Abstract
This paper highlights Masahiko Aoki’s theoretical quest in the 1970s. The subject he first chose was the design of processes to find the solution maximizing a given objective function of a large-scale economic organization. So long as the information on technologies is scattered among individual production units, the optimal solution must be approached through successive communication between the central planning board and these production units. In his first book (1971), the optimal planning theory is considered to be an analytical tool for the search of a more desirable social system than existing systems in terms of both efficiency and morality. However, in the second book (1978), this theory is applied to describe prototype models of adjustment mechanisms working in the actual capitalist system: one is “the quantity adjustment mechanism” in which parts of inputs are assigned to production units based on a comparison of their shadow prices and the other is “the dual adjustment mechanism” in which each production unit increases production in response to excess demand and raises price when it is lower than marginal cost. Aoki’s theory of the capitalist firm starts from the perception that the firm organization is an institutionalized form of the quantity adjustment mechanism. It is also accompanied by a theory of the market being an institutionalized form of the dual adjustment mechanism. The latter contends that successive corrections of short-term disequilibrium in product markets due to inevitable errors of demand forecasts by individual firms involve underemployment of durable capital goods and labor. Although these developments of Aoki’s view are less known than his game-theoretic comparative analysis of the firm organization in later works, they are worth receiving more attention as an ambitious challenge to construction of the general theory of the matured capitalist system.
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Notes
More precisely, before this book Aoki had already published a book titled Formation of the State Monopolistic Capitalism in Japan in 1960 (under the pseudonym Reiji Himeoka).
According to Hurwicz, “in a sense” Utopian socialists were “the first systems designers” in the realm of society. He thinks it “unfortunate” that Marx, Engels and their followers neglected the problem of resource allocation in the socialist system on the ground that the transition to this system is “historically inevitable” (Hurwicz1973: 3).
The equilibrium conditions which should be satisfied in the socialist economy were examined in the 1900s by Pareto (1971) and Barone (1935). Pareto clearly pointed out huge practical difficulties in the collection of information required for setting equations as well as in the computation of these equations.
Hurwicz justifies this assumption as “an introduction, at least, to the more complex problem raised by the presence of many individuals, each of whom judges the workings of the economic system in the light of his own utility function”. He notes that “the difficulties of the simpler situations do not disappear when goal conflicts are introduced” (Hurwicz 1973: 4).
Aoki criticizes the Turnpike growth model for the reason that it assumes that the planner can calculate the optimal path based on “centralized knowledge on the technological structure” (Aoki 1978: 244). Recent Ramsey-type models of optimal growth almost completely neglect the problem of how the planner computes the optimal solution. While planning processes analyzed by the optimal planning theory are imaginary processes that go on in logical time, the strong concern with the possibility to approach the optimal solution is undoubtedly one of the important merits of this theory.
Roughly speaking, the strong convexity of economic environment means: (1) an ‘average’ of two different bundles of final goods gives higher utility than each of them (decreasing marginal rates of substitution), and (2) for any two different feasible combinations of inputs and outputs, there exists another feasible combination which is more efficient than their ‘average’ (decreasing returns to scale) (Aoki 1978: 29–30).
Under assumptions which are more loyal to Lange’s original formulation, stability of the process depends on the property of aggregate excess demand functions (Aoki 1971a: 69).
On Aoki’s active participation in this movement, see his own recollection (Aoki 2008).
In 1962–64 Aoki joined into the seminar of Yoshiro Tamanoi held at the University of Tokyo. While Tamanoi was originally a Marxian economist, in the 1960s he had already moved to a position searching an intersection of Marxian and modern economics. Especially, he was concerned with the socialist calculation debate and the linear economic theory (see Tamanoi 1966). It is highly probable that discussion in Tamanoi’s seminar exerted some influence on Aoki’s choice of subject.
Another new field which Aoki thinks equally important is “the public economics which proposes collective actions intended to extend participatory democracy under existing economic systems” (Aoki 1971a: iv). The policy proposals made in the last section of Theory can be read as an attempt to taking a first step in this direction.
In Analysis Aoki pays attention to formation of new knowledge through the diffusion process of existing knowledge, and states that “Hayek finds the merit of the market mechanism in the possibility of the change of knowledge which the mathematical comparative economic theory has excluded from its sight” (Aoki 1978: 258).
In more detail, a planning process is defined by (1) the components of signals sent by the CPB to the production units, (2) the reaction rule to these signals imposed on production units, (3) the CPB’s revision rule of signals to the production units, (4) the way to start communication, and (5) the way to make the final decision after the termination of communication (Aoki 1971a: 78).
Admitting this independence in his model, Aoki points out that members of an organization might be paid by “mental satisfaction” or “a possibility of promotion” (Aoki 1971a: 105).
However, each production unit still has a motive to raise the prices of its outputs or lower the prices of its inputs by manipulating the report of its production plan (Aoki 1971a: 114).
On this model, see also Aoki (1971b). For sake of simplicity, we omit evaluation of terminal stocks and foreign currency included in Aoki’s original model.
Since “expected price” \(p_{i} + \dot{p}_{i}\) is equal to marginal utility \(u_{i}\), it implies that the CPB receives each firm’s marginal profitability calculated by marginal utilities. In other words, it is equivalent to an assumption that the CPB informs each production unit the marginal utilities and orders it to calculate its marginal profitability by them. Aoki admits that to regard marginal utilities as expected prices is “a mere possible institutional interpretation” (Aoki 1971a: 155).
Namely, “the CPB transfers the funds from projects with negative marginal profitabilities to those with positive marginal profitabilities” (Aoki 1971b: 277).
This point is described more explicitly in Aoki (1978: 37).
It is informationally the most efficient since the number of necessary signals is equal to the number of goods (prices of private goods and quantities of public goods). If the CPB sets prices of all external effects, it must distinguish them by (1) the production unit that causes a particular externality, (2) the public good through which this production unit affects other production units, and (3) the production unit that is affected by this externality.
As long as public goods are freely supplied, the problem of “free riders” does not occur. Inversely, production units may attempt to obtain more supplies of public goods by inflating their evaluation (Aoki 1971a: 206).
Aoki remarks that functions of the central government in this field are to be limited to mediation of conflicts among communities and intervention to communities adopting too egoistic policies (Aoki 1971a: 231).
In literature on the mechanism design this term denotes a mechanism in which some (not necessarily all) of goods are controlled by quantity signals. Note the difference from its usual meaning.
Aoki made this change of naming from the CPB to the controller in order that his argument might not be interpreted as a description of a planning system. He asks readers of Analysis to read Theory as “a study of mechanisms in the system of a single helmsman” (Aoki 1978: 257).
Here quantity adjustment means that the CPB uses quantity signals, or more concretely, makes assignments on inputs or outputs. Note that it does not exclude the possibility that a part of goods is controlled by the price adjustment mechanism.
The weights used in the calculation of the average are the quotas to each production unit. The conversion into evaluation by utility prices is done by multiplying each shadow price with the ratio of the profit of the corresponding production unit calculated by marginal utilities to the one calculated by prices (Aoki 1978, mathematical note: 34–36).
Under this assumption, the values derived through the conversion mentioned in the previous note are equal to the marginal revenues calculated by marginal utilities (Aoki 1978: 37–38).
The term ‘dual adjustment’ is used in Morishima (1977) to denote the mechanism in which prices of goods are adjusted in response to its excess demand, and supplies of goods are adjusted reacting to the excesses of their prices to production costs. Aoki’s dual adjustment mechanism corresponds to what Morishima calls “the Keynesian adjustment rule”.
The following explanation includes some simplification of Aoki’s original model.
It is easy to extend this model to the case of multiple primary factors. As far as short-term adjustment is concerned, capital goods can be also regarded as primary factors (Aoki 1978: 264).
If the technologies are assumed to be linear, equilibrium prices of each product are equal to their respective production costs (including labor costs). It is easy to extend this model to the case that a certain mark-up is added to production costs. In the third part of Analysis, Aoki examines mark-up pricing by the firm in connection with its policies of investment, employment, and inner-firm distribution.
It should be noted, however, that the condition for (local) stability becomes more restrictive if time is assumed to be discrete. In that case, stability will depend also on the coefficient of adaptive expectation.
As to the long-term growth path of the capitalist economy, Aoki argues that it can be stable only when long-term predictions of individual firms are roughly made common among them through a certain process (Aoki 1978: 249). Coordination of expectations among individual agents continued to be one of central points in Aoki’s theory until his later years. See Aoki (2001).
Interestingly, in late 1970s also Morishima turned from a Walrasian to a radical Keynesian and made an attempt to reconstruct Walras’ model into a model in which quantities are adjusted by quantity signals and investment is determined independently from saving. See Morhishima (1977).
This understanding on the role of unused capacities and unemployment is close to Kornai’s view (Kornai 1971).
Aoki admits this point and makes a provision that his model is “constructed as a subjective model used by firms in formation of their expectations, or a kind of tâtonnement process obtained by reflecting the adjustment process in historical time onto the one in abstract logical time” (Aoki 1978: 264).
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This study was partly supported by JSPS Kakenhi no. 15K03386.
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Morioka, M. From the optimal planning theory to the theory of the firm and the market: a quest in Masahiko Aoki’s early works. Evolut Inst Econ Rev 15, 267–288 (2018). https://doi.org/10.1007/s40844-018-0095-8
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DOI: https://doi.org/10.1007/s40844-018-0095-8
Keywords
- Information efficiency
- Tâtonnement process
- Non-convex economic environment
- Price adjustment mechanism
- Quantity adjustment mechanism
- Durable capital goods
- Commonly used goods
- Underemployment of capital goods and labor
- Keynesian short-term equilibrium