Economic Systems

Systems Theory


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Excerpts from 



"Economic Development for Eastern Europe", 
MACMILLAN London 1968, pp. 89 - 99



 THE rate of economic development represents one of the most important internal problems facing the socialist countries. On it depends the speed with which their economy can be transformed on socialist principles, and the course of their economic competition with the developed capitalist countries. The consolidation of economic and political power within states and of their international potential as members of the world socialist economic system is dependent upon these factors

Progress within the countries concerned, particularly in industrial development, has been considerable: within 12 years, from 1950 to 1962, the average annual rate of the growth of industrial production in the member states of Comecon was 11.4 per cent and in the U.S.S.R., 11.3 per cent; that in all the capitalist countries together was 4~9 per cent; in the members of the Common Market, 7.6 per cent and in the U.S.A., 3.9 per cent. Some western economists have sought to demonstrate that the socialist states are at a stage of industrialization corresponding to that of the now-developed capitalist countries in the nineteenth century. This contention is ill founded when the western capitalist economies were at the per capita industrial product levels of Comecon members today, they were growing more slowly (as a rule, by not more than 5 or 6 per cent per annum).

The priority given, on the basis of public ownership of all social production, to achieving the largest possible national income, allows ever-fuller satisfaction of the peopleís needs and constantly expands both the market for consumersí goods and the means of production.

Together with the systematic planned control exercised over production, this obviates economic crises and depressions, and provides for a continuous growth of production, thus producing the higher rates of economic development characterizing socialist countries. This is not to say, of course, that there are no bounds to the expansion of production and of consumer-good markets under socialism. The limits of the extension of production are determined at each given stage by the real resources for accumulation ó the natural endowment, the stock of material assets, and manpoweróand the efficiency of their utilization. ....



Although rates of economic advance play a great role in the development of the socialist economic system, they should not be considered as an end in themselves. They cannot be regarded independently of their contribution to satisfying the needs of the population, and of the influence they exercise on the proportion between productive and non-productive investment and current consumption.

It is a commonplace that the economic development rates depend both on productive manpower and its productivity, and on capital assets and their utilization. .... the influence of development on the improvement of welfare may be estimated through analysing the proportion between productive accumulation and consumption at different rates of growth, and thence choosing the optimal combination of accumulation and consumption. 

 ... we may limit ourselves to three simplified types of economic development: (I) based on a rising rate, (II) based on a constant rate, and (III) based on a decreasing rate of productive accumulation. In all these, the national income in the initial year is taken as 60,000 million (60 billion) rubles, of which 20 per cent is devoted to productive accumulation. ...

 The rate of increase of the national income is determined by the rate of productive accumulation under, and the capital coefficient of, three variants. These are shown in Chart 1, viz, with an additional one per cent of national income added annually to productive accumulation (I), with a constant allotment to accumulation (II), and with one per cent of national income deducted each year from accumulation (III). The annual rate of growth of national income in variant I rises to 11.6 per cent by the tenth year, in variant II remains at 8 per cent, and in variant III falls to 4.4 per cent in the tenth year. For the first six years the consumption return is greatest in variant III : the aggregate for those years is 355 billion rubles, against 352 billion in variant II and 348 billion in variant I. 

Hence, if it is desired to achieve the largest consumption fund in the shortest period, economic development on the basis of a decreasing rate of productive accumulation is most effective. Variant I, with a rising allotment to productive accumulation, is obviously disadvantageous. The amount by which the volume of the consumption fund ... under variant III exceeds that in variant I is greatest in the fourth year, and disappears after the sixth year. After the seventh year variant III becomes increasingly disadvantageous from year to year. In the seventh year the consumption fund in variant I amounts to 400 million rubles more than in variant III, and in the tenth year to 11 billion rubles more. For the whole ten years calculated, the volume of the consumption fund is equal to 700 billion rubles in the first variant, 695 in the second, and 687 in the third variant. Thus variant I produces 13 billion rubles more for the total ten-year consumption fund than does III, and 5 billion rubles more than does II. In other words, maximization of the consumption fund for the whole calculation period is given by variant I with a gradually increasing rate of production accumulation, while in variant III this maximization can be obtained only in the first six years.




This demonstrates the well-known contradiction between long-term and current interests of a socialist society, which must be continuously controlled, taking into account the stage of social development reached : at some stages preference is given to productive accumulation (e.g. in the years of the first five-year plan in the U.S.S.R.), at others to the acceleration of the rise of consumption. However, socialism entails the need to provide for the absolute growth of the consumption fund in aggregate and per capita even under conditions of very intensive accumulation. In the first place, this is a consequence of the rise in employment and productivity associated with the growth of income and, secondly, of the need for an increase in consumption per capita as incentive for both urban and rural labour. Therefore, in socialist countries the growth of the accumulation fund is usually accompanied by a more rapid expansion of the consumption fund than of population. As the following table shows, in the U.S.S.R. in 1959ó62, when the share of productive accumulation was rising, aggregate personal consumption increased by 16í5 billion rubles, i.e. by nearly 19 per cent, and the population increased by 10í8 million, or 51 per cent.                                                          


 1959 196019611962
Percentage of national income devoted to productive accumulation19.920.1   22.1    22.5
Personal consumption (billion rubles)88.0 .593.9 96.7 104
  End-year population (millions)212.3216.1 219.7 223.4

... One of the most important tasks of socialist planning is permanently to ensure not only intensive accumulation and high rates of reproduction, but also a more rapid growth of consumption to keep pace with population increase.

... a socialist society naturally cannot ignore the fact that for the long period the highest increase of consumption per capita is ensured by an initial increase in the rate of productive accumulation. To find the most favourable combination not only of productive accumulation and consumption ... a developed socialist society should,... resort to a settlement by compromise. ... a constant share (variant II) has two advantages. In the first place, such a policy avoids the strain on the national economy associated with increasing the rate of accumulation, which requires the incorporation of considerable additional natural and labour resources into the economic process. Nor does it, secondly, involve losses in the national economy which could arise from decreasing the rate of accumulation (e.g. incomplete utilization of capacities in the capital≠ good and building industries and unemployment).

In the example given above the mean coefficient was assumed to be constant. ... There are circumstances, ... in which the coefficient may be altered by the rate of growth of investment.

...  a rapid expansion of the volume of productive accumulation and production often necessitates the exploitation of less-effective natural resources, requiring more capital investment and higher production costs. With a slower rate of investment, there is a greater possibility of selecting the natural resources most suited for immediate exploitation, and deferring use of others until technical progress permits their more efficient employment.

With an increasing rate of accumulation there may be a tendency to encourage capital investment in developed regions, which often do not dispose of the most valuable resources, and into existing enterprises of which the reconstruction and expansion may not provide the best economic indices ...




The proportion between production and productive accumulation, on the one hand, and non-productive accumulation and current consumption, on the other, is based (in a closed economy) on the proportion between the growth of output of capital and consumersí goods, The more the production of capital goods exceeds the retirement and wear of fixed assets, the higher evidently is the rate of reproduction. According to the classic concept, the preferential development of the output of the means of production is conditioned by technical progress, by the mechanization of manual labour, and by the supply of energy per worker. The industries needed to embody technical progress, to substitute capital for labour, and to develop energy production are hence crucial to the process of growth.

Technical innovations and discoveries, especially in the present scientific and technical revolution, constantly promote further automation, and the more rapid replacement of obsolete equipment.

The experience of the Soviet Union and other socialist countries shows that the preferential development of the output of industrial producersí goods is necessary to accelerate the growth of those sectors, but that when a modern industrial structure has been achieved, it is readily feasible to align more closely the rates of growth of producersí and of consumersí goods. The trend towards more efficient use of capital and of current inputs permits a high rate of growth to be maintained with a lower proportion of net investment. Technical progress, moreover, tends more frequently to substitute for labour than for capital, and the priority growth of the output of means of production hence retains its significance even in a developed industrial society.

...  faster than average growth for the means of production ... it is, ... a reality which must be taken into account when planning the development of a national economy: indeed, far from inhibiting a rise in welfare, it creates the material prerequisites for it....  Furthermore, since the greater part of the means of production are intermediate goods, their specific weight tends to rise during a period of technical innovation. Producersí goods, moreover, are not only required for the production of other producersí or of consumersí goods, but also for defence. At present in the U.S.S.R., when a high level of the output of means of production has been reached, means of production ... should serve directly or indirectly to the development and expansion of consumer-good production. ...

In recent years the stock of fixed assets has increased more rapidly than gross national product and the national income; i.e. capitaló output ratio rose and the gap in the rate of increase of the output of producersí and of consumersí goods has remained rather considerable. This excessive gap was aggravated by the insufficient development of the raw materials forming the basis for the industrial production of consumersí goods ó agricultural produce, synthetic fibers, artificial leather, plastics, etc.

The following factors seem significant if the growth of production of consumersí goods in industry is to be accelerated to parity with that of producersí goods. First, the reduction of the capital-output ratio, particularly by progressive improvements in the branch structure of production; second, the development of the basic raw materials for agriculture by intensifying agricultural production and by increasing the material incentives for higher production; third, the acceleration of growth in the chemical industry, supplying agriculture with mineral fertilizers and other chemical means of production, and the production of consumersí goods in industry using all types of modern chemical raw materials; fourth, the full utilization of productive capacity for consumersí goods in both light and heavy industry; and fifth, the expansion of the output of equipment for agriculture and for those branches of industry which produce consumersí goods.



 Professor Domar  Beginning with Professor Notkinís paper, he agreed with the authorís basic assumption that consumption should be the final purpose of economic activity, while investment should be merely an instrument for increasing future consumption. The main purpose of the paper was the determination of the optimal rate of capital accumulation, or, more precisely, of the fraction of national product to be invested in productive industry (indicated by the symbol a). Ö This determination of an optimum  had been a rather popular subject in economic literature, beginning at least. with the classical work of the English economist Ramsey in 1928 ; recently it had been dealt with by the Indian economists Sen and Chakravarty, the American Koopmans and many others. Professor Notkinís paper had the advantage, as compared with the others, of simplicity, though its scope was more limited. Professor Notkin divided his a by the marginal capital-output ratio, which he termed capital efficiency (indicated here by v). The ratio a/v was the relative rate of growth of national product which he used in his quest for the optimum.  This formulation would be familiar to Western economists ó one of its originators, Sir Roy Harrod, was among the Conference participants. A model similar to Professor Notkinís but much more fully developed, had been published by the Soviet economist Feldman in the Soviet journal, Planovoe khozyaistvo, as early as 1928. Feldmanís work had been taken up in America, England, India, Japan, Poland, Czechoslovakia, and in many other countries, although, puzzlingly, Domar had never seen any references to him in Soviet economic literature.

Professor Notkin considered first a rising, then a constant, and finally a falling a, and found ó again correctly ó that the optimum a depended on the time horizon of the decision-makers. The longer the horizon, the more would a rising a justify itself. This treatment should be extended not only to the rate of change of a but to the magnitude of a itself. Again, the longer the time horizon, the higher would be the optimal magnitude of a, provided that a larger a did not increase v. It was unlikely, however, that the magnitude of v would remain constant irrespective of the size of  a.    

Recent studies carried out in the United States by Kendrick, Abramovitz, Solow, and others had thrown serious doubt on such a simple relation between the rate of growth of output and the rate of capital accumulation.

Other factors, such as the growth of the labour force, changes in its quality, technological and managerial progress, economies of scale, etc. played their roles. Professor Notkin was aware of these considerations. According to his own calculations, the Soviet v had indeed been increasing, a characteristic confirmed by Bergson and other American scholars working in Soviet economics. Perhaps this phenomenon had been caused by too large an a in the Soviet economy. If so, the optimum a was likely to be lower than Professor Notkin seemed to suggest, but his model was too simple for the determination of the optimal magnitude of a under more realistic conditions.

Professor Notkin, in reply, felt that Professor Domar might have been making too much of the formula a/v it was well known in the process of planning and he had neither made special mention of it in his paper nor assumed authorship of it. He had used it only indirectly in calculating the efficiency of accumulation. The rate of growth of national income, t = a/v, was solved for v, the coefficient of efficiency of accumulation (v = a/t). All were rather simple arithmetical manipulations, and he could hardly believe that Sir Roy Harrod thought that his own use of a similar presentation was a significant part of his important work on the theory of economic growth. Nor, he was sure, had Feldman considered this element to be the crux of his study. Ö..

Professor Notkin denied Professor Domarís claim that his model neglected efficiency. There was a hypothetically constant coefficient of efficiency in the model, and, later in the paper, the factors causing a change in the coefficient of efficiency of accumulation were considered.. ...

Dr. Kyn observed that Czechoslovak economists were now less concerned with analysing the factors in the very fast postwar growth of Czechoslovak industry and were more concerned with identifying the causes of the recent deceleration. Putting the problem in terms of Professor Notkinís paper, he would suggest that, of the two factors determining the rate of growth, the rate of accumulation a and the capital-output ratio v, the difficulties lay in the latter. Professor Notkinís emphasis on the influence of the rate of accumulation on growth was misplaced because the largest of investment outlays could be inefficiently spent: it was rather the capital-output ratio which demonstrated the efficiency of the allocation of investment. The majority of economists in Czechoslovakia had now come to the conclusion that the limiting factor in economic development in their country was the system of planning and management, and not the rate of accumulation. As Dr. NovozŠmsky had pointed out the previous day, mistakes had been made in the structural composition of new capacity. This misallocation of investment had generated the disproportions which were at the root of the slow rate of Czechoslovak growth. The trouble had been perceived for several years, but only recently had it been generally realized that the old systems of planning and  management were incapable of adopting corrective measures. The reform of economic management would have to change the administrative structure, the system of information flows, and the criteria for managerial decision-making.

Professor Grossman    Ö There was no rigorous definition of the concept of the optimum and he himself was unable to produce one. An arbitrary optimum could always be taken from a long-range target and empirically-derived coefficients which determined the required level of investment in each subperiod. Alternatively, one could proceed with Professor Notkin and attempt to determine the Ďbestí rate of investment over the medium term, i.e. nine to ten years; again, he did not see how this could be considered an optimum. Professor Notkinís time-horizon was an instrument for measuring the weight of benefits today against benefits tomorrow, but in the last resort the ultimate decision was a political one. It was not the function of the economist to state categorically how much the present generation had to sacrifice for the next generation. ...

Professor Notkin termed Professor Grossman an agnostic in claiming that the economic optimum had to be selected on political grounds. It was the task of the economist to formulate the constraints within which the political authorities decided how much and what the present generation should sacrifice for future beneficiaries. Ö.

Professor Grossman felt that it was not agnostic, as Professor Notkin had put it, to point out that the economist could not allocate between accumulation and consumption without political guidance: surely the history of the Soviet investment rate was that of political decision. The political process had something of the role of the physician in prescribing a diet restriction: the function of the economist was like that of the patient in choosing the specific foods. Western estimates of the Soviet rate of investment showed considerable fluctuation during the decade to 1963 : it had declined from 1953 to 1955, had been rising to 1961, and had subsequently been stabilized. He believed that these changes had been made for political reasons and that the political determination of the rate could not be avoided in a socialist economy, especially in the short run. Professor Notkinís attempt in his paper to identify an optimal ratio of accumulation to consumption could not be made realistic without reference to political choice. There was a further divergence from reality in Professor Notkinís model in that he had assumed a stable capital-output ratio. This was of course appropriate for the construction of a theoretical model, but there had been substantial variations in the incremental capital-output ratio in Soviet experience:

the marginal productivity of capital had, for example, halved between 1959 and 1963. This was surprising when it was realized that the rate of investment remained more or less stable, that the non-agricultural labour force was rising normally, and that technological opportunities were still ample. Ö

Finally, Professor Grossman queried the relationship which Soviet economists continued to perceive between the producer-good sector of industry and the rate of accumulation. The producer-good sector (termed Group A) was a most heterogeneous category, comprising not only capital goods but also building materials, semi-manufactures, raw materials, and fuel, all of which served either Group A or Group B (final consumersí goods). Was it really the case that Soviet planners continued to use such an aggregative category? If some disaggregated sub-groups were used, he was surprised that data had not been published on them.

Professor Notkin wished to make some corrections to Professor Grossmanís statements. First, he took issue with Professor Grossmanís claim that capital productivity in the U.S.S.R. had fallen by one-half. The decrease between 1958 and 1962 was only 4 per cent for industrial capital and 11 per cent for the national economy as a whole, due largely to the lag in agricultural production. A number of factors had raised the capital- output ratio in the U.S.S.R., notably the reduction of working hours in industry, construction, and transport, and of the number of shifts worked. Some of the investment in agriculture had substituted for manpower transfers to other sectors. As industrial shift work again began to rise and as agriculture adjusted to a declining labour force, the strong pos≠sibility arose of stabilizing, or even reducing, the capital-output ratio.

Since Professor Grossman had cited a substantial fall in the marginal productivity of capital, his statement was not inconsistent with Professor Notkinís quotation of a small decrease in average productivity (Editorís note).



















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