Excerpt from 

Economic Devolution


 in Eastern Europe 

by Ljubo Sirc



Prices as criteria?

  Fixing of prices in the Soviet Union
  On 1 July, 1967, the Soviet Union introduced revised wholesale prices as a major step in the implementation of the economic reform. This revision, coming 12 years after the previous one, tries to introduce law and order into the price system by relying on the principle of what communists call ‘normal’ (cost-plus) prices.35 Political prices were hitherto subordinated to the goal of ‘the construction of a communist society36, which meant that the prices of goods deemed particularly desirable from the viewpoint of communist doctrine were kept low. Two Soviet statisticians37 claim that before the 1967 revision wholesale prices of light industry products were 21 per cent higher, on average, in relation to production costs than prices of heavy industry products. The revision raised the prices of coal by 78 per cent and of oil by 60 per cent. Yet retail prices have not been altered38 which is only possible because the Soviet Union uses a so called ‘dual price system’—prices of consumer goods are insulated from the influence of production costs by turnover tax.39 The prices of fertilizers and implements needed in agriculture have not been altered and adapted to their costs. This insulation indicates that some prices are still subsidized. Cross-subsidization within the same branch will also be necessary if ‘normal’ prices are used instead of prices equal to marginal cost. So long as average prices continue to be used, some enterprises must have cost of production plus normal profit higher than the average and must, therefore, be subsidized by those having cost of production plus normal profit lower than the average.

However, even disregarding political subsidies and cross-subsidies within branches, two problems remain: ‘How were the prices calculated?’ and ‘What use are “normal” prices ?‘.

In Florence, Professor A. J. Pashkov of the Soviet Academy of Sciences was trying to explain the pricing system in his country by defining the price as ‘a measure of labour’ and then telling the conference that, at present, 45 per cent of all Soviet prices are fixed by authorities of constituent republics and not by central authorities. But this explanation did not satisfy the Czech participant, Oldrich Kyn,40 who wanted to know by what methods exactly the prices of millions of products are being established either by central or republican authorities. He showed from Czechoslovak experience the problems that, bedevil central determination of all prices. In the past, prices were revised at intervals of about five years. The calculation of new prices required about three to four years. But there was the problem of’ ‘feed-backs’. Coal production, for example, requires machines. The usual procedure was to calculate the prices of raw materials first and derive the prices of products from them. But these products are partly used for the production of raw materials. To obtain more precise prices, the calculations would have to be repeated several times, in other words several ‘iterations’ are needed and each requires the recalculation of  3 million prices. In the Soviet Union about 5 million. Even if an iteration required only two years and only five or six iterations were needed, the whole procedure would be excessively lengthy and complex. Meanwhile conditions might have changed completely. The exercise would be more or less futile.

If computers are used, Dr. Kyn continued, less time is needed - six months to one year - but. it is impossible to work out a computer programme for calculating millions of prices. According to Czechoslovak experience, it is possible to calculate prices of 20,000 to 25,000 ,groups of goods at the most; prices of individual goods can in practice never he obtained. For this reason the Czechoslovak reform is based on a return to the market mechanism.

Another Soviet economist attending the conference, Professor L. M. Gatovsky, came to the rescue of his countryman. He criticised the Czech faith, in the market as exaggerated.41 However, he did not. substantiate this criticism by falling back on Marxism-Leninism, but pointed out that the market did not work freely anywhere. Even in the United States, Britain and France, there was government intervention and all round the world important prices were fixed by state agencies. This fact cannot he denied. But it is one thing for the government to fix a few or even quite a large proportion of individual prices, and quite another to set up the entire price system.

In the first case the government can base its estimates on the existing system and try to prevent a branch or enterprise from earning monopolistic profits or thwarting some objective of government policy. In the second, the price-fixing agency would have to establish all prices at the same time. Because prices are interdependent, it cannot be done coherently. There are at least 5 million prices to be fixed in the Soviet Union and about 1.5 million in Czechoslovakia, The solution often chosen by the ‘planners’ is to use the price relationship on the world market which, of course, makes a nonsense of the pretence that prices are established on some non-market basis.

Fixing of prices in leading reformist countries

In spite of this difficulty the Soviet Union and other European countries bent on economic reform wish to fix a large proportion of prices. Czechoslovakia introduced the new system at the beginning of 1967 with the intention of freeing prices of 15 per cent of home market transactions and preserving central price-fixing for over 60 per cent; the rest would be allowed to fluctuate within set limits, the Hungarian reform introduced on 1 January, 1968, foresees free prices for 25 per cent of production, and fixed, maximum and limited prices for 75 per cent. Other countries envisage stricter price controls.42

For the moment, Czechoslovak fixed prices will apply to ‘the most important items -the principal raw materials, fuel, electric power, staple food and manufactured consumer goods’, free prices to ‘articles of minor importance’.43 The explanation given is that the price system had been so distorted that it would be disastrous to allow prices to fluctuate freely. To restore the market, it is necessary to control prices and bring them to equilibrium level under supervision.44 To a large extent the dual system of prices (i.e. retail prices separated from wholesale prices by turnover tax) has been retained and retail prices will he gradually adjusted to cost and market circumstances.45 In general, it is hoped to confine price controls to selected basic goods by 1970. Surprisingly, the intention is to introduce free prices for producer goods, but to control prices of basic raw materials and consumer goods.

Yugoslavia also started its reform by state price-fixing of basic raw materials, It seems to be a common illusion that one can make production cheaper (i.e. more efficient) simply by keeping prices down46 In Yugoslavia, this illusion was paid for dearly because prices do tend to influence production despite their combination with planning. The result was that price-controlled raw materials were not produced in sufficient quantities so that capital equipment often remained idle, The Yugoslav communists clearly recognised this misconception and would have freed their prices in the 1960s, had the attempt to keep the distorted economy going not produced such an inflation that all prices had to be frozen in 1965 47. The freeze was not permitted to thaw until 1967.

Simultaneously, there was a heated discussion in Yugoslavia on the doctrinaire question of what a ‘normal’ price should be under socialism. But as Professor Bajt from Ljubljana pointed out at the CESES seminar in Florence, the Yugoslav economic reform was a pragmatic affair and such ideological debates were virtually ignored by those in charge. Some Yugoslav and other, particularly Czech, economists have now come forward with marginal cost theories.

Flexible price-fixinq

  Although Czechoslovakia and Hungary are in this way committed to price fixing, it is clear to them that the ‘fixing’ of prices should be ‘flexible’ and that ‘flexible’ prices cannot be fixed by one central body.48 The Hungarian resolution introducing the reform was almost rhapsodic:

“By making use of the relations between sellers and buyers, as they work through the market mechanism, we can relieve the responsible central planning body of the completely intractable task of keeping count of the millions of constantly changing partial processes and interrelations . . . By using the market mechanism we can make socialist planned economy more flexible and efficient and we can promote the development of a favourable interaction between production and demand.. . Thus the market cannot be some reinless ground of free competition, but one that will exercise its economic: influence while being itself regulated and directed, thereby pro­moting the realisation of well-founded economic plans."

This desire for more flexible planning of prices to take account of variations in supply and demand is also present in the USSR and elsewhere and the need for ‘rolling planning’ (i.e. constant adjust­ment of plans) is recognised; but no solution has yet been found.49

In the Hungarian case this hesitation between market pricing and plans is most surprising, because their resolution clearly includes demand (individual preferences) among the factors on which the trends of prices must be based. They include

  1. cost of production,

  2. value-judgements (individual preferences) emerging from the markets,    

  3. government preferences (for reasons of economic policy).

When asked about the reluctance to free prices, Professor Bela Csikos-Nagy, the President of the Hungarian Price Office, said in Glasgow during a seminar at the end of June 1967 that prices have to be kept under control because of the structural disproportions of the Hungarian economy. If freed, they would get entirely out of hand. Therefore, structural changes had to be carried out first which might take 10—15 years. This approach appears to be risky since in Professor Csikos-Nagy’s view disproportions are inevitable if there is central direction. Yet if structural change is not implemented under the influence of prices it will take place under central direction, Similar problems in Czechoslovakia have already been mentioned, The disequilibrium was the product of the administrative system itself and cannot be eliminated within it. Present Hungarian prices bear no relation to costs; only 10 per cent of prices cover opportunity costs, 60 per cent are higher and 30 per cent lower. Any change is therefore bound to be only gradual.

  Transition to market pricing

  The preoccupation with the ‘transition’ was noticeable among East Europeans in Florence, where the Hungarians stated that it should be ‘carried out step by step’. Historically, this gradualness has not always been proved necessary. In 1948, the West Germans coped with planning distortions by abolishing all restrictions overnight and the ‘German miracle’ followed. The reform was intended to open the way to the enterprise of individuals, while in Eastern Europe individual initiative is still frowned upon. But in 1921 Lenin introduced the New Economic Policy (NEP) abruptly and without any period of transition.50 These two examples indicate it is easier to deal with war ruins than with peace-time misallocation of resources. The reason may be political or psychological: it is an extremely grave decision to curtail production of undamaged factories. This explanation would seem to be confirmed by what Professor Vajda of Budapest had to say at a conference at St. Gall in Switzerland in May 1966 ‘We are not starting from zero but have inherited a mortgage from the old system which we cannot throw overboard in a day’.51

In Czechoslovakia it was also thought there should be a distinction between cilove reseni (the ultimate model to come into force in 1969—70) and the transitional solution, But even the ultimate model is not fully consistent because it is “ a compromise between the supporters of a market economy and those who did not manage to rid themselves of their prejudices about the function of the market, and who retained their belief in the necessity and advantages of some of the methods used heretofore.52

  The influence of those unconverted and others with vested interests is probably another reason for a protracted transition. Yet it accentuates inconsistencies of the transitional model and they are reflected in the continued isolation of some categories of prices. Retail prices are isolated from wholesale prices by a differential turnover tax which weakens the connection between sellers and buyers. Chaos over prices, therefore, remains a major problem of the Czech economy even in the view of the Deputy Manager of the State Bank, Jiri Rusmich,53 who said that without fair market prices a free market economy was a nonsense.

Long transition from centralisation to decentralisation is dangerous in so far as it implies a mixture of both. But the remaining centralisation continues to, create disequilibria which are then tackled by recentralisation. The economy runs into a vicious circle from which it is very difficult to break in spite of everybody’s wishes. In Czechoslovakia, many economists regret that all institutional changes have to come from the centre and speak about the need to introduce a ‘selforganising mechanism’.54

  Price system Irreplaceable

  The role of prices.   In spite of the slow freeing of prices in Eastern Europe, and fear of the consequences of using prices not only as indicators for firms of how to steer current production, but also for structural reform, most East European and some Soviet economists realise that no central planning could replace prices. Prices can be tinkered with to express government as opposed to individual preferences —in the way in which consumption of alcohol is everywhere restrained by the imposition of an indirect tax. But prices cannot be abolished without entailing disastrous misallocations. The communists have learnt this lesson the hard way. The importance now attached to prices is hardly surprising, since the mathematical approach of linear programming has shown beyond doubt that prices are only a reflection of real economic scarcities. They perform the functions of global physical planning far more manageably. While quantitative planning demands that all economic questions should he dealt with at the highest level, prices also make partial analysis possible. Using prices, each economic unit can find out for itself what to do, at least at the moment, without passing all relevant data to the centre and then waiting for its decisions. Prices relate current supply to demand and thus permit, not only the maximum desirable output of individual products, hut the best way of employing available resources to satisfy human needs. Prices express producer’s and consumer’s ‘time preference’ by evaluating the alternatives of future and present output. Quantitative planning, on the other hand, has to introduce an arbitrary horizon lest the plan is always for the morrow amid neglects the needs of the present generation. By providing incentives prices ensure efficient production.

The essential role of prices is dramatised in the new mathematical economics for all those who have been reluctant to accept classical and neoclassical theory. After claiming that linear theory ‘may be regarded as a restatement of a central part of conventional theory,’ Professor Sir John Hicks adds 55

  “It must nevertheless be recognised. - . that the new methods are a great advance upon the old in the understanding which they convey of the raison d’être of the price mechanism. The rather inappropriate mathematical methods which have been employed (at all levels of mathematisation) by the school of Cournot and Walras and of Marshall—did in this respect rather let us down. For they caused it to appear that the price system is just one way of organising an economy efficiently; that it is, in a sense, exterior to the economic problem, something that is brought in from outside. What the linear theory has shown—and this, speaking as a theoretical rather than a practical economist, seems to me to have been its greatest service is that...56 -  the price mechanism is something that is inherent, It did not have to be invented or brought in from outside. It belongs.”57

  The importance of this conclusion—which imposes itself on anybody studying linear programming - cannot be exaggerated for countries whose governments deny the rationality of pricing and attempt to improve economic performance by abolishing or supressing it. Moreover, linear programming was developed in the Soviet Union by Academician L. V. Kantorovich before the Second World War: it is therefore not surprising that in the Soviet Union the mathematical programmers and optimisers find themselves very close to the ‘free-market dogmatists’.58

  Mathematical methods and centralisation

  Mathematical methods might have encouraged centralisation of decision-making in two ways. Dr Kantorovich originally thought that the central authorities in the Soviet Union (the Party and government leadership) would determine the ends and pattern of consumption, while the mathematical economists would charge themselves with finding the most efficient means for producing the required goods. But this assumption is no longer acceptable to the Soviet mathematical economists, the majority of whom demand that the criterion for optimality should be consumers’ preferences with due allowance, of course, for public consumption, not the preferences of communist leaders. This sounds more logical and even wiser given the accumulated evidence that the impossibility for the population to ‘vote with the rouble’ causes tension and dissatisfaction and, in the end, apathy which is reflected in poor economic performance.

The other way in which mathematical methods could have encouraged centralisation is the hope of some mathematicians that they could determine the optimal decision-making structure which would distribute decisions to various levels according to their nature, the availability of information and other matters. This approach assumes there is no need for decisions to be concentrated somewhere - nobody need be responsible for them - and that there is no difficulty in aggregating and disaggregating data. In that case ‘the planning mechanism from top to bottom can act as an upwards and downwards transmission mechanism of requirements and of the best means to meet these requirements’,59 But it could only be done if it were possible to calculate required inputs and outputs first for large sectors and then let each large sector do the same for smaller sectors (disaggregation) until the level of individual products is reached, This procedure is impossible because to aggregate individual products in small sectors and the small sectors into larger sectors, requires the components to have far more properties in common than they ever do.

Even if this were not so, the data for calculations would have to come from the productive units, the enterprises. But they tend to distort information—a defect which ‘is a necessary product of the system and cannot in principle be done away with’.60 In fact, the situation of the enterprise depends on how it fulfils the plan and so the enterprises are tempted to send information that ensures them favourable conditions; for instance, they ask for excessive quantities of raw materials or equipment, or conceal their real capacities.

For these reasons, quantitative planning by computation has little chance of success and planning by price computation (parametric planning) cannot calculate programmes for several millions of goods. Therfore, mathematicians are often to be found among those who favour markets.61

Lenin’s NEP then and now

  While some economists are couching their criticism of the Stalinist system and predilection for a free market in mathematical terms, others, led it appears by Genady Lisichkin, have taken a short cut and claim that markets were discovered by Lenin himself. This view seems to have found support in the highest party circles because the Theses of the Central committee on the October Revolution, published in Moscow for the 50th anniversary (1967), contain a reappraisal of Lenin’s NEP which has up till now usually been explained as a ‘breather’ in socialist construction, A Yugoslav daily62 commented gleefully:

  “An interesting point of the theses which have just been published, is that the document looks at NEP from a new standpoint. In this ‘policy of an extraordinary international importance’ the following aspects are being stressed: co-operatives in the village, material incentives and economic accountancy, which are precisely those features which were previously passed over in silence or expressly denied any value. This clearly indicates an effort to draw a straight line of connection from Lenin’s NEP to the present economic reform adopted in September 1965, and to prove that the present reform continues the spirit of the classical Leninist economic policy.”

  What Lenin would have thought of this effort is a different question. The significant point is that the Soviet Party leadership seems to recognise the logic and the usefulness of the price mechanism and is trying to justify it in communist political terms.


35 In the term 'normal price' the word 'normal' is used in the same sense as in the classical economic term 'normal profit', i.e. it is the long-term equilibrium price. Marx himself did not use the word 'normal', but described what is now called 'normal price' as 'market value'. The relevant quotations from Marx are in R. Freedman (ed.), Marx on economics, Pelican, 1963, pp. 140-145: ' . . . the value of the commodities is determined by the labour contained in them... Whatever may be the way in which the prices of the various commodities are first fixed or mutually regulated, the law of value always dominates their movements ... The assumption that the commodities of the various spheres of production are sold at their values implies, of course, only that their value is the centre of gravity around which the prices fluctuate, and around which their rise and fall tends to an equilibrium. We shall also have to note a market-value, which must be distinguished from the in­dividual value of the commodities produced by the various producers. The individual value of some of these commodities will be below the market-value, that is to say, they require less labour time for their production than is expressed in the market-value, while that of others will be above the market-value. We shall have to regard the market-value on one side as the average value of commodities produced in a certain sphere, and on the other side as the individual value of com­modities produced under the average conditions of their respective sphere of production and constituting the bulk of the production of that sphere.' From these passages the Soviet price-fixers deduced that the appropriate price is the price equal to the average cost of production. Recently a charge on capital used has been added. (Above, p.41.) Back to the text

36 Cf Friedrich Haffner, 'Probleme der zentralen Preisbildung' ('Problems of central price fixing') in Sowjetunion-Das Wirtscheflrsystem, op. cit., p.s 90; on the same subject see also Alec Nove, The Soviet Economy, op. cit.; Peter Wiles, The Political Economy of Communism, op. cit., particularly Chapter 6; and S. G. Stolyarov, O tsenakh i tsenoobrazovanii v SSSR (On prices and price formation in the Soviet Union), Gosstatizdat, Moscow, 1963. Back to the text

37 S. Stolyarov and Z. Smirnova, 'Analyx struktury tsen' ('Analysis of price structure'), in Vestnik Statistiki, 1/1963, quoted by Haffner in the article mentioned in note 36 above. Back to the text

38 Professor A. J. Pashkov of the Soviet Academy of Sciences said in Florence that in the Soviet Ution 'retail prices can move only downwards'. (CESES, op. cit., p.135.) Back to the text

39 The intention is to make retail prices clear the market, i.e. match supply and demand. But as they are not flexible, market tensions persist and people have to queue to obtain goods which, among other things, leads to disenchantment with shop assistants. At any rate, prices cannot transmit information about demand to producers so long as. production costs are divorced from retail prices by varying rates of turnover tax. Back to the text

40 Cf. CESES, op. cit., p.414. Dr Kyn's ideas seem to be shared, according to Professor Nove, by Soviet mathematical economists like Pugachev and Shatalin. Back to the text

41 What he said was: 'I shall try to explain the concept of the socialist market: it is not the free market described by our colleague Kyn.' In Gatovsky's words 'the planned socialist economy is a special kind of mercantile production'. (CESES, op. cit., pp. 44and 45). Back to the text

42 Percentage for Czechoslovakia from Dr Kyn's Tremezzo Lectures and for Hungary from Dr B. Csikos-Nagy, Pricing in Hungary, op. cit., p. s6. Back to the text

43 Ota Sik, Economic Planning, op. cit., p.24. In his Tremezzo Lectures, Dr Kyn said: 'The final proposal [of the Czechoslovak reform] presented in January 1965 was in many respects the result of a compromise and did not, therefore, represent a con­sistent realization of the initial ideas. This particularly concerned prices, obligatory indicators and organization of the economy. While the original concept of the reform, as well as the idea of the theoreticians, stressed the need for the fullest freeing of prices so that they would be formed on the basis of an agreement between buyers and sellers in the market, very broad categories of centrally established fixed and limited prices were inserted into the proposal . .. [They have been] introduced in proportions which for all practical purposes eliminate any serious functioning of the marke¶.' Back to the text

44 Analogy with the abolition of rent control in the United Kingdom. Back to the text

45 The reformist Action Programme of the Czechoslovak Communist Party, published on 9 April, 1968 says: 'Today's system of retail prices is clearly divorced from the costs of production; it incorrectly orientates the structure of personal consumption by the population and reduces the possible degree by which its requirements can be satisfied.' Back to the text

46 George R. Feiwel writes in his economics of a Socialist Enterprises:   A Case Study of the Polish Firm, Praeger, New York, 2965, p. 96, of the 'doctrinal assertion that low prices of investment goods favour industrialisation, low prices of material inputs entail low production cost, and generally low prices of producer goods are a potent tool in the struggle for cost reduction . . Back to the text

47 Cf. L. Sirc, 'Inflation in Yugoslavia', op. cit. Back to the text

48 Ota Sik, Econosnic Planning, op. cit., p.24. Back to the text

49 Cf. Zaleski, op. cit, Chapter 3. John Brunner, The National Plan: A Preliminary Assessment, Eaton Paper 4, Institute of Economic Affairs, London, second edition, 1965, argues that the admission that plans must 'roll' is a confession that planning has failed because it means that plans are following on the heels of events instead of shaping them. Back to the text

50 During the period of war communism from 1918-21, the Communist Party attempted to obtain the resources necessary for the war effort and to create condi­tions for communism by widespread nationalisation, payments in kind, compulsory food deliveries and obligatory labour service. Chaos and discontent led to the in­troduction of the New Economic Policy in 1921 the aim of which was to restore the economy by concessions to private enterprise and money relations. The policy worked but was abandoned in 1928 in order to start the 'socialist reconstruction'. Back to the text

51 Problems of communism, 5/1966, p. 8o. Back to the text

52  Cf. Dr Kyn's Tremezzo Lectures, op. cit. Back to the text

53  Quoted by The Sunday Times, '7 September, 1967. Back to the text

54 These argtments were put forward by Dr Kyn at the Westfield College conference, 1968. Back to the text

55  'Linear Theory', in Surveys of Economis Theory, Volume III, Macmillan, London, 1966, p.110. Back to the text

56 Here Professor Hicks states the condition 'so long as the convexity assumption holds', the convexity assumption being the exclusion of falling costs, but adds: 'And though I have constantly emphasised that they do not hold universally, I would certainly admit that they hold, to a fair approximation, over a large part of the economic field.' The operative words are 'fair approximation'. It is interesting that Professor Michal Kalecki, the well known Polish economist, also points out 'the approximate nature of the solutions' in his Preface to Mieczyslav Rakowski. (ed.), Efficiency of Inuestment in a Socialict Economy, Pergamon Press, Oxford, in conjunction with the Polish State Publishing House, Warsaw, 1966. More than a 'fair approximation' cannot be expected in a field as complex and as bedevilled by future uncertainties as economics. Experience proves, however, that such an ap­proximation is sufficient in practice and that by discarding it in a search for greater precision a less satisfactory solution is obtained. (See below, p. 73.) Back to the text

57 Academician V.S. Nemchinov struck a very similar note in 'Sotsialisticheskoe khozyaystvovanie i planirovanie proizvodstva' ('Socialist economy and production planning'), Kommunist, 5/1964: 'The national economic plan cannot be internally consistent in all its parts and cannot be an optimal plan with just any kind of price system, but only with a quite definite price system that, among other things, fully corresponds to the volume indicators of the plan in the sense of balancing production and consumption and making efficient use of labour, equipment and natural resources.' (Italics supplied by Michael Ellman in his translation of this passage quoted in his forthcoming PEP pamphlet, Economic Reform in the Soviet Union.) Back to the text

58 Alec Nove, 'Soviet Union March 1967', in private circulation. For a thorough discussion of the Soviet mathematical approach to economics see M. Ellman, 'Optimal Planning', Soviet Studies, July 1968. Back to the text

59 The quotation is taken from Alec Nove's private circulation paper as also some other data on the views of Soviet economists. Back to the text

60 Dr Kyn's Tremezzo Lectures, op. cit. Back to the text

61 Professor B. R. Williams, Technology, Investment and Growth, Chapman & Hall, London, 1967, p.150, writes about the Soviet mathematicians: 'The "cybernetics group" took the view that the development of computers has so transformed the information-decision problem that it is now both feasible and advantageous to centralise the economy still further. Others argued that although mathematical models and computers have an important role to play in working out an outline plan, socio-economic life is too complex to lend itself to complete description and control of the type required for computerisation. In announcing the reforms Mr Kosygin (an ex-Gosplan man) made no mention of the application of computers to planning.' Back to the text

62 Delo, published in Ljubljana, 28 January, 1967. Back to the text






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