Decision centralization and decentralization in a dynamic economic system (Q1104219)

This paper studies one of the most important problems of economics - the problem of centralization and decentralization of decisions on quantities and prices of products and capital. Considered is a dynamic economic system based on the Leontief input-output model with constant input, output and incremental capital output coefficients. The behaviour of the nonlinear dynamic system is investigated and it is shown that in a model with n sectors the following properties hold: a) any time-dependent solution of the system is periodic; b) the system is conservative and the cycle in Proposition a) is neither stable or unstable; c) it is structurably unstable. It follows that any small perturbation in the functional forms may result in a completely different behaviour. The problem of stability is also analyzed under specific assumptions made about the determination of prices and outputs: the prices are determined according to the Walrasian tatônnement procedure, while decisions on quantitative changes are assumed to be determined in a Marshallian tatônnement process. The problem thus formulated is primarily related to short run oscillations. The problem of homogeneous economic growth is analyzed from the point of view of the long run. This system can achieve an equilibrium in terms of a special aspect of long term welfare maximization. These basically decentralized reaction patterns are then confronted with a supplementary centralized policy making, based upon interest rate and growth rate controls for the economy seen as a macro entity. In this case it is proved that: a) with decentralized determination of prices and quantities according to the tatônnement process and b) with centralized determination of growth and interest rates according to an adaptive adjustment procedure, the periodic solutions in prices and outputs disappear and the system becomes stable. It follows that for this case there exists a long run stable solution which can converge towards the unique general equilibrium, and welfare maximizing problem. This implies that a linear dynamic input-output system can be stabilized by using a combination of decentralized decisions on prices and quantities and centralized determination of interest and growth rates according to an adjustment principle.