Knowledge that Transforms

One of the principal quantitative techniques used in the studv of costs and benefits of regulation involves the evaluation of consumer's and producer's surplus. Examples are [2], [3], [4], [6]. The method can be caricatured as follows: Obtain data on quantity and price for the output produced by the regulated industry. Obtain estimates of the slopes of the demand and marginal cost from cross-section or timeseries estimates of elasticities. Calculate where demand and marginal cost would intersect. Complete a triangle whose vertexes are (1) the predicted intersection of marginal cost and demand, (2) the current demand price, and (3) the current estimated marginal cost. Add to the area of this dollar triangle the direct total cost of the entire regulatory machinery-the budget of the regulatory agency and the budget for lawyers, accountants, engineers, public relations men, and for all the other costs incurred by those being regulatedand you have an estimate of the social cost of regulation. Waiving their validity and accuracy for the moment, the calculations assume that a feasible social alternative to the regulated status quo is, in fact, described by the intersection of the measured marginal cost and demand curves, and that this alternative situation can be reached without new direct regulation costs offsetting the savings. If the social optimum were to require a price-output configuration for the regulated industry described by the pricemarginal cost equality, and this equality could be brought into being by a costless restructuring of the regtulated industry into one behaving like a competitive industry, then the social choice is trivial. The complex statistical calculations are unnecessary. However, if pure competition or its simulation are not viable alternatives to the regulated status quo because of decreasing unit costs often considered characteristic of public utilities, then the calculations are beside the point. Dismantling the regulatory machinery will save the resources used by the regulatory process, but the laissez-faire outcome will probably be oligopoly with its absence of price competition, excessive product differentiation, wasteful sales promotion and advertising, excess capacity, and expensive legal talent to forestall and defend antitrust prosecutions. The measured demand and marginal cost curves and the triangle provide no information about a new deregulated equilibrium. And it is not a valid proposition that entry of firms, threats of entry, and oligopolistic rivalry will be an improvement over regulated monopoly. So far I have not challenged the proposition that the intersection of demand and * Research support of the National Science Foundation is gratefully acknowledged.

My title immediately raises difficult questions about definitions. I shall not, however, discuss the meaning of decentralization and the characterization of the extent of decentralization in an economy, subjects which were dealt with at some length in a session of these meetings two years ago (see [9 ], [15 ]). We shall have to keep in mind the distinctions between informational decentralization and decentralization of decision-making authority; between the processes of plan construction and plan implementation; between implementing a central plan by prescribing prices (or price-like parameters) or by issuing quantitative commands; etc. But I shall ignore the many unresolved issues in these areas in order to focus on the relevance of decentralized planning procedures to the operation of the centrally planned economies. By centrally planned economies (CPEs) I mean those of Eastern Europe (excluding Yugoslavia). Here again we must distinguish between the standard Soviet-type system and the variants which have evolved in recent years. Hungary is at present farthest from the standard system, so that the two other papers in this session should indicate the range of institutional frameworks which I have in mind. In this context, I shall point out what seem to me to be the most important problems deserving further research, and then suggest an example illustrating one aspect of a general approach which seems likely to be fruitful in such research. Decentralized planning procedures are models which assume that the Central Planning Board (CPB) cannot solve the planning problem directly: i.e., either the CPB does not possess all necessary information regarding technology (and possibly preferences), or even if it had this information it could not directly solve the overall optimization problem (because of its size), or both. Hence there must be an exchange of information between the CPB and the various units into which the economy is partitioned, and typically some calculations must be performed by units other than the CPB (for examples of the literature, see [1], [2], [5, Chap. 23], [7], [8], [10, Chap. 24, 25, App. H], [11], [12], [13 ], [14], [17 ]). This kind of process does operate in all CPEs, but it bears little resemblance to the form of iterative search for an optimal plan characteristic of the formalized decentralized planning procedures. In practice in the CPEs, plan construction involves very few rounds of iteration between the CPB and lower-level units. Much of the iteration in seeking a plan takes place within the CPB itself, and at the same time there is direct communication between the lower-level units, often going through intermediate levels of an administrative hierarchy. This kind of apparent discrepancy between the models and the actual planning process raises the broader question of the objectives of the models. In some respects, they are descriptions of planning; in other cases, prescriptionis of procedures for

Within the last two years a series of articles has been published dealing with the existence of surplus labor in the United Arab Republic. The most recent, an article in this Review by Bent Hansen, used the results of a rural employmnent survey conducted by the International Labor Organization and the United Arab Republic government (Employment Problems in Rural Areas, henceforth EPRA) to settle the issue of surplus labor rather definitely against the surplus labor hypothesis in that country (Hansen, p. 298). In the present author's view neither Hansen's article nor the EPRA survey itself provide the evidence for such an unqualified rejection of the surplus labortraditional wage hypothesis; nor do they suggest unqualified acceptance of a marginal productivity theory of distribution. Instead, it will be argued that the evidence is broadly consistent with more sophisticated hypotheses about rural wage determination. This latter view holds that with correct policy, labor might be drawn out of the agricultural sector for work on development projects or in regional industry, at relatively constant wages.