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CONFERENCE OF THE INTERNATIONAL ECONOMIC ASSOCIATION IN PLOVDIV

 

In 1964 I had already several publications in Czechoslovakia some of which was about prices under socialism. This was the reason why Ota Sik recommended me for the IEA conference in Plovdiv Bulgaria. Bellow are excerpts from my paper I presented there and from the responses of some conference participants . Note that  most of them were internationally well known economists at that time.

 

I want to stress that the outcomes  of the Plovdiv conference had a considerable impact on my life and due to that also on the life of our family. First of all my paper and my official discussion contributions were positively accepted by many western participants  – especially by Gregory Grossman and Evsey Domar from the USA, by Michal Kaser from England, by Leon H. Dupriez from Belgium, by Luc Fauvel and J. M. Jenneney from France and Tsvi  Ophir from Israel, – and also by some participants from East – as for example by Eduard Lipinski, and Zygmunt Knyziak from Poland, Ivan Maximovic and Zoran Pjanic from Yugoslavia,  and finally Andras Hegedus from Hungary. Already at the conference I had extensive personal discussion with some of them and apparently under their influence I was later invited to many additional conferences and to lectures at their universities.

Soon after the conference references to my Plovdiv presentations began to spread through both Western and Eastern Europe. As a result of that and of my discussions at other conferences and my lectures at various European universities I became quite well known. This was also the reason, that immediately after the Soviet invasion in August 1968 I received many invitations to visit various universities, especially in Great Britain and USA. That made our emigration much easier.

One funny story happened directly at the Plovdiv conference. My knowledge of the Russian language was not very good, so I started my discussions in English. However I was immediately told that according to the established rules all the East European participants must speak Russian. Fortunately both Grossman and Domar, who were Russian by origin, were sitting next to me so they could help me to find appropriate Russian words.

 

Excerpts from

THE ROLE OF PRICES IN A SOCIALIST ECONOMY

by  O. KYN

In M. C. KASER(ed.): ECONOMIC DEVELOPMENT FOR EASTERN EUROPE

Proceedings of a Conference held by the International Economic Association, MACMILLAN, 1968

 

  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,…. 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 …The role of prices was hence no more than as a subsidiary form of cost accounting;

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.
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.

 

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.

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. 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. ….. Price stability is undoubtedly desirable, but only if it does not cloak a violation of economic equilibrium. ….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; ….. 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. ….. 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. …. 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. …...

 

  3. THEORETICAL AND HISTORICAL ORIGINS OF THE PRICE SYSTEM

…. 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. ….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. …. . An automatic (spontaneous) functioning of the market was considered a source of anarchy,  …. 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  …. 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 …  With all this went an unreasoning repudiation of anything evolved by bourgeois economic theories such as market equilibrium, the theory of consumer's behavior 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 ….. 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. …..

 

4. ADVERSE CONSEQUENCES OF ADMINISTRATIVE PRICE-FIXING

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…the demand for certain types of goods continues to be unsatisfied for a long time, while …. unsalable 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. … 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. …

 

5. CRITIQUES WITHIN THE SOCIALIST COUNTRIES

… 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. 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

 

  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…… 

 

7. CZECHOSLOVAK PROPOSALS FOR REFORM

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

Professor Fauvel  ... 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. ….

 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 centered.    (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. ….

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. …..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. … 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. ….

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 …. 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 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….Professor Gatovsky had listed a number of factors which require prices to deviate from this value, …. 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….. 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. …

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.

 

 

 

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