Market Socialism


Branko Horvat

An interview with Branko Horvat,
Poddgorica's "Monitor" August 4, 1995

Analysis of a Price Theory
by Cindy Urrutia

Analysis of a Price Theory

by Cindy Urrutia


Branko Horvat is an economist who is well recognized for his work as a central planner and a theorist. One of Dr. Horvat’s best known text’s is Toward a Theory of a Planned Economy which arose out of the need to provide a practical and usable frame of reference for an economists involved central planning. In his work, Dr. Horvat proposes to examine the issues which constitute an efficient economic system given historical circumstances. The foundation for Dr. Horvat’s theories drawn from the experiences provides by the failures and successes of post war Yugoslavian economy.


As stated in the above, Toward a Theory of a Planned Economy proposes to study different ways in which an efficient economic system would generated maximum product given the historical social-economic conditions of Yugoslavia. Due to the time and length constraints of this analysis, all of Dr. Horvat’s theories can not be adequately synthesized. For that reason, the focus shall be his Theory of Price which is the foundation of Toward a Theory of a Planned Economy.


According to Dr. Horvat, the fundamental importance for the economic organizational mechanism by which economic valuations are being transformed into market categories is price. Price is the starting point to economic planning in which classical labor theory of value is recognized. Horvat, however, intertwines Marx’s meaning of value with the above. In Towards a Theory of a Planned Economy, Horvat establishes the general nature of man’s situation, value and labor. In a planned economy, the amount of economic wealth created is related to the of labor expended and that changes in relative values of particular goods may be meaningfully related to changes in the productivity of labor engaged in the production. (pg. 12) The key issue is to integrate sociology and economics. This is achievable in a collective economy if production is organized with the direct purpose of satisfying the needs of the community. In order to obtain this goal, appropriate prices derived from value must be introduced.


In order to understand price better, Horvat gives the reader a theory of price in a socialist economy. It is important to understand that in socialist mode (in particular Marx), price is a derivative of the labor value inputed into the production of a good. According to Horvat, labor is not homogenous like Marx stated (in Marxist view, higher labor was a multiple of simple homogenous labor), but heterogeneous and has an affect on otherwise homogenous labor. In this theory of price it is found that to satisfy demand, labor is applied to heterogeneous factors of production. Thus, heterogeneity needs to be measured. Varying productivity of the same quantity labor applied to natural resources will be leveled out by rent, relative product, and living labor working with capital measured by interest and relative production of labor, itself measured by wages and profits. (pg. 15)


In having given a brief summation on the value of labor, its relation to price can be better understood. It should be clear that in a socialist economy, prices are the instruments by which the preferences of economic agents are registered. As a result, prices should be reflections of individual and social valuations which express the relative importance of economic services and goods that satisfy human needs. (pg. 17)


In the above it has been stated that prices are the core of economic values and that labor value in essence shall lead to prices. Although this statement appears simple in form, it is more intricately woven. Yes, labor value is a function of prices, but it is important not to forget that primary and intermediary goods also have value which must be also be a function of price. How then does Horvat propose to give a theory of price? To begin with, he stated that labor is heterogeneous. The next step is to give a Theory of Optimal Allocation of Resources in which marginal cost pricing is used. This theory is given to illustrate how it works and why it is not appropriate for a social economy. Horvat then moves on to explain why full cost pricing is a better method for valuation.


The reason why Horvat fell that marginal cost pricing is inefficient is because it is meant to fix output, not prices. Horvat states that output is fixed due to the fact the when marginal cost pricing is used, demand is equalized with supply. This is seen as the product of every commodity is then pushed to the point where the marginal cost is equal to the price of the product. (pg. 21) To further state his case, Horvat professes that when testing marginal pricing, the empirical investigations illustrate that a major portion of a marginal cost curve is horizontal. If the equalization rule is proclaimed compulsory, it can have serious consequences. (pg. 24)


Having found marginal cost pricing inapplicable, Horvat moves to state that full cost pricing is more efficient if there is not a time preference. It can be seen that a growth curve of a full cost economy is steeper than that of a marginal cost curve economy. With the above information in mind, one may ask, what is full cost pricing? Full cost pricing encompasses many things. For our purposes and constraints, the most important issues shall be highlighted. There are several rules and conditions for full cost pricing. They are as follows:

  1. The marginal rate of substitution for every pair of consumer goods is equal for all consumers and is equal to the price ratio of the goods.

  2. The production of every commodity has to be pushed to the point where it entails maximum profit,… thus marginal cost equals marginal revenue. (pg. 31)


Although, there is more to full cost price than the above, the former provides the foundation for which central planners are to work from. The reason is that Horvat feel that although continual demand-supply equalization may be conducted by market forces, it can also be done through central planning. Central planning is also inherently preferable because it is less vulnerable to economic shocks. The reason lies in the fact that planned economies, the market will be anticipated by firm. This will occur because firms will have information on demand’s future trends, the plans of other firms, and will be informed on the Planning Board’s future intentions.


The nirvana for central planning is to have an efficient economic system which equally enhances the social welfare of its citizens. The issues raised above in this text have been a simplification of a portion of Branko Horvat's theories on central planning. It should also be understood that theories do not exist in a vacuum, but are dependent on other pre-existing or additional theories. For that reason, it is the recommendation of the writer have its readers read all of Branko Horvat’s text so his theories can be fully appreciated and understood. It should also be noted that Horvat’s theory on prices was but the beginning and foundation for his work on planned economies.


An Interview with
Branko Horvat

Poddgorica's "Monitor" in its issue of August 4,  


Horvat, himself does not think that the economic system brought about the breakdown of Yugoslavia. On the contrary, he says, the economic imperatives have signalized the necessity of stronger integration of the Yugoslav region. The Yugoslav example shows that in these region the economy is not important, but the politics. The people seem to be willing to be hungry only to be able to see their flag.


The reasons for the Yugoslav breakdown lies in the undemocratic system, thinks Horvat. Due to the undemocratic system some people were overlooked some were favoured... Plain citizen, who cannot fully grasp the whole situation, who is not fully educated, projected the complete situation on a national plane, that he is not able to fully realize his rights since another nation is oppressing him. Since the economic policy and some other elements were conducted from Belgrade, everybody came to the conclusion that this is due to the fact that Belgrade is exploiting him. The whole thing was aggravated by the appearance of Slobodan Milosevic, probably the worst leader to appear in all 75 years of the existence of the South slavic union.


In the long run, Horvat says, there must be elements of integration. EU shows that, particularly in Europe, no state can remain isolated. So, the Balkan states must unify somehow. Since they cannot be absorbed by the EU, even Croatia and Slovenia, these state will turn to themselves and form an alternative union.


A simple fact has to occur for the re-integration to be possible, thinks Horvat - that is to remove Tudjman and Milosevic, meaning essentially democratization of Serbia and Croatia as a precondition. The second one is that international organizations start supporting democratic ally minded people in those countries. The EU has to agree which and what kind of democratic forces they will support in both countries and with which they will not even contact. Making various negotiators circulate between Tudjman and Milosevic only brings them legitimacy they do not deserve.


Source: Podgorica weekly "Monitor", August 4, 1995;



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