Figure 3
Advocates of central economic planning agreed that the economic plan would be rational, in some sense that market economies are not. The word "rational" can mean many things. Neoclassical economists usually interpret "rational" as meaning "optimal;" that is, a decision is "rational" if it is directed to an objective (or a compromise between two or more objectives) and achieves that objective (or those objectives) to the greatest extent possible. Thus, economists have explored the idea of an "optimal plan."
The first step in optimal economic planning, then, is to determine the objective or objectives the plan is to advance. Since there will almost certainly be more than one objective, the central planner will also have to determine how one objective is traded off against another -- how the objectives are to be compromised, when they conflict. If the planned society is supposed to be democratic, then these objectives and compromises will be decided by democratic procedures -- otherwise, by the sovereign authority in an authoritarian system. Next, it will be necessary to translate those objectives into quantities of goods and services that will support the objectives to a greater or lesser extent. For example, if health improvement is a highly ranked objective, then a mixture of goods and services that includes more medical care and less chocolate will probably advance the objectives of the planners more than the reverse -- but only up to a point. If production of medical care were to compete with the production of food, resulting in malnutrition, that mix of production would rank low in terms of the health objective, and probably others as well. Notice that this judgment is a technical one. It depends on knowledge of how production of goods and services affects the objectives. This is a question of fact, and not politics; leaving it to politics, however democratic, could only cause confusion.
From this point on, most of the decisions to be made in economic planning are like that, technical rather than political. The next step is to determine what goods and services the economic system is capable of producing. An optimal plan is one that achieves the objectives to the greatest possible extent; one thing that limits the possible extent is that the economy can produce only a limited quantity of goods and services.
Once again, we express this limit with the production possibility frontier, as in Figure 1 above. This limitation on what can be produced with scarce resources is what forces the plan to compromise between the various objectives the planners might pursue.
But the first step for Economia's planning bureau (we recall) is to determine what its objectives are, and to express those in terms of quantities of food and machinery produced. Let's suppose the planning bureau's objectives are expressed by the gray curves in Figure 3. The idea is that every combination of food and machinery expressed by a point on the lowest curve meets the planning bureau's objectives to the same degree, and that is a fairly low degree. Every combination of food and machinery expressed by a point on the highest curve equally meets the planning bureau's objectives to a relatively great degree. Every combination of food and machinery expressed by a point on the middle curve meets the planning bureau's objectives to the same, fair-but-not-great degree. Combinations of food and machinery on a higher curve meet the planning bureau's objectives more completely than those on a lower curve. In brief, the planning bureau wants to place the economy on the highest curve that it can -- and that is what the curves express. The curves are one way to express the planning bureau's objectives in terms of production. (There could be many more curves -- infinitely many). These curves express the Planners' preferences.
Figure 3
Visually, the highest curve the Economian economy can get to is the middle one, and to do that the planning bureau has to plan for the production of the combination of food and machinery shown by the *. That is the optimal plan. But how is the planning bureau to move the economy toward that optimal plan? If they simply had all the necessary information, and a very powerful computer, perhaps they could simply tell each farm, workshop and office -- that is, each enterprise in the economy -- what to produce and where to ship it. (This is called the double address system -- each directive is addressed to the enterprise that is to produce the good or service and also to the enterprise, perhaps a retail store, that is to receive it). The difficulty is that the planning bureau is not likely to have all the information it needs to do this. It may direct some enterprises to produce much more than they are capable of producing, with the resources supplied, and others to produce much less, so that most of their resources go to waste. In general, the managers of the enterprises will probably have a better estimate of what they can produce than the planning bureau has, and of the resources necessary to produce it. How can the planning bureau function, in such a case? How can they get the information they need?
Iteration 