# MAXIMIZATION OF THE RELATIVE RESERVE (I.E. MAXIMIZATION OF THE PARETO PROBABILITY OF SURVIVAL IN A CPE)

One minor shortcoming of the absolute reserve maximization model is that the producer's utility depends solely on the absolute amount of the reserve and not on the volume of production. If a manager has to decide between two firms, he will be more attracted to the one which has the larger reserve-to-production ratio, because in real terms twice the reserve at four times the production volume means half the security against a tightening-up of the plan in terms of percentages, profitability directives[1] and so on. In our opinion, maximization of the relative reserve

as used in all other chapters of this book, is closer to what went on in reality from the early 1960s onwards.

We will stick with the assumptions used in the previous section. As in that section, it is evident that the production situation maximizing the relative reserve lies on the plot of the plan function.

The shape of the producer's utility isoquants is different from that in the previous section. This is illustrated for the single (aggregate) input case by Figure 37 (cf. Figure 34).

Figure 37: Isoquants of a homo se assecurans producer maximizing its relative reserve against the technological maximum

The producer's optimal production situation, illustrated in the following figure, is point , which is the point of contact of the (sole, under the assumptions made) utility isoquant that is tangential to the plan function g(x):

By comparison with the absolute reserve model, a homo se assecurans producer maximizing its relative reserve will tend to prefer production situations with lower output volumes:

Whereas the optimal production situation of an absolute reserve-maximizing producer is , where the derivative (the slope of the tangent) at point x* is the same for both and , the optimal production situation for a relative reserve-maximizing producer is , where the logarithmic derivative at point x** is the same for both functions:

The homo se assecurans model (be it with maximization of the absolute reserve or with maximization of the relative reserve) allows us to describe the situation where an economic agent prefers a production situation lying inside the production set. This situation was typical of central planned economies. Standard neoclassical microeconomics with its homo economicus paradigm cannot grasp and describe such producer preferences well enough.

The hypothesis of the unre for mability of communist-style central planning[2] was based on this model — even instruments that would create pressure for efficiency in a standard economic environment were ineffective or even counterproductive in the homo se assecurans environment.[3]

Figure 38: The optimal production situation for a producer maximizing its relative reserve against the plan

Figure 39: Comparison of a producer maximizing its absolute reserve (optimum E*) with a producer maximizing its relative reserve (optimum E**)

• [1] In the early days (the 1950s in Czechoslovakia) the centre was only interested in the volume of production and firms were stimulated to waste resources on a vast scale. Later on, the centre tried (without success) to reduce such waste.
• [2] This hypothesis was formulated and empirically and theoretically tested in Zieleniec, J. et al.: Česko-slovensko na rozcestí. Praha: Lidové noviny, 1990, which was based on an extensive research study of the same name conducted at the Economic Institute of the Czechoslovak Academy of Sciences in 1989.
• [3] For example, “accommodative planning”—part of the “systems of measures to enhance management by planning” introduced in the 1970s—had the opposite effect than intended. See Hlaváček, J.: Objektivi-zace informací v plánovacím dialogu—možnosti a meze. Praha: Academia, 1989, pp. 103–30.