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COMPUTATION OF PRICES

 

I should like to speak on two problems; the first is the problem of prices, and I have more questions for Mr. Pashkov, since I did not receive satisfactory answer to the question I asked him yesterday. The second problem is the problem of different types of economic mechanism based on the considerations of Mr. Zaubermann, Zielinski, Lipinski and others.

The question I would like to ask professor Pashkov is whether he can tell us in more detail, what methodology was used in computing production prices. From what has been said I have only understood, that the newly computed prices will be production prices, since profit will be allocated proportionally to capital. But it is not clear to me how the prices for millions of individual products will be calculated.

 

I should like to demonstrate the experience of Czechoslovakia what problems are connected with centralized price setting of all prices. Let us suppose we have 2 to 3 million individual commodities which must have their prices set. We can follow the traditional method by which price reforms were carried out in the past or the more modern method making use of computers. This new method is being used in the present price reform taking place in Czechoslovakia.

In the past price reforms took place approximately every five years. The calculation of new prices took about three to four years and thus practically filled out the entire period between the reforms. The traditional method of calculation was roughly as follows: first the prices of primary products such as coal, iron ore, etc. were calculated. On their basis the prices of derived products such as electricity, steel etc. were calculated and on their basis in turn, the prices of further commodities, such as machine-tools etc. The process of price calculation took place in successive stages up to the calculation of prices of the final products. This seems quite rational, but the problem is in feed-backs. As everyone knows, there exist in the national economy a great number of complex feed-backs. For instance the production of coal, electricity, etc. requires the use of the products of the machine-building industry. Therefore the correct price for coa1, iron ore etc. Cannot be calculated without knowing the price of machines. Since the traditional method could not take these feed-backs into account, price thus calculated cannot be considered as real production price. To achieve more correct prices it would be necessary to repeat the calculation several times, i.e. to do several iterations. But each iteration means a new calculation for two to three, millions products. Even if each iteration takes only two years and five or six iterations were sufficient for finding correct prices, the whole process would take too long. We have therefore come to conclusion that such a method is not adequate for the calculation of real production prices. Our experience has also taught us that after each general reform of prices, the results were quite out-of-date because in the meantime conditions had changed, and under new conditions, they were not real production prices any more.

 

The second method of computing prices, that is the one using electronic computers takes less time, but it is impossible to prepare a program for a computer, which would compute two to thee millions prices. With the use of electronic computers we must reduce the number of commodities for which prices are computed. According to our experience with the help of computers the duration of price reform can be shortened from two or four years to half a year or one year. But we obtain only average price indices for aggregate groups of commodities.

So neither does this method give us real and exact production prices for individual commodities. Our experience thus tells us that none of the known methods makes it possible to calculate individual prices exactly and sufficiently fast.

The economic reform now being introduced to Czechoslovakia rests upon the renewal of the market mechanism. But the existing price system is greatly distorted and prices are far from equilibrium. If we want to renew the market mechanism and efficient functioning of the economy we must reach equilibrium prices as soon as possible. If in the present situation prices were set free, large price movements would be set in motion, which would subsequently lead to large shifts in demand with the result that chaos and steep inflationary development would. take place. The success of the economic reform is therefore dependent on whether a central price reform (which we hope will be the last) will be able to produce prices at least not too distant from equilibrium. The renewed functioning of the market mechanism could then be expected to adapt individual prices to equilibrium level. I am of the opinion that without the market mechanism it is impossible to achieve equilibrium or "rational" prices in the national economy.

 

 

 

 

 

 

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