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Prices 

Sekerka - Kyn - Hejl:  A Model for Planning of Prices

 

I. INTRODUCTION  

 

The interest of economists has recently concentrated a great deal on the problem of prices. Under conditions of a centralized system of management of the economy it was not correct to identify the planning of prices with centralized administrative price fixing of all products. Since no adequate method of planning prices existed and since it was practically impossible to make available to the centre the huge amount of information (as well as to process such information at the centre) necessary for the fixing of prices for all products, all the centre could do was adjust prices from time to time on an 'ex post’ principle. Under such conditions it was only natural that after some time the system of prices prevailing in the economy became so deformed that it almost ceased to fulfill any rational economic function.  

This deformation of the price system has at present two important negative consequences for the Czechoslovak national economy: (a) the basic criterion for evaluating the efficiency of the economic process has been deformed, which means that under the old price system it is impossible to make rational economic decisions either at the centralized or at the decentralized level; (b) with the price system in operation until now, existing prices are at such variance with equilibrium market prices that it is very difficult to renew quickly the functioning of a market mechanism.

Thus the task of rationalizing the price system has become one of the basic conditions for a better functioning of the socialist economy as a whole. During the last few years this problem has, to an increasing extent, become the focus of interest among economists in the socialist countries. This was apparent in the discussions concerning the functioning of the law of value and the role of the market mechanism under conditions of socialism, as well as in the discussions concerning the so called ‘rational price-formula.’  

 

This paper aims at following up the discussions about a rational price formula, and especially the work of Belkin, Nemchinov, Novozhilov, Korac, Csikos-Nagy, Ganczer and Racz.1) We have tried to generalize individual price formulae (or types of prices) and project them into a more general price theory. We have also, by way of experiment, made calculations of basic price types on empirical data from the Czechoslovak economy for the year 1962. On the basis of a theoretical analysis of the individual types of prices we have tried to sketch the method by which a model of price planning might be used.  

The mathematical and economic apparatus used in this paper is simple and is based on economic models of the Leontief type. More sophisticated optimization models exist today, which can give an optimal price system as their solution. But these optimization models still present a number of unsolved problems and also the information necessary for their use is not available and so makes them impossible to use for the practical planning of prices in the near future. In this paper we do not claim to have found the best price system, but we think that the suggested method can be used under present conditions to find a price system that will at least be more rational than the present one. The practical use of this price model has been tried out by experimental price calculations (see Hejl, Kyn, Sekerka),2) by use in the preparations for a general reform of wholesale prices which came into effect in Czechoslovakia on 1 January 1967, and also in a forecast of price development until 1970 which was made by the State Commission for Finance, Prices and Wages at the beginning of 1966.  

 

One more point must be made about the relationship of this model to the functioning of the market mechanism. Some authors believe that mathematical methods and the use of computers will enable such exact calculations of prices of all important products as to make it possible to set these prices centrally as binding for all enterprises. We do not share this opinion. The statistical information necessary for price calculations is never sufficiently perfect, nor does it reach the centre quickly enough, to make it possible to consider the calculated prices as entirely adequate to the momentary state of the economy. Even if the largest computer available were used, it would not be possible or efficient to calculate millions of prices of various concrete products. We therefore think the importance of price calculations lies especially in the fact that they yield information on how basic, macroeconomic price relations should develop—in other words how the relations between aggregate price levels of individual industries should develop. Such information can then help planning institutions to better planning and enable institutions concerned with day-to-day management to use those indirect methods of influencing the economic process which will lead to such development that current prices, formed by the market, become as close as possible to planned prices. Such a concept of the planning of prices with the help of mathematical models and computers does not presuppose an elimination of the market mechanism, but, on the contrary, presupposes its existence. The planned price should at the same time be an equilibrium market price, with current market price moving according to momentary supply and demand.

 

 

 

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