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

 


SUMMARY RECORD OF THE DISCUSSION

SESSION  V - PRICE SYSTEMS

(In the Chair: Professor RACHMUTH )
 

 

Professor Fauvel found five principles of price formation in the system described by Dr. Kyn. The first was that prices were fixed by a central agency (as occasionally in the West during periods of scarcity), and secondly were stable for several years. The third feature was the dual level of prices, viz. those of production (determined by labour value) and retail prices. Fourthly, it had been the practice to deflate retail prices gradually.  Finally, the system of prices in agriculture differed signifi­cantly from that in the rest of the economy, but for reasons that seemed of expediency rather than deliberation. 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. (D1)

The paper by Professors Maksimovic and Pjanic had the same objective as Dr. Kyn in seeking a 'normative price', and both concentrated their attention on the concept of 'net income'  that is, total revenue less out­lays on materials, depreciation, payment for capital, and taxes. It embraced both labour remuneration and profits; not all was distributed as a divi­dend to labour and it could be controlled by the state in the same way that profits were influenced in a capitalist economy. It seemed to him that this practice did not guarantee in Yugoslavia the operation of a market economy, for 70 per cent of prices were still controlled. Nor did the technique of profit-sharing ensure that the benefit of low rates of interest to stimulate certain branches was not dissipated in labour remuneration. He hoped that, in the discussion, economists from the socialist countries would indicate the extent to which the unique basis of labour value was still tenable; whether a unitary price system to replace the present dual levels was compatible with the implementation of social desiderata; and whether a socialist market economy might emerge along different lines (e.g. using the Swedish system of 'price listing' to exhibit enterprises which were overcharging).

 

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 centred.    (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. He found Professor Domar's principle of marginal-cost pricing generally unworkable - because the quantity produced had to be known in order to ascertain marginal cost -but valid under certain conditions. Marginal cost could be approximated by average variable cost when surplus capacity existed, but might be many times average cost when capacity was deficient. When fixed capital could not be rapidly expanded, price should serve to ration the limited stock to its most productive uses. A socialist economy could price by negotiation, but this was open to abuse by the exertion of monopoly power. Professors Maksimovic and Pjanic had touched - unfortunately only briefly - on the problem of monopoly control under socialism. The relation of prices to the world market had also to be considered: the domestic price of an imported commodity should be the world price plus transport costs; similarly, the domestic price of an export good should be the export price minus transport costs.  Commodities which were not traded need not be priced in any exact relation to the world price, but would be valued within the ranges set by the above prices, viz. its opportunity cost should be no lower than the export price but no higher than the import price. These relationships would, of course, have to be appropriately modified if the volume of trade in any commodity so priced by the socialist country concerned was large enough to affect the world market price.

 

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. Adam Smith's 'natural' price did not differ substantially from the price based on cost in Marx's Kapital, vol. III. Professor Mateev's paper was a development of Marx and he concluded that price Type II was that which correctly embodied the principle of socially-necessary cost; of the two variants that with capital at replacement cost (p. 78) was the better.  If enterprises were allowed to deviate from Marxian prices, in order to prevent market short­ages (or surplus stocks), they should be instructed to restore normal prices as quickly as possible by changing their level of output. Information that this had been done, and why, would be conveyed to the planning agencies.

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. The United Kingdom had experi­enced the excess-demand type of inflation during and after the War; more recently there had been little excess demand, but spiraling inflation persisted. The British Government had set up an agency to review prices, and many hoped that its function was not to be mere window-dressing: its task would be made far easier if there was already in existence a set of official prices, such as the socialist countries had. 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. In Western terms, the general principles of the socialist system of prices seemed to be the following. Salaries and prices were planned, although it was not clear upon what criteria. The ideological basis of price was Marx's labour theory of value, as opposed to a system of value determined by the marginal productivity of the factors employed.  The socialist economy set a value for labour according to a scale of wages - with only slight variations by location and type of activity - such that the aggregate remuneration equaled the value of the planned production of wage goods.  That part of the national product which was not to be consumed by the workers approximated to Marxian surplus value and depreciation; prices were established to generate the appropriate surplus value and depreciation.

This surplus value comprised government consumption, funds for investment, and amortization as remuneration for the factors owned by the state (rent, interest, and the gross profit of enterprises).  Socialist countries seemed always to have determined this surplus value crudely, in the light of government revenue needs and without reference to any norms. The use of capital charges in Eastern Europe reintroduced one of the norms familiar to Western economies. It seemed to him that the global technique of calculating surplus value had tended to cause the level of accumulation to exceed that indicated by the marginal productivity of capital, and that the share of surplus value was hence larger in relation to the wage fund in socialist than in market economies.

 

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 wrong. Professor Fauvel had pointed out that capitalist economies had recourse to rationing in war-time. Historically, price control and con­sumer rationing during the Civil War and the Second World War were two of the most important economic conditions for victory. The same was true of the two levels of prices, which had been essential to implement the policy of the development of heavy industry in preference to agri­culture and those branches of industry producing consumers' goods: prices ruling for producers' goods were lower than those for consumers' goods. This dichotomy could be relaxed now that the Soviet Union and the other socialist countries had entered a new stage permitting as rapid development for consumers goods as for heavy industry. This was not to say that there had not been mistakes in the past: excessive centraliza­tion, the incorrect substitution of administrative decisions for economic methods, and the inadequate utilization of commodity-money instruments. Such defects were still far from eliminated; 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 an 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.  The Scientific Council on Price Formation in the U.S.S.R. was working on the assump­tion that prices had to be based on the Marxist theory of labour value and, in particular, on the category of socially-necessary labour outlays. The determination of value by socially-necessary labour expenditure stimu­lated technical progress, because those enterprises introducing advanced technology reduced their labour outlay below that socially necessary, and, selling their commodities at industry-wide prices, received supplementary profits. Those enterprises where costs were higher than socially necessary gained less than average profits or even made a loss at industry-wide prices, and were forced to improve their technology and organization of production. On the other hand, prices set in accordance with relative utility slowed technical progress, because they assured a normal profit to backward industries and increased profits to all other enterprises by artificially inflating the industry-wide price above the value of the socially-necessary expenditure of labour. The cost of production and the average rate of profit had also played important roles in the history of commodity economies:  intra-industrial competition had induced a systematic deviation of prices from value and created an incentive for a transfer of capital to those branches of industry where there was a high concentration of living labour and a higher rate of profit.

The essence of the problem was to derive prices which corresponded most closely to value, that is, to the cumulative costs of live and embodied labour. For this it was necessary to elaborate a practical method of deter­mining such costs, the very substance of value, and in the conditions of a planned economy it could be based on the mathematical approach and on modern computing technology. The two implicit problems of mensura­tion were of skilled labour in terms of unskilled labour, and of the socially-necessary labour costs of any good in the main and ancillary industries contributing to its production. The first problem could be solved by applying a scale of wage relationships used to remunerate workers of different skills ; the second involved the construction of an intersectoral balance. The final cumulation could be made in units of money or in hours of work; either would be a reasonably exact measure of value as production costs.

 

Professor Gatovsky had listed a number of factors which require prices to deviate from this value, among them quality differences or other elements of use-value, novelty, supply and demand, and natural condi­tions. The advantage of determining value, as socially-necessary labour costs, was to permit society to decide consciously and precisely where prices should diverge from value on economic grounds and where they should be more closely correlated with Socially-necessary expenditures. The need to reform pricing in such terms had been appreciated in the U.S.S.R., but the manner of change was not yet decided: there would be a gradual approximation of wholesale prices to socially-necessary out­lay on criteria which still had to be precisely determined. 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. In all of them, discussions were taking place which would not be concluded for a long time. In the G.D.R. a reform of prices on the industrial level became necessary before the theoretical discussions could be completed and the problem satisfactorily solved.  The prices for coal and electricity and railway tariffs ruling until April, 1964, were inadequate reflections of cost and had indubitably to be increased. The problem, of course, was by how much. As an interim solution the Commission of the Ministry of Finance, of which Professor Oelssner was a member, had authorized the addition to labour costs of a rate of profit which would assure that each industrial branch was able to self-finance its planned investment. This solution was not ideal, but was the most expedient under the circumstances. Professor Oelssner recalled that he had already mentioned the working group of the Academy of Sciences of the G.D.R., which was trying to establish work-time expenditures per unit of production. It had raised the question of delineating that part of labour which contributed to value.

Marx had observed that one did not have to work oneself to be part of the total work-force. The problem of definition arose, for example, in classify­ing work on research and development.  For the price reform in the G.D.R. it was decided that such outlays should be counted in cost if carried out at the enterprise or in the enterprise-group. But the definition of labour was only part of the problem: the main difficulty was to decide what part of surplus value had to be added to cost. Several proposals had been made, among them basing value on the actual price of pro­duction (Produktionspreis).  Professor Oelssner personally advocated market value as defined by Marx in Chapter 10 of Volume III of Kapital viz. the addition to Marx's cost of production (Kostpreis) of a profit rate differentiated by industrial branch. However, whatever variables were chosen, prices had to be dynamic, since productivity was constantly changing.  Market value would, furthermore, express such objective factors as worth to the user, and the interaction of supply and demand; it would hence deviate from normative prices (Normativpreisen).

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. Since, by that time, profit would have become the main criterion for enterprise operation, it would be necessary to perpetuate central price control.

 

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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