Shortage, repressed inflation, and distorted growth: A general disequilibrium model of centrally planned economies.

Abstract

Centrally planned economies (CPEs) are generally recognized to be in a disequilibrium state. Yet many previous attempts to model CPEs in a general disequilibrium framework have failed to characterize them properly within their special environments. This dissertation examines the overall setting of CPEs, paying special attention to features distinct from those in capitalist market economies. The behavior functions of CPE firms and households are reformulated in order to give adequate attention to the effective supplies from firms and the forced substitution and forced cash hoarding behaviors of the households. The planners in this new model are characterized as attempting to maximize the national output subject to some restriction on the money supply. Variations of the money supply schemes and the national output definition lead to four different planning regimes. The derived behavior functions of the firms, the households, and the planners, are integrated in a three-commodity economic system of rationed goods, unrationed goods, and money. Within this framework, new perspectives of the economic behavior of CPEs are provided: (1) in the output market, both the case of partial shortage and the case of general shortage are admitted in the same framework by varying the planning regimes; (2) in the production factor market, extensive shortage is demonstrated to be the normal state for all planning regimes; (3) the growth paths of the CPEs can be characterized and the planning regime with partial shortage is proved to be dynamically inconsistent; (4) the severity of repressed inflation in CPEs can be theoretically examined; and (5) the national incomes claimed in CPEs is shown to be exaggerated by their overestimating the value of the goods with little utilities.