Reforms O. KYN: THE ROLE OF PRICES  IN A SOCIALIST  ECONOMY

 


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 fulfilment of planned indicators and not directly in the production of commodities demanded by the consumer: on the one hand, the demand for certain types of goods continues to be unsatisfied for a long time, while on the other hand unsaleable 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,

 

The constancy of prices and the elimination of competition fostered monopoly conditions. The divorce of prices from socially-necessary costs vitiated the criteria for investment efficiency, for the exploitation of scarce resources, for choice of technique, and for foreign trade. Macroeconomic ratios for planning were distorted by a wrong reflection of costs and by the dual scale of prices, which undervalued material costs in relation to wage costs.

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. An excessively high price for goods with high elasticity may, by restricting consumption, result in an unemployment of productive capacity, and the purchasing power which could have been absorbed on that good will intensify market disequilibrium by being directed to deficitary items. Far from solving conflicts of interests, the price system intensified them.
Excessive centralism overloaded the administrative apparatus and created favorable conditions for the growth of bureaucratic tendencies.

 

 

 

 

 

 

 

 

 

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