privatization has resulted in a falling share of SOEs in national output and investment. The share of government funding in total R&D funding has also fallen in virtually all capitalist countries, although not by very much in most cases. However, I would argue, despite the relative decline of government planning in the recent period, there is still extensive, and increasing, planning in the capitalist economies. Why do I say that?
Suppose that a new CEO arrived in a company and said: ‘I am a great believer in market forces. In this fast-changing world, we should not have a fixed strategy and should maintain maximum possible flexibility. So, from now on, everyone in this company is going to be guided by ever-changing market prices, and not by some rigid plan.’ What do you think would happen? Would his employees welcome a leader with a vision fit for the twenty-first century? Would the shareholders applaud his market-friendly approach and award him with a pay rise?
He wouldn’t last a week. People would say he does not have leadership qualities. He would be accused of lacking the ‘vision thing’ (as George Bush Sr once put it). The top decision-maker, it would be pointed out, should be willing to shape the future of the company, rather than letting it just happen. Blindly following market signals, they would say, is not how you run a business.
People would expect a new CEO to say something like: ‘This is where our company is today. That is where I want to take it in ten years’ time. In order to get there, we will develop new industries A, B and C, while winding down D and E. Our subsidiary in industry D will be sold off. We will shut down our subsidiary in industry E at home, but some production may be shifted to China. In order to develop our subsidiary in industry A, we will have to cross-subsidize it with the profits from existing businesses. In order to establish a presence in industry B, we have to go into strategic alliance with Kaisha Corporation of Japan, which may involve supplying it with some inputs that we produce at below-market prices. In order to expand our business in industry C, we will need to increase our R&D investment in the next five years. All this may mean the company as a whole making losses in the foreseeable future. If that is the case, so be it. Because that is the price we have to pay in order to have a brighter future.’ In other words, a CEO is expected to be a ‘man (or a woman) with a
Businesses plan their activities – often down to the last detail. Indeed, that is where Marx got the idea of centrally planning the whole economy. When he talked about planning, there was in fact no real-life government that was practising planning. At the time, only firms planned. What Marx predicted was that the ‘rational’ planning approach of the capitalist firms would eventually prove superior to the wasteful anarchy of the market and thus eventually be extended to the whole economy. To be sure, he criticized planning within the firm as despotism by capitalists, but he believed that, once private property was abolished and the capitalists eliminated, the rational elements of such despotism could be isolated and harnessed for the social good.
With the development of capitalism, more and more areas of the economy have become dominated by large corporations. This means that the area of the capitalist economy that is covered by planning has in fact grown. To give you a concrete example, these days, depending on the estimate, between one third and one half of international trade consists of transfers among different units within transnational corporations.
Herbert Simon, the 1978 Nobel laureate in economics who was a pioneer of the study of business organizations (
