The financial crisis and global recession have made many commentators ask, "Are the prevailing business models bust?" Twenty years after the fall of Communism in Europe, has the last nail been put in the coffin of the market as the organising principle of civil society?

In a recent edition of The Bottom Line, executives of three companies reflected on how to plan for the long term in the face of the recession and the possible upturn. Simultaneously, a number of influential bodies, including the Engineering Employers Federation (EEF), are calling for the establishment of a national investment bank. Is planning back in fashion and will we see Indicative Planning regain favour? Furthermore, are there lessons to be learned from GOSPLAN, the Soviet Union’s economic planning committee?

Is planning back in fashion?

The recent dominance of financialisation, with its accompanying short-termism and reification of shareholder value, is deemed to be fundamental to our present difficulties. Not all sectors of the economy can plan for the longer term. Mining; oil and gas exploration and refining; engineering and industrial and commercial construction; project management and so on are subject to indivisibilities and long lead times, so planning in a technical sense is a must. The challenge is whether planning can be scaled up to the aggregate level of the economy in order to provide the critical mass on which business models can be built and sustained.

Herbert Hoover during his time at the US Department Of Commerce.
[image in the public domain, owned by US Department of  Commerce, accessed from  Wikimedia Commons]

Indicative planning involves co-ordinating the private and public sector’s investment and output plans, on the basis of forecasts and targets. It is most strongly associated with the development of the French economy in the post-War era, but its lineage can be traced back to the influence of Herbert Hoover in 1920, when he was US Secretary of Commerce. Today, one can see versions of indicative planning (in the form of sectoral targets) in the emerging economies, influenced perhaps by the organisational underpinnings of a number of advanced Asian economies.

In some senses, these later versions of indicative planning are voluntary versions of GOSPLAN, whose targets and plans were implemented using input-output analysis. Input-output models were invented by the Nobel Prize winning economist Wassily Leontief. They link the outputs of different industries in the economic system to show how change in one part affects all other parts. Perhaps, if the leading economies of the world had embraced indicative planning using similar analysis and decision-matrix techniques, some of the worst aspects of the economic and financial crisis may have been avoided.

This matrix approach is at the heart of Scenario Planning, which was developed by Herman Kahn to model the likelihood of thermonuclear war. It can also be seen as part of Indicative Planning and related to input-output analysis. It was versioned for large industries and organisations to undertake long-term flexible planning, based on a range of plausible scenarios.

...hoping for a return to normal based on "business as usual" appears to be very short-sighted, even for sectors whose market horizons are quarterly or seasonal.

It could be argued that the credit crunch and global recession are akin to a thermonuclear shock to the world economy. In this scenario, hoping for a return to normal based on "business as usual" appears to be very short-sighted, even for sectors whose market horizons are quarterly or seasonal. This response is about survival rather than sustainability. The cost of this survival is borne by the whole economy. There may be a revival of faith in induction (generalising from an individual perspective to make sense of the whole) but, in a complex system, one organism doesn’t account for everything.

John Maynard Keynes.
[image in the public domain, owned by the IMF, accessed from  Wikimedia Commons]

For the guests appearing on The Bottom Line, with their businesses in large-scale project management (trucks; and plumbing and piping), discussing the long-term did not engage with the epigram of the economist John Maynard Keynes from his masterly Tract on Monetary Reform of 1923: “In the long run we are all dead”. The full quote gives Keynes’s intention to show that the current state of affairs is no guide to the future

“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again”.

The insights of great economists notwithstanding, if businesses don’t attempt to plan and we have an economic system that appears indifferent to the future, then we all will have shorter life spans.

Find out more

These Open University Business School courses will help make your planning sharper:

Engineering the future
Making sense of strategy
Capacities for managing development

Image of John Maynard Keynes [© Wikimedia Commons]

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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Evan Davis gets to the heart of the big finance stories at The Bottom Line.

Prices for many everyday goods such as clothing and groceries have dropped radically, in real terms, over the past 20 years. Globalisation and more open trade have led to efficient commodity and product sourcing. The effect of this has been multiplied by improved logistics and comparatively cheap fuel for moving ships and goods around the world and within countries.

The proportion of unskilled jobs has dropped in Europe and the number of 'knowledge workers' with higher salaries has increased. New hotels and flights to foreign destinations have opened up to supply the demand as people find themselves having to pay less for the basic necessities and more for leisure. But what was once a satisfying situation of supply and demand for businesses has now become a problem of over-supply and falling consumer discretionary spending.

In this world of over-supply and rising unemployment, it is not surprising that prices should drop. The theory of price elasticity teaches that by lowering your price you will make more sales. However there is a limit to what the market can absorb. The idea of competitive advantage contains within it the idea that any price advantage one business holds over another will eventually be whittled down to zero by competition and some businesses will then cannibalise their capital base to stay in business. Customers realise that many retailers, airlines and hotel companies have their backs to the wall and they want the feeling that they are getting a fair deal.

Until the middle of the 19th century in France and the advent of the department store, as described by Zola in his novel Au Bonheur des Dames, prices weren’t displayed. The norm was to bargain for everything you bought, as in the markets of many developing countries today. In the UK, it was the Quakers who introduced the idea of the fixed price as part of their rule to ensure honesty and fairness in business dealings.

"there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase"

Consumers in Western Europe and in the United States, by challenging the 'normal price' are reverting to type and doing what most other parts of the world have always done. David Roche, the President of Hotels.com said on the programme that there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase. That percentage used to be 20 per cent and it is now above 50 per cent.

So, how should businesses react to this situation, in which there is no such a thing as “the normal price” but more than half the market wants an obvious fair deal?

In some areas of purchase, prices remain fairly constant. Nobody would accept to pay £5 for a box of 100 teabags one day, and £15 for the same teabags the next day, or even £15 one day and £5 the next. They would feel that they were being diddled. Yet we accept the fact that if we buy an economy class airline ticket for Spain four months before a trip we will probably pay £50 and if we wait right up until the last minute we will pay £250 or more. The way in which airlines and hotel companies have introduced revenue management and yield management has accustomed customers to the fact that prices will vary according to the time of year they make the purchase or the date of their holiday.

But other industries cannot use yield management. They have to lower their prices but avoid the perception that they are 'conning' their clients.

Expensive restaurants will do everything to maintain the usual price in a downturn, but the restaurateur will probably offer you a free bottle of wine to go with your meal. If he maintains his prices and doesn’t throw in an obvious gesture of good will, you will feel that he is not giving you a fair deal in a time of recession. This does not apply to places where there is a lot of pass-through traffic and no attempt to keep your loyalty. On a recent trip to Budapest, I saw that many restaurants in the tourist areas were displaying price cuts of 30-40 per cent in their windows.

With regard to the luxury goods industry, even in a downturn everything is done to maintain the price, the perceived integrity of the vendor and the value of the brand. If one customer remembers proudly paying £15,000 for a watch two years ago and meets a friend who paid only £5,000 for the same watch last week, he will feel cheated and vent his wrath on the seller of the item or on his own foolishness, never to visit that shop again. The well-known luxury goods providers will do anything to avoid a drop in price and accept a decrease in sales for quite a long period in the effort to maintain their reputation and the promise of their brand.

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• Watch Evan Davis on market prices
• Watch Evan Davis on market power
• Sharpen your management skills with The Open University Business School

About the author

John Gaynard is a management consultant and associate lecturer with The Open University Business School. He is based in France and tutors on the Creativity, Innovation and Change course in Brussels. He also does some teaching on the Master's programme at the ESIEE School of Engineers in Paris.

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One theme explored by Michael Sandel in his recent Reith Lectures is the link between morality and markets. But – given current concerns about the rampant excesses of various money-makers, city traders and financial speculators – one might be forgiven for thinking that no such link exists. Capitalists have created an advanced market system that over-rides moral concerns in the interest of profit – end of story. Yet if we look closer we can see that even markets need morals.

One argument developed by the American economist William J Booth, and more recently developed by UK social scientists Russell Keat and Andrew Sayer, is that economies are intrinsically moral, in so far as they are reliant on norms, values and ethical presumptions for their effective exercise. How might we demonstrate this?

Markets are socially embedded
[image of Leadenhall Market, London © 2008 Jupiterimages Corporation]

Firstly, (as I discussed in my posting on Karl Polanyi) economies can be judged moral because they are socially embedded within non-economic institutions (for example the state, but also institutions of family, religious, voluntary, charitable or communitarian origin) that help set norms and ethical frameworks for acceptable economic conduct. Despite coming under ideological attack from market-liberals, these institutions remain important for checking capitalist tendencies for unfettered accumulation of profit.

Secondly, because people are socially embedded, moral beings (and not just ‘rational’ economic actors), moral presumptions and conventions external to economic rationality are always heavily implicated in everyday patterns of economic exchange. These moral presumptions and conventions would include such motivations as love and care for others, respect, fairness and justice). So people must continually strike a balance between ethical and economic imperatives when transacting. In practice this means that most of us wouldn’t choose to sell our own mother!

Thirdly, economic institutions themselves operate according to intrinsic moral norms and conventions (even if this often appears hard to spot); for example in capitalism there are ethical standards that affect the application of property rights, reward systems, distributions of rights and responsibilities, as well as norms and values shaping the way we treat other people in economic situations (the exercise of ‘professionalism’, ‘business ethics’ and so on) – and these are not merely contractual in origin but involve ethical judgment. For economies to function there has to be moral framework for economic action.

What should properly concern us is not the absence of morality but the particular quality of morality...

However this is not to say that because the economy is ‘moral’ that it is intrinsically ‘good’. The persistence of greed, fraud, corruption and other economic crimes and misdemeanours indicate that this is not the case. But, equally to assume that economies are devoid of ethical substance is to misunderstand their character. To paraphrase Russell Keat what we should recognise is that "all economies are moral but some are nicer than others." What should properly concern us is not the absence of morality but the particular quality of morality inherent to different kinds of economic system. Providing we accept that any kind of economy is shaped by the norms of the community of which it is a part, then the political issue becomes not whether an economy is moral per se, but whether or not the particular moral principles of an economic system are compatible with (say) our own understanding of equality and our requirements for social justice.

Why is this important? By recognizing the moral basis to economic life we retain the theoretical ammunition we need to conceive of alternative economic futures – for if economies always have some kind of moral principles (derived from being socially embedded), this means they are amenable to transformation from within the social contexts that created them. This helps counter the market-liberal myth that certain ‘self-governing’ economic processes (e.g. ‘free hand of the market’) lay beyond social determination, but also checks ‘market fatalism’ – the belief we are powerless to transform capitalist economic institutions and practices.

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• Interested in listening to Sandel's Reith Lecture on markets? Get the 'Markets & Morals' podcast
• More from Open2 on the Reith Lectures 2009
• What do you think? Join the the Reith Lectures debate

About the author

Mark Banks is Reader in Sociology at the Open University. His research interests include the cultural and creative industries, popular culture, cities and urban space.

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