# BEHAVIOUR OF A FIRM IN A CENTRALLY PLANNED ECONOMY- THE HOMO SE ASSECURANS MODEL

Western economic theory has dealt only marginally with centrally planned economies and has done so by essentially sticking to the standard homo economics paradigm. In our opinion, the views of "insiders" are more interesting and more useful.[1]

The homo se assecurans[2] model is a purely microeconomic view of the behaviour of producers in a centrally planned economy. Homo se assecurans is an agent maximizing its reserve within a set of production situations that are feasible both technically and according to the plan (i.e. that are both produce- able and tolerated by the centre). This is another special case of our general "survival probability maximization" criterion, one which, as we will demonstrate in this chapter, is necessarily anti-efficient in a centrally planned economy.

## SET OF FEASIBLE PRODUCTION SITUATIONS IN A CENTRALLY PLANNED ECONOMY

In contrast to standard microeconomics, the situation in the homo se assecurans model is assessed from two angles, using two utility functions. In addition to the utility of the firm (or its manager/management) the utility of the centre is relevant. The centre imposes its will by defining a plan. Besides the standard microeconomic set of technically feasible production situations the firm has to "fit" into the production plan set , where is the plan function,y is the volume of output produced andis a vector of inputs (xi is the volume of the i-th input used). Functiongives the inefficiency limit tolerated by the centre for each input vector. A company manager who fails to fulfil the plan risks losing his job. The set of feasible production situations is therefore the intersection of the sets

The plan function is one of the centre's isoquants, i.e. the lines connecting the individual producer's production situations[3] rated equally by the centre. As a utility isoquant, this function must be convex. It is therefore also continuous.

We also assume that the production function is strictly concave over its entire domain, i.e. the firm's output exhibits declining marginal product for all its inputs . Being strictly concave this function is continuous as well.

We will also assume that both functions and are differentiable. This is a normal assumption in standard microeconomics for both the production function and the utility isoquant.

We will also assume that the plan is implementable, i.e. the intersection of the set of technically feasible production situations T and the set of production situations feasible under the plan P is not empty. For the single-input case, the set of feasible production situations for a producer in a centrally planned economy is illustrated in Figure 33.

Figure 33: The set of feasible production situations of a homo se assecurans producer: intersection of the set of technically feasible production situations T and the set of production situations feasible under the plan P

This is a non-empty compact set. The optimum of any continuous function exists in such a set.

• [1] See, for example, Kornai, J.: Economics of Shortage. Amsterdam: North Holland, 1980, or Mlčoch, L.: Chování československého podnikového sektoru. VP No. 384. Praha: Ekonomický ústav ČSAV, 1990, or Brixiová, Z., Bulíř, A.: Output Performance Under Central Planning: A Model of Poor Incentives. Economic Systems 27, 1(2003): 27–39, or Hlaváček, J., Kysilka, P., Zieleniec, J.: Plánování a averze k měření. Politická ekonomie 36, 5(1988): 593–606.
• [2] Homo se assecurans = self-insuring man. See Hlaváček, J.: Homo se assecurans. Politická ekonomie 35, 6(1987): 633–39.
• [3] The plan can theoretically have the nature of a single directive (for example, a common lower limit on labour productivity or the profit-to-costs ratio for the whole system). In such case, however, the centre de facto does not attempt to influence—or does not care about—the structure of production in the sys-tem. In the opposite case, the centre is forced to issue a firm-specific production plan that takes account of the firm's capacity. This, however, is information which the centre obtains from the producer and which is necessarily subject to interest-based distortions. See Hlaváček, J.: K ekonomické subjektivitě plánovacího centra. Politická ekonomie 36, 4(1988): 1039–52.