A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bjerkholt, Olav Working Paper Markets, models and planning: The Norwegian experience Memorandum, No. 2005,14 Provided in Cooperation with: Department of Economics, University of Oslo Suggested Citation: Bjerkholt, Olav (2005) : Markets, models and planning: The Norwegian experience, Memorandum, No. 2005,14, University of Oslo, Department of Economics, Oslo This Version is available at: http://hdl.handle.net/10419/63196 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu MEMORANDUM No 14/2005 Markets, models and planning: the Norwegian experience Olav Bjerkholt ISSN: 0801-1117 Department of Economics University of Oslo This series is published by the In co-operation with University of Oslo The Frisch Centre for Economic Department of Economics Research P. O.Box 1095 Blindern Gaustadalleén 21 N-0317 OSLO Norway N-0371 OSLO Norway Telephone: + 47 22855127 Telephone: +47 22 95 88 20 Fax: + 47 22855035 Fax: +47 22 95 88 25 Internet: http://www.oekonomi.uio.no/ Internet: http://www.frisch.uio.no/ e-mail: [email protected] e-mail: [email protected] List of the last 10 Memoranda: No 13 Diderik Lund An analytical model of required returns to equity under taxation with imperfect loss offset. 42 pp. No 12 Hilde C. Bjørnland and Kai Leitemo Identifying the Interdependence between US Monetary Policy and the Stock Market. 34 pp. No 11 Kari Due-Andresen Tax evasion and labour supply in Norway in 2003: Structural models versus flexible functional form models. 44 pp. No 10 Steinar Holden and Fredrik Wulfsberg Downward Nominal Wage Rigidity in the OECD. 39 pp. No 09 Kjell Arne Brekke, Karine Nyborg and Mari Rege The Fear of Exclusion: Individual Effort when Group Formation is Endogenous. 23 pp. No 08 Geir B. Asheim and Bertil Tungodden A new equity condition for infinite utility streams and the possibility of being Paretian. 14 pp. No 07 Hilde Bojer Income inequality and the economic position of women in Norway 1970 – 2002. 24 pp. No 06 Øystein Jørgensen, Tone Ognedal and Steinar Strøm Labor supply when tax evasion is an option. 30 pp. No 05 Rolf Golombek and Michael Hoel The Kyoto agreement and Technology Spillovers. 22 pp. No 04 Cathrine Hagem and Hege Westskog Dominant Agent and Intertemporal Emissions Trading. 35 pp. A complete list of this memo-series is available in a PDF® format at: http://www.oekonomi.uio.no/memo/ Mai, 2005, Rev. Markets, models and planning: the Norwegian experience by Olav Bjerkholt Abstract After World War II economic policy in Europe comprised considerable elements of planning. The paper discusses how this shift was related to the conceived failure of the free enterprise economy to provide full employment in the interwar period and to the war experience. The Norwegian post-war planning had a more integrated and comprehensive character and a more structured format than in most other countries in Western Europe. Some major aspects of the Norwegian planning system and the models developed to support it are discussed, with particular emphasis on the roles played by key economists. Keywords: Economic planning; planning models; national budgeting; Marshall Plan; JEL-Codes: A11; O21; P41; 2 1. Introduction* The topic of “markets vs. planning” can be dealt with as a purely theoretical topic based upon a general equilibrium representation of the economy, perhaps with market failures, external effects, bargaining, or other imperfections, and use of devices of economic planning, e.g. price mechanisms and other mechanism designed for planning purposes, possibly considering problems created by agents having rational expectations, time consistency problems and other limits to planning. Rather contrary to that I will deal with these topics within a concrete historical context, which is that of the economic policy in post-war Norway. The setting is the shift from the interwar free enterprise system, with limited government intervention and not too well functioning markets via wartime controls and regulation towards a system of comprehensive economic planning, without large-scale nationalization of the means of production. The presentation will have a historical narrative with some key actors, some of them famous, and not too much theoretical discussion. Some of the referenced works offer a more elaborate and detailed presentation. A similar shift towards more government intervention and planning took part in several countries. Perhaps it could be ventured that economic planning in Norway had a more integrated and comprehensive character and a more structured format than in most other countries in Western Europe, but the drift went in the same direction, particularly in the early years. Why did this happen? Was it influenced by theoretical discussions? Was it the result of a political shift towards the left with more planning oriented parties coming to power? Was it in some way the outcome of a reaction to the war? It could be some contribution from each of these, but in my view it was above all a reaction to the dismal failure of the economic system of the interwar years. But then, what was the role of economists in this process? Who called the shots, who gave the signals? There had been indeed theoretical discussions on the international arena of the possibilities of more or less perfectly functioning planning systems, based upon competitive principles within a general equilibrium framework, but these did not seem to have exerted much influence in Norway. There was indeed a political swing to the left after liberation in Norway, as also happened in other countries, which undoubtedly nourished the interest in pursuing alternatives to the poorly functioning capitalistic system of the pre-war years, a situation that no one wanted back. The ruling political force in post-war Norway, the Labour Party, after it had shed its revolutionary past in the 1920s, had embraced national planning as part of a democratic development. During its government form 1935 it had promoted a more comprehensive role for the state. The topic is really too big for a single lecture but I will thus touch upon why comprehensive planning became the chosen way of conducting economic policy, in this context I deal with the role and impact of the Marshall Plan. The concrete embodiment of * Lecture at Norwegian School of Business Administration and Economics in course MET510 Vitenskapsteori, 13 May 2005. 3 the planning aspects of economic policy was shaped differently in different countries, but I have to limit the discussion to cover only Norway and only main features. I will try to get the setting of post-war economic policy reasonably clear and then discuss some aspects of the design of economic planning and policy. I will mention some key economists who contributed in this setting, and the narrative will be a mix of economic history and the history of Norwegian economics. Finally, I will say something about what was achieved in terms of the results of economic policy, point out elements of economic policy, which survived beyond what we can call the economic planning period in post- war economic policy, and make some further remarks on the more recent theoretical discourse on the possibilities and limitations of planning. 2. The dismal failure of the economy in the interwar period. Let us first have a bird’s-eye view of the dominant features of economic development in the industrial world before and after World War II (WWII). Table 1 below put the key figures in the perspective of the entire time span from 1870 to 1990. Table 1. Average growth rates for 16 industrialized countries.* Growth rates % 1870-1913 1913-1950 1950-1973 1973-1990 GDP 2.5 2.0 4.9 2.6 GDP/cap 1.4 1.2 3.8 2.1 Real capital 3.4 2.0 5.8 4.2 Export volumes 3.9 1.0 8.6 4.7 Unemployment % 4.5 7.5 2.6 5.7 Inflation % 0.4 -0.7 4.1 7.3 * The 16 countries are Australia, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Norway, Great Britain, Sweden, Switzerland, Germany, Austria, USA. Kilde: A. Maddison: Dynamic Forces in Capitalist Development, Oxford: Oxford University Press, 1991. Look closely at these numbers, they may all seem small, but they have massive significance as the averages of the overwhelming part of the industrial world for long spans of time. The shift downwards form 1870-1913 to 1913-1950 is very marked in these numbers, in particularly with regard to trade. The shift from 1913-1950 to the post- war period of 1950-1973 is even more distinct. Look at the dramatic shifts in the growth of real capital and in exports. The individual countries naturally followed somewhat different paths. The interwar figures cover the miserable record of the UK economy in the 1920s, coinciding with the roaring twenties of the US economy.