A note on the aggregation of slack and shortage in centrally planned economies

Abstract

This note attempts to identify the key methodological problems that remain unsolved in the controversy about the aggregation of slack and shortage in disequilibrium econometric models of centrally planned economies (CPEs). The procedure of ‘smoothing by aggregation’ implemented by Burkett (1988) is critically reviewed and found wanting, despite possible attribution to Kornai (1980) for justification. We argue that the procedure neglects the problems of resource immobility and hoarding that have prevailed in CPEs. Even from a neo-Keynesian perspective, it is at odds with a rigorous microeconomics of rationing that takes into full account the substitution and income effects of spillovers. One important issue is that saving may actually be reduced because of a tightening of the ration. These considerations throw serious doubt on the validity of the smooth trade-off between slack and shortage that forms the basis for econometric estimation and lead to concern that the Walrasian configuration cannot be identified from the estimation results.