Capital Finance and Relevant Economic Calculations in a Planned Economy

Capital investment, a matter of vital importance in the planned economy, suffered for years from serious defects due, among other things, to disregard of economic calculation and of the rate of interest as the price of capital. In practice, this meant that virtually all investment was financed by non-repayable interest-free allocations from the state budget. In these circumstances enormous claims were made on the investment fund by enterprises, industrial concerns, ministries and other investors. The demand for free investment funds was, in principle, in excess of the country ’s accumulation potential, and in excess also of capacity of production and construction enterprises. Interventions by the Government and repeated adjustments of the plan were equally unable to check the proliferation of investment projects in the absence of any self-regulating factor in the investment process. The result was a dispersion of resources; the simultaneous construction of an unduly large number of factories meant that each one of them took too long to build, and this tied up enormous capital funds.