interview
Jagdish Bhagwati on The Errors and Fallacies of Theoretical Planning
2018
Summary
Jagdish Bhagwati critiques the theory of planning, which evolved toward ever more sophisticated maximisation of a welfare function over long time horizons but produced targets with no relationship to the real world. He illustrates the gap with an anecdote about Nobel laureate Ragnar Frisch, who worked as a planner and needed a country's intertemporal objective function, the trade-offs between income now and later, and income against employment, to proceed. Taken by Bhagwati's boss Pitambar Pant to meet Nehru, Frisch repeatedly pressed the Prime Minister on how much income he would sacrifice for later income or employment, until an exasperated Nehru dismissed him and told Pant never to bring the man back.
Bhagwati then explains the flawed reasoning behind interventionist planning: the belief that a country starting late must accelerate growth through government intervention, and the counterintuitive but mistaken conviction that scarce resources cannot be left to the market. He notes how the drive to waste nothing led to short-sighted policies, such as airlines run with no spare planes, so that a single failure could paralyse the whole system.
Key points
- Theoretical planning grew more mathematically sophisticated while generating targets divorced from the real world.
- Planners needed a national objective function specifying trade-offs between income over time and between income and employment.
- Ragnar Frisch could not proceed in India without eliciting such an objective function from the government.
- Pitambar Pant took Frisch to meet Nehru, who grew exasperated by his questions and dismissed him.
- A common fallacy held that a country starting late must accelerate growth through government intervention.
- Planners wrongly assumed that scarce resources could not be entrusted to the market.
- The drive to avoid all waste produced brittle systems, such as airlines run without spare planes.
Transcript
Jagdish Bhagwati on The Errors and Fallacies of Theoretical Planning
Source: https://www.youtube.com/watch?v=F3m_kH6CM0I Duration: 232.4s
Speaker 1 (00:00): The theory of planning is you evolve in two different directions. One, people assuming that you can really plan efficiently and making it more and more sophisticated, taking the welfare function into account over
Speaker 2 (00:24): protracted periods and so on, and then maximizing a welfare function. Then you
Speaker 1 (00:29): get a whole bunch of targets but that has no relationship with the real world. And there’s a funny story about how among many people who came through was one of the first Nobel laureates Professor Ragnar Frisch. He was a planner in Iran. So he would take what we call in economics an objective function,
Speaker 2 (00:47): meaning how much employment to be traded off against how much income, how much income against something else and then over time how much income now versus how
Speaker 1 (00:59): much income late in period two, then because how much income in period three. So that’s called intertemporal, overtime welfare. So he couldn’t plan without that. He had to get from somewhere India’s objective function laid out in these different diamonds.
Speaker 2 (01:17): Then he would maximize it given the resources. So the funny story was that he didn’t know how to proceed in India, or anywhere for that
Speaker 1 (01:27): matter. How do you get an objective function for a country or a government? And so when he went, he went with my boss, Kitamba Pant, who was a great planner, a very interesting man. And he took Frisch to Prime Minister Nehru. So, you know, Professor Frisch over here is his chance to find out the country’s objective function. So he kept asking Prime Minister Nehru, you know, how much income would you sacrifice? now for more income later how much of that would you sacrifice for how much employment and so on. So he kept bothering you know Prime Minister Nero about these trade-offs you see. Then Nero got fed up and said goodbye. Then he called Pitamba Pantina and said never bring that man back to me again. But that was theoretical planning you see. So in theory, if you had all this information and you knew how many resources, which itself is subject to how you organize your economy.
Speaker 2 (02:39): Many of us, you know, fell victim to the idea that if you’re behind the curve, you’re starting late, then you have to accelerate the system. But to accelerate the system meant the government had to intervene and make it move faster. So maybe the car could go into first gear, but to make it go into second gear, the government also had to assist and so on. So that was one kind of thing.
Speaker 1 (03:10): And two, when your resources are scarce, it is counterintuitive to think that you can leave it to the market.
Speaker 2 (03:18): then you feel you’ve got to make sure nothing is wasted and so on and so forth. Like, everything was run, all the airlines were run on a tight ship.
Speaker 1 (03:28): There were no spare planes. If something went wrong, the whole system was… So that is a very short-sighted policy. But you say, ah, one spare plane? That is a waste of, you know, resources. So the ideas were wrong in terms of how you look at the consequences of scarcity.
Speaker (03:48): The Dienst Dienst
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