The Command-Bureaucratic Economy

The economic system China operated before reform is often called a "command economy," and this term accurately captures the nature of most economic decision making in such a system. Information is collected from production and consumption units; the information flows upward through bureaucratic channels; decisions are made on the basis of this information; and commands are issued down through the same bureaucratic channels to determine production decisions. Vertical flows of information and command are thus the basis of the system. The label "command economy" applies to the economic system as a whole because the "commands" issued by superiors are the central features that organize the system. Just as the flow of energy through an organism or a machine determines the physical form of that system, so the flow of commands through the bureaucracy determines the characteristic forms of the command economy. Individual incomes are determined by the extent to which commands are carried out (degree of plan fulfillment); input purchases and output sales are planned to enable production commands to be fulfilled; and financial flows are set to accommodate those planned tasks. Moreover, various planning exercises are expected to mesh into a single integrated plan that expresses the will of those who command. Thus, the command economy is "monomorphic," or uniform: all economic decision making is organized in such a way that it replicates and is subordinate to the basic "command" relationship. Similarly, economic organizations generally have the same internal structure regardless of their rank in the hierarchy, because all organizations serve the same functions of relaying commands and information. This monomorphism characterizes the command economy regardless of whether it is highly centralized or relatively decentralized.

The command economy is also monolithic. That is, there are no significant organizations outside the planned economy that compete with units inside. Because of the lack of competition and markets, prices do not carry much information useful in economic decision making. Instead, important information flows mainly through a few narrow channels connecting lower and higher levels. The importance and scarcity of official information channels means that they become the focus of interest of many different individuals. Those at lower levels, for example, have an interest in retaining information so that they can use this scarce resource to advance their own careers. The same superior-subordinate relations are used to structure information gathering and to issue commands, so the incentives to manipulate and distort those relations are very great. Bargaining within the bureaucracy is

concentrated on the level of commands coming down the bureaucratic chain and the type of information going up: it is predominantly "plan bargaining."

In ordinary times this bargaining takes the form of "hiding reserves." Lower-level units wish to conceal capacity from their superiors in order to obtain plans that are easy to fulfill. In that way, they can be assured of a quiet life and an adequate income. Thus, the economic system as a whole tends to sink into a low-level equilibrium of low productivity and low effort. The situation is neatly captured by an epigram from Eastern Europe: "They pretend to pay us, and we pretend to work." In this respect, the command economy resembles any bureaucratic system, which may fall into this low-level trap when morale is low, tasks routinized, and external checks weak. The basic problem is that the narrow channels connecting subordinates to superiors become clogged with pseudoinformation, which is often intentionally distorted. While the system continues to report thousands of "bits" of data, the actual information content is quite limited. Production data are abundant, but these reflect merely an institutional consensus about appropriate levels of effort, rather than actual information about attainable levels of output. Uniformly organized production units all report more or less adequate performances, and it becomes impossible to know, for instance, the potential savings in energy usage that could be achieved by a drastically reshaped enterprise. Because of this impoverished information flow, it becomes difficult for leaders to get the kind of response from the "command economy" that they desire. The "command economy"—a model of subordination to the leader's will— becomes instead the "bureaucratic economy"—a model of unresponsiveness. It would be best to characterize these systems as "command-bureaucratic economies" to capture both the authoritarian flavor and the sense of unresponsiveness which the word bureaucratic has come to carry in daily language.^[1]

One of the curiosities of the command economy is the tendency of the system to generate an opposite, superresponsive kind of behavior during certain exceptional periods. During exceptional "forward leaps" a different response emerges, which we can call Stakhanovite after the Soviet coal miner who hewed 104 tons of coal—fourteen times his output quota—on one particularly good day in 1935. During these periods the incentive structure is altered to reward exceptional achievements, and production workers and units begin vying to overfulfill their plans by ever more astonishing margins. Suddenly, all the desire to conceal reserves is abandoned: in the context of a revivalist spirit, the worker-hero

shatters the stagnation of the bureaucratic system. Certainly the most spectacular example of this behavior shift was the Great Leap Forward in China, when it seemed for a period that all the laws of nature had been repealed. In 1958 cadres eager for recognition reported spectacular grain harvests, leading the central leadership to believe that China's total harvest had increased by a miraculous amount. The commands that followed included instructions to reduce the acreage sown to grain and increase deliveries of grain to the state, thus leading directly to disastrous famine.^[2] While Stakhanovite leaps forward seem to be the opposite of the bureaucratic economy, they are really just the flip side of the same phenomenon. In both cases, the tangling of the incentive system and information flows creates a distorted and degraded flow of information; the indeterminacy of the whole system, because of the absence of external checks, permits the most outrageous outcomes to appear acceptable for a period. The extremes of stagnation and Stakhanovite leaps forward are both more likely when central planners have a weak and uncertain grasp over concrete decision making in the economy.^[3]

What determines the level of effective control over the economy exerted by central planners? The size and complexity of the economy play a major role, and Chinese planners would face a formidable control problem under any conceivable system. More specifically, however, effective control basically depends on two factors. The first is the direct control over resources—particularly investment resources—exercised by planners, and the second is the quality of the information available to planners. In both these respects, Chinese planners were exceptionally weak before reforms. Even before reforms, financial control over one-third of investment had been decentralized, and only two-thirds of investment was disbursed directly through the government budget. Slightly less than half of state investment went for projects that were included in the central-government investment plan. Moreover, central-government resources were tied up in the misguided "Third Front" development strategy, leaving central planners with little freedom to shift resources in

response to changing priorities.^[4] Even more striking was the decline in the quality of the information available to planners. During the Cultural Revolution the State Statistical Bureau was reduced sharply in size, and most of its functions were incorporated into the planning commissions at all levels. This meant that the government sacrificed a semiautonomous source of information and became completely dependent on information channeled directly through the industrial hierarchy. Moreover, the whole scope of statistics gathering changed. Previously, the Statistical Bureau had been charged with gathering data about the entire economy, but as control over significant blocks of resources was decentralized, the data-collection network shrank to cover only those areas directly under central control. Thus, when control over "technical transformation" investment was decentralized, the government ceased to collect information about this important component of investment. The government literally did not know how much total investment was taking place.^[5] Similarly, materials that were under local control and "balanced" by local authorities were not incorporated into the central-government balancing process at all. Of course, the government continued to collect output figures, but it made no effort to coordinate sources and uses of this important portion of total output. Finally, the decimation of the technically skilled economic bureaucracy meant that only relatively crude direction of resource flows could take place. Only a few hundred commodities were centrally planned, whereas in the Soviet Union several thousand such commodities are planned. With limited skills and limited information, the central government was unable to exercise detailed control over even those portions of the economy where it nominally possessed absolute authority.

China's economic system before reform was unquestionably a "command economy," but it is of only limited value to describe it as a centrally planned economy. While the Center had enormous formal authority, and while the ultimate centralization of the Communist Party and other aspects of the political system cannot be neglected, the Center was extraordinarily weak compared with other planned economies. As a result, the industrial economy was unresponsive to attempts to regulate daily decision making but was at the same time vulnerable to recurrent periods of

leaping forward. One case that occurred on the eve of economic reform is symptomatic of the weakness of central control. In November 1977 the State Council approved a proposal to build at Baoshan in the Shanghai suburbs an advanced iron mill, to be imported from Japan and capable of supplying 5 million metric tons (MMT) of iron annually. Within six months of approval, the cost of the projected plant had approximately quadrupled, as it was expanded to a comprehensive steel mill producing 6 MMT of iron and 6 MMT of steel, plus continuous hot and cold steel rolling mills. Yet at this time no blueprints or construction plans had ever been submitted to the central Planning Commission. In July 1978 the Planning Commission finally obtained and approved blueprints, but the discovery that the designs submitted incorporated a further expansion of the project and still more cost increases led to escalating doubts. Subsequent rethinking led to the recognition that the project was deeply flawed, but by that time contracts had been signed with Japanese suppliers that basically locked the government into the proposal. Ultimately, the government proceeded with a project with a total cost of over 20 billion yuan (over $4 billion at today's exchange rates), in spite of the fact that planners had not possessed any detailed information about the project until it was already under way.^[6] Surely few decisions of this magnitude have ever been made on such a flimsy information base. We can speculate that cases like this, occurring after the door had been decisively closed on the Cultural Revolution era, forced China's leaders to recognize the weakness of their bureaucratic decision-making process and made them more receptive to the possibility of economic reform.