Planning & the Market in Cuba

By Armando Nova Gonzalez*

Restoration Work in Old Havana – photo: Caridad
Restoration Work in Old Havana – photo: Caridad

HAVANA TIMES, May 22 — (IPS) Planning and the market constitute issues of outstanding importance in the current context of the economic transformation that Cuba is undergoing. These are controversial issues around which there is a lack of needed debate, bearing in mind that presently, on occasions, an identity is established between the market and capitalism.

It appears there are three rather dispersed lines of thought. One proposes that planning play the fundamental role, and ignores the existence of the market and its functioning. Another sees the market as having the principal role, and ignores the importance of planning. Lastly, one suggests the establishment of an objective relationship between the two.

A few questions might facilitate the path toward this debate. These can be posed as:

• Is a planned economy synonymous with socialism, given that planning also exists under capitalism?
• Is the market economy synonymous with capitalism, though in the stage of its transition to socialism the market also exists?
• Are planning and the market more than just economic mechanisms?
• Is having “a little more planning” or “a little more market control” what essentially distinguishes socialism from capitalism?
• Is the structure of the form of property what determines whether a society is socialist or capitalist?

Unquestionably, this analysis by no means seeks to respond to all of those questions, but instead aims to present some reflections with respect to them.

Under the economic conditions of Cuba’s “Special Period” of economic crisis – which began in the 1990s and continues to be experienced today– the planned and centralized economy in place up until that time did not correspond to the transformations that began during that decade.

Confronted with the present objective reality, the concept and process of planning requires changes in form and content because they no longer facilitate the development of the productive forces and thus require a gradual process of transformation. Experts believe that rigid forms of control continue to be exerted over businesses – equally on state-run companies and those having collective and mixed ownership – depriving them of necessary autonomy. This hinders the development of the law of value, impedes the functioning of the market and managerial competition, and hampers the full development of the productive forces.

In fact, the market has nothing to do with capitalism or socialism, since it has existed since the breakup of the primitive communal formation. Karl Marx himself asserted that commodities only achieve social recognition through exchange (on the market), and this exists in both modes of production.

The whole of production relations (economic relations) forms the economic structure of society, its base. These ties depend on how the means of production are controlled throughout society and how the ownership problem has been resolved. The form of property (the ownership of the means of production and the decisions of owners regarding production and output) determines the nature of the tie that unites the owner with the means of production, not only in the process of material creation, but also in the relations of distribution, exchange and consumption. Also dependent on the form of property ownership are the type of distribution and the way and amount of income received by members of society.

More than a few economists recognize the primary role of planning in macroeconomic aspects, as it serves to establish proportions, equilibrium, equity and sustained economic growth, both nationally and regionally. They consider the market as the agent that facilitates better distribution, greater economic efficiency and price formation, among other aspects. However, they do not see this as being based on a spontaneous market, but rather a well-regulated one, and one having economic rather than administrative controls in which the state plays the role of regulator, preventing and correcting any distortions that the market might introduce.

In reality, it is not only an issue of more or less planning or of a greater or role of the market, but of making decisions and establishing proportions at the appropriate time. This especially involves the functions and role that the state must play as the facilitator and supervisor of socio-economic growth affording the greatest possible economic efficiency and equity in the redistribution of wealth to achieve a more just society.

The analysis of the potential and limits of the market, as well as the action of the state in the economy, is fundamental to defining the areas and forms of sectoral policy. In general, there are three main models of the role of the state and market in society. (To a certain degree, these are consequences of the three lines of thought previously pointed out concerning planning and the market.)

Neoclassical Keynesian vision and the theory of development

A Shoe Factory in Havana – photo: Caridad
A Shoe Factory in Havana – photo: Caridad

The Keynesian vision of the economy assumes that supply creates its own demand, which presupposes markets as essentially stable and the economy as a whole functioning as a system that tends to be balanced at a level close to full employment. Nevertheless, English economist John Maynard Keynes – whose theory became prominent and was applied during the world crisis of the late 1920s and early 1930s – argued that markets favored rigidity in organization and response to production, which for its part generated unpredictability and instability.

Keynesian thought examined the shortcomings that resulted from the operation of the market, on one hand, and on the participation of the state to correct them, on the other. Keynes set limits, highlighting that the state should not take over the means of production, while at the same time arguing that a certain degree of public investment would ultimately be the only means that the system would achieve full employment.

This neoclassical vision, which originated in the mid-19th century, always maintained the need for a minimum level of state intervention in the economic process. This presumed that individuals, acting without intermediaries and in their own interests, would be capable of achieving the greatest efficiency.

This position left room for two major interpretations. One was the well-known theory of perfect competition, the fundamental mechanism for achieving fair exchange between diverse agents competing in the marketplace. The other one accepted the validity of imperfect competition (the Austrian school, which arose in the 1930s) as a result of the observation of situations and processes not explained by the first interpretation and which in some instances were directly contradictory to it.

Variations on the Neo-Classical theme

There exist variations that developed on the basis of the general neoclassical position, which incorporated an analysis the role of the state. Among them are the supply-side economics, rational expectations, monetarism and public choice theory.

Supply-side economics of course shares all neoclassical theory’s negative assessments of state intervention in the economy as being a disincentive to private investment. It holds that problems of supply are automatically corrected, without the need for state participation, since the objective of maximizing revenues leads to production levels close to the economy’s full potential capacity and achieves the greatest possible efficiencies.

This focus considers it necessary to prevent the action of the state in order to achieve such efficiency. For these outcomes, this variation proposes the reduction in state participation through tax cuts, reduced social spending, and decreased public regulatory and monetary controls, which supposedly stimulate investment, employment growth, productivity and production.

Parallel to this, decreases in social expenditures would force the owners and workers to assume the costs of their own social well-being. For their part, monetary controls entail an anti-inflationary effect that prevents recession.

The focus of rational expectations theory is based on denying the possibility that state participation can have positive effects on economic activity. This theory asserts that private agents supplied with market information, with which they always operate rationally, anticipate events and can neutralize the participation of the state so that it does not significantly alter the operation of the market.

The monetarist current centers its analysis on the effect of the means of payment (the money supply) on economic activity and the consequences of its inflationary character. Likewise, it incorporates an examination of the components of the balance of payments. Its focus is on strict control over the monetary supply to maintain price stability and a favorable investment climate.

In the focus of public choice theory (which emerged in the 1960s), the participation of the state leads to revenue-seeking activities that siphon away resources from productive activities. These actions are bolstered by the solidarity that emerges between the government bureaucracy and the beneficiaries of the social spending.

This theory proposes to reduce the action of the state, thereby allowing the market to dictate the allocation of resources. In addition, it suggests that individual decisions are conditioned by those of other actors, including the state, and that the socio-economic context as a whole significantly effects these actors.

The tide of neoliberal theory contains the fundamental position of global neoclassical theory and its variations (previously addressed). This line highlights, firstly, that monetary instruments should relinquish their traditional function as regulators of exchange rates and concentrate on the control of the money supply. Meanwhile, fiscal tools – which up until now have had as their fundamental task the maintaining and directing of the volume of global demand – should be used to serve the stimulation of private investment and the settling of public accounts.

In the context of that theory, the combined actions of reduced tariffs and the fiscal and monetary tools contribute to price changes that favor the marketability of products. Along with these actions, the processes of privatization and deregulation are expected to increase competition and the leading role of the market.

In first instance, proponents believe that the coordination of markets at the macroeconomic scale is substantially different from that which operates at the micro-economic level. In the economic process as a whole, there are conflicts that lead to contradictions between global results and the objectives and results of those micro-economic actions. The aggregate effect of objectives can marginalize collective aspirations in search for equity in the distribution of wealth.

Neo-liberalism and underdevelopment

From a social perspective, the practice of neo-liberalism in underdeveloped countries has given rise to outcomes that place in question its supposed “advantages.” Among its consequences include enormous difficulties in attempting to increase employment, prevent the drop in real income of the majority population, and limitations or reductions in outlays aimed at improving the quality of life of society.

The current global economic crisis constitutes an example of the adverse outcomes of neoliberal policy. The theory of development proposes that, although the state cannot guarantee the optimal allocation of resources possible, its role as the driving force of development in underdeveloped countries is decisive. This position holds that the fundamental reason for market failure in these countries is substantially greater and more significant than that which occurred in the developed countries.

In addressing the results of market deficiencies in underdeveloped countries, the theory of development points to their most important characteristics as being the following:

• Allocations of resources that can cause important gaps between the potential and real rates of growth
• An international market characterized by a deterioration of the terms of exchange
• Deepening structural heterogeneity, particularly among the agricultural and industrial sectors
• A lack of regulation over monopolies
• The concentration of the wealth and income

The theory of development ascribes to the state the capacity to direct economic process on the national scale (in the medium and long-term) to promote accumulation and to concretely realize growth through the resources that it provides society.

Such efforts include the construction of needed public infrastructure, the integration of different branches of the economy, modernization of the financial system and facilitating the coordination of productive process and services.

The development theory has achieved general acceptance through its concrete economic results over several decades. However, it has not in fact been able to solve the serious problems of development, such as intra and inter-sectoral structural economic disproportions and the increasing world chasm in the distribution of wealth. For that reason, the question remains as to what should be the new role of the state and market in the process of socio-economic development.

As part of socialist theory on the role of the state, China and Vietnam have executed a new form of planning and market operation for several years. These countries continue to proceed along the socialist path under the guidance of the Communist Party, whose central task is economic construction. In the practice, they have incorporated the market economy within socialism, with the market serving as the principal mechanism for the distribution of resources.

All enterprises (state, cooperative, mixed and individual, among others) operate independently and are responsible for their own earnings and losses under conditions of market competition; likewise, prices are formed spontaneously. The state exercises macroeconomic regulation and control, but does not hinder or eliminate the role of market mechanisms; instead, it safeguards the appropriate performance of these.

Some specialists estimate that these experiences have had unfavorable consequences. Such outcomes have included greater inequality, the heating up of the economy (price increases and inflation), uneven regional development, increased crime and corruption, the production and appearance of poor quality product brands, tax payment violations, and bribery — each having the basic aim of financial gain.

Undoubtedly, this issue is quite timely and important in the context of the changes and structural transformations that Cuban must effect in the transition of its economy, while constantly maintaining commercial monetary relations and the presence of money during the transition process toward socialism, because of the operation of the law of value. From this is derived the objective presence of the market and its laws under the eye and action of the state so that the market and its operation are employed in an advantageous manner and help to achieve a more just society.

*Professor and researcher

Translation by Havana Times

3 thoughts on “Planning & the Market in Cuba

  • It is unfortunate that fifty years later, Cuba continues to be as a society and in the integrity of its citizens, a third world country. We in south america see many cubans who have left Cuba recently, and are shocked to see the inconsistencies of Cuban planned economy and the new cuban human-being. Paul Krugman has written in the New York Times a few weeks back an interesting condemnation of lumpen-capitalist macroeconomics. Has Cuba and its economists gone beyond the ideology of planned economy, and sat down to the more serious job of planning a communist economy which consubstantially implies the creation of the new man, without the recent lumpen christian ideologization being fostered by Fidel and his brother, et al?

  • “Experts believe that rigid forms of control continue to be exerted over businesses – equally on state-run companies and those having collective and mixed ownership – depriving them of necessary autonomy. This hinders the development of the law of value, impedes the functioning of the market and managerial competition, and hampers the full development of the productive forces.”

    Which “experts” are you referring? Obviously, the advocates of a return to capitalism in Cuba – those who…

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