Decentralization and Financial Equilibrium in a Centrally Planned Economy (CPE)

Trzeciakowski, W. (1982). Decentralization and Financial Equilibrium in a Centrally Planned Economy (CPE). IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-82-002

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Abstract

This paper deals with the fundamental problem of socialist economies: how to ensure compatibility of financial equilibrium with efficient allocation of resources in a decentralized decision-making system. In order to ensure rational allocation of resources in a decentralized system, it is indispensable to apply marginal pricing of labour, materials and foreign currencies. In order to ensure financial equilibrium on the consumer market the financial system operates with average cost pricing rules, thus violating efficiency rules. Trying to solve this dilemma the constructors of economic reforms of the system give priority to financial equilibrium conditions by using average cost prices and exchange rates and correct them by subsidies differentiated for branches. This leads to bargaining processes and to the neglect of efficiency rules. The author proposes instead the use of a uniform subsidy of the central budget and presents variants of this systemic solution: in the form of a uniform subsidy to wage earners or in the form of a uniform subsidy to enterprises. The formalized analysis is included in the appendix.

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