I am trying to understand the differences between the Parecon annual planning procedure @robinhahnel and the “textbook” general equilibrium (GE) model—specifically the production equilibrium model presented in Section 5.3 (“Production Equilibrium”) of Jehle and Reny’s Advanced Microeconomic Theory.
It seems to me that one key difference is the following. In the Parecon annual planning procedure, the total endowments of capital goods (produced in the previous year) are given, but the distribution of these capital good endowments across workers’ councils is determined endogenously through the annual planning process. By contrast, in the textbook GE model, the distribution of capital good endowments across agents is specified exogenously at the outset.
Is this understanding correct? I would very much appreciate your thoughts.
I can confirm that in our proposal the stocks of capital goods previously produced and available for use are distributed for use by worker councils through the annual participatory planning process. In effect worker councils ask, or “bid” to use them, at the same time that they offer to produce new outputs and ask for intermediate inputs, natural resources, and different categories of labor as well as user rights over capital goods in order to do so. I’m very familiar with the literature on general equilibrium microeconomic theory for private enterprise market economies. But I am not familiar with the particular textbook you cite: Jehle and Reny, Advanced Microeconomic Theory, so I can’t say what exactly they do.
Regarding private enterprise market economies, I was referring to the notion of competitive equilibrium defined in Definition 17.B.1 of Microeconomic Theory by Mas-Colell, Whinston, and Green.
According to that definition, both the aggregate endowments of capital goods and their distribution across consumers are taken as given data in determining a competitive equilibrium.
By contrast, (my understanding is that) in the Parecon annual planning procedure, while the total stock of capital goods inherited from the previous period is given, their distribution among individuals is not a primitive datum.
Indeed, strictly speaking, there is no concept of “distribution of capital goods among consumers” in Parecon, since capital goods are socially owned rather than privately held. What is determined through the planning process is their allocation among workers’ councils for productive use, not their ownership by individuals.
So, I think the above point is a difference between the equilibrium generated by Parecon annual planning procedure and the competitive equilibrium of a private enterprise market economy. I am not sure whether my opinion is correct.
Yes. I agree with your explanation of the difference between GE models for capitalist economies and how annual participatory planning works in a participatory economy.
There is another big difference in the modeling as well: In all other GE modeling individual consumers are actors along with individual capitalist owned firms. The participants in our annual planning process are worker councils and neighborhood consumer councils. Individual consumers don’t participate as “actors” during our annual planning procedure. Instead, neighborhood consumption councils make consumption proposals on behalf of all households in the neighborhood. This requires discussion and meeting within neighborhood consumption councils to approve individual household consumption requests, and to also decide what collective goods the neighborhood wants to request. But what is submitted during annual planning is the neighborhood consumption request. That is the sum total requests for private and public goods and services by all in the neighborhood. And what is submitted along with the entire neighborhood’s consumption request is the aggregate income plus allowances of all the households in the neighborhood.
I would also like to raise another question. In the current Parecon model, it seems that all capital goods produced during a given year are not put into use within that same year, but are instead stored for use in next year.
However, in practice, some capital goods are completed in the middle of the year. If these were allocated to workers’ councils and brought into production immediately, the economy could potentially achieve a higher level of output and welfare within that year.
Do you think this foregone output should be understood as a necessary trade-off for implementing the investment and annual planning procedures more smoothly or easily? Or is there room within the Parecon framework to incorporate mid-year capital deployment?
Yes. You are correct. However, what is “traditional” in economic thinking is that there is a real difference about how soon a produced input can be available to use. For example steel which is produced during a year can also be used during the same year it is produced. Whereas an new warehouse produced during a year may not be available for use until the following year, or maybe two years later. That “distinction” is traditionally made by defining some inputs as “intermediate” inputs, and some inputs as “capital goods.” That’s all we are doing when we explain how our annual planning procedure would work.
I am still a bit confused on this point. To take your example:
If a new warehouse is completed in March of year t, and it can provide productive services for the next 20 years, while also being technically available for immediate allocation to any workers’ council, should it be classified as an intermediate input or as a capital good?
If it is considered an intermediate input, then it cannot be fully used up during year t. According to the traditional definition of an intermediate input, this new warehouse would therefore not qualify as one.
If it is considered a capital good, is it permissible within the Parecon framework to allocate it for productive use during year t? Or must it instead be stored and only allocated at the beginning of the following year (t+1)?
A new warehouse which can provide productive services for the next 20 years IS A CAPITAL GOOD, not an INTERMEDIATE GOOD for the reason you point out.
When doing simulations one must make any number of simplifying assumptions. One of the most questionable ones is that actors will behave in their rational self-interest… since we know that often we humans do not! A relatively minor “simplifying assumption” is that capital goods only become available for use in future years, and NOT in the year they are produced.
You raise the question of a capital good which is produced during a year, will be useful for 30 years, but which will also be available for use during the last six months of the year in which it was produced. Of course in the real world we would want to allocate user right over such a capital good as soon as it is available. But in our simulations we skip over this detail by assuming that capital goods only become available for use during the years after which they are produced. It’s a relatively minor departure from life in the real world just to keep things simple. There are far larger departures we make in our simulations from the real world, such as assuming actors will always behave rationally.
There are always many things that can be implemented in real world settings which theoretical “models” of things do not take into account. So my answer, in short, is “of course,” but that doesn’t mean that making a simplifying assumption when discussing things in theory isn’t useful.
Hi, Yuriy. I think by contrast the annual planning procedure essentially is a Warlasian auctioneer. In a double auction sellers and buyers propose their bids and ask prices, this is not the case of the annual planning procedure.
The Walrasian auction mirrors Participatory Planning through its iterative tâtonnement and the “no-transaction-before-consensus” rule, whereas the Double auction is structurally closer to PP due to its decentralized many-to-many proposal framework. Their divergence is distinct: the Walrasian model lacks the active agency found in PP’s decentralized councils, while the Double auction’s logic of instantaneous, fragmented trades precludes the holistic democratic coordination central to the Parecon allocation mechanism.
By contrast, in annual planning and Warlasian auction there are also proposals, but they are quantity proposals. Both AP and WA has a centralised price setter (In WA, this is called Warlasian auctioneer; in AP, it is called IFB) and many decentralsied agents proposing many quantity proposals.
But their proposals are separated as individuals. It is not many-to-many collective proposals. I am not saying it is bad or good, just a bit different feature compare to PP.