TRANSFORMED
MARKET CONFORMING
PLANNING
Philip Sutton
Director, Policy and Strategy
Green Innovations Inc.
Tel & fax: +61 3 9486 4799
Philip.Sutton@green-innovations.asn.au

3 December 1996 (First version 16th September 1993)
Version 3.f.ii (Web v.) - Doc. 136

Thanks to Anthony Cameron
for marking up this paper
in HTML format.

Return to Green Innovations Home Page

CONTENTS

Introduction
The trouble with the market . . .
Successful economies can manage the market
Market conforming planning
The limits of market-conforming planning
The causes of the trade-off
A way through?
An historical example of transformed market conforming planning
Transformed market conforming planning - for an ecologically sustainable economy
The productivity potential of an ecologically sustainable economy
Econometric modelling suggests win-win results
Conclusions
References
Footnotes

INTRODUCTION

In 1991 I spent some time working in the Victorian Government Office of the Environment exploring the issue of whether it was possible to have a "successful" green economy. In that same year I also participated in the Federal Government´s Ecologically Sustainable Development process as a member of the Manufacturing Working Party. My aim in both exercises was to develop the theoretical basis for practical policies to enable a truly ecologically sustainable economy to provide full employment, high incomes and growing productivity.

This working paper discusses one of the major concepts developed through that work, the concept of transformed market conforming planning. (1).

THE TROUBLE WITH THE MARKET . . .

The "market" is often seen as having inherent tendencies to generate social and environmental problems such as unemployment, wide income/wealth differentials, community breakdown, the destruction of indigenous cultures, pollution, destruction of biodiversity, and the depletion of fossil fuels and high grade mineral resources. To curb the market, people often turn to law-based controls, regulatory taxes and subsidies, and government planning.

Business interests, however, argue that efforts to control the market should not be taken too far because government interventions distort the market and depress GDP. It appears that the tools of market management can only be used if we are prepared to accept a fundamental trade-off between economic performance and social and environmental welfare. But is such a major trade-off necessary?

SUCCESSFUL ECONOMIES CAN MANAGE THE MARKET

Contrary to the conventional wisdom prevailing in the English-speaking countries, it is possible to successfully manage economies. Japan and its Asian emulators, using a minimally democratic model, and Northern Italy, Germany, Scandinavia, and countries such as the Netherlands and Austria using a much more democratic model, have not only out-performed(2) the centrally-planned command economies but have also done better than most of the laissez-faire economies. Their high performance economies combine markets, regulation and planning without reducing economic performance. Indeed the combination is actually a significant cause of their superior performance (World Bank, 1993).

MARKET CONFORMING PLANNING

Many of the successful, managed-market economies use a technique called market-conforming planning; that is, a system where planning and regulations are directed at assisting the market to more effectively achieve its potential.

Market-conforming planning involves conscious:

(Johnson et al., 1989; Komiya et al., 1988; Cohen & Zysman, 1987)

See footnote (3) for guidelines for identifying industry sectors that would be favoured by market conforming planning.

Factors contributing to the success of market conforming planning are:

Administrative guidance nudges the economy in the direction of the national interest as defined by the planners (7). This form of market management or planning works because the market and the management system complement one another, the market providing opportunities for spontaneity and innovation and the planning system providing for foresight, coordination, the large scale mobilisation of resources and conscious synergy (8).

Active steps are taken to ensure that social and regulatory policy does not lead the planning system and the market to negate each other´s efforts. Goals such as economic growth and income growth are shared, making cooperative action easier.

Market conforming planning needs to be complemented by market-building rather than market-negating regulations (9).

THE LIMITS OF MARKET CONFORMING PLANNING

Unfortunately market-conforming planning will not always result in the achievement of all of a society's social and environmental goals. There are two reasons for this. The first is that interests that are not recognised as important by the economic planners will not be allowed to shape the economy. This is obviously a problem in undemocratic countries, but it is often a problem in more democratic countries too, where economic policy is seen to be the exclusive province of the business sector and government economic agencies.

The second reason why market-conforming planning might fail to deal with social and environmental issues is that if the economy has a deep-seated tendency to cause problems in these areas, then using market-conforming planning will only make matters worse since it accelerates the economy in the undesirable direction. For example, the prodigious economic growth rates of Japan and the East Asian tiger economies have generated environmental damage and resource depletion on an equally large scale.

Furthermore, market-conforming planning only works, that is, produces superior economic results, if the objectives of the planning and regulatory system are aimed at enhancing the "natural" potential of the market. If the market is naturally destructive in social and environmental terms then the use of regulation and planning to negate these tendencies will almost certainly depress the performance of the economy.

In these circumstances there must be a trade-off between social, environmental and economic performance even though it is not the use of regulation and planning per se that causes the reduced economic performance.

THE CAUSES OF THE TRADE-OFF

The trade-off between social, environmental and economic performance has four possible causes:The intervention burden can be increased markedly if a multitude of symptoms are being suppressed rather than the root cause being treated (10). A grid-lock effect can occur if regulations and planning only have the effect of negating or blocking the market rather than convincing the market to move in a new direction. If a large amount of existing investment has to be scrapped and replaced well ahead of its normal retirement date, then economic performance will be depressed during the transition to the new economic structure. And finally if the new economy has an inferior trajectory of productivity growth, then long term performance will be depressed.

A WAY THROUGH?

Markets are complex human creations. They are established through the interplay of an array of human institutions (11)and it is highly improbable that there is only one "best" way to set them up.

So it might be possible to restore the usefulness of market-conforming planning if a way could be found to transform the market through a few profound changes, so that its deep-seated tendencies to cause social and environmental damage are eliminated. Once this was done, market-conforming planning should be able to be used to deliver a win-win outcome provided the transforming measures did not place the economy on the path of reduced productivity improvement.

Market-conforming planning for the transformed market, or "transformed market conforming planning" would involve first diagnosing the features of the economy that cause the major problems, then determining the institutional structures that give rise to these features. The next step would be to create an integrating vision to guide the choice of policy actions. Four action steps then need to be taken:

This approach, designed to create win-win outcomes at the level of the nation, is very similar to the problem solving methods developed by Goldratt (1989, 1994) and Anon. (1994) for use at the level of the firm. See Sutton (1995b) for an application of a modified version of the Goldratt method to the task of creating a closed-cycle economy.

AN HISTORICAL EXAMPLE OF MARKET CONFORMING PLANNING

The transformation of the Swedish economy provides a good illustration of a defacto process of transformed market conforming planning. This account is adapted from Milner (1989).The 1930s Depression firmed the conviction of the Swedish people that unemployment should not be tolerated. It was a feature of the market that was clearly identified as being unacceptable. However, unemployment was not at the time amenable to the normal market conforming planning measures.

It was known that reflation of the economy could restore full employment during recessions, but full employment tended to undermine the success of the reflated economy due to the inflationary effects of excessive wage bids.

Sweden, having a small population, could not support a fully self sufficient economy so it had to trade. Inflation however undermined the competitiveness of its exports (12). Since the maintenance of full employment was a non-negotiable goal, a means had to be found to control inflation in the presence of full employment.

Most economists assumed that strong unions pursuing their members´ self interest inevitably demand excessive wages. Therefore the bargaining power of the unions had to be moderated by maintaining a degree of unemployment. However the labour movement turned this notion on its head. The movement argued that wage moderation could be best achieved by strengthening the unions so that they could speak with one voice. Specifically the best outcome would be achieved if labour and employers bargained with each other as single units since each group would be concerned about the macroeconomic effects of their bargains on their members. So a market inadequacy was overcome through a change to the wage setting institutional arrangements.

It could not be assumed however that solidarity bargaining could be maintained if some workers were forever locked into disproportionately low wages. As a consequence the solidarity wage system was introduced under which wage differentials were gradually reduced over an extended period (13).

Self interested bargaining is not just the preserve of labour. More productive companies would naturally bid up wages to get good staff. The freedom to do this was also challenged. Productive companies would only offer to pay super-normal wages if they have super-normal surpluses from which to them. The institutional reform to overcome this problem was to tax productive companies sufficiently strongly so they could not afford wages that went beyond the solidarity wage settlements.

At the time it was well known that high taxes bleed investment funds from industry, preventing expansion or up-grading thus threatening jobs, productivity and the growth of GDP. A further reform overcame this problem too. Money raised from company taxation was directed by the government back into investment as low cost finance.

The institutional change to ensure solidarity bargaining through solidarity wage settlements raised further difficulties. It was widely understood by economists that wage differentials were needed to signal areas where labour was in short supply and to provide an incentive for workers to change jobs. However this expectation was also challenged. Instead of reverting to a system of high wage differentials, further institutional reforms were undertaken to ensure that the market performed adequately.

Active labour market measures were introduced. For example, better information was provided to people planning to enter the work force or people changing jobs so that they knew of opportunities. Training and retraining was provided to ensure a good match between people and jobs. Relocation assistance was provided to assist job mobility.

Thus Sweden, through a program of market transformation, systematically constructed an economic system that was able to deliver very positive economic and equity outcomes (14). This achievement defied conventional wisdom which held that equity and efficiency must be traded off against each other.Other solutions to the problems described above could no doubt have been found. After-all the Austrian economy has performed as well as the Swedish over the last four decades despite having a significantly different structure. In fact in the last ten or so years Austria has managed much better than Sweden.

The Swedish example nevertheless illustrates the concept of transformed market conforming planning very well.

TRANSFORMED MARKET CONFORMING PLANNING - FOR AN ECOLOGICALLY SUSTAINABLE ECONOMY

How could transformed market conforming planning be used to create a successful green economy? This is discussed more fully in Sutton (1995b). In this paper we will limit the application to the problem of resource consumption.

For more than 100 years the relative prices of raw materials have been falling. This has made the transition to a throw-away society virtually inevitable. The result has been the mass destruction of natural ecosystems and the accelerating depletion of high grade minerals and fossil fuels.

The cause of the falling relative prices has been the conjunction of five factors:

The long-term and continuing trend for the relative price of resources to fall could be halted if any one of these factors were changed. So which of these should be changed?

Economic growth isn´t a measure of human welfare and with the right policies in place it need not correlate with environmental damage either. Economic growth should therefore not be automatically promoted or prevented (Sutton, 1996).

A declining share of national income going to labour should be rejected on equity grounds. In any case it would only narrow the price gap between the labour intensive factors of production and capital intensive resources if labour costs were reduced absolutely. Furthermore, this effect would occur only while the reductions were working their way through the economy.

The greater ease of decreasing the costs of production in the resource sector compared to the other sectors of the economy arises because of the physical concentration of fossil resources and the comparatively greater ease of mechanising and automating resource processing. This pattern is relatively unresponsive to policy preferences alone since it is the respective technologies that have to change.

Changing resource royalties or severance charges is an appropriate and obvious way to change the long run pattern of relative prices in a resource conserving way. Whether it is a sufficient measure, on its own, is another question.

Most people gain their income almost totally from wages because of the current institutional arrangements. It is something that can be changed with ease, technically, and there is no obvious a priori reason to maintain the current arrangements.

How can we develop a perspective that will guide the selection of the changes required to transform the current economy so that it can be inherently sensitive, both environmentally and socially?

One useful technique is to work through the issues in a hypothetical context where all the factors that might need to be changed can be changed. Let´s imagine that a Mondragon-style multi-unit cooperative made up virtually the entire economy of a country (16). Like most other countries this one has suffered from increasing environmental damage and from growing unemployment. Eventually the Board of the cooperative organises a consultation to develop ideas for solving these problems.

It is recognised that the country and much of the global economy have long since passed the point where the modern economy "takes off". There is therefore no need to pump-prime the economy with cheap raw materials. At this point in the country´s development it is important to ensure the most efficient use of resources to stimulate technological development and to ensure that as large a stock of physical resources is passed on to future generations. It is therefore decided that, to create a built in "governor", the price of non-renewable resources will be increased in line with the growth of the economy using a regulatory tax. This will produce an increasingly large revenue stream that will have to be channelled back into the economy. Some of the money will be invested in measures to boost the responsiveness of the economy (elasticity) to resource price increases - so that the resource conserving impact of the resource tax is magnified.

Because unemployment has been rising due to the rapid introduction of new generations of labour saving technologies, competition from low wage countries and the net outflow of capital to invest in low-wage growth havens, it is decided to set employer-paid wages and dividends at the market clearing rate. Individual purchasing power is to be increased in line with the growth of the economy through the introduction of a social dividend. For convenience´s sake this dividend is to be funded by the resource taxes.

Modelling exercises suggest that:

This is the opposite pattern to that of the present real economy and yet the hypothetical economy has been shaped in accordance with highly rational design rules.

Does this hypothetical have any relevance to the current real economy, given that the real economy is not going to become one large cooperative? It does because the basic ideas developed for the hypothetical cooperative can be emulated in the real economy by introducing a resource tax and wage subsidy program.

THE PRODUCTIVITY POTENTIAL OF AN ECOLOGICALLY SUSTAINABLE ECONOMY

It used to be routinely assumed that if there was a reduction in the physical resources available to the economy there would have to be a fall in productivity. However, physical resources are not the only factors of production.

The factors of production in any advanced economy are:

If the total input of physical resources into the economy is to fall dramatically then overall productivity must be maintained by increasing the use of other factors of production. Given that recycled materials and renewable energy are generally more expensive than newly processed non-renewable resources, the main factors of production that must be relied on to maintain productivity are:All three of these factors are in fact the product of or are highly influenced by the information industry.

A strategic analysis shows that the move to a profoundly green economy could, far from bringing economic growth to an end, actually make it easier to continue high levels of quality driven economic growth for longer.

Measures to create an ecologically sustainable economy are likely to boost the growth of economic productivity by:

From this analysis it appears that there are strong grounds for thinking that the proposed measures for transforming the current consumer economy would not reduce the economy´s potential for productivity improvement.

ECONOMETRIC MODELLING SUGGEST WIN-WIN RESULTS

As environmental issues have increased in significance and controversy, interested parties have put more effort into modelling the possible economic effects of response measures. It has been widely assumed that strong environmental measures would reduce economic performance. Although the extent of the reduction has been expected to be reduced if economic rather than law-based instruments were favoured.

Although the results of modelling work varies enormously, with some simulations showing strongly negative results (26), a number of important new modelling exercises are strongly suggesting that, with the right packages of measures, the net economic effect of strong environmental programs may in fact be positive. The best packages seem to include significantly increased taxes on resources (eg. energy) and/or pollution (eg. greenhouse gases) with the revenue being recycled to reduce wage and other business costs. In the model runs, these packages of measures reduce resource wastage and environmental damage, increase employment and provide a modest but fairly immediate boost to GDP. Results of this sort have been reported for Europe and the US by Brinner et al. (1991), DRI et al. (1994) and Jacobs (1994). Similar results have been achieved by Common and Hamilton (1994) for Australia and by Bertram et al. (1993) for New Zealand.

Most of these model runs do not capture the effect of the complete range of productivity boosting influences discussed in the previous session. So with better specification of the models the results might turn out to be even better.

The econometric modelling studies quoted above, which show positive results, reinforce the view that win-win results, environmentally, socially and economically, can be obtained through transformed market conforming planning. In such a situation more companies will gain from the proposed shift in a green direction than will lose.

CONCLUSIONS

This paper puts forward the framework for an approach to the economy which challenges conventional wisdom in a number of areas. It recommends industry planning at a time when ideologies of the unconstrained market are at their height. It also suggests that ecological sustainability can be achieved without depressing the economy, at a time when the need for a trade-off between the economy and the environment is still a fundamental belief of most key decision-makers and most committed environmentalists.

However the paper attempts to integrate and make sense of much of the wisdom of both the business community, academia and the environmental community so that these interests can work together productively for a genuine win-win result.

The ideas in the paper need testing and challenging. They also need further development and elaboration. If the ideas stand up to this scrutiny they will then need to be put into effect.

REFERENCES

Anon. (1994). An introduction to The Avraham Y Goldratt Institute and the Theory of Constraints. The Avraham Y Goldratt Institute: New Haven.

Bertram, G., Stroombergen & Terry, S. (1993, Oct.). Energy and carbon taxes: Reform options and impacts. Simon Terry Associates/BERL: Wellington, NZ.

Brinner, R., Shelby, M., Yanchar, J. & Cristofaro, A. (1991). Optimising tax strategies to reduce greenhouse gases without curtailing growth. The Energy Journal, 12:4, pp. 1-14.

Cohen, S. & Zysman, J. (1987). Manufacturing matters. Basic Books: New York.

Common, M. and Hamilton, C. (1995). The economic consequences of carbon taxation in Australia. Presented to the Greenhouse 䚮 Conference, Wellington, NZ.

DRI et al. (1994). Potential benefits of integration of environmental and economic policies. Graham and Trotman and Office for Publications of the European Communities, Brussels.

Flavin, C. & Lenssen, N. (1995). Power surge: A guide to the coming energy revolution. Earthscan Publications: London.

Goldratt, E. (1994). It´s not luck. Gower: Aldershot, Hampshire.

Goldratt, E. (1989). The goal. Gower: Aldershot, Hampshire.

Jacobs, M. (1994). Green jobs? The employment implications of environmental policy. World Wide Fund for Nature, Brussels.

Johnson, C., D´Andrea Tyson, L. & Zysman, J. (1989). Politics and productivity: How Japan´s development strategy works. HarperBusiness: New York.

Komiya, R., Okuno, M. & Suzumura, K. (Eds) (1988). Industrial policy of Japan. Academic Press: Tokyo

Milner, H. (1989). Sweden: Social democracy in practice. Oxford University Press: Oxford.

Pasinetti, L. (1981). Structural change and economic growth: A theoretical essay on the dynamics of the wealth of nations. Cambridge University Press: Cambridge.

Sutton, P. (1996, Jan.). "Economic growth: A review from an environmental perspective". (Working Paper) Green Innovations: Melbourne.

Sutton, P. (1995b). "Ecological tax reform: A policy analysis of the Costanza, Daly, Hawken and Woodwell package." Presented at the Inaugural Conference of the Australian and New Zealand Society for Ecological Economics: Redefining resource management and environmental policy through ecological economics. Coffs Harbour, Australia.

Sutton, P. (1995a). "Scenario 2 - waste elimination: waste minimisation report - chapters 2, 11 & 15.". (Working Paper) Green Innovations: Melbourne.

Sutton, P. (1992). "Industrial and market restructuring: Key tools for a green strategic economics." Presented at the 2nd Biennial Conference of the International Society for Ecological Economics: Investing in natural capital. Stockholm.

World Bank (1993). The East Asian miracle: economic growth and public policy. Oxford University Press: New York.


FOOTNOTES:

1. The concept was first presented publicly at the second biennial conference of the International Society for Ecological Economics in Stockholm in August 1992 (Sutton, 1992)

2. Conventional indicators of economic "success" have been deliberately chosen; that is, full employment, high standard of living, high productivity growth and a strong competitive position internationally in the traded goods sector. Such a choice does not automatically lock in poor environmental or social outcomes. See Sutton (1996).

3. Cohen & Zysman (1987, p.241) have suggested a number of questions that might be asked when identifying economic sectors that should be promoted as part of a market conforming development strategy. It is based in part on the questions asked by the Japanese planning agency MITI. The questions were not designed with environmental and social objectives in mind, and modifications will almost certainly have to be made to take these issues into account. The Cohen & Zysman questions, as condensed by the author of this paper, are:

A. Is the economic sector of interest a growth sector? For example:

(i) Does the sector have substantial potential for exporting?

(ii) Are there long-term declining costs, either from the scale of the manufacturing plant or the marketing organisation, or learning curve economies so that, if volume of production grew, costs would fall?

(iii) Are there substantial price and income elasticities so that, as incomes in the domestic market grow, demand would steadily grow?

B. Will the sector help the economy gain competitive advantage? Does the sector have the potential to positively influence the product characteristics and production processes of other industries? (Is it a transformative sector?)

C. Will the sector help the economy avoid the loss of competitive advantage? Within the sector or in inter-related sectors will there be a loss of competitive advantage to other nations/regions if this sector is not developed (ie. established from scratch or technologically or organisationally upgraded)?

4. Incompetence in businesses where there are plenty of competitors is not catastrophic because the worst that can happen is that the badly run companies will fail and their places will be taken by others. Incompetence in government agencies or monopoly companies cannot be tolerated if there is nobody able to take their place.

5. It is not surprising that "planned market economies" perform better than either "centrally planned command economies" or "unplanned but regulated market economies". Successful planning allows economic synergy to be maximised because resources can be mobilised on a large scale, specialist skills can be coordinated and known problems can be systematically dealt with. But innovation, spontaneity and responsiveness are also vital. No plan can deal with the real world perfectly. Only a few years from the present, the future becomes substantially unknowable. Consequently society should not place all its eggs in one basket. New ideas need to be generated using non-orthodox techniques or even just random trial and error! That is why the anarchism of the free market is a necessary complement to the rationality of planning.

6. The objective of a market conforming economic management measure is to create a unit, company or industrial sector that can, in due course, stand on its own in the market place.

7. Economic planners need not be exclusively from the government sector. They may also work in private sector businesses and in private non-profit and community organisations.

8. Successful economies have requirements for: (a) innovation, (b) synergy and (c) stabilisation. The market contributes strongly to innovation, while planning contributes strongly to synergy and stabilisation. However, through special strategies the market could also contribute to synergy and stabilisation, and planning could contribute to innovation.

9. For example, regulations to ensure that greenhouse gas emissions are reduced will build a market geared to the needs of the 21st century, whereas a regulation to prevent energy utility prices rising faster than the consumer price index could, in some circumstances, cause utilities to become saddled with crippling debts.

10. The planning and regulation needed to suppress symptoms are likely to be very intrusive, extensive and costly.

11. The pattern of "natural" prices exhibited by each economy (Pasinetti, 1981) emerges because of the enduring institutional arrangements.

12. Adherence to the gold standard early in the century prevented devaluation being used easily as a means of compensating for inflation.

13. The solidarity wage structure both required and contributed to efficiency gains since the unavailability of low wages in the less productive sections of business meant that they tended to be pushed out of business, thus releasing labour and other resources to be employed in the more productive sections of the economy.

14. Sweden´s current difficulties caused by the declining competitiveness of some sectors of the Swedish economy does not undermine the claim that Sweden has, for a very long time, avoided the usual equity/efficiency trade-off. It is probable that the failure to promote a large and dynamic small business sector is a major cause of Sweden´s current malaise. The promotion of such a sector should be compatible with the maintenance of a variant of Sweden´s unique full employment system. However special attention would need to be given to the provision of low cost venture capital for small businesses, given the country´s low wage flexibility. In many other countries the economic viability of new ventures is underwritten by small businesses paying low wages.

15. Wages could be derived from dividends from the employing organisation or from a tax-funded social dividend.

16. Let´s assume that the cooperative has introduced internal competition between its business units and other measures to encourage innovation and the efficient use of the various factors of production.

17. Experience with ecodesign has shown that very close attention must be paid to the needs of the customer in order to create the design freedom to find win-win solutions. This close attention to the customer is likely to yield additional benefits unrelated to environmental issues thus boosting overall value adding or productivity.

18. When societies, economies and technologies become complex, most people focus on incremental improvements in the parts of the system. This leaves a vast reservoir of economic and environmental efficiency gains to be made by those who can handle complexity.

19. In a conserver economy tax/subsidy policies would ensure that the relative prices of physical resources rose strongly against labour costs. So in economic downturns, employers would be less inclined to turn to labour shedding as a way of reducing costs. Instead they would be inclined to save costs by using labour to reduce resource consumption.

20. The change in cost structure would arise because of Increased urban land taxation that would be part of a physical containment policy package and the increase of raw material costs relative to labour costs.

21. Through cleaner and leaner production - reducing virgin resource production, improving in-plant resource utilisation, reducing pollution processing costs, reducing public waste disposal costs.

22. Through increased use of just-in-time hiring rather than product ownership.

23. By improving public transport operating on its own right-of-way (eg. rail and sometimes buses and trams), by improving electronic communications where this substitutes for physical movements, and by reducing the use of roads thus making commercial movements faster where they do occur.

24. Through carefully designed higher density and by reducing resource requirements per person.

25. This is a paradoxical opportunity. Exports by the richer elements of poor countries to the rich countries, for example the US, is a tried and true method of kick starting economic development on a large scale with high growth rates in poor countries. However, such a strategy leaves countries very exposed to international trade cycles and to the correction of the unsustainable US trade deficit. Boosting wealth creation among large numbers of the resourceful poor can be a high growth, lower risk strategy in well managed poor countries. Exports to the rich countries would still be needed to pay for the investment capital under this scheme but the scale of exports would be smaller than strategies where income growth arose directly from export revenues.

26. For example, the Financial Review of 22/9/95 (p.6) quoted a major study by National Institute of Economic and Industry Research for the Electricity Supply Association of Australia as saying "it is not possible to achieve any proposed Government target without considerable cost to the Australian economy".

Back to Top