Central Planning and the `Second Economy' in Soviet-Type Systems

Abstract

Our profession has developed two polar idealisations of the economic system of socialism, in the sense of collective ownership of the 'means of production'. One is that of hierarchical planning, with information flowing up from factories and farms to a central planning agency, where it is fed into computers, processed for consistency and perhaps even optimality relative to some objective function of the policy-makers and then becomes the basis for directives that are binding on all managers and ultimately on all workers in the system. An authoritative exposition of the pure theory of this approach to socialist economies is the work of L. V. Kantorovich (I965), which can be looked upon as a 'rational' version of the 'command economy' depicted in Grossman (I963). At the other extreme is the vision of decentralised market socialism, associated with the names of Lange (I936) and Lerner (I934), in which the role of the central planning agency is merely that of a Walrasian auctioneer, guiding the economy to a Pareto-efficient equilibrium with consumer sovereignty. Sophisticated hybrids of the two polar cases, such as 'two-level planning', have been developed by Kornai (I967), Malinvaud (I967) and others. Reality in the Soviet Union and the East European satellites deviates considerably from either of these theoretical constructs. The actual operational mechanisms and outcomes of the Soviet system have been intensively studied by Western economists for the last forty years following the pioneering work of Alexander Gerschenkron and Abram Bergson. Various experiments in Yugoslavia, Hungary and Czechoslovakia have been identified with 'market socialism', though none appear ever to have approached close to the pure Lange-Lerner scheme. A phenomenon that is drawing increasing attention from scholars of Soviettype economies is what has come to be known as the 'Second Economy' or 'Parallel Market'. In the major article on the subject, Grossman (I977) defines the 'Second Economy' as all production or trade for private gain, whether legal or illegal.' He gives afascinating account of the phenomenon, with many examples from agriculture, industry, transport, construction and retail distribution, concluding that its quantitative significance for the Soviet system is large and growing. His account depicts the allocation of resources in these economies as being the outcome of an interaction between official planning and the 'invisible * This article is based upon work supported by the US National Sciences Foundation under Grant SES-8i-i6380. We gratefully acknowledge the hospitality of the Institute for International Economic Studies, Stockholm, where Findlay completed his work in this paper, and the helpful comments of two anonymous referees. 1 Both the terms 'Second Economy' and 'Parallel Market' were coined by K. S. Karol in 197I, according to Grossman. Further detailed information and commentary is contained in Katsenelinboigen