Modeling a National Economy and the Economic Mechanism

Mihailov, B. (1979). Modeling a National Economy and the Economic Mechanism. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-79-107

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Abstract

This paper is an attempt to link the problem of modeling to the problem of improving the economic mechanism in socialist countries.

The necessity to improve the economic mechanism is based on an analysis of its functioning under the constraints before new economic experiments in some socialist countries, as well as the new method implemented in the management of the economy. There the connection between its basic elements on the level of the economic organization -- price formation, planning, credit system, incentive system, etc. -- and usage of respective approaches and models for planning on a national level, is analyzed. The conclusions drawn show that using only the centralized methods for planning contradict the new principles for economic management.

The basic change in the management method requires an independence of the economic organization in decision making regarding the volume and structure of production using local criteria. Under these economic conditions, the central planning authorities have to use different, but common economic regulators in order to control local interests. On that basis a convergence between the local criteria (expressing the interest of the economic organization) and the global criteria of the economic system could be achieved. Mathematical models, which adequately reflect the process of planning at the two levels are of extreme importance for analyzing the economic mechanisms and their implementation in practice.

This paper will be presented at the IFAC/IFORS Conference, Warsaw, Poland in June 1980.

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