THE ROLE OF PRICES IN A SOCIALIST ECONOMY
in M. C. KASER(ed.): ECONOMIC DEVELOPMENT FOR EASTERN EUROPE
Proceedings of a Conference held by the International Economic Association
1. THE PLACE OF PRICING THEORY
UNTIL recently pricing was considered a secondary problem in a socialist economy. This was the result both of practices which had become established in the past, and of a set of generally-accepted theoretical postulates. Very little attention was paid to the theory of prices, the deficiency of which profoundly marked recent economic practice. This neglect of pricing was justified by the assumption that the central problem of the socialist economy was the assurance of planned proportions derived primarily from material balances and their disaggregation as directives for production enjoined upon individual plants. The role of prices was hence no more than as a subsidiary form of cost accounting; to make it independent and related to the market was in fact considered irreconcilable with the system of planning and central management.
The retention of prices and of Marx’s category of commodity production was ascribed to the remnants of obsolete economic relations, which, however, were doomed as a result of a further development of the economy. This opinion held that socialism left a product exchanged within the state sector with no more than a formal character as a commodity, because the role of the market had been replaced by the central management. A slightly larger role was attributed to the prices of articles sold to households and to and by cooperatives, but, even in this respect, the function of price was to redistribute national income in accordance with planned living standards; it was not envisaged that a price mechanism would provide for a direct feedback between the producer and the consumer.
More recent opinions, however, have favored some rehabilitation of the classical concept of price, and a more intensive employment of the automatically-operating market within the mechanism of a socialist economy. These new ideas arose after economists in the countries concerned had overcome a limited and one-sided interpretation of Marxist theory, and in response to a number of practical problems in socialist planning. The change of view was to a great extent brought about by the rapid infiltration of mathematics into Marxist economics during the past five years, and by the realization that cybernetics could be applied to the processes of economic management.
It followed that price problems were basic to socialism and could not be brushed aside as secondary. Price theory, formerly devoted primarily to price calculation in individual branches, became inseparably linked with problems of planning, above all in formulating optimization criteria for output and for the use of scarce resources; it had, furthermore, to the integrated with management techniques, economic information incentives, conflict of interest, distribution and redistribution of the national income etc. The old forms of organization were criticized not only for failing to make a positive use of prices throughout the economy, but even for suppressing their role. Today, by contrast, the socialist countries have at their disposal a substantial theoretical literature on prices and their function in the economic mechanism(1) and gradually, changes are being introduced in practical price policy. The theoretical views which have emerged are by no means uniform and the future use of prices could considerably differ from country to country. This diversity precludes in the present study an analysis of the current price system in all socialist countries and of the criticism to which it has been subjected over recent (and in Yugoslavia many) years. This report hence attempts no more than a sketch of the existing price system, and its shortcomings, a brief review of new theoretical work, and, in conclusion, a personal interpretation of Czechoslovak experience and discussions on the scope for associating the price mechanism with planned management. The constraint of space requires the omission of a detailed history of the price system by country, but an essay is made to identify their common features. All exhibit the same socialist economic relations, under which state ownership prevails in industry and cooperative ownership in agriculture, engendering four types of transaction, with corresponding forms of price:
This characterization oversimplifies: a more precise classification would distinguish cooperative enterprises in industry, state enterprises in agriculture, and numerous other exceptions,- and would discuss the problem of traders margins. But it is hoped that the present approximation will serve.
2. PRICE FORMATION IN THE ESTABLISHED SYSTEM
Pricing policy in the socialist countries has hitherto been characteristic in five major respects: prices have been centrally fixed, have been constant for long periods, have been formed into two sets, wholesale and retail, with the latter subject to systematic reduction, and a special regime has operated for agricultural prices.
In common with all other economic phenomena, prices have been centrally managed under socialism. If we may distinguish between central determination and central control, we may characterize the majority of prices as directly determined by a central agency, while others-farm produce sold by cooperatives or certain local goods -are determined by district bodies. The term central control, which implies absence of such direct instruction, is discussed below.
A second feature of price policy has been stability; prices once determined are not changed for a long time, the main exception being farm prices on the cooperative market which vary with market conditions. Stability means that price neither reflects the current relation between demand and supply, nor --save at long intervals and at the discretion of central agencies-- responds to a change in costs. The original practice, no longer followed, was annually to reduce selected retail prices and once every five years generally to adjust wholesale prices. This characteristic is not inseparable from the principle of central management, although, in the past, they were thought of as related and presented as the contrast to flexible market prices, considered to be a symptom of competitive anarchy. It is of course perfectly feasible for prices to be both centrally regulated and flexible, or market-determined and stable.
The central agency can adjust prices according to the conditions of supply and demand without infringing, in our opinion, the principle of planning; indeed, planning can be inconsistent with stable prices. Some countries (e.g. Poland) have already rejected strict stability of prices and frequently adjust prices in accordance with market conditions; during 1963 certain steps were taken in this direction in Czechoslovakia, although prices continue to remain stable for the majority of consumers' goods. Price stability is undoubtedly desirable, but only if it does not cloak a violation of economic equilibrium. As long as the economic system is kept in equilibrium, by means of planning and central management, prices can be stabilized without resort to directive fixing.
The price system here described is formed at two levels. Retail prices are determined so as to clear the market of planned household expenditure, itself dependent on the volume of income; this procedure does not require that the price of any individual product correspond to Marxian value, although the average of all assures equality with c + v + m. The level of wholesale prices, on the other hand, does not include the entirety of surplus value (m), and, in practice, wholesale prices are computed by adding a very small profit (three per cent would be a usual rate) to the costs of production; wholesale prices for a number of producers' goods have been fixed even below production cost, requiring state subsidies.
With some exceptions, retail prices are used only for final products sold to consumers, while almost all intermediate products are transferred at wholesale prices, this gap being bridged by the turnover tax. Historically, the turnover tax evolved from an indirect tax of the kind its name implies, but it has now lost all connection with a fixed impost per unit of turnover; on the contrary, it is a differential tax, the amount of which is determined as a difference between the calculated wholesale price and retail price. The rates of turnover tax differ widely from item to item even within a single commodity group: rates range from a few per cent to thirty, fifty per cent and more. Because the state owns the taxable enterprises, there seems to be little difference between profit and tax, since all accrue to the state, which represents society, and economists in these countries used to declare that there was hence no element of taxation in the turnover tax, but merely an alternative channel to the appropriation of profit by the state. Such an approach could be justified only from the point of view of the ownership, not of the functioning, of the economic system.
A fourth rule, less absolute than the three just listed and inoperative since about 1960, was that the only possible movement of retail prices was downward. The extreme theoretical formulation of this policy excluded the possibility of raising prices even in exceptional cases. On a given day of the year, a massive reduction of retail prices of selected goods was decreed. Since about 1960 price adjustments have taken place in both directions throughout the socialist countries: while the practice of synchronized bulk actions has weakened, its principle is woven into the logic of that form of price policy.
The final element in pricing practice common to the countries concerned, farm prices, evolved through two stages. During the first period low procurement prices (in some cases even less than the cost of production) were applied to obligatory deliveries to the state by cooperative farms, and state purchase prices - higher, but generally failing to represent the whole Marxian surplus product -were accorded to supplementary deliveries, although cooperatives, after having fulfilled their compulsory deliveries, were allowed to sell some produce at free prices on the cooperative market.
The state procurement prices used to be considered as a tool by means of which part of the surplus product created in agriculture was withdrawn into the centralized funds; part was returned to agriculture in the form of government subsidies, loans, etc. During a second period, this system of dual prices was abolished and all deliveries to the state by the cooperatives were paid for at uniform prices, the level of which ranged somewhere between each of the former prices. Transfers were maintained of a certain part of surplus product to the state, by means of lower prices, with direct taxation playing a considerably less significant role. Problems of differentiating prices according to production conditions may be mentioned, but are not here discussed.
3. THEORETICAL AND HISTORICAL ORIGINS OF THE PRICE SYSTEM
In turning to the theoretical aspects and to the historical circumstances which helped to create this price system, it may be observed that, while there always existed some relationship between the practical organization of the price system and its underpinning theory, the situation resulted, in some cases, from a set of a priori theories, and, in others, from certain historical conditions which endowed the practice with a concrete form before it was interpreted in theory. There is perhaps no need to stress that the theoretical conclusions criticized in this connection are to be considered as a product of a dogmatic misrepresentation of Marxism in the past and not of Marxism as such.
The incompatibility of planned development based on central management with the automatic functioning of a market mechanism was part of a theory, particularly prevalent during the cult of Stalin, that socialist economic relations were a simple negation of the corresponding feature of capitalism. The so-called 'law of planned proportionate development' was supposed to be valid under socialism, and a similar 'law of competition and anarchy in production' precluded planning and proportionate development under capitalism. An automatic (spontaneous) functioning of the market was considered a source of anarchy, and the existence of commodities and prices was regarded as nothing but a temporary phenomenon, which would be liquidated during the transition towards communism. Under socialism prices had merely an accounting function and could affect decisions' only on consumption and never on production. Such views looked to an ideal economic organization which rested on central balancing of production in kind (including labour in numbers of hours worked), and a direct and centrally-organized distribution of consumers' goods without recourse to a market.
As just described, the idea of planning was erroneously presented as inseparable from the administrative determination of targets and of prices. In fact, there was no planning of prices, for they remained constant until glaringly proved incompatible with evolving economic conditions; sets of such prices were more random in their relative values than those formed on the market, for they were a compound of errors in computations, false appraisals of the situation, and lack of information and subjective criteria on the part of decision-makers. It seems entirely justified therefore to use 'central determination' rather than 'planning' of prices. It may be noted that such determination was in line with the view, then common, that the utmost centralization was to be imposed on decision-making in subordinate units, as the only way to coordinate development towards ends most beneficial to society. It was also thought that an increase in any retail price would negate the aim of raising the level of living under socialism; retail prices were regarded solely in the framework of the cost of living.
Indeed, a systematic deflation was seen as essential, because the Marxist labour theory of value implied that, during economic growth, a rise in labour productivity reduced the value of commodities: obviously, the reduction of the labour value of a commodity is inconsistent neither with stable prices nor with inflation. The same sort of over-simplification - in this case on the role of ownership in economic relations - made the planners indifferent on whether surplus product be realized on intermediate or on final products. It accrued to the state at either level and ease of administration favored a levy on final goods. With all this went an unreasoning repudiation of anything evolved by bourgeois economic theories such as market equilibrium, the theory of consumer's behaviour and the concepts of marginal utility and of the elasticity of demand. The incomprehensible rejection of mathematical methods, which, as can be seen today, are eminently applicable to pricing, had the same unfortunate results.
False theorizing was not the only factor in creating that price system: certain historical circumstances engendered other features of pricing, which were theoretically supported ex post and sometimes incompetently generalized and transferred to other countries.
The fact that in the U.S.S.R. and the other socialist countries the economic system had arisen in conditions of wartime disruption induced readier acceptance of rationing at centrally-fixed prices. But, as consumer-good shortages were overcome, the gap between the actual and the appropriate price relationships widened, and a sudden unfreezing of prices would have caused substantial movements of prices and shifts in demand and consequential planning difficulties. The gradual development of supplies thus induced specific features, which were originally unintended. The dual price level was established in similar fashion. Pressure on wages could not be successfully resisted and raised purchasing power above the value of consumer-good availabilities, and the planners' concern was hence concentrated on turnover-tax revenue to absorb the widening margin between wholesale and retail prices. This attention was given added stress by the necessity to centralize accumulation for industrialization, with agriculture participating through the system of state procurement prices. The policy was defined long before the war as 'primitive socialist accumulation'.
An excessive centralization rendered a flexible price policy impracticable, for frequent adjustments of prices would have required a vast increase in the quantity of information processed at the center. Had the data been available, it would necessarily have enlarged inordinately the administrative apparatus. But information on changes of demand was not available and, given the priority allotted to industrialization, adjustments of the production pattern would not have been feasible. In this way a long-term disequilibrium on the market arose, a justification of which was sought in the theory that consumption demand had necessarily to exceed production under socialism.
Nationalization and administrative methods of management engendered or enhanced monopoly conditions in a number of branches, under which the market mechanism could never successfully operate; the directive to keep prices stable thus appeared to be the only instrument against monopolistic price increases.
Among the results of the price system must first be counted disequilibrium on the market both in volume and structure of the supply and demand for consumers' goods. The producer is interested above all in the fulfillment of planned indicators and not directly in the production of commodities demanded by the consumer: on the one hand, the demand for certain types of goods continues to be unsatisfied for a long time, while on the other hand unsaleable goods accumulate. Thus the economy suffers heavy losses - materially in the unsold goods and in the time spent in queues; there is discontent on the part of the consumer who cannot find the goods he requires; and surplus purchasing power endangers economic stability (as in the ease of recurrent spending sprees).
A similar situation arises for producers' goods; market relations were replaced in transactions between state enterprises by a quota system ('material and technical supply'). The producer has no direct interest in satisfying the needs of the consumer, and supply does not match demand. In consequence, overall economic efficiency is low, technical progress is slow and large funds are sterilized in stockpiling and unfinished construction. An administrative price determination, by severing the link between the producer and the consumer, tended to lower the quality of goods and services and weaken incentives for innovation.
The constancy of prices and the elimination of competition fostered monopoly conditions. The divorce of prices from socially-necessary costs vitiated the criteria for investment efficiency, for the exploitation of scarce resources, for choice of technique, and for foreign trade. Macroeconomic ratios for planning were distorted by a wrong reflection of costs and by the dual scale of prices, which undervalued material costs in relation to wage costs.
Distorted price relations in retail trade induced an irrational structure of consumption: an excessively low price may waste raw material and labour - in extreme cases it has been known for a consumer to buy a finished product solely to extract its raw material. An excessively high price for goods with high elasticity may, by restricting consumption, result in an unemployment of productive capacity, and the purchasing power which could have been absorbed on that good will intensify market disequilibrium by being directed to deficitary items. Far from solving conflicts of interests, the price system intensified them.
Excessive centralism overloaded the administrative apparatus and created favorable conditions for the growth of bureaucratic tendencies.
The price system described in the framework of administrative economic management became the subject of general criticism, which may be roughly divided into two groups. One criticized incorrect price relations (including the dual price level) and led to the call for a uniform basis. Discussions continue on the type or formula of uniform pricing, e.g. value, average value, production price, etc. The other criticized the centralized and administrative methods of price regulation, and resulted in pleas for the rehabilitation of the market mechanism throughout the socialist economic system. Two problems remain in debate: how to organize the system of planned management so that the functioning of the market mechanism does not conflict with planning, and the manner of transition to a new system while the old disproportions and disequilibria persist.The problem of a uniform price system has been most intensively discussed in the Soviet Union, and chiefly connected with the application of the mathematical methods (structural analysis and linear programming) to compute such prices; the names of Kantorovich, Novozhilov, Nemchinov, and Belkin were particularly prominent.(2) Initially, Soviet views (and those in Hungary) concentrated on the correction of price relatives, without impugning the method of central price-fixing. The mathematical procedures suggested were to improve the decision-making of central agencies. Recently, attention has been focused even in the U.S.S.R. on the necessity of restoring the role of the market mechanism: it is of interest that such a conclusion was made by none other than the advocates of mathematical methods (Nemchinov, Novozhilov, etc.), because they adopted the cybernetic view of automated economic regulation. In this connection also the mathematical problems of market analysis (demand elasticity), long neglected in the U.S.S.R., started to be taken up. In some other socialist countries, however, theoretical and practical concern was first concentrated more on the role of the market than on the formula of price. This was undoubtedly true in Yugoslavia where not only a theoretical criticism, but also a practical introduction, of the market mechanism had taken place. It was also the case in Poland, as the work of Brus testifies,(3) and in Czechoslovakia, where the theoretical analyses were made by Sik, Kozusnik, and Komenda,(4) and where - at present - intensive preparations are under way for a new system of economic management, based on a broad employment of the market. Many Czechoslovak economists consider the restoration of the market much more important than the problem of a price formula, even though it is essential to the successful functioning of a market and could play an important part in resolving the conflict of group interests. This order of priorities is supported by the work of Novozhilov,(5) who shows that dual prices may be used without risk under decentralized decision-making, because they ensure that an optimal plan for an enterprise, prepared by decentralized decisions, conforms to a social optimum. Other prices would, however, result in an irrational utilization of resources.
6.THEORIES OF PRICE
Theoretical work on the price formula in eastern Europe started around 1958-60. Previously, economic texts had often asserted that under socialism the planning of prices should derive from commodity-value, but these were general and impractical proclamations, because such value (in labour terms) could not be quantified. Indeed, nobody believed that a feasible way could even be found for such a calculation. However immature, there were nevertheless valuable and long-standing fundamental concepts of the transformation problem, originating in the works of Marx (in the history of which the essay by Bortkiewicz (6) is of particular significance), and of the structural model, evolving from Walras through Leontief. Both these approaches were combined in one of the most significant of contemporary works, namely in the article by Morishima and Seton,(7) which presents an exact formula of value on the Leontief structural model.
The first formula of value dates from 1904 in the development by the Russian economist and mathematician V. K. Dmitriev (8) of Walras' model of general equilibrium. He demonstrated that labour value - in present terminology cumulative labour - can be computed as an iterative solution of an equation, relating cumulative labour costs with technical coefficients and direct labour costs.(9) It is sometimes described as a Dmitriev-Leontief equation, because an identical set of equations may be derived for cumulative labour costs from Leontief's structural model, which, however, usually envisages not an iterative solution but an inversion of a matrix. The development of the theory of linear programming, resulting in dual (shadow) prices, is also relevant, and it is in this connection that the work of Kantorovich and Novozhilov (10) is important.
Prices in terms of labour value may be computed either directly in labour units using the Dmitriev equation (thence converted into monetary units), or directly in monetary units as long as wage costs are calculated instead of direct labour costs. In the first case the problem arises of aggregating labour of different intricacy and intensity, while in the second the problem is to determine the rate of surplus product, which appears in n equations as the (n +1) variable.
The term 'average value' is usually understood in socialist countries as material and wage costs plus a profit at a uniform ad valorem rate. The 'production price' formula relates the uniform rate of profit to the value of productive assets. The so-called 'multi-channel' prices, applied in Hungary, (11) represent a combination of the formulae of value and of the production price in such a way that part of the surplus product is distributed according to wages and part according to productive assets. The shadow price formula, the 'objectively-conditioned valuation' of Kantorovich, is not discussed here, because it follows from the theory of linear programming; it is a technique of pricing scarce resources to regulate decentralized decision-makers towards a socially-optimal use of such resources. Novozhilov, finally, takes labour value as his basis and - as shown by the dual - deviates according to the degree of relative scarcity.(12)
The group of Czechoslovak economists of whom the author is one postulates the need for reform firstly by rejecting the assumption that planning is incompatible with the price mechanism, and that socialism permits the central regulation of production without recourse to the market mechanism. This leads them to contend that central management is self-defeating, since the information needed to eliminate all uncertainty in decision-making becomes too costly and unwieldy. Any restriction of the amount of information transmitted to the center increases the uncertainty of the decision-making and hence the risk of adopting wrong decisions; the absorption ( a considerable part of the labour force in administrative service decreases overall efficiency. They therefore suggest that a market mechanism automates in a coordinated manner a large part of these decisions; in addition, the producer is stimulated to satisfy the demands of the consumer. A market is thus prima facie desirable for the functioning of a socialist economic system. This, however assumes that prices be freely formed on the market and not set up by fiat.
It is nevertheless evident that the market mechanism cannot by itself ensure the smooth and undisturbed operation of the economy and cannot bring about the achievement of the sort of target which a socialist society endeavors to attain. The function of planning and central management should therefore supplement this mechanism in those spheres where it cannot operate satisfactorily - to implement social priorities and fully to utilize capacity. If this is to be done, planning must be seen in an entirely new light: the plan cannot be a fetter constraining reactions to economic change, but a coordinator of the development process from the standpoint of society and with an optimal level in view. But prices cannot fluctuate spontaneously. Some stability is undoubtedly desirable, but it should be achieved not by administrative determination, but by the assurance in the plan that productive capacity would correspond to the demand arising on the basis of planned incomes and planned prices. A situation would then be approached in which the planned price would be a market-equilibrium price. As long as capital investment is centrally allocated, and certain other central instruments of management are retained, such equilibrium prices can only develop as automatic expressions of the law of value and of the economic and social policy of a socialist country.
SUMMARY RECORD OF THE DISCUSSION
(In the Chair: Professor RACHMUTH )
Professor Fauvel found five principles of price formation in the system described by Dr. Kyn. The first was that prices were fixed by a central agency (as occasionally in the West during periods of scarcity), and secondly were stable for several years. The third feature was the dual level of prices, viz. those of production (determined by labour value) and retail prices. Fourthly, it had been the practice to deflate retail prices gradually. Finally, the system of prices in agriculture differed significantly from that in the rest of the economy, but for reasons that seemed of expediency rather than deliberation. Generally, price changes tended to be ex post adjustments rather than ex ante decisions to influence economic activity. Dr. Kyn believed that price formation on the basis of labour value inherently induced a waste of capital and proposed a unitary price system in which, first, an ad valorem tax on wages would create the accumulation fund and, secondly, prices would be adjusted to the conditions of demand as well as to those of supply. Professor Fauvel could not accept that this was the only solution because a labour-content price could serve as guide to the general interest in decentralized decision-making, as the Dmitriev and Morishima-Seton formulae had demonstrated. (D1)
The paper by Professors Maksimovic and Pjanic had the same objective as Dr. Kyn in seeking a 'normative price', and both concentrated their attention on the concept of 'net income' that is, total revenue less outlays on materials, depreciation, payment for capital, and taxes. It embraced both labour remuneration and profits; not all was distributed as a dividend to labour and it could be controlled by the state in the same way that profits were influenced in a capitalist economy. It seemed to him that this practice did not guarantee in Yugoslavia the operation of a market economy, for 70 per cent of prices were still controlled. Nor did the technique of profit-sharing ensure that the benefit of low rates of interest to stimulate certain branches was not dissipated in labour remuneration. He hoped that, in the discussion, economists from the socialist countries would indicate the extent to which the unique basis of labour value was still tenable; whether a unitary price system to replace the present dual levels was compatible with the implementation of social desiderata; and whether a socialist market economy might emerge along different lines (e.g. using the Swedish system of 'price listing' to exhibit enterprises which were overcharging).
Dr. Ophir found himself in a large measure of agreement with the two papers under discussion and that by Mr. Laszlo. They all considered prices not in terms of some theoretical-ideological basis, but from the pragmatic viewpoint of their effects on the performance of the economy. The functions and problems of the price system in a socialist economy were analogous to those of intracompany pricing in a large Western corporation, upon which his own interest was centred. (D2) A number of theoretical works were available on pricing in a socialist economy, notably Lange's classical work and Lerner's economics of Control.(D3) He had found the comparison with intracompany pricing in an article by Nove.(D4) In a centrally-planned economy, prices were not strictly necessary, for they were only the dual to the chosen allocation of resources to derive the desired bill of goods, as Professor Mateev's system of equations demonstrated. If, however, decision-making was not completely centralized, prices became necessary. As lucidly argued by Dr. Kyn (pp.20l and 207-208), the costs of a highly-centralized decision process were prohibitive; the more decentralized the system, the more important became prices, and hence the problem of price formation. He found Professor Domar's principle of marginal-cost pricing generally unworkable - because the quantity produced had to be known in order to ascertain marginal cost -but valid under certain conditions. Marginal cost could be approximated by average variable cost when surplus capacity existed, but might be many times average cost when capacity was deficient. When fixed capital could not be rapidly expanded, price should serve to ration the limited stock to its most productive uses. A socialist economy could price by negotiation, but this was open to abuse by the exertion of monopoly power. Professors Maksimovic and Pjanic had touched - unfortunately only briefly - on the problem of monopoly control under socialism. The relation of prices to the world market had also to be considered: the domestic price of an imported commodity should be the world price plus transport costs; similarly, the domestic price of an export good should be the export price minus transport costs. Commodities which were not traded need not be priced in any exact relation to the world price, but would be valued within the ranges set by the above prices, viz. its opportunity cost should be no lower than the export price but no higher than the import price. These relationships would, of course, have to be appropriately modified if the volume of trade in any commodity so priced by the socialist country concerned was large enough to affect the world market price.
Sir Roy Harrod said that he had been greatly stimulated by both papers but found the multiplicity of proposals bewildering. Although it might be paradoxical for a capitalist economist, he had to declare some unease at the claims for greater freedom and flexibility in the price mechanism. He wanted to stress that he greatly valued the function of price, in a market mechanism, of equating supply to demand. Queues of consumers waiting, when supply fell short of demand at given price, or the inability of producers to procure needed components or materials without delay, entailed a shocking waste. It would be a great gain to remedy those evils. Moreover, if an enterprise produced variants of a certain type of article, it might be expedient for it to be able to test out consumer preferences by some freedom of price maneuver. Subject to that, he had two points to make.
He was convinced that in a socialist system an official, or 'normative', price was necessary. Adam Smith distinguished the market price from the 'natural' price, the first being that which actually obtained, the second that to which the market price tended under competitive capitalism. The 'natural' price could not be identified and might never be realized, owing to a change of intervening circumstances, but it epitomized the action of capitalists striving to maximize private profit. No such force operated under socialism, and it was for this reason that it was necessary for a 'natural' or 'normative' price to be calculated and promulgated. Without it there would be no guideline for that allocation of productive resources which best satisfied consumer needs. Adam Smith's 'natural' price did not differ substantially from the price based on cost in Marx's Kapital, vol. III. Professor Mateev's paper was a development of Marx and he concluded that price Type II was that which correctly embodied the principle of socially-necessary cost; of the two variants that with capital at replacement cost (p. 78) was the better. If enterprises were allowed to deviate from Marxian prices, in order to prevent market shortages (or surplus stocks), they should be instructed to restore normal prices as quickly as possible by changing their level of output. Information that this had been done, and why, would be conveyed to the planning agencies.
Sir Roy Harrod was also disquieted by the idea that too much laxity in the matter of prices might lead to inflation, specifically to spiraling inflation. It might be that socialist economies had a perfectly firm grip on the wage situation, but feared for the efficacy of such control if prices broke loose. Spiraling inflation had often little to do with the type of inflation that resulted from a lack of balance (or excess of demand) in the economy, e.g. that due to an excess of capital accumulation in relation to the provision of funds for that purpose. The United Kingdom had experienced the excess-demand type of inflation during and after the War; more recently there had been little excess demand, but spiraling inflation persisted. The British Government had set up an agency to review prices, and many hoped that its function was not to be mere window-dressing: its task would be made far easier if there was already in existence a set of official prices, such as the socialist countries had. Sir Roy Harrod's fears of a serious wage-price spiral led him to enjoin caution upon socialist countries in decontrolling prices: the prevention of inflation was more difficult than its cure.
Professor Dupriez observed that the numerous different concepts of price proposed by socialist economists all represented moves away from price formation by political decision and in global terms to rational 'norms of production' under which individual price relationships would be established. This objective had much in common with the long-term equilibrium price of the market economy. In Western terms, the general principles of the socialist system of prices seemed to be the following. Salaries and prices were planned, although it was not clear upon what criteria. The ideological basis of price was Marx's labour theory of value, as opposed to a system of value determined by the marginal productivity of the factors employed. The socialist economy set a value for labour according to a scale of wages - with only slight variations by location and type of activity - such that the aggregate remuneration equaled the value of the planned production of wage goods. That part of the national product which was not to be consumed by the workers approximated to Marxian surplus value and depreciation; prices were established to generate the appropriate surplus value and depreciation.
This surplus value comprised government consumption, funds for investment, and amortization as remuneration for the factors owned by the state (rent, interest, and the gross profit of enterprises). Socialist countries seemed always to have determined this surplus value crudely, in the light of government revenue needs and without reference to any norms. The use of capital charges in Eastern Europe reintroduced one of the norms familiar to Western economies. It seemed to him that the global technique of calculating surplus value had tended to cause the level of accumulation to exceed that indicated by the marginal productivity of capital, and that the share of surplus value was hence larger in relation to the wage fund in socialist than in market economies.
Academician Ostrovityanov observed that some Western economists attributed the present discussion of price-formation in all the socialist countries to a crisis in methods of centralized planning; they perceived a movement towards capitalist methods of the free market and the pursuit of profits. There were even some socialist economists inclined to view as mistaken the entire history of socialist price-formation. Professor Robinson and others had characterized the pricing techniques of socialist countries as purely administrative. It was alleged that fixed prices, constraint of market relations, and the two-level price system were inherently wrong. Professor Fauvel had pointed out that capitalist economies had recourse to rationing in war-time. Historically, price control and consumer rationing during the Civil War and the Second World War were two of the most important economic conditions for victory. The same was true of the two levels of prices, which had been essential to implement the policy of the development of heavy industry in preference to agriculture and those branches of industry producing consumers' goods: prices ruling for producers' goods were lower than those for consumers' goods. This dichotomy could be relaxed now that the Soviet Union and the other socialist countries had entered a new stage permitting as rapid development for consumers goods as for heavy industry. This was not to say that there had not been mistakes in the past: excessive centralization, the incorrect substitution of administrative decisions for economic methods, and the inadequate utilization of commodity-money instruments. Such defects were still far from eliminated; the answer was not the rejection of central planning, but its optimal combination with the wide initiative of local organs, firms, enterprises, and workers' collectives, This meant the restriction of central planning to a determination of the basic lines of development and the granting of much greater managerial and operating independence to the enterprises. A fundamental improvement in the system of price formation would play an important role in this transformation.
Dr. Kyn had frequently reiterated a belief in the value of an automatic market mechanism, but had failed to describe his ideal. Did he reject the planning of prices and of the equilibrium between personal income and expenditure? Would he abandon the guarantee of income by commodities to the spontaneous forces of a free market ? Should not reliance rather be placed on an awareness and utilization of economic laws, and the elevation of planning to a higher level by taking advantage of modern mathematical methods and computer techniques? The second choice was the correct one, making the best use of the mechanism of commodity production and distribution - which had centuries of practice behind it but eliminating those negative features of spontaneity which wasted productive resources and induced cyclic fluctuation. The Scientific Council on Price Formation in the U.S.S.R. was working on the assumption that prices had to be based on the Marxist theory of labour value and, in particular, on the category of socially-necessary labour outlays. The determination of value by socially-necessary labour expenditure stimulated technical progress, because those enterprises introducing advanced technology reduced their labour outlay below that socially necessary, and, selling their commodities at industry-wide prices, received supplementary profits. Those enterprises where costs were higher than socially necessary gained less than average profits or even made a loss at industry-wide prices, and were forced to improve their technology and organization of production. On the other hand, prices set in accordance with relative utility slowed technical progress, because they assured a normal profit to backward industries and increased profits to all other enterprises by artificially inflating the industry-wide price above the value of the socially-necessary expenditure of labour. The cost of production and the average rate of profit had also played important roles in the history of commodity economies: intra-industrial competition had induced a systematic deviation of prices from value and created an incentive for a transfer of capital to those branches of industry where there was a high concentration of living labour and a higher rate of profit.
The essence of the problem was to derive prices which corresponded most closely to value, that is, to the cumulative costs of live and embodied labour. For this it was necessary to elaborate a practical method of determining such costs, the very substance of value, and in the conditions of a planned economy it could be based on the mathematical approach and on modern computing technology. The two implicit problems of mensuration were of skilled labour in terms of unskilled labour, and of the socially-necessary labour costs of any good in the main and ancillary industries contributing to its production. The first problem could be solved by applying a scale of wage relationships used to remunerate workers of different skills ; the second involved the construction of an intersectoral balance. The final cumulation could be made in units of money or in hours of work; either would be a reasonably exact measure of value as production costs.
Professor Gatovsky had listed a number of factors which require prices to deviate from this value, among them quality differences or other elements of use-value, novelty, supply and demand, and natural conditions. The advantage of determining value, as socially-necessary labour costs, was to permit society to decide consciously and precisely where prices should diverge from value on economic grounds and where they should be more closely correlated with Socially-necessary expenditures. The need to reform pricing in such terms had been appreciated in the U.S.S.R., but the manner of change was not yet decided: there would be a gradual approximation of wholesale prices to socially-necessary outlay on criteria which still had to be precisely determined. Dr. Kyn had spoken of using the market mechanism in this connection, but did not make clear precisely what he had in mind. The Soviet price reform presented many serious problems and could not be accomplished at a single stroke.
In conclusion, Academician Ostrovityanov reproached Dr. Kyn for his skepticism on the definition of value. While criticizing those who said value was unknowable, Dr. Kyn condemned as Stalinist the idea (accepted by Professor Notkin) of eventually calculating value under full communism in work-time. The concept, however, was not originated by Stalin but by Marx and Engels. Until now Marxists had had to accept value on faith since there were no tools to compute it: today, the techniques of mathematical economics could be used to quantify value.
Professor Oelssner felt that it was significant that the subject of prices had come up at every session. In all socialist countries, price-formation was not only the most important and urgent of problems but also the most complicated. In all of them, discussions were taking place which would not be concluded for a long time. In the G.D.R. a reform of prices on the industrial level became necessary before the theoretical discussions could be completed and the problem satisfactorily solved. The prices for coal and electricity and railway tariffs ruling until April, 1964, were inadequate reflections of cost and had indubitably to be increased. The problem, of course, was by how much. As an interim solution the Commission of the Ministry of Finance, of which Professor Oelssner was a member, had authorized the addition to labour costs of a rate of profit which would assure that each industrial branch was able to self-finance its planned investment. This solution was not ideal, but was the most expedient under the circumstances.
Professor Oelssner recalled that he had already mentioned the working group of the Academy of Sciences of the G.D.R., which was trying to establish work-time expenditures per unit of production. It had raised the question of delineating that part of labour which contributed to value. Marx had observed that one did not have to work oneself to be part of the total work-force. The problem of definition arose, for example, in classifying work on research and development. For the price reform in the G.D.R. it was decided that such outlays should be counted in cost if carried out at the enterprise or in the enterprise-group. But the definition of labour was only part of the problem: the main difficulty was to decide what part of surplus value had to be added to cost. Several proposals had been made, among them basing value on the actual price of production (Produktionspreis). Professor Oelssner personally advocated market value as defined by Marx in Chapter 10 of Volume III of Kapital viz. the addition to Marx's cost of production (Kostpreis) of a profit rate differentiated by industrial branch. However, whatever variables were chosen, prices had to be dynamic, since productivity was constantly changing. Market value would, furthermore, express such objective factors as worth to the user, and the interaction of supply and demand; it would hence deviate from normative prices (Normativpreisen).
It was because price in a socialist planned economy was not only the money expression of the value of a certain commodity, but also an instrument of planning structural change, that Professor Oelssner disagreed with Dr. Kyn (p. 208) on the automaticity of the market mechanism: price control could only be abandoned if central planning were to be dismantled. In the context of the G.D.R., the current economic reforms would delegate price-fixing to enterprise associations once the substantive price reform had been completed. Since, by that time, profit would have become the main criterion for enterprise operation, it would be necessary to perpetuate central price control.
Dr. Kyn agreed with Academician Ostrovityanov that it was necessary to bear in mind the specific situation of the Soviet Union in the twenties and thirties, when the price system under discussion came into existence. But he felt (as did Professors Maksimovic and Pjanic) that it was wrong to generalize those experiences - the result of concrete conditions in a particular country in a certain period - as the only correct way for all countries at all times. He strongly denied the contention of some at the Conference that his paper advocated doing away with planning and returning to a pure market mechanism of the sort that operated in the nineteenth century. He assured Sir Roy Harrod that the danger of inflation was fully appreciated in Czechoslovakia, and that means to combat it were being sought. He pointed out that the cause of inflation was nevertheless not price flexibility as such but the state of the economy. If the economy was in disequilibrium, inflationary tendencies could arise independently of the procedure of price-formation.
Dr. Ophir had implied that one of Professor Mateev's price formulae supported a dual price-system. Certainly Professor Mateev seemed to favor prices heavily differentiated by turnover tax, and in this he would be supported by a number of Czechoslovak economists. Dr. Kyn himself felt that the situation in his own country showed that the dual price-system retarded, rather than fostered, growth. Of the three price models which had been programmed on the 1962 input-output table, the two-level price-system was demonstrated to have been the least suited to decentralized (i.e. enterprise) decision-making. It had seemed to be Professor Oelssner's view that planning could not operate in a market economy: the proposals for a new system of planning and management in Czechoslovakia were based on the belief that a combination was possible, and its feasibility had already been demonstrated in Yugoslavia. Academician Ostrovityanov had been right in finding him skeptical of work-time valuation under full communism, but there were so many pressing problems facing contemporary socialism that the point could be left for the rather more distant future.
1 See Cestmir Kozusnik, Problemy teorie hodnoty a ceny za socialismu (Problems of the theory of value and price under socialism), Prague, 1964; Bohumil Komenda, Ekonomicka funkce a pusobeni velkoobchodnich cen (The economic function and effect of wholesale prices), Prague, 1964; and Ota Sik, K problematice socialistickych zboznich vztahu (On the problem of socialist commodity relations), Prague, 1964. (back)
2 L. V. Kantorovich, Ekonomichesky raschet nailuchshego ispolzovaniya resursov, Moscow, 1959 (for English translation see footnote, page 81); V. V. Novozhilov, 'On the Discussion of the Principles of Planned Price-formation', Primenenie matematiki V ekonomike, vol.1, Leningrad, 1963; V. S. Nemchinov, 'Basic Outlines of a Model of Planned Price Formation', Voprosy ekonomiki, no. 12,1963, pp.105-121; V.0. Belkin, Tseny edinogo urovnya i ekonomicheskie izmereniya na ikh osnove (Unified-level prices and economic measurements. (back)
4 B. Komenda, C. Kozusnik, 'Basic Questions of Improving Socialist Economic Management', Politicka ekonomie, no.3, 1964; O. Sik, 'Problems of the New System of Planned Management', Nova Mysl, no.10,1964, and O. Sik (ed.), K problematice soustavy planoviteho rizeni ekonomiky CSSR (On the Problem of the System of Planned Management of the Czechoslovak Economy), Prague, 1964. (back)
8 V. K. Dmitriev, Ekonomicheskie ocherki: Opyt organicheskogo sinteza trudovoi teorii tsennosti i teorii predelnoi poleznosti (Economic Essays: an Attempt to Integrate the Theories of Labour Value and Marginal Utility), Moscow, 1904. (back)
10 L.V. Kantorovich, Matematicheskie metody organizatsii i planirovaniya proizvodstva (Mathematical methods of organizing and planning production), Leningrad, 1939; V. V. Novozhilov, 'The Measurement of Outlays and of their Results in a Socialist Economy', in Primenenie matenzatiki V ekonomicheskikh issledovaniyakh I (The Application of Mathematics to Economic Research), Moscow, 1959. (back)
D1 On V. K. Dmitriev, see A. Nove and A. Zauberman, 'A Resurrected Russian Economist of 1900', Soviet Studies, July, 1961, pp.96-101 and A. Zauberman, 'A Few Remarks on a Discovery in Soviet Economies', Bulletin of the Oxford University Institute of Statistics, November, 1962, pp. 437#45 (reprinted in A. Zauberman, Aspects of Planometrics, London, 1967, pp.47-55); M. Morishima and F. Seton, op. cit. (back)