Growth Cycles in Centrally Planned Economies: An Empirical Test

For some time Marxist economists believed that central planning as applied in the Soviet-type economies could prevent cyclical fluctuation. This view, however changed, when in 1960’s it became quite obvious, that some type of cycle is generated in centrally planned economies as well. Because the mechanism of functioning is different than in market economies, the existing theories of business cycle do not apply. This paper provides empirical tests of the recently developed theories of socialist “growth cycles” or “quasi-cycles”, using data for Czechoslovakia. Two theories of “investment cycles” were tested. The first one, formulated by Oskar Lange was based on the idea that the large amount of investment concentrated in the short time period—as happened during the industrialization in the Soviet Union and Eastern Europe—would have an “reinvestment echo effect” when the obsolete physical capital needs to be replaced. The evidence from Czechoslovakia very clearly demonstrates, that although the need for increased reinvestments may have contributed, it could not have been the main cause of the recessions in economic growth in early 50’ and 60’s. The second theory formulated by Josef Goldman blames the cyclical fluctuations on the very long gestation period between planners’ decisions to invest and the introduction of the newly constructed capital into production. The empirical evidence shows that the average time lag in the investment process is much shorter than ten years that would be needed for this theory to be valid. Finally, a new theory is formulated and empirically tested. It attributes the cycles to a peculiar behavior of the planners, who plan the future growth rates of the economy on the basis of their observation of the actual growth rates in the past.