ABSTRACT
The difference between the performance of North and South Korea underlines a basic question in economics: how should nations coordinate economic activity. Markets and hierarchies are two fundamental institutions that coordinate this activity. This chapter examines the theory of coordination, which provides answers to the question of markets versus hierarchies as fundamental methods of coordination. Central planning played a crucial role in the Indian economy in the first decades after the country achieved independence from England in 1947, just as it did for Algeria after its war of independence against France and in many other developing countries such as Vietnam or Cuba. Oskar Lange maintained that a planning problem could be represented as a mathematical problem of optimization under constraints, where the constraints represent the scarcities of resources available for an economy. The consequence of the managerial incentives in the centrally planned economy was shortage a situation in which demand exceeds supply.
