Asking The Right Question
by E. R. Alexander
Planning vs. markets is a fallacy, based on obsolete economics. Comparing their merits is the wrong question: in theory and reality it is impossible to separate them. Transaction cost theory shows the error of the link between planning and "public" that is behind the "planning/market" dichotomy: there is also planning in, for, and of markets. The right question is: What governance is appropriate, from hierarchical organization and its associated planning, through various forms of modified markets, to the rare "perfect" market that has no planning and needs none. Analysis of some Planning & Markets papers shows how this approach could improve them.
"Planning and Markets is devoted to the study of planned interventions versus market approaches."
If P&M's editorial policy were consistent with its name, it would deserve an unqualified welcome. But its juxtaposition of planning and markets is based on obsolete economics and does a disservice to its contributors and readers. "(P)lanned interventions versus market approaches" (1) implies that planning and markets are separate, opposed, and mutually exclusive. As I will show below, this is incorrect.
Perhaps this error would not be a problem, if it were not the framework for soliciting, reviewing and selecting papers for the journal, and structuring their authors' conceptual and analytic contributions. The journal's basic question: "comparing the merits of planned interventions and market solutions", means evaluating, in the context of a particular policy issue or problem, whether "planning" or "markets" are more effective.
But (except in extreme cases (2) ) "planning" and "markets" are not analytically or empirically distinguishable. The false dichotomy between them is based on a widely held association between planning and public intervention and governmental or state regulation and action, as opposed to private enterprise in the supposedly unplanned market. Institutional economics has modified the simplistic assumptions of classic economics to reveal the fallacy of this dichotomy: planning is not limited to the public sector, nor do markets exclude planning.
In equating planning with public intervention, P&M makes a common definitional error (3). In the sense in which it is commonly understood, planning is any activity involving making a plan: "to devise...design (some)thing to be constructed... something to be done or some action to be carried out; to scheme, project, arrange beforehand." (OED, 1971: II P-Z 941). A narrower definition of planning in its collective sense is more useful for us here, viewing planning as the deliberate social or organizational activity of developing and deciding upon strategies for future action (4).
There is planning in markets (5), e.g. corporate strategic planning, planning of markets, e.g. "artificial" markets, and planning for markets, e.g. policies and institutions like the SEC to regulate the New York Stock Exchange. There are also markets in the public sector: political markets (such as logrolling in legislatures), quasi-market arenas for economic exchanges, such as tradable emission rights and auctions of telecommunications transmission frequencies, and interagency resource exchanges as in Britain's National Health Service.
If planning and markets cannot be separated, it follows that comparing their effectiveness is asking the wrong question. A better question emerges, I suggest, when, rather than juxtaposing planning and markets, both are subsumed under the more overarching concept of governance. Then the question is no longer "to plan or not to plan", but: What is the most effective form (or mix of forms) of governance? Asking this question in the historical sense (i.e. in an ex post evaluation) we are undertaking institutional analysis; raising it in the context of addressing a policy issue or problem we are doing institutional design (Alexander, 1995: 51-52; Bolan, 2000; Salet, 2000: 16-21).
Below, I will suggest that an integrated transaction cost theory (TCT) derived from transaction cost economics, offers a useful approach and set of analytical tools to address this question. My argument begins with a summary presentation of TCT leading into a "Transaction Cost Theory of Planning" that shows the fallacy of juxtaposing "planning" and "markets". I illustrate the importance of asking the right question, demonstrating its institutional analysis and design potential with an application to governance of the land development and property market. Finally, a critical review of some sample P&M articles will suggest how they could be improved if they had only asked the right question.