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Towards A Socioeconomic Theory Of Socialism

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Towards A Socioeconomic Theory Of Socialism

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Content 70- 25,056 PERLMUTTER., Edith Laura, 1914- TOWARDS A SOCIOECONOMIC THEORY OF SOCIALISM. University of Southern California, Ph.D., 1970 Economics, general ' I ■ I University Microfilms, A X E R O X Company, Ann Arbor, Michigan © Edith Laura Perlmutter 1970 ALL RIGHTS RESERVED THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED TOWARDS A SOCIOECONOMIC THEORY OF SOCIALISM by Edith Laura Perlmutter A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) June 1970 UNIVERSITY O F SO U TH ERN CALIFORNIA THE GRADUATE SCHOOL UNIVERSITY PARK LOS ANGELES. CALIFORNIA 9 0 0 0 7 This dissertation, written by EDI.TH.MyM..PmMUXXER.................. under the direction of Dissertation C om mittee, and approved by all its members, has been presented to and accepted by The Gradu ate School, in partial fulfillment of require ments of the degree of D O C T O R O F P H I L O S O P H Y \ J Dean TO MY MOTHER ROSE GREEN ii DEDICATION TABLE OF CONTENTS Page ii Chapter I. INTRODUCTION.............................. 1 Purpose Scope Hypotheses Method Literature and Sources Terms and Concepts Defined Underlying Assumptions of the Socioeconomic Theory of Socialism Organization of the Dissertation II. STAGES IN THE DEVELOPMENT OF THE POLITICAL ECONOMY OF SOCIALISM .................... 16 Introduction Marxism— The Pre-Soviet Era Contradictions in Capitalist Development Some Specific Characteristics of Socialism Socialism and Communism Era of Rapid Industrialization and Extensive Growth in the Soviet Bloc— Lack of Systematic Economic Theory Theory of Growth Market and Price Theory Lack of a Systematic Theory for the Functioning of a Socialist Economy Contributions to Economics A Systematic Economic Theory of Socialism— The Lange Model Why Lange Developed the Model Economic Theory of Decentralized Socialism Economic Theory of Centralized Socialism The Influence of the Lange Model Chapter Page Era of Slower Growth and Revival of Economy Theory for the Functioning of a Socialist Economy Causes of the Revival of Economic Theory Divergence of Theories with Respect to Techniques for Economic Efficiency Divergence of Theories with Respect to Human Relations Conclusion III. FOUNDATIONS FOR A SOCIOECONOMIC THEORY OF SOCIALISM: AN OVERVIEW...................... 78 Introduction Problems in the Formulation of a Systematic Theory of Socialism Level of Development Economic Laws, Theories, and Political Economy The Functioning of an Economic System The Goals and Ends Public Ownership and the Underlying Welfare Assumption Public Ownership and the Means to Attain Ends The General Theory of Socialism: Organization of the Discussion IV. QUANTITATIVE ASPECTS OF SOCIOECONOMIC THEORY— DEVELOPMENTAL AND FULL EMPLOYMENT EFFICIENCY....................................102 Introduction Developmental Efficiency Aims of Development Policy Choice of Alternatives Choice of Methods of Developmental Planning Choice of Time Period for Planning Choice of Optimality Criteria Choice of Criterion of Comparative Economic Efficiency iv Chapter Page Choice of Computation of Interest Choice of a Growth Model The Role of Technology Law of Planned (Proportional Development Full Employment Efficiency Model X Model Y Conclusion Clues, Facts and Concepts Generalizations Drawn from Above Clues, Concepts, and Facts Suggested New Approaches, Methods, and Questions V. QUANTITATIVE ASPECTS OF SOCIOECONOMIC THEORY— ALLOCATIVE EFFICIENCY THROUGH BEST USE OF GIVEN RESOURCES............................... 203 Introduction Similarity Between Actual Pricing in Western Oligopolies and in the Soviet Bloc Labor Theory of Value and Prices New Views of the Labor Theory in the East New Views of the Labor Theory in the West Labor Theory of Value— Ideological and Operational Mechanism for Allocating Resources Soviet Bloc Yugoslavia Cuba Survey of Alternative Theoretical Methods of Pricing of Inputs in a Centralized- Decentralized Model The Dobb Solution The Novozhilov Solution Two-Level Planning Conclusions Clues, Practices, Concepts, Trends Generalizations Concerning Economic Efficiency Suggested Approaches and Concepts v Chapter Page VI. VII. QUALITATIVE ASPECTS OF A SOCIOECONOMIC THEORY OF SOCIALISM .................... Introduction Aims of Socialism Socioeconomic Means Wo rke rs' Counci1s Motivation Distribution of Income— Means to Attain Aims Maximization of Education— Means to Attain Aims The Ordering of Priorities— Towards a Socialist Model of Consumption— Means to Attain Aims Conclusions Clues, Trends, Concepts, Practices Generalizations Suggested Approaches and Concepts PUBLIC OWNERSHIP AND THE AIMS AND MEANS OF SOCIETY .............................. Introduction Concepts of Public Ownership Public Ownership and the Aims of Socialism Growth and the Standard of Living Development of Socialist Man in a Classless Society Difficulties in Relating Aims to Public Ownership Public Ownership and the Means to Attain Socialist Goals Public Ownership and the Means to Attain Growth and Higher Living Standards Public Ownership and the Means to Attain Socialist Man Summary and Conclusion vi 279 345 Chapter Page VIII. SUMMARY AND CONCLUSIONS .................... Summary Stages in the Development of a Political Economy of Socialism Foundations for a Socioeconomic Theory of Socialism: An Overview Quantitative Aspects of a Socioeconomic Theory—Developmental and Full Employ ment Efficiency Quantitative Aspects of a Socioeconomic Theory— Allocative Efficiency Through Best Use of Given Resources Qualitative Aspects of a Socioeconomic Theory of Socialism Public Ownership and the Aims and Means of Society Hypotheses Hypothesis Number 1 Hypothesis Number 2 Hypothesis Number 3 Other Conclusions The Role of Ideology Socialism and the Scientific Revolution Socialism as a Transitional Stage to Communism BIBLIOGRAPHY ........................................ vii 391 435 CHAPTER I INTRODUCTION The choice of the topic, "Towards a Socioeconomic Theory of Socialism," may well be quixotic. To treat the subject from a nonethnocentric point of view (that is, not judging the theory of socialism solely on the basis of Western economic theories and values or on the basis of Marxian theory) may well be impossible. Nevertheless, the topic is of such compelling interest in the hot and cold battle between "capitalism" and "socialism" that we deemed it to have a high utility or use value. Such high utility balanced the socially necessary labor cost of tackling such a broad and controversial subject. No doubt the eclectic approach will please neither the Western economists nor the Marxian economists. But so be it. Perhaps the author's feet are firmly planted in mid-air. 1 2 PURPOSE Well-known economists, such as Lange and Dobb, have indicated the need for systematizing and generalizing from the empirical evidence and experiences of the Communist nations. With all due modesty, conscious of our limitations as to foreign languages and mathematical expertise, we are undertaking this task. This study examines the literature of the Communist economies for clues, facts, and theories for the purpose of determining whether a socioeconomic theory of socialism is emerging. We shall then attempt to identify and describe the leading elements in the evolu tion of a socioeconomic theory of socialism based on those clues, facts, and theories, in order to lay a foundation for a systematic general theory. SCOPE This dissertation is limited to a survey of the Soviet bloc, Yugoslavia, Cuba, and China. Due to the relative lack of data on Cuba and China, there will be lesser emphasis on the functioning of those two countries. Theories of democratic socialism or social democracy are omitted. The restriction of this study to the above economies should not be construed to mean that the Communist path is considered the only path to socialism. While there are divergencies within the Communist orbit, their theories and practices provide a unifying framework for analysis. The political aspects are outside the province of this research, although the concept of the dictatorship of the proletariat under the political rule of the Communist Party as a common feature of these nations is recognized. Furthermore, although the study includes social relations as well as economic theories, the social relations are confined to the economic spheres of produc tion, consumption, and distribution. HYPOTHESES This study seeks to examine and evaluate criti cally the following hypotheses: 1. That generalizations and conclusions can be drawn from the practical experiences and theoretical formulations within the Communist economies which indicate that a general socioeconomic theory of socialism is emerging. 2. That divergencies in theory and practice exist in the Communist economies within a unified frame work. 3. That various forms of decentralization are growing out of the needs of the socialist system in attaining efficiency. METHODS Two possible methods of approaching the subject are: (1) building an a priori abstract model of an economic system; and (2) deriving a theory from the actual system. The latter method is utilized in this study. LITERATURE AND SOURCES For the historical sketch and the overview chapter, the writer draws on Karl Marx, Capital, "Critique of the Gotha Program," Early Writings; Frederick Engels, "On Historical Materialism," "Socialism, Utopian and Scientific"; Oscar Lange, On the Economic Theory of Socialism; Joseph Stalin, Economic Problems of Socialism in the U.S.S.R.; Ota Sik, Plan and Market under Socialism; Oscar Lange, Political Economy, Vol. I. In writing the; chapters on the quantitative aspects of socioeconomic theory, we utilize in part Janos Kornai's Mathematical Planning of Structural Decisions, Czechoslovak Economic Papers, Numbers 4, 5, and 6; Branko Horvat, Towards a Theory of Planned Economy; Alfred Zauberman, Aspects of Planometrics; L. V. Kantorovich's The Best Use of Economic Resources; Aims and Methods of Soviet Planning by Mikhail Bor; Economics of Planninq, o Volumes III, VI, and VII; New Currents in Soviet-Type Economies, edited by George R. Feiwel; J. R. Hicks, "Linear Theory" in Surveys of Economic Theory, Volume III; Joan Robinson's Economic Philosophy, The Use of Mathematics in Economics, English edition edited by A. Nove, On Political Economy and Econometrics: Essays in Honour of Oskar Lange, Edward Boorstein's The Economic Transforma tion of Cuba; Leo Huberman and Paul Sweezy, Socialism in Cuba; Robert Campbell, Soviet Economic Power, Comparative Economic Systems, edited by Jan S. Prybyla. We are particularly indebted to John E. Elliott's and Robert W. Campbell's Comparative Economic Systems. For the chapters on the qualitative aspects of socioeconomic theory of socialism, we rely in part upon Socialist Humanism, edited by Erich Fromm; Karl Marx, "Economic and Philosophic Manuscripts," in Marx's Concept of Man by Erich Fromm; John M. Montias, Central Planning in Poland; Saul W. Gellerman, Motivation and Productivity; the June 1966 issue of Bulletin of the Atomic Scientists, Political Economy of Socialism, edited by G. N. Khudokormov. TERMS AND CONCEPTS DEFINED Socioeconomic Classical and Marxist economists used the term "political economy" in a broader sense than "economics." However, the term "political economy" is misleading because it infers an interrelationship between political and economic sciences. Although the terms "political economy" and "social economy" are considered synonymous,^ for our purposes we prefer the term "socioeconomic" theory as a more modern term and broader than the concept of ^Oskar Lange, Political Economy, Vol. I (New York: The Macmillan Company, 1963), 13. economics. A broader concept is essential, in our opinion, in theorizing about a new, evolving economic system, involving economics as a science not only of allocation of scarce resources and national income, but also a science of man. And if human propensities may be changeable in aT’changing society, then surely a study of man is necessary in a social science. However, as noted above, we are limiting the social concept to a study of relations of man in the economic spheres of production, consumption, and distribution. "Socioeconomic" pertains, then, to a study of efficient allocation of scarce resources and national income, and the social relations in production, consump tion, and distribution. Socialism In defining the term "socialism" we shall utilize the dialectical approach, in the manner of Georgescu- 2 Roegen. In logic, the property of discrete distinction covers not only symbols but concepts. Such discrete 2 Nicholas Georgescu-Roegen, Analytical Economics (Cambridge, Mass.: Harvard University Press, 1960). 8 distinction is called "arithmomorphic." However, Georgescu-Roegen asserts that life has no arithmomorphic boundary and therefore the fundamental law of logic cannot be applied; that is, that B cannot be both A and non-A. In certain instances B is both A and non-A. Thus, the dialectical concept may violate the principle of contradiction. For example, a nation may be both a democracy and a nondemocracy. "Should we strive for an arithmomorphic concept of 'democracy,' we would soon discover that no democratic country fits the concept . . . "3 Furthermore, Georgescu-Roegen declares that qualitative change eludes arithmomorphic schematization. "Democracy," "feudalism," "monopolistic competi tion," for instance, are dialectical concepts because political and economic organizations are continuously evolving . . .^ With this lengthy introduction we can attempt to define socialism as an economic system where the means of production are publicly owned and the allocation of scarce resources and national income is performed by conscious control, for the purpose of raising the standard of living 3Ibid., p. 26. ^Ibid., p. 31. 9 of human or labor resources. This definition doubtlessly is surrounded by a dialectical penumbra in that socialism may also include a private sector and an automatic market mechanism or quasi market. However, if we would strive for an arith momorphic concept of socialism, no socialist country would fit the concept. Some economists would therefore prefer the concept of "mixed economies" along a continuum from pure capital ism to pure socialism. The dialectical concept, however, appears to fit the problem of defining socialism in that it incorporates the idea of change and the transitory nature of economic organizations. Communist We use the terms "Communist" and "socialist" economies interchangeably in this dissertation. Commu nist economies refer to those nations under the political rule of the Communist Party. The term "Communist" does not refer to post-socialist systems. For such post socialist economic systems we use the term "communist" with a small "c." 10 UNDERLYING ASSUMPTIONS OF THE SOCIOECONOMIC THEORY OF SOCIALISM We are positing the following assumptions without asserting their validity. They are, however, considered to be the assumptions underlying the theory of socialism in the Communist economies, and are accepted as such by Marxian economists. One assumption is the theory of historical materialism. The following quotation is Marx's view of that concept: In the social production which men carry on they enter into definite relations that ar in dispensable and independent of their will; these relations of production correspond to a definite stage of development of their material powers of production. The sum total of these relations of production constitutes the economic structure of society— the real foundation, on which rise legal and political superstructures and to which cor respond definite forms of social consciousness. The mode of production in material life deter mines the general character of the social, polit ical and spiritual processes of life. It is not the consciousness of men that determines their existence, but, on the contrary, their social existence determines their consciousness. At a certain stage of their development, the material forces of production in society come in conflict with the existing relations of production, or— what is but a legal expression for the same thing— with the property relations within which they had been at work before. From forms of development of the forces of production these relations turn 11 into their fetters. Then comes the period of social revolution. With the change of the eco nomic foundation the entire immense superstructure is more or less rapidly transformed. . . . In broad outlines we can designate the Asiatic, the ancient, the feudal, and the modern bourgeois methods of production as so many epochs in the progress of the economic formation of society. The bourgeois relations of production are the 1 ~\st antagonistic form of the social process of production— antagonistic not in the sense of individual antagonism, but of one arising from conditions surrounding the life of individuals in society; at the same time the productive forces developing in the womb of bourgeois society create the material conditions for the solution of that antagonism. This social formation constitutes, therefore, the closing chapter of the prehistoric stage of human society.5 According to this theory, socialism is the successor to capitalism. However, instead of emerging in the highly developed capitalist countries, as Marx and Engels predicted, the socialist revolutions occurred in the underdeveloped or "exploited" nations. This modifica tion of Marxian theory was undertaken by Lenin in his analysis of the "imperialist" phase of capitalism.^ 5 Karl Marx, A Contribution to the Critique of Political Economy (Chicago: Charles H. Kerr & Co., 1904), pp. 12-13. 6V. I. Lenin, Imperialism, the Highest Stage of Capitalism (New York: International Publishers, 1939). V , 12 Another underlying assumption of socialist theory is that man's nature or human propensities change as the economic system changes. In discussing a socioeconomic theory of socialism, we therefore cannot formulate eco nomic postulates on the basis of observed behavior of man under a capitalist economic system. ORGANIZATION OF THE DISSERTATION Chapter II deals with stages in the development of the socioeconomic theory of socialism. The exposition of such development is presented around three main stages: (1) the contributions of Marx and Engels; (2) the Soviet era of rapid growth under Stalin; and (3) the period since Stalin's death, with its slower growth and a need for and acceptance of re-theorizing in economics. Chapter III is an overview of the leading elements in the prospective evolution of a socioeconomic theory. It contains an explanation as to why it is premature to systematize a general theory of socialism at present and why it is appropriate to use the title, "Towards a Socio economic Theory of Socialism." The "organizing principle" which determines the ends and means of a society is 13 identified as the ownership of the means of production; that is, the property resources. The organization of the discussion of the general theory of socialism is then presented briefly as follows: 1. The major dimensions with regard to economic efficiency: (a) developmental efficiency; (b) the full use of given resources; and (c) the efficient allocation of given resources. These dimensions are regarded as the quantitative aspects of the theory or the economic techniques for attaining development, growth and full employment. 2. The social relations in production, consump tion, and distribution. These dimensions are regarded as the qualitative aspects of the theory or the view of economics as a social science dealing with man in his relation to the above economic spheres. 3. The "organizing principle" which determines the ends and means of a socialist society— public owner ship of the means of production— in relation to points (1) and (2). Chapter IV is an analysis of the quantitative aspects of socioeconomic theory from the viewpoints of 14 development and full employment efficiency. In that analysis, methods of planning, periods of operation of planning, optimality criteria, views on interest and efficiency of investment criteria, theories of economic growth, the role of technology, and the "law" of propor tional development are discussed. Chapter V deals with the quantitative aspects of socioeconomic theory from the viewpoint of allocative efficiency. It examines the new views of the labor theory of value in the East and the West and the ideological and operational aspects of the theory. A survey is made of the mechanisms for allocating resources in the Soviet bloc, Yugoslavia, and Cuba. Clues, practices, concepts, and trends based on Chapters IV and V are scrutinized, generalizations and conclusions drawn, and new approaches and concepts sug gested. Chapter VI is concerned with the qualitative aspects of the socioeconomic theory of socialism. The qualitative aim of socialism is the development of socialist man. The issues, in the context of social relations in production, consumption, and distribution, cover workers' control and de-alienation, motivation, distribution of income, and a socialist concept of consumption. Chapter VII seeks to show a relationship between public ownership and the aims and means of a socialist society. Chapter VIII briefly summarizes the preceding chapters and draws conclusions with respect to the hypoth eses listed in Chapter I. CHAPTER II STAGES IN THE DEVELOPMENT OF THE POLITICAL ECONOMY OF SOCIALISM INTRODUCTION1 The purpose of this chapter is to briefly trace the major stages in the development of the theory of the political economy of socialism from Marx to the present, with some reference, in the Marxian fashion, to "objective conditions." Exposition of the development of socialist theory will be presented around three main themes or stages: (1) the contributions of Marx and Engels; (2) the Soviet era of rapid growth under Stalin; (3) the period since The main sources for this chapter will be Karl Marx, Capital, Vol. Ill; Marx, "Critique of the Gotha Pro gram," Selected Works, Vol. II; Joseph Stalin, Economic Problems of Socialism in the U.S.S.R.; Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism; and Ota Sik, Plan and Market Under Socialism. 16 17 Stalin's death, with its slower growth and a need for and acceptance of re-theorizing in economics. Because the scope of this dissertation is limited to ideas, notably within the Marxist tradition, pertinent to the Communist economies, several important dimensions of socialist thought within that Marxist tradition, particu larly the theory of democratic socialism, are omitted. MARXISM— THE PRE-SOVIET ERA While Marx was the father of the theory of socialism, he bequeathed only an extremely brief sketch of characteristics to his successors. He envisioned that socialism would emerge as a post-capitalist system in an economically highly developed form. Such a conclusion was based on a theory of social development known as historical materialism. Contradictions in Capitalist Development In his economic writings, Marx concentrated on examining the laws of motion of the development of capitalism rather than determining a blueprint for socialism. By examining the "contradictions" under capitalism, Marx and Engels envisaged the manner in which 18 socialism would resolve those contradictions. The following are some of these contradictions, with an indication of how socialism develops as a result of them and resolves them: 1. The contradiction between production and consumption. There exists an accidental rather than a necessary connection between the allocation of total labour-power to produce a certain article and the volume of that article demanded by society to satisfy its wants. It is only where production is under the actual, predetermining control of society that the latter establishes a relation between the volume of social labour-time applied in producing definite articles, and the volume of the social want to be satisfied by the articles.2 Marx also stated that the more productiveness develops, the more it is at variance with the narrow base on which consumption rests. (This relates to his concept of surplus value which shall not be explored here.) Marx also pointed to the disproportionality of the individual branches of production "because the cohesion of the aggregate production imposes itself as a blind law upon 2Karl Marx, Capital, Vol. Ill (Moscow: Foreign Languages Publishing House, 1939), p. 184. 19 the agents of production, and not as a law which, being understood and hence controlled by their common mind, brings the productive process under their joint control." Under socialism, aggregates such as consumption and investment, could be controlled rather than left to "blind laws." 2. Contradiction between productive forces and productive relations. The contradiction, to put it in a very general way, consists in that the capitalist mode of production involves a tendency towards absolute development of the productive forces, regardless of the value and surplus value it contains, and regardless of the social conditions under which capitalist pro duction takes place; while, on the other hand, its aim is to preserve the value of the existing capi tal and promote its self-expansion to the highest limit . . .4 Crises are forcible solutions of the existing contradic tions and restore the "disturbed equilibrium." Through this means new investment takes place— that is, in the boom— but it is in conflict with the property relations of production. Self-expansion of capital is the motive and purpose of production and not a "means for a constant 3Ibid., pp. 251-252. 4Ibid., p. 244. O 20 expansion of the living process of the producers."^ A resolution of this conflict under socialism would require conscious social control of investment to achieve stabili zation and growth, accompanied by an increasing standard of living of the workers. Booms would not alternate with recessions and depressions. 3. Contradiction between the planned division of labor organized in the individual factory and the anarchy of production in society as a whole. Anarchy exists in production based on the laws of competition. In the course of development "freedom of competition changes into its opposite— into monopoly," and "the planless production of capitalist society capitulates before the planned production of the invading socialist society."*’ This planned regulation of production "would be in accordance with the needs both of society as a whole and of each individual." The development of monopoly, Engels 5Ibid., p. 245. **F. Engels, "Socialism, Utopian and Scientific," Selected Works, Vol. I (Moscow: Co-operative Publishing Society of Foreign Workers in the USSR, 1935), p. 178. 7Ibid., p. 181. 21 believed, leads to state ownership under capitalism. This paves the way for the taking of power by the working class, and planned socialist production. 4. Contradiction between social production and capitalist appropriation; between worker and capitalist— the class struggle. The means of production become social under capitalism with the factory system where goods are produced by many workers, and where specialization and the division of labour exist. But the capitalists, as the owners of the means of production, become the owners of the goods produced. Marx noted that the growing accumulation of capital implies its growing concentration. (This contra diction and the former one are closely related, as in fact, all of them are.) With this grows the power of capital and "the alienation of the conditions of social production personified in the capitalist from the real producers." There then arises a contradiction between "the general social power" of capital and the private power of the individual capitalists over the social con ditions of production. Yet, it "contains the solution of the problem, because it implies at the same time the 22 transformation of the conditions of production into g general, common social conditions." It is the workers who will bring about this transformation, creating thereby a society without antagonistic classes. Some Specific Characteristics of Socialism Scientific socialism. The evolution of socialism from the contradictions of capitalism is conceived of as "scientific socialism" because it is rooted in the science of the general laws of motion as contrasted to utopian socialism. Marx did occasionally speak of some specific characteristics of socialism. The distinctive features of socialism are a classless and planned society with increasing standards of living for the workers as produc tivity develops. Means of production. Under socialism, Marx felt that the means of production would become the co-operative property of the workers themselves. And he envisioned that because class distinctions based on private property Q Marx, Capital, p. 259. 23 would no longer exist, all social and political inequality arising from them would disappear. Engels spoke of the proletariat seizing political power and turning "the means of production in the first instance into state property."® However, when the state takes possession of the means of production it does so as a representative of society as a whole. That is its "last independent act as a state." When there are no longer any classes to repress and no anarchy of production the state qua state is no longer necessary. "It withers away."10 Allocation of resources. Allocation of resources through some value determination and calculation will exist under socialism. In this regard, Marx indicated that the determination of value "continues to prevail in the sense that the regulation of labour time and the dis tribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, Q Engels, "Socialism, . . . ," p. 181. 10Ibid., p. 182. become more essential than ever."^ It should be remem bered that Marx spoke of capital as "dead labor" and therefore does not consider it as a separate factor of production. And, as wiirh planning, Marx does not offer a blueprint for socialism as to allocation of resources. Distribution of the "social product." In dis tributing the total "social product," Marx offered the following: Deductions are made for (1) replacement of means of production; (2) new investment; (3) a reserve insurance fund to provide against natural calamities. This then leaves the "means of consumption" from which the following deductions are made: (1) general costs of administration, which would decrease as the new society develops; (2) common satisfaction of needs as schools, health service, which would increase with the new society (3) funds for poor relief, for those unable to work. This then leaves the "net social product" which is dis tributed to the producers. However, “. . . what the producer is deprived of in his capacity as a private ^Marx, Capital, p. 830. 25 individual benefits -him directly or indirectly in his 12 capacity as a member of society." Socialism and Communism In this transitional stage of socialism, "still stamped with the birthmarks of the old society from whose womb it emerges," equal right is still "bourgeois right" in the sense that the "right of the producers is propor tional to the labor they supply; the equality consists in the fact that measurement is made with an equal stand ard, labor. In this stage, labor which is physically and mentally superior, is more highly rewarded. Whereas socialism is still circumscribed by the limitations of capitalism, communism is not. Marx foresaw the leap from the 'realm of necessity* to the 'realm of freedom.' Man would not be pitted against nature in the sense that economists view the issue of scarcity. 12 Karl Marx, "Critique of the Gotha Program," Selected Works, Vol. II (Moscow: Foreign Languages Pub lishing House, 1952), p. 22. 13_, . , „_ Ibid., p. 23. 26 \ Communism is the positive abolition of private property, of human self-alienation, and thus the real appropriation of human nature through and for man. It is, therefore, the return of man to himself as a social, i.e., really human being, a complete and conscious return which assimilates all the wealth of previous development. Communism as fully developed naturalism is humanism and as fully developed humanism is naturalism. It is the definite resolution of the antagonism between man and nature, and between man and man. It is the true solution of the conflict between exist ence and essence, between objectification and self-affirmation, between freedom and necessity, between individual and species. It is the solu tion of the riddle of history and knows itself to be this solution. Further, socialist man will be emancipated from the narrowness of the conditions of labor imposed by the division of labor. . . . while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criti cize after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic.15 14 Karl Marx, Economic and Philosophic Manuscripts of 1844 (Moscow: Foreign Languages Publishing House, 1961), p. 102. ^Karl Marx and Friedrich Engels, The German Ideol ogy, edited by R. Pascal (London: Lawrence and Wishart, 1938), p. 22. 27 Under communism, work will be "life's prime want" and will unfold the worker's potentiality. In a higher phase of communist society, after the enslaving subordination of the indi vidual to the division of labour, and therewith also the antithesis between mental and physical labour, has vanished; after labour has become not only a means of life but life's prime want; after the productive forces have also increased with the all-round development of the individual, and all the springs of co-operative wealth flow more abundantly— only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each accord ing to his ability, to each according to his needs! The emergence of socialist man in a classless society may be seen as one answer to the question, "Why socialism?" A new civilization would arise oriented away from economic problems and towards the solution of the conflict between freedom and necessity. The author elaborated and quoted at length from Marx on his "Messianic" vision of communism since it is essential to emphasize that socialism is only a transitional stage in the Marxian schema. Since this paper will concern itself not only with the technics of economics but economics as ^Marx and Engels, Selected Works. Vol. II (1962), p. 24. 28 a social science, the direction in which socialism is moving as well as "where it is at" must be considered. In the foregoing, we examined the Marxian concept of socialism as emerging from capitalism and evolving into communism. Little was said in Marx's writings about socialism itself— which accounts in part for the dearth of theory after the Russian revolution. Let us look at that era now. ERA OF RAPID INDUSTRIALIZATION AND EXTENSIVE GROWTH IN THE SOVIET BLOC— LACK OF SYSTEMATIC ECONOMIC THEORY Contrary to the Marxian theory of the emergence of socialism in the fully developed capitalist economies, Russia, as the "weak link" in the capitalist chain, embarked on the path to socialism in an underdeveloped economy under the Communist Party. Theory of Growth As is well known, under the priority goal of industrialization, a period of extensive growth took place in the Soviet Union. By extensive growth is meant a quantitative expansion of inputs as the cause of growth. By contrast, intensive growth is based on the qualitative 29 development of factors and increased labour productivity through technical improvements in capital goods, increases in knowledge and skills of labour, and development of scientific knowledge and technology. To this list the author would add improvement in the economic management of the factors. While the two types of growth supplement each other the former was dominant until the present decade. Since)growth was the dedicated' goal of all Soviet- type economies, theories of growth developed, albeit in an oversimplified fashion compared to present-day sophis ticated theories. Since the theoretical objective of socialism was a classless society, with its absence of economic conflict or "exploitation" of man by man, and since such an objective was predicated upon a highly developed industrialized system, it was consistent that industrialization should be the priority goal. 17 As Dobb pointed out, two related issues were encountered in practice: the first issue was the source Maurice Dobb, Economic Growth and Underdeveloped Countries (New York: International Publishers, 1963) , pp. 28-32. 30 of investment funds. The provision of machinery required the building of iron and steel plants and a complex en gineering industry. If industrialization were to occur without depending on imports (since importing machinery would have meant exporting needed grain), it was necessary to pressure farmers to produce a greater surplus. This led to the second issue of the relation of industry or the State to the peasantry. The Soviet method of industrialization was to combine a high rate of industrial growth with collectivi zation of agriculture. It reversed the traditional method of development— development of consumers' goods industries first and capital goods industries later. Priority was given to construction of "heavy industry," such as elec trification, iron and steel, and machine building. Put another way, a high rate of saving by command was imposed upon the peasantry and workers and a high rate of invest ment concentrated on the means of production for the production of the means of production. Theoretically, growth theory was based upon the Marxian model of economic growth set out in his schema of Expanded reproduction," which was inspired by Quesnay's i 31 < > Tableau Economique. Lenin developed a variant of Marx's model. After giving a concise example of Marx's model of simple reproduction (where production does not expand) and expanded reproduction (where new investment takes place), Lenin stated: From Marx's scheme . . . the conclusion cannot be drawn that department I predominates over depart ment II; both develop on parallel lines. But that scheme does not take technical progress into con sideration. As Marx proved in Volume I of Capital, technical progress is expressed by the gradual decrease of the ratio of variable capital to con stant capital (v/c). whereas in the scheme it is taken as unchanged. ® Lenin proceeded to demonstrate examples of decreasing v/c (the organic composition of capital), and concluded that in capitalist society, We thus see that growth in the production of means of production is the most rapid, then comes the production of means of production as means of con sumption, and the slowest rate of growth is in the production of means of consumption.^ In the 1920's G. A. Feldman modified the Marxian growth model. Zauberman gives a thumbnail sketch of this 1 ft V. I. Lenin, "On the So-Called Market Question," Collected Works, Vol. I (Moscow: Foreign Languages Pub lishing House, 1960), p. 85. 19Ibid., p. 87. 32 model, wherein national income is the maximand. The rate of growth of national income is defined as: T = dY/dt.l/Y = d(C.K)/dt.l/Y = dCdt.1/C+dK/dt.1/K where Y is national income, K is capital stocks and capital efficiency C=Y/K. The rate of growth of national income is the sum of the rates of growth of capital stock and of efficiency of its employment. The other key co efficient is one describing the patterning of K as between the spheres of 'means of production* and 'means of consumption.' . . . Several students have noted constructional similarities of the Feldman and the Mahalanobis models. Elliott and Campbell expand on and evaluate the simple Marxian expanded reproduction scheme and the Feldman model. They point out that the Marxian model "requires constancy of all the basic proportions and also uniform growth." It does, however, suggest that capital accumulation is essential for growth. They further point out that: Feldman modified Marx's scheme slightly in accord ance with the idea that the really important distinction is between activities that add to 20 Alfred Zauberman, Aspects of Planometrics (New Haven: Yale University Press, 1967), p. 173, footnote. 33 capacity (i.e. , create new capital goods), and those that only sustain or utilize it, rather than between the production of the means of pro duction and the means of consumption. (The means of production is a much broader concept than the production of capital goods, since it also takes in the production of materials.) So Feldman makes Department I the production of capital goods, Department II the production of consumption goods. Since the purpose of this chapter is merely to survey the development of economic theory in the Soviet bloc in a brief manner we shall not pursue this question in a more rigorous and extended fashion, but turn to the theories of the market and prices. Market and Price Theory - In the area of price theory, the Marxian concept that the market was inseparably linked with private property and would disappear with the disappearance of 22 private property prevailed. As Sik points out, Lenin believed that production and distribution would take place directly by administrative order. During the NEP period 21 John E. Elliott and Robert W. Campbell, Com parative Economic Systems, unpublished manuscript, chap. xv. 2 2 Ota Sik, Plan and Market under Socialism (New York: International Arts and Sciences Press, Inc., 1967), p. 22. 34 (1921-1929) Lenin pointed out the importance of cost accounting (Khozraschot) for the enterprises not only as a method of keeping records but related it to the utiliza tion of the material interests of the enterprises. He repudiated his former concepts in regard to managing the economy through administrative order. However, these concepts during the NEP period were still considered as temporary measures due to the existence of private farmers and handicraftsmen. When collectivization had been achieved economic theorists urged the return of a direct exchange of goods. Stalin*s views on the market. Stalin postulated that a market would continue to exist under socialism but . . . confined to strict bounds thanks to such decisive economic conditions as social ownership of the means of production, the abolution of the system of wage labor, and the elimination of the system of exploitation.^3 The market, although restricted by the above considerations, would exist because, although the state disposes of the product of the state enterprises 23 Joseph Stalin, Economic Problems of Socialism in the U.S.S.R. (New York: International Publishers, 1952), p. 16. 35 . . . the product of the collective farms, being their property, is disposed of only by them. But the collective farms are unwilling to alienate their products except in the form of commodities, in exchange for which they desire to receive the commodities they need. At present the collective farms will not recognize any other economic rela tion with the town except the commodity relation— exchange through purchase and sale. Because of this, commodity production and trade are as much a necessity with us today as they were thirty years ago, say, when Lenin spoke of the necessity of developing trade to the utmost. Of course, when instead of the two basic pro duction sectors, the state sector and the collec- tive-farm sector, there will be only one all- embracing production sector, with the right to dispose of all the consumer goods produced in the country, commodity circulation, with its 'money economy1 will disappear. . . . ^4 Further, Stalin perceived the law of value existing as long as the market continued to exist, and performing some allocative function. In the consumer market, "the law of value preserves, within certain limits, of course, the function of a regulator." In the sphere of produc tion, Stalin declared: True, the law of value has no regulating function in our socialist production but it nevertheless influences production, and this fact cannot be ignored when directing production. In this con nection, such things as cost accounting and 24 Ibid., pp. 16-17. 36 profitableness, production costs, prices, etc. are of actual importance in our enterprises.25 The above indicates that Stalin conceived of a small role for consumer demand in allocation and an important role for the supply side. Whether Stalin believed in the need for a consumer goods' market after the existence of "one all-embracing production sector" is unclear. In declaring that the law of value cannot be the "regulator" or perform an unrestricted allocative func tion, Stalin intended that the law of value could not be a mechanism for allocating labor to the various branches of production and/or as between consumption and invest ment. For example, although profitableness is an impor tant criterion, light industry, which is most profitable, is less preferred than heavy industry, which is less profitable, or unprofitable. The law of value- is limited by the social ownership of the means of production, and by the law of balanced development of the national economy, and is consequently also limited by our yearly and five-yearly plans which are an approximate reflection of the requirements of the l a w .26 25 Ibid., p. 17. 26 Ibid., p. 22. 37 In other words, Stalin emphasized problems of development and growth, while recognizing the need for attention to profits, costs and prices in each firm. If profitableness is considered not from the stand point of individual plants or industries, and not over a period of one year, but from the standpoint of the entire economy and over a period of, say, ten or fifteen years, which is the only correct approach to the question, then the temporary and unstable profitableness of some plants or indus tries is beneath all comparison with that higher form of stable and permanent profitableness, which we get from the operation of the law of balanced development of the national economy and from eco nomic planning, which save us from periodical eco nomic crises . . . and which ensure a continuous and high rate of expansion of our national economy.^ Interestingly, Stalin averred that in the post socialist society, allocation of labor would be regulated not by the law of value, ". . . but by the growth of 2 f t society's demand for goods." The decentralized market model of Oskar Lange. An exception to the general tendency of viewing socialism as antithetical to the market was Lange's decentralized market model of socialism of the 1930's. We shall treat this model in a separate section at length because of its relevance to the Yugoslav system. 27 28 Ibid., p. 22. Ibid., p. 21. V 38 The role of prices and the law of value. In the early phases of socialism the main purpose of fixing prices was the facilitation of account keeping and control under a centralized administrative system of steering the economy based on quantity indices. The law of value, that is, the labor theory of value wherein exchange of commodities is effected in accordance with the amount of socially necessary labor, was not the regulator of pro duction and distribution. Prices were theoretically based on the law of value although deviations from value appeared to be the practice. We shall pursue a discussion of this most tangled concept later when dealing with the new economic reforms in a later stage. At this point we shall utilize Morris Bornstein's 29 neat summary of the role of prices during this period. * Bornstein distinguishes three functions of prices: (1) control and evaluation; (2) allocation; (3) income distribution. The writer would add the function of shifting consumer tastes. 29 Morris Bornstein, "Soviet Price Theory and Policy," in George R. Feiwel, New Currents in Soviet-Type Economies: A Reader (Scranton, Pa.: International Text book Co., 1968), pp. 224-256. 39 As noted above, the first function was the primary one. Prices were used to secure compliance by enterprise managers with the plans of the Central Planning Board and to evaluate the performance of the managers. Although allocation was in physical terms, input and output tar gets for enterprises were in value terms. The second function, although not as important as the first, is shown in the following ways: (a) prices were used to construct macroeconomic balances, as national production and intersectoral accounts. Also, relative pricing of substitutes may have had some influ ence on selection of technological coefficients for physical planning— where more abundant materials were substituted for scarcer materials during successive iterations. Value calculations were used in determining effectiveness of investment (which will be discussed further below); (b) since the Central Planning Board could not specify input and output targets in detail for each enterprise, managers did have soma limited range of choice and no doubt were influenced by relative prices; (c) prices affected the total supply of labor and its distribution. The planners used "low real wages resulting 40 from the relationship of money wages and consumer prices to evoke a high rate of participation of the population 30 in the labor force," and used wage differentials to get allocations of labor desired by the planners; (d) in the collective farm sector prices as well as delivery quotas were used to influence allocation of resources to certain preferred products over others. The above description of the role of prices as an allocative device must be considered in a very limited manner. There is general coexistence of thinking on this issue in the East and West, i.e., prices did not perform the allocative function as it is understood in academic economics in the West. The third function of prices is related to income distribution. Wages were paid according to productivity. Distribution of income was then determined by the wage system plus transfer payments and income taxes. Through the following devices distribution of real income was made more equal than distribution of money income: (a) free goods and low rents; (b) fixing low prices for 30 Ibid., p. 225. 41 mass consumption goods and high prices for luxury goods by means of turnover taxes. The fourth function related to influencing con sumer tastes in accordance with state preferences. For example, prices on books were low while vodka prices were high. Type of prices and their determination. Prices were divided into wholesale, agricultural procurement, and retail prices. Enterprise wholesale prices equalled planned branch average cost of production (sebestoimost) plus a profit markup. Sebestoimost included direct and indirect labor, materials, depreciation allowances, and overhead expenses. Interest for short-term loans were included and rent and interest on capital excluded. The profit markup was not intended to allocate resources but was a source of accumulation to the state. The retail prices were fixed with the aim of clearing the market both in aggregate and relative terms. The general level of retail prices were fixed so that total retail sales at that price level would absorb money income which the population was expected to spend. The price level depended on tax (turnover and profits tax) 42 and wage policies. The taxes were the source of funds for investment, military expenditures and social or collective expenditures. The turnover tax was the principal tool for achieving the desired level and structure of retail prices (clearing prices). It was the cushion between retail and wholesale prices. Planners could alter con sumer prices without changing production prices and vice versa. The retail prices were composed of: (1) enter prise wholesale price; (2) turnover tax; and (3) wholesale trade margin; (4) retail trade margin plus transportation. Bornstein points out that with planners' sovereignty the basic method for eliminating disequilib rium is to adjust demand to supply in contrast to adjustment of supply to demand under consumer sovereignty. Adjustihg demand to supply would necessitate changing prices. However, stable prices were an objective of the planners. This was one of the fundamental problems or dilemmas of the pricing mechanism. Since a further objective in pricing was to make real income less unequal than money income, the lower prices for basic foodstuffs and higher prices for luxury 43 goods created queues and empty shelves. However, this appears to the writer as a trade-off between the objective of "satisfying needs" rather than wants and the inconve nience caused thereby, in an economy of great scarcity. Lack of a Systematic Theory for the Functioning of a Socialist Economy The lack of a systematic theory was due in part to the role of ideology. We shall discuss ideology subsequently but a brief digression is in order. According to Marxists, "Ideology in class society is the sum total of the social views . . . of a given class reflecting its position and interests."31 Bourgeois ideology reflects "false consciousness" in that the bourgeoisie attempt to make its particular interests appear as the social interests. On the other hand, socialist ideology "... is, as regards its scientific content, the sum total of the cardinal findings of philosophical, historical and economic sciences."3^ Socialist ideology therefore 31 W. Hollitscher, "Ideology and Utopia," World Marxist Review (Ontario, Can.: Progress Books, July 1966), p. 44. 32Ibid., p. 46. 44 represents scientific, "true consciousness." Socialist economists, accepting this view of ideology, made the mistake of labeling certain ideas hostile "... even when they did not derive from class relationships and, had they not been distorted, could not have served the ends of the ideological enemy." As a result of labeling all Western economics "bourgeois ideology," with its "false consciousness," there existed a dogmatic dislike for anything connected with marginalism or diminishing returns or a value theory stressing subjective valuations. Additionally, scarcity was not considered except in an administrative-planning sense— what is meant by the phrase "in short supply." This led to a complete banning of the opportunity cost concept. Although mistakes were made in the ideological arena, there were other factors which impeded the growth of a systematic economic theory. Under the era of direct- centralist regime intent on rapid industrialization, there was no compelling need for a political economy of socialism to guide the functioning of the economy. Investment and production decisions were based on material 45 balances. From experience, a ton of steel required a given quantity of iron ore and other inputs. If the required inputs were available or potentially available with the given capacity the allocation decisions were taken by planning agencies or investment decisions made so that the required inputs would be available. Although there were some theoretical discussions on investment variants, they were inconclusive. In other words, with administrative planning based on physical quantity indices the need for theory was subordinated to practical problems. Thirdly, political economy was conceived of as mainly qualitative, concerned with the social relations of production and scant attention was paid to quantitative questions. An extreme viewpoint is epitomized by Rosa Luxemburg. "The role of economics as a science will come to an end," wrote Rosa Luxemburg, as soon as the anarchistic economy of capitalism will have ceded its place to a purposeful economic system, consciously organized and managed by the whole working society. The victory of the modern working class and the realization of socialism means thus the end of economics as a science.^ 33 Tamas Foldi, ed., For the Progress of Marxist Economics (Budapest: Akademiai Kiado, 1967), p. 11. 46 Although this idea was not so explicitly stated by all economists inside the Soviet bloc it was implicitly followed. A fourth factor impeding the development of eco nomic theory was the role of Stalin himself. It may be argued that the political economy of socialism must of necessity have been in its infancy since socialism in the Soviet bloc itself was in its infancy. However, the backwardness of the science until the last decade must also be traced to the personality cult under Stalin in the Communist-led countries. In support of this statement, let it suffice to mention two facts only. One is that in those years economic statistics and the facts of economic life were inaccessible not only to the public but even to the economists; only the leaders of the Party and the Government and, in respect of their own sector, those responsible for the individual sectors were able to gain an insight. The other fact is that in economics and, indeed, in all social sciences a dogmatic interpretation of Marx and Lenin became predominant, with Stalin jealously striving to appropriate for himself the monopoly of further developing Marxism-Leninism. Either of these two facts would have been effective enough not only to hamper the development but also to prevent the emergence of any political economy of socialism.34 ^ Ibid., p. 9. 47 Stalin narrowed the province of political economy to production and the economic relations of men which included the following: (1) the forms of ownership of the means of produc tion; (2) the status of the various social groups in production and their interrelationships that follow from these forms or what Marx calls 'mutual exchange of their activities'; (3) the forms of distribution of products, which are entirely deter mined by them. Political Economy investigates the laws of development of men's relations of production. Economic policy draws practical conclusions from this, gives them concrete shape, and builds its day to day work on them. To foist upon political economy problems of economic policy is to kill it as a science.35 Presumably then, theories of allocation, growth and planning came within the scope of economic policy rather than political economy. Despite the obvious truth of the above one should give the devil his due. One dogmatic view held by Marxist- Leninists was that the laws of the economy under capitalism acted spontaneously and blindly but under socialism they are replaced by laws passed by men. Stalin rejected this concept and emphasized the objective nature of economic Stalin, op. cit., p. 56. 48 "laws," which, he stated, take place independent of human will. At any rate, despite the lack of developed theory, especially in microeconomics and the lack of a non efficiency price, extensive growth did take place. Western economists are divided in their opinions as to the effects of noneconomic pricing (prices not reflecting scarcities) since planning was done in physical terms and through direct instructions. Prices, therefore, did not play a large role. According to Zauberman little harm was done. A. Nove believes that the crash-programme allocation was not related to economic effectiveness. Contributions to Economics While the emphasis in the foregoing has been on the lack of theory it would be incorrect to give the impression that no contributions were made in economics. Firstly, the transforming of an entire system, the policy of rapid industrialization, was considered an economic as well as political policy. In the twenties the chess board or input-output table was originated. This was allegedly the basis of the input-output model which Leontief perfected and developed. The analysis of growth 49 briefly referred to was undertaken when Western economics was almost wholly absorbed with the static problem of efficient allocation of given resources. In practical work the material balances were an innovation. However, it was recognized within the Soviet bloc and Yugoslavia that there were serious shortcomings in both theory and practice and the need for re-theorizing in economics was urgent. However, before discussing the revival of economic theory for the functioning of a socialist economy, in the last decade, we shall discuss an exception to the general trend of socialist economics in the 1930's. Oskar Lange, unlike other Marxist econo mists, did develop a systematic economic theory of socialism. A SYSTEMATIC ECONOMIC THEORY OF SOCIALISM— ' THE LANGE MODEL An exception to the general state of economic theory of socialism was the attempt by Oskar Lange to develop a systematic economic model of decentralized socialism. This model assumes particular importance for this study since it has influenced the thinking of economists in Yugoslavia. We are, therefore, making a lengthy digression on this subject. 50 Why Lange Developed the .Model Marx, though aware of the problem of the alloca tion of resources in a socialist economy, tried to solve it in an unsatisfactory way, with the labor theory of value. Labor was the only scarce resource, in Marx's view, leading to a "simplicist" solution. (It seems this view was based on Marx's presumption that socialism would be a post-capitalist development. And since capitalism, in his opinion, would have developed enormous productive capacity and technology, only labor would be a relatively scarce resource. Furthermore, capital was considered as "dead labor.") In addition, the question of utility or demand still remained. Without incorporat ing demand in the solution of allocation the quantity of various goods to be produced would be indeterminate. Thus, said Lange, "... the limitations of Marx and 36 Engels are those of the classical economists.” 36 Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism (New York: McGraw-Hill Book Co., 1938; First Paperback Ed., 1964), p. 134. 51 Professor von Mises postulated that socialist theoreticians failed to solve the economic problem. Lange amusingly expressed his thanks to the professor for his criticism in that it forced socialist theoreticians to attempt a solution. Further, Lange pointed out that Hayek, while agreeing that logically a socialist economy could solve the problem, it would be impractical. Lange developed his model, in part, in answer to these criti cisms . His purpose was to show the way in which alloca tion of resources is effected by trial and error, in a socialist economy, similar to the workings of the market mechanism in a capitalist economy. To do so, Lange cleared up some confusion with regard to the nature of prices by designating the two meanings of the term "price." It may mean either price in the ordinary sense, i.e., the exchange ratio of two commodities on a market, or it may have the generalized meaning of 'terms on which alternatives are offeraad.'^? Prices in the former sense cannot exist for capital goods since there is no institutional market for such goods. Prices in the latter sense, the generalized 37 Ibid., pp. 59, 60. 52 sense, are indispensable in allocating resources. Such prices are knowable in that "terms on which alternatives are offered" are determined by the transformation or production functions, which are available to administra tors of a socialist economy. The economic problem, said Lange, involves the problem of choice between alternatives for which three data are needed: (1) a preference scale; (2) knowledge of the "terms on which alternatives are offered"; and (3) the amount of resources available. Since the data under (1) and (3) are given and (2) is determined by the production function, the problem of choice is soluble. Therefore, Mises, according to Lange, was incorrect in posing the problem as the impossibility of rational calculation where a market for factors of production did not exist, such factors being owned by the state. The problem of a socialist economy providing a method of allocating resources by trial and error, how ever, as a practical problem, was raised by Hayek and Robbins, and it was to this problem that Lange addressed himself. 53 Economic Theory of Decentralized Socialism The Lange model is a theoretical, not an actual system. It is distinguished from centralized socialism in that it develops a price system based on the theories of a purely competitive system. Furthermore, it pre supposes a post-capitalist, highly developed economy. It is similar to centralized socialism in that the means of production in the "commanding heights" are publicly owned, although Lange suggested that private enterprise should be retained in small-scale industry and farming, where economies of scale are not operative. The determination of equilibrium on a competitive market. Lange first succinctly summarized three condi tions of equilibrium. He distinguished between subjective and objective conditions. The former referred to indi viduals attaining maximization of utility, profit and income on the basis of equilibrium prices. That is the first condition of equilibrium. The latter referred to equilibrium or clearing prices determined by the equality of supply and demand for each commodity. That is the second condition for equilibrium. The third condition is an identity, in that incomes of consumers are equal 54 to their receipts from the sale of their resources, plus entrepreneurs' profit. After a textbook lesson on equilibrium and the process of tatonnements or series of successive trials, Lange proceeded to apply the method of trial and error in a socialist economy. The subjective conditions of equilibrium. Lange assumed a society in which freedom of choice in consump tion and in occupations existed and consumer sovereignty guided allocation of resources. There would be an institutional market for consumer goods and labor inputs but not for capital and land. Prices of the latter were thus accounting prices or "indices of alternatives available." Prices of the former are exchange ratios of commodities on a market. The subjective equilibrium conditions would be carried out as follows: 1. Given incomes of consumers and prices of consumer goods, demand for consumer goods would be deter mined . 2. The Central Planning Board would impose rules on managers of firms to satisfy consumer preferences. 55 The rules would determine combinations of factors and scale of output, similar to the textbook rules for mini mizing cost and maximizing profit, in a competitive market. 3. Flowing from the above rules for the output of plants and industries, total demand for factors are determined. 4. Supply of labor would be determined, freedom of choice of occupation being assumed, as labor would offer its services to those paying the highest wages. The objective conditions of equilibrium. The objective conditions of equilibrium would be carried out in a socialist economy by a trial and error process based on the parametric function of prices. In the case of the noninstitutional market for capital and natural resources, prices would be imposed on managers by the Central Planning Board and the Board would perform the function of a market. If the Board would make an error in fixing prices, physical shortages or surpluses of the commodity or resources would result. This would be corrected by raising prices when shortages occurred and lowering prices when surpluses occurred. Thus, through the trial 56 and error process, equilibrium prices would be determined. These prices would perform a parametric function similar to the function of prices in the purely competitive market mechanism. That is, although prices are a result of the behavior of individual consumers and workers on the insti tutional market and the result of the Planning Board's trial and error process on the quasi-capital and natural resource market, each consumer, worker and manager regards the prices as given data to which he must adjust. In the writer's opinion, some ambiguity exists in the Lange model as to the determination of prices. At one point, Lange clearly states that prices . . . of consumer goods and services of labor . . . are determined on a market; in all other cases they are fixed by the Central Planning B o a r d .38 Subsequently, in discussing the trial and error method, as distinguished from the theoretical determina tion of economic equilibrium, Lange stated: This method of trial and error is based on the parametric function of prices. Let the Central Planning Board start with a given set of prices chosen at random. All decisions of the managers of production and also all decisions of individ uals as consumers and as suppliers of labor are 38Ibid., p. 78. 39 made on the basis of these prices. There appears to be a contradiction between the two statements in that the latter might be interpreted to mean that all prices are chosen at random by the Central Planning Board. The third condition of equilibrium. The third condition for equilibrium would be fulfilled in a social ist ec ! ■ ' by viewing income of consumers as composed of two parts: (1) the receipts for labor services; and (2) a social dividend constituting the individual's share of the income arising from capital and natural resources. The distribution of the social dividend must not interfere with the optimum distribution of labor. The optimum distribution is that which makes the difference of the value of the marginal product of the service of labor in different industries and occupations equal to the difference in the marginal disutility of working in those industries or occupations.^0 The functions of the Central Planning Board. In addition to setting and readjusting prices for publicly 39 Ibid., p. 86; underlining by writer. 40Ibid., pp. 83-84. 58 owned resources, the Central planning Board has the following functions: 1. It determines "corporately" the rate of investment. This decision reflects the Board's evaluation of "the optimum time-shape of the income stream"^ rather than consumers' evaluation. 2. It passes on the claims of plants and indus tries for loanable funds for capital expansion. 3. It distributes the "social dividend" among the workers as their share of income from publicly owned capital and natural resources. 4. It supervises plant and industry managers to assure they are following the rules to produce efficiently. 5. It provides for the "collective wants" such as national defense, education, et cetera. Economic Theory of Centralized Socialism In this model there would be no freedom of choice in consumption or the labor market. Rational economic accounting would be possible, except that the Central Planning Board would fix the scale of preferences. All 41Ibid., p. 109. prices would be accounting prices and determined by the trial and error method described above. Consumer goods would be distributed by rationing and labor would be assigned to occupations. However, Lange pointed out that as national output increased, rationing was in fact replaced by a consumer goods* market and freedom of choice in the labor market existed in the Soviet Union. Although a market for consumer goods existed, consumer sovereignty did not necessarily follow. That is, the accounting prices would be based on planners * preferences and it would be the accounting prices which managers would use in decision making. Lange correctly foresaw that such a situation would become intolerable to the consumers with the result that the Board would have to be influenced by consumer 42 preferences except "in the interest of social welfare." The Influence of the Lange Model The Lange model, while not immediately influencing economic theory in the Soviet bloc, eventually did affect 42Ibid., p. 97. 60 the Yugoslav model and no doubt the new economic reforms and theories within the Soviet bloc. As growth slowed down, the need for economic theory grew and with it, the issues of centralization and decentralization, of plan and market, gained momentum. Lange's model surely con- 43 tnbuted to these developments, to which we now turn. ERA OF SLOWER GROWTH AND REVIVAL OF ECONOMIC THEORY FOR THE FUNCTIONING OF A SOCIALIST ECONOMY In this section the author will attempt to show the causes of the revival of economic theory; the diver gence of emerging theories with respect to the technique for economic efficiency; and the divergence of theories with respect to human behavior in relation to production, distribution, and consumption. 43 In a modern statement, Koopmans formulated an allocation model independent of the concept of an insti tutional market. A price concept was derived from the requirements of efficient allocation and is applicable to all commodities. One use of the Koopmans model would be for a central planning board which possesses all the information that goes into a technology matrix. Another use would be for an extreme case of decentralization, if the information about an appropriate shadow price is available to all managers. Tjalling C. Koopmans, "Analysis of Production as an Efficient Combination of Activities," Activity Analysis of Production and Allocation, ed. by Tjalling C. Koopmans (New York: John Wiley & Sons, Inc., Causes of the Revival of Economic Theory The main causes of the revival of discussions on economic theory can be summarized as follows: (1) the death of Stalin in 1953; (2) the practical needs for the functioning of a socialist economy; and (3) the develop ment of mathematical economics. The death of Stalin. With the removal of the dictatorial and dogmatic leadership of Stalin, an era of freer discussion and creativity throughout the Soviet bloc began. This has not resulted in an even, balanced development of political economy. Suffice it to read a recent Soviet publication, Political Economy of Social ism,^ published in 1967, and compare it to The Use of Mathematics in Economics.^ jn the former work the qualitative aspects of economics alone are considered and exhortations about the superiority of public ownership 1951), pp. 33-97. Gerhard Tintner, Methodology of Mathe matical Economics and Econometrics (Chicago: The Univer sity of Chicago Press, 1968), pp. 97-98. A A G. N. Khudokormov, ed., Political Economy of Socialism (Moscow: Progress Publishers, 1967). 45 V. V. Novozhilov, The Use of Mathematics in Economics, English ed. edited by A. Nove (Cambridge, Mass. MIT Press, 1964). 62 abound. The lack of analysis is striking. However, in the latter work there are profound attempts at analysis of economic efficiency. The practical needs for the functioning of a socialist economy. A chorus of complaints about the slowing down of economic growth are evident in the * writings of most of the Soviet bloc economies. For example, in Hungary, although great acclaim is given to the superiority of the new system of socialism over the old (capitalist) system, . . . the rising of the standard of living not only stopped but actually gave place to decline. . . . One of the results of disillusionment was the recognition of our scientific backwardness. . . . We also made the first tentative steps towards fighting this backwardness.^ In 19 54 the Institute of Economics was founded. In Czechoslovakia Ota Sik states that . . . from about 1954-55, there began a develop ment where growth of production was not only dependent on extending the factor input to an increasing degree, but also the capital-output ratio worsened to such an extent that capital in this context refers not only to fixed capital but also to material and labour inputs. . . . The development not only became extensive from 46 Ibid., p. 12. 63 the standpoint of an international comparison, but also the extensive expansion of factors of production became completely uneconomical and negative.47 Sik declared that the administrative system of planning was responsible for the "negative extensive growth" and prevented the change to intensive development. Initially, productivity of agricultural labour grew rapidly due to reallocating surplus manpower from agriculture to industry and the development of collective large-scale agriculture. The rapid growth in manpower resulted in the rise of industrial production. As invest ment and productive capacity increased, production rose in industry. By the early part of the 1960's industrial production in Czechoslovakia declined suddenly. The reallocation of labour from agriculture to industry became more difficult. Moreover, mechanization of agri culture was insufficient. Sik postulated that where there is unemployment or underemployment, rapid extensive growth of the produc tive capacity makes possible growth of employment and utilization of manpower effectively and is therefore Sik, op. cit., p. 50. 64 justified. In other words, extensive development is economic even if the increase in factor inputs means a smaller growth in productivity of labor than with inten sive development. Accompanying extensive growth of capital was the utilization Of obsolescent machinery, which was justified, in Sik's opinion, as long as hidden unemployment existed. However, conditions changed to a shortage of labor and costs of labor and capital inputs increased more rapidly than the growth of output. Despite this change, economic planning continued in the direction of extensive development. This resulted in lagging produc tivity and growing inputs. New investments were used, not to replace worn-out, obsolescent machinery, but for expanding productive capacity. The experienced and skilled workers were equipped with obsolete machinery whereas the modern factories were manned by new, less experienced and less skilled labor. Consequently, the marginal capital- output ratio increased. Furthermore, . . . when the total production input increased more rapidly than social product and society must spend an increasing share of the relatively smaller increment of product to extend fixed assets and material inputs, without making a saving in living labour, this would necessarily 65 mean a relative (sometimes even absolute) dimin ishing of general c o n s u m p t i o n .48 Due to the methods of imperative or administrative planning, technical development lagged as there was no incentive for technological change on the part of firms, nor sufficient motivation of technicians and scientists. Although the Yugoslav case differs in that an economic blockade by the Eastern European Soviet countries in 1948 slowed the rate of growth, other internal factors existed. Bureaucracy, lack of incentive, and poor quality of goods led to a re-examination of economic doctrine. In the Soviet Union, V. V. Novozhilov also speaks of the shift from "ei^tensive" to "intensive" growth, similar to the above discussion. In addition to the problem of extensive and intensive growth but related to it is the question of the economic effectiveness of investment. This issue arose out of the demands of practice on the part of engineering- economists, particularly in transportation. Most indus trial construction can be planned according to several technical variants. The crucial problem in investment 48 Ibid., p. 65. 66 planning is that variants differ in the initial cost of construction and in the results or outputs achieved. The choice of an investment project is clear when one variant has both lower initial capital investment cost and also lower expenditures per annum than the other. However, some criterion of investment efficiency must be utilized when one variant has a higher capital investment cost and lower annual expenditure cost than the other. Another way of putting this is that one is comparing investment cost with economies subsequently in prime costs. As 4Q Maurice Dobb points out, J such a comparison is a com parison in price terms. This issue will be dealt with at greater length in a subsequent chapter. A third practical need for revival of economic theory, and in particular, price theory, was the wasteful use of capital goods with no incentive to economize. Prices were fixed for wholesale goods to achieve some administrative objective instead of on economic rationality. 49 Maurice Dobb, Papers on Capitalism, Development and Planning (London: Routledge and Kegan, Paul Ltd., 1967) . 67 A fourth practical need for price theory was due to the greater decentralization or devolution of decision making, which was part and parcel of the new methods of management undertaken in one form or another throughout the Soviet bloc. If performance was to be judged by some % indicator of efficiency rather than in terms of physical output norms it was essential to have meaningful prices. The greater measure of decentralization of deci sions . . . is likely to give increased importance to price policy; so that the next round in the price discussion may, like that on effectiveness of investment, be immediately provoked by 'the demands of practical life' rather than by a priori considerations.50 Under the new economic reforms the emphasis is on khozraschot, meaning commercial accounting, where the enterprise has some financial autonomy, must cover its cost out of revenues, and has an incentive to make prof its. This differs from budget financing where money is allocated from the state budget to cover expenditure. In a wider sense it includes all the incentives which operate at the enterprise level. A fifth practical need for economic theory and rethinking of the labor theory of value was due to the ^ I b i d . , p. 155. 68 increasing complexity of the consumer goods sector and the urgent need to satisfy consumer demand as well as planner demand. Practically, it was due to the stock piling of unwanted and "socially unnecessary" goods while queues existed for other goods. Theoretically, the basic economic "law" of socialism is the satisfaction of the growing material and cultural needs of the people through growth and improvement of production. Leaving aside the question of whether this is a "law" or a goal, there is no doubt that production of unwanted goods is contrary to this so-called "law." Mathematical economics. The development of mathematical economics may be considered as the third cause of the revival of economic theory or as another direction in economic thought. One explanation is that computers and cybernetics created a need for programming techniques. The prejudice of Marxists against mathematics was related to the kind of equilibrium theory derived from Walras and Pareto with its justification of com petitive equilibrium in a market economy. Such prejudice was overcome by demonstrations by mathematical economists and statisticians that two of the principal techniques 69 had their roots in the Soviet rather than in the "bourgeois" world— the input-output method developed from * the method of material balances and linear programming developed by Kantorovich in 1939. The author is abstain ing from the parochial controversy over whether in fact the West or the Soviets were primarily responsible for the above techniques. An assessment of the advance in Soviet thought as far as mathematical tools in relation to efficiency in planning and rational pricing is made by Zauberman. He notes that Novozhilov and Kantorovich are no longer silenced; that perhaps Soviet economics will reconcile Marx with marginalism. Looking back from around the mid-1960's, it seems safe to say that obstacles to change in Soviet thought are being overcome at a faster pace and with greater ease than expected by most students, including this writer . . .51 A glance at Janos Kornai's Mathematical Planning 52 of Structural Decisions similarly indicates the Zauberman, op. cit., p. 13. 52 Janos Kornai, Mathematical Planning of Structural Decisions (Amsterdam: North-Holland Publishing Co., 1967). 70 sophisticated level of mathematical economics in Hungary. DIVERGENCIES OF THEORIES At this point of the discussion on the evolving socioeconomic theory of socialism, it should be sufficient to indicate the divergence of theories in Communist economies with respect to the question of techniques or instruments for economic efficiency and the qualitative question of choice of institutions, motivations and con sumption patterns to attain socialist and/or communist goals. We are considering the quantitative aspect of economics broadly. This aspect deals in the main with quantifiable variables, with problems of maximization and minimization. While the dichotomy between the quan titative and qualitative aspects of economics cannot be meticulously drawn, we are treating the economic problems of efficiency as quantitative questions of techniques. For example, the issue of centralization-decentralization is both a quantitative and qualitative question. While the control over inputs, outputs and prices pertains to quantitative variables, the problem of initiative from 71 above or below is a qualitative question. The theories with respect to techniques for economic efficiency, which we consider quantitative in the main, include: (1) developmental efficiency; (2) allocative efficiency; and (3) full employment effi ciency . The qualitative aspects of political economy or the socioeconomic theory of socialism deal in the main with the social relations in the areas of production, distribution and consumption. Divergence of Theories with Respect to Techniques for Economic Efficiency At this point we are merely indicating the diver gence of theories with respect to techniques or instru ments for economic efficiency. Further analyses of the theories will be undertaken in a subsequent chapter. Two main strands of theory and practice are discernable at present in solving the basic economic problems of develop ment, allocation and full employment, as well as a third speculative model. Economic Model X. One strand, based on a modified theoretical Lange model, and practiced in Yugoslavia, may 72 be conveniently called Economic Model X, wherein state preferences are applied to a real market economy through indirect economic methods of steering. Model X is a marriage between macroeconomic planning and the micro- economic market or a planned market economy. Although microeconomic allocation of resources is done automatic ally by the market the surplus product or social invest ment funds are appropriated and allocated to a large extent by the Central Planning Board. While this model is exemplified uniquely at present only in Yugoslavia, theoretical discussions in Czechoslovakia before the invasion were revolving around a similar model, which lends some generality to this strand of thought. Economic Model Y. The second and more general strand is that of a quasi-market economy with public enterprises supplying goods subject to comprehensive quantitative economic regulations based on "perfect computation." This model is based on the theories and practices within the Soviet Union and other East European countries in the Communist orbit. While the theories and practices in this model 73 are still evolving, one can generalize and theorize a Model Y. However, it should be noted that Model Y is merely a prognostication. There may be greater conver gence to Model X should "perfect computation" prove impractical. Economic Model Z. The third strand, a "perfect computation" model is purely conceptual in that it exists nowhere. However, in noting the divergence of theories a "perfect computation" model should be included for theoretical completeness. The determination of final composition of output to satisfy consumer and planners' demand; the allocation of resources; planning macro- economic proportions— all would be accomplished without the aid of any institutional market. Such a model would presume a development of computers and a supply of skilled mathematicians and programmers far beyond the level of attainment in the near future. It is injected here merely in a speculative way. Had socialism developed, as envisioned by Marx, in a post-capitalist system which had advanced well on the road to cybernation, such a conjectural model might be less fanciful. 74 Divergence of Theories with Respect to Human Relations Since socialist political economy deals not with a given economic system but as a system evolving out of capitalism and towards communism, the "qualitative" question of choice of institutions, motivations, and consumption patterns to attain socialist and/or communist goals become relevant. If economics is broadly conceived as a science of choices to achieve ends, then such a treatment is well within the scope of the discipline. While the aim of socialism, qualitatively, is the development of "socialist man" in a classless society, there is diversity as to the means for attaining this aim. On the production or supply side, the choice of institutions, notably public ownership of the means of production, and the choice of control and motivation are relevant. On the demand or consumption side, the ques tions of consumer and/or planner sovereignty and issues concerning simplicity of needs, wants, and fancies are important. Public ownership of the means of production. Basic to theories of socialism in the Soviet orbit is the 75 public ownership of the means of production. While there is agreement in theory and practice as to the need for public ownership of the "commanding heights" of the economy, there is divergence of opinion in regard to the agricultural sector, handicrafts, and retail trading. Yugoslavia, for example, has a large private sector. Choice of control. Firstly, there are dissimilar approaches as to what constitutes an optimum system of centralization-decentralization as far as decision-making is concerned. Secondly, the issue of workers' control versus managerial elitism exists. Yugoslavia has evolved a system of workers' control and Czechoslovakia had con sidered copying that system before the Soviet invasion. While there are many discussions in the Soviet bloc concerning worker participation and initiative, there is no concerted movement toward workers' control. Choice of motivation. Whether material or moral and social incentives should be emphasized is a prominent source of disagreement in theory and practice. While China and Cuba de-emphasize the former, the Soviet Union and Eastern European countries denigrate the latter. 76 Choice of consumption patterns. Firstly, there is the question of consumer and/or planner sovereignty. Theoretically, there is general agreement that both consumer and planner sovereignty are essential. However, Model X emphasizes consumer sovereignty, whereas Model Y emphasizes planner sovereignty. Additionally, the issue of proletarian-oriented culture with the adoption of simplicity of life (discussed by Thomas More) is again on the agenda, with China adopting this course and the Soviet Union attempting to up with the United States, as far as its output of < d services. CONCLUSION Thus far, we have traced the development of the political economy of socialism from Marx through a period of stagnation in economic theory, particularly in its microeconomic aspects, to a revival of economic theory. At present, with the need for theory as a basis for the practical functioning of an economy which is less cen trally planned and more economically managed, together with growing mathematical sophistication, a political 77 economy of socialism is evolving. Within that evolution can be discerned two main aspects: the quantitative and qualitative. And within each of these areas divergent theories can be detected in the choice of means to attain the ends of socialism. Having briefly examined the evolution of socialist thought, we shall turn to the exceedingly more difficult task of laying the foundations for a systematic general theory. CHAPTER III FOUNDATIONS FOR A SOCIOECONOMIC THEORY OF SOCIALISM: AN OVERVIEW INTRODUCTION The preceding chapter summarized the evolution of the political economy of socialism from Marx to the present. Forthcoming chapters will identify and describe the leading elements in the prospective further evolution of such a political economy or socioeconomic theory. In this chapter, we shall present an overview of these lead ing elements of the subject. Firstly, it will be noted that it is premature to systematize a political economy of socialism, mainly for two reasons: (1) the level of development of the economies involved; and (2) the nature of economic laws, theories, and political economy. Secondly, in discussing the nature of economic laws and political economy the "organizing principle" which determines the ends and means of a society will be 78 identified. Finally, borrowing from both Marxist and Western academic economists, an organization of the general theory developed in the remainder of the paper will be presented. PROBLEMS IN THE FORMULATION OF A SYSTEMATIC THEORY OF SOCIALISM Let us now examine the two main reasons why the writer believes it is premature to fully generalize the theory of socialism: the level of development and the nature of economic laws and political economy. Level of Development From a broad historical perspective, the present stage of socialist development of the Communist countries is similar to that of merchant capitalism or the mercantilist era of capitalist development. The main features of capitalism and the market system in the mercantilist era were not yet evolved and neither was economics as a science. In the Soviet bloc at present, including Yugo slavia, development is uneven, but certainly no economy has yet achieved the productive capacity Marx envisioned in a post-capitalist system. 80 Lange^ contended that in the first phase of the socialist and national revolutionary types of economic development (i.e., in the period of industrialization), the main problem is one of assuring rapid growth of pro ductive capacity, not one of prices serving as a means of accounting or incentives. Efficient allocation of resources is overshadowed by the problem of growth. For example, it is more important to develop a machine indus try than to do it in the most efficient way. Only at a higher stage of economic development, with a more complex and diversified economy, do the problems of efficiency and incentives become more important. Lange argued that once the important goals of centralized socialist planning have been achieved— rapid industrialization, establishment of a socialist sector which controls "the commanding outposts" of economic life— a socialist economy should and can viably become, in large part, decentralized. While planning of economic development and detailed microeconomic decision making Oskar Lange, "The Role of Planning in Socialist Economy," in Morris Bornstein, ed., Comparative Economic Systems (Homewood, ILL.: Richard D. Irwin, Inc., 1965), pp. 198-210. 81 through administrative measures were a historical necessity, in Lange's opinion, at an early stage of socialist development, these methods are not peculiar to socialism but are techniques of a war economy. Centralized planning is a historical necessity, said Lange, because the process of any social revolution which "liquidates" one social system and establishes another requires centralized disposition of resources, as income distribution is radically altered and ownership of capital resources is changed. Additionally, in underdeveloped countries the priority goal of rapid industrialization, as indicated above, requires central ized administration of resources in the first phase of socialist development. However, methods which are necessary in periods of social revolution and rapid industrialization later become fetters on further development. (This view is shared by most economists in the European Communist countries.) They lead to waste of resources due to inflexibility, require a wasteful bureaucracy, and make it difficult to adjust production to consumption and the needs of the people. Also, the incentives of moral and 82 political exhortations to the workers by appealing to their patriotism and "socialist consciousness" need to be replaced by economic incentives. (This viewpoint is not shared by the Cubans and Chinese.) This approach is considered " . . . a classical example of the dialectical character of the development of socialist society," or the laws of motion of socialism. Moreover, in the first, centralized phase of socialist development, the working class is weak; but it rapidly develops with industrialization. In this first stage, the bureaucratic state machine and the "cult of personality" thrive. The growth of the working class and the "socialist intelligentsia" are the required social forces which make possible a change in these methods. Apparently, a second phase has begun in the Soviet bloc. Yugoslavs were of course the first to embark on a unique decentralized market socialist model; but their position is not unique. We find that divergent theories and practices, as noted heretofore, exist in this present phase. Similarly, looking back at the 2Ibid., p. 201. 83 development of capitalism it is easy to discern vast differences in development, with feudal remnants still existing side by side with emerging capitalism. However, mature capitalist nations do exist as laboratories for the study of economic theory, which cannot be said of the socialist economies. For these reasons, it is premature to fully generalize a theory of socialism at this industrialization stage of socialism. For a further reason we shall examine the nature of economic laws, theories and political economy. Economic Laws, Theories, and Political Economy Since Oskar Lange was well versed in both Marxist and Western academic economics the author is relying in part on his analysis of economic laws, theories and political economy.3 Firstly, Lange speaks of the economic process 4 as a complex of continually repeated human actions." 30skar Lange, Political Economy, Vol. I (New York: The Macmillan Co., 1963), 49-147. ^Ibid., pp. 49-50. 84 Economic laws are defined as "continually repeated connections (relationships) between various elements of the economic process." They are stochastic in nature. Such laws are objective, neither the product of the human mind nor the product of the science of political economy. Science merely tries to "discover" them. They are independent of human will. Lange designates economic theories as combinations of economic laws to form logical systems, as for example, monetary theory or cycle theory. Economic theories specify the conditions in which abstract laws are true and connected in a definite way. The conditions specified in an economic theory are called its assumptions, and a set of such assumptions has recently come to be called a theoretical economic model.^ A model of pure competition and the accelerator- multiplier model are examples. Political economy is the formulation of a general theory of a "mode of production," as for example, the political economy of capitalism or the political economy of socialism. ^Ibid., p. 106. 85 LAWS OF CAUSATION, CONCOMITANCE AND FUNCTIONAL RELATIONSHIPS Lange distinguishes laws of causation, concom itance, and functional relationships. Although the wording he uses differs somewhat from our familiar categories, they will be seen to be very similar. Causal relationships are those in which a given event is always followed by some other event or act or action, which takes place in time. Concomitance relationships are those in which two or more events always occur jointly. If the author is not mistaken Lange is here referring to correlations. Functional laws exist when there is a relationship between variables and can be formulated as mathematical functions. Laws: The Technical and Balance Laws of Production, the Laws of Human Behavior, and the Laws of Interrelationship of Human Actions Lange then distinguishes three kinds of economic laws which we shall attempt to use in part and adopt for the purposes of this study. They are: the technical and balance laws of production, the laws of human behavior, 86 and the laws of the interplay or interrelationship of human actions. The technical and balance laws of production. This type of law is the outcome of material and technical necessities of production and is connected with man's relations to nature. It is independent of human will, but people are conscious of it. The production function would be one example. The concept of input-output may be related to this law in that the output of some goods serve as inputs of other goods. Laws of human behavior. The laws of human behavior are independent of human will though they deal with purposive activity. Particular economic relations of production and distribution give rise to particular economic stimuli and reactions to those stimuli. For example, in a purely competitive market, competition stimulates producers to reduce costs. The whole question of incentives and motivation as they relate to the economic relations of production and distribution will be examined under the qualitative aspects of socioeconomic theory of socialism. 87 Laws of the interrelationships of human economic actions. The laws of the interrelationships or interplay of human actions are also independent of human will. Production and distribution relations determine the way production and distribution are organized, and therefore, the way in which human economic activities interrelate or interoperate. As examples, Lange gives cooperation, division of labor, exchange of products, competition, monopoly, and planning. In Lange's view, e.g., the development of the market mechanism together with the development of capitalism was not accidental. While individual actions are purposive and con scious , the actions of the whole are unintended or unconscious. The paradox of thrift may be one example. The disappearance of pure profit under pure competition may be another example. Under monopoly the interrelationships differ from those of pure competition. Certainly the exchange of products takes place under different market conditions with monopoly and competition. Presumably, the inter operation of human actions differs under comprehensive planning. We shall attempt to analyze this later. 88 The above laws are related not only to the relations and forces of production, but to the super structure. The role of the state may affect stimuli through taxation and thus affect human behavior. The state may also affect the interrelations of human actions by rationing, forbidding or encouraging cartels, et cetera. Historical Aspect of Economic Laws The above laws may emerge in certain historical epochs and disappear at other stages of development. The first law, that is, the technical and balance laws, Lange considers universal in that the laws of production do not cease to operate with the transition from one social formation to another, they are only enriched by more highly developed ways of operating arising from the development of productive forces in the new social formation.6 In other words, as the relations of production change, the technical and balance laws of production do not change. However, there seems to be some controversy in this regard, among Marxian economists. In a postscript 6 Ibid., p. 65. 89 7 to the Use of Mathematics in Economics, Nemchinov criticizes Lange's conclusion in an article in the above- mentioned book that prices, wages, surplus product ratios are entirely determined by technical conditions of production. Nemchinov averred that they are mainly determined by social-economic relations. Although the productive forces or technology and quantity and quality of the factors of production progress, the general laws do not cease to operate, stated Lange. But quite obviously the concrete numerical values of particular relations change. If, for example, these laws are expressed in mathematical equations or inequalities, the value of the parameters of the equations or inequalities change, but not the equation or the inequalities themselves.8 The other two laws, however, change as the economic relations between men change. Three kinds of these laws are distinguished: (1) laws specific to a given mode of production; (2) common economic laws, common to all modes of production; and (3) laws arising 7 Use of Mathematics in Economics, Russian ed. edited by V. S. Nemchinov; Engl .sh ed. edited by A. Nove (Cambridge, Mass.: MIT Press, 1964), p. 370. 8 Ibid., p. 65 (footnote). 90 from the influence of the superstructure. Laws specific to a given mode of production. In the laws specific to a given mode of production the role played by the ownership of the means of production is decisive, stated Lange. This concept is shared by all economists in the Soviet orbit and Yugoslavia. The ownership of the means of production determines goals and means of obtaining those ends. We shall return to this concept later in the chapter. It affects the stimuli or motivation and the reactions to these stimuli. Unlike the technical and balance laws which are common to capitalism and socialism "... the laws of human behavior and the laws of interplay of human actions . . . are products of economic relations between men, and 9 change as those relations change." Here, Lange is very vague and abstruse. He referred to the way in which production is directed and planned. This question brings up the entire issue of "planned" versus "unplanned economies." The writer takes the position that in order to show a meaningful functional ^Ibid., p. 67. 91 relationship between public ownership of the means of production and planning we would have to overstep the bounds of economics and incorporate political science and the concept of power. We shall say more on this later and expand it in a subsequent chapter. Economic laws common to different social forma tions . Lange does not relinquish the idea that the relations of production play a role, but explains the following: The laws of human behavior and interrelations of human actions are "also determined by relations of production but by the properties of those relations which appear in more than one social formation."^ This particularly refers to the laws of the market, wherever products are exchanged. Thus the laws of supply and demand would operate as long as products are exchanged. Where money is used there are common general monetary laws. Economic laws resulting from the superstructure. Economic laws of the third type are the result of the 10Ibid., p. 67. 92 influence of the superstructure. Lange gave examples which result mainly from the actions of the state. Examples are free trade or protective tariffs, currency based on gold or paper money without gold backing. "This activity moulds certain economic relations to which defi nite economic laws correspond; these laws operate as long as the economic relations resulting from these state activities exist.Lange would presumably consider fiscal and monetary policies as examples belonging in this category. THE FUNCTIONING OF AN ECONOMIC SYSTEM To study the whole system of socialism one should analyze the productive forces as well as the relations of production. Lange further stated: Feudalism, socialism, capitalism and other social formations are real entities existing independently of our scientific classification; they are internally connected systems of repeat- able human actions (i.e., relations). They form objective "wholes" in the sense that the proper ties of these systems of human activities are different from the properties of the various parts of these systems, i.e., the individual ^ Ibid., p. 68 . 93 human actions taken separately. . . . Cybernetics has established that the behaviour of a system depends not only on the way in which its elements operate, but also on the way in which the opera tion of individual elements of the system are "coupled" to one another— to use the terminology of cybernetics. . . . The system is a "whole" possessing properties different from the properties of its elements.12 To understand the method of functioning of a particular economic system it is necessary to know the specific economic relationships or laws resulting from the relations of production which are specific to that economic system. According to Lange, the law of surplus value was the basic economic law of the capitalist mode of production. The basic economic law of socialism, . . . resulting from the type of ownership of the means of production dominant in a given social formation, determines the goal to which the means of production and the entire productive forces of society are directed, in other words, it deter mines the main economic incentive of the owners of the means of production. It also determines the means of attaining this goal. In other words, the basic economic law of a given formation deter mines the main economic stimulus together with the way of reacting to that stimulus within the formation.13 12 Ibid., pp. 70-21 (footnote). 13Ibid., p. 73. 94 The Goals or Ends If the owners of the means of production are theoretically the producers themselves, the satisfaction of the needs of the producers or "the people" is the pronounced aim of socialism. The basic stated economic "law" (goal) of socialism is "the ever fuller satisfaction of the growing material and cultural needs of the people through a constant growth and improvement of socialist production, n1^ according to a recent textbook on the Political Economy of Socialism, published in the Soviet Union. An important facet of the relationship between productivity and needs and/or wants is that the sequence appears reversed in the underdeveloped socialist and developed capitalist economies. In the (less developed) socialist economies, the needs of the people require increasing productivity. In (developed) capitalist economies, as Galbraith points out,15 wants are manufac- 14 Khudokormov, ed., Political Economy of Socialism (Moscow: Progress Publishers, 1967), p. 72. 15John Kenneth Galbraith, The New Industrial State (New York: The New American Library, Inc., '1967), pp. 279-282. 95 tured and as productivity grows, wants grow. (Whether the distinction merely reflects the level of affluence of the nations or is due to institutional factors is a complex question.) While productivity and growth to satisfy needs is the stated aim of this phase of socialist society, a longer-run social aim is to develop socialist man in a classless society, an aim stressed in greater and lesser degree within the Communist countries. Public Ownership and the Underlying Welfare Assumption Related to the question of the aims of a socialist society is the underlying welfare assumption that the people presumably helped or favored by a system charac terized by public ownership— the workers— are preferable to those who are hurt. The preference for workers over property owners is based on the theory of capitalist exploitation and the role of labor as the class destined to bring about a classless society. Thus, the needs of workers, their initiative and motivation, the issue of workers' control in production, and workers' consumption patterns are all interrelated (or should be consistently related). 96 The above welfare assumption pertains to the distribution of income, property, and power. It does not exclude the possibility of pursuing— or achieving— a Pareto welfare optimum in the allocation of resources once the institution of private ownership and the status quo is replaced, and a new distribution pattern is established. Public Ownership and the Means to Attain Ends As stated above, the ownership of the means of production determines (or constrains) the means of attaining goals. As Zauberman notes, Institutional environment is relevant, and indeed decisive, for the number and effectiveness of the instrument-variables the planning State has at hand, and for its degrees of freedom* in solving the underlying system of equations. This may be expected to influence the choice of certain approaches to, and tools of, plan construction and plan implementation in preference to others. Mikhail Bor, to cite a second source, is critical of the effectiveness of the means used in Western-style Alfred Zauberman, Aspects of Planometrics (New Haven: Yale University Press, 1967), p. 247. Under lining by the author. 97 (e.g., French) planning. He argues that in the "planning" of capitalist production it is not the economy that follows the plan but, on the contrary, the plan is adjusted to fit the un predictable vicissitudes of the economy. ^ By contrast, Jan Tinbergen challenged the view that ownership of the means of production is directly related to the means for achieving ends. In a later chapter, we shall assemble and evaluate the response to this challenge. THE GENERAL THEORY OF SOCIALISM: ORGANIZATION OF THE DISCUSSION From the foregoing discussion of economic laws, theories, models, and the general theory of socialism, it is obvious that a full analysis of such a general socio economic theory of socialism is premature. Perhaps, had Lange lived, he would have pursued this line in attempting to develop a political economy of socialism relevant to the present stage of development. The present writer will use a much more modest framework, Mikhail Bor, Aims and Methods of Soviet Planning (New York: International Publishers, 1967), p. 238. 98 although influenced by Lange's framework. What is common to all past and present economic systems is scarcity of resources in relation to needs and/or wants. The writer is not positing this relation ship as something eternal. Therefore, efficiency in the use of resources is imperative. Perhaps, utilizing the Langian "laws," we may state that there is a causal relationship between scarcity and the need for efficiency. Succeeding discussion of the general theory of socialism will encompass three major dimensions or view points : first, developmental efficiency, which involves qualitative as well as quantitative changes in inputs as well as changes in institutions; second, the full use of given resources; third, the efficient allocation of given resources. Interwoven with all three, and common to all economic systems is the issue of the distribution of income. Several chapters will treat the quantitative aspects, as the problems of efficiency involve quantifi able variables and maximization and/or minimization. (However, because of the writer's orientation and training, a primarily verbal or "literary" approach will be used.) 99 However, efficiency with respect to resources in relation to needs is only one aspect of a general socio economic theory. The whole subject would be "dismal" indeed if the aims and means of socialism were to be so narrowed. Marx stated in his early writings: It will be seen how in place of the wealth and poverty of political economy come the rich human being and rich human need. The rich human being is simultaneously the human being in need of a totality of human life-activities— the man in whom his own realization exists as an inner necessity, as need.18 Thus, the aim of creating a new man involves qualitative aspects of socialism. The questions of decision-making, workers' control, incentives, motivation, cooperation, and shifts in consumer tastes, are pertinent questions to be discussed. Such issues may be considered as relating to the laws of human behavior mentioned above. We shall then discuss the "organizing principle," that is, the ownership of the means of production, how it does or does not affect the problems of efficiency, and Karl Marx, Economic and Philosophic Manuscripts of 1844 (Moscow: Foreign Languages Publishing House, 1961), p. 112. whether it is a necessary and sufficient condition in relationship to the aims and means of an economic system. The relationship, if any, of public ownership to the qualitative aspects will be examined. In sum, succeeding chapters will provide a general theoretical description of these problems and methods for their resolution under socialism. Divergencies within the Soviet bloc and Yugoslavia will also be discussed. In addition, areas of similarity of technique, especially in mathematical economics, between socialism and capital ism will be described. While we have only presented an overview of the material to be covered, it is very apparent that the title "towards" is aptly used. No monetary, cycle, international trade theories are even mentioned. And unfortunately, no "laws of motion of socialism" will be discovered. At the same time, to do justice to the theme of the dissertation, the writer is of the opinion that broader political and social issues need to be interwoven with the more tech nically economic. Notwithstanding all the constraints mentioned, we shall proceed with our analysis in the hopes of making 101 some incremental contribution. As Heilbroner has so imaginatively put it, The hope is that in combining the Marxian angle of vision, with its emphasis on class structure and privilege, with the fierce insistence of neoclassi cal techniques on consistency and clarity, that we might have the beginnings of a new and fruitful chapter in the effort to comprehend the social universe. 19 Robert L. Heilbroner, "Putting Marx to Work," New York Review of Books (December 5, 1968), pp. 8-12. CHAPTER IV QUANTITATIVE ASPECTS OF SOCIOECONOMIC THEORY— DEVELOPMENTAL AND FULL EMPLOYMENT EFFICIENCY INTRODUCTION In this chapter we begin an examination of the next steps in the evolution of a general theory of socialism. The common economic problem of all past economic systems has been scarcity. Perhaps the best way of expressing it in regard to the socialist economies is the relation of scarce resources to output targets. In this chapter, we shall be concerned with macroeconomic efficiency to meet the problem of scarcity.^ Under this heading, we shall discuss developmental and The main sources for this chapter will be Czechoslovak Economic Papers; Alfred Zauberman's Aspects of Planometrics7 Janos Kornai's Mathematical Planning of Structural Decisions; The Use of Mathematics in Economics, English edition by A. Nove; Political Economy of Socialism, edited by G. N. Khudokormov; and Branko Horvat's Towards a Theory of Planned Economy. Also, Robert W. Campbell's 102 103 full employment efficiency, leaving the microeconomic question of efficient allocation of given resources to satisfy targets, needs, or wants for the following chapter. It should be understood at the outset that the distinction between developmental and full employment planning is rather blurred. In the early years, as already noted, emphasis was on development rather than efficient allocation of given resources. The issue of full employment still receives secondary consideration in the Soviet sphere, but increasing attention in Yugoslavia. This emphasis on "nonallocative efficiency" appears to parallel the findings of Harvey Liebenstein: "Empirical evidence has been accumulating that suggests that the problem of allocative efficiency is trivial.Although problems of allocative efficiency are far from trivial in the Communist nations, the accent on nonallocative effi ciency seems to be a common tendency, in the West as well Soviet Economic Power, Comparative Economic Systems, edited by Jan S. Prybyla. 2 Harvey Liebenstein, "Allocative Efficiency vs. 'X-Efficiency,'" The American Economic Review (Wisconsin: American Economic Association, June 1966), p. 392. 104 the East. While initial emphasis in development was on revolutionary structural changes, enabling a "surplus" to be mobilized and utilized, the tendency at present is towards planometrics or methods of mathematical program ming. As of this period, however, planometrics cannot replace the "traditional" methods for a number of reasons: (1) prices necessary for economic calculation are adjusted to the customary methods of planning; (2) bookkeeping and statistics providing data are conso- nent with traditional planning methods; (3) computers are insufficient; and (4) there are few experts in mathematics. Since this study, in part, points to the future, we shall touch on the newest developments, keeping in mind that the role of the mathematical methods is to "check, supplement and correct plans drawn up by the traditional methods. Janos Kornai, Mathematical Planning of Struc tural Decisions (Amsterdam: North-Holland Publishing Co., 1967), p. 44. 105 Considering the immensity of the subject of development, the succeeding discussion will be limited to a consideration of some of the diverse theories and practices and the choices to be made of the following: alternative methods of planning, the periods of operation of planning, optimality criteria, views on interest and efficiency of investment criteria, and models of economic growth. The distribution of income will be considered as part of this discussion. We shall then discuss the role of technology and the "law" of proportional develop ment. Under full employment efficiency, we shall con sider Model X, the macroeconomic planning model epitomized by Yugoslavia, and the New Economic Management and Planning Model, Model Y, as related to the Soviet bloc countries. We shall then use this material as clues to formu late conclusions and generalizations. While we shall not adhere strictly to a purely quantitative approach, the emphasis will be on quantita tive economic variables in relation to efficiency. 106 DEVELOPMENTAL EFFICIENCY Aims of Development Policy Before discussing the various choices confronting planners in the present stage of development, the aims of economic policy should be briefly considered. Basically, the aims are industrialization and raising living stand ards. Depending upon the particular country, other aims include increases in military defense, economic aid to other countries, attaining equilibrium in the balance of payments, et cetera. The question of an optimality criterion is related to the aims of policy and will be discussed below. Choice of Alternatives While "objective conditions," such as increasing complexity, scientific revolutions, the problems of over centralization and bureaucracy, and the growth and acceptance of mathematical methods have all brought the various issues and alternatives to the fore, planners must make choices. According to the Marxian method, if the choices adopted do not conform with changing objective conditions, other choices must be made. 107 In developmental planning there are many alter native methods, theories and practices. We shall deal with some of the most important issues, where choices are being considered, discussed and utilized within the Communist countries. In the absence of an explicit general theory of socialism, it is necessary to discern the clues which enable theorists to perceive one. The following areas of choices indicate new steps in this evolutionary process and may serve as clues: (1) choice of methods of development planning; (2) period of opera tion of plans; (3) choice of optimality criteria, as mathematical programming gains ground; (4) choice of views on "rental of capital," or criterion of general or absolute efficiency; (5) choice of a coefficient of comparative economic efficiency; and (6) choice of a growth model. Choice of Methods of Developmental Planning Administrative methods of planning have been superseded by macroeconomic planning and the market in Yugoslavia and central planning with the use of economic or market instruments in the Soviet bloc. Within the new economic reforms are movements towards mathematical 108 programming. Planning by administrative directives is generally conceded to have had its day and is relegated to a lower type of socialist planning. The instruments used were not "economic" but physical directives. Such planning was considered suited to abnormal conditions of economic development, economic backwardness, the need to accelerate structural transformations, or a war economy. Because, as noted earlier, new methods of planning for development were necessary due to greater complexity, the need for intensive growth, and greater decentraliza tion, a choice of methods is being made in practice and in theory. These choices thus involve the following: market socialism, as in Yugoslavia and the aborted attempt in Czechoslovakia; the new economic reforms in the Soviet bloc which are moving toward greater use of market instruments on the one hand, and mathematical programming on the other. Market socialism. In Yugoslavia, based in part on Lange's prewar decentralized market socialist model, the central plan is merely macroeconomic in nature. The autonomous role of enterprises in an institutional market is also geared to contribute to initiative and 109 thus growth. Some generalization can be claimed for this approach, as Czechoslovak economists were discussing a similar model before the Warsaw Pact nations' invasion. For example, Karel Kouba states, "The new system derives from a deeper concept of socialist planning: integration of the plan with the law of value and the market mecha- 4 nism." Also, the prominent economist, Ota Sik, was developing a model similar to that of the Yugoslav economy.^ New economic reforms. The New Economic Manage ment in Soviet Russia and East Europe generally emphasizes economic stimuli instead of physical directives, which involved giving plan targets in great detail, and seeks greater decision-making and initiative at the "operational" level. Thus, top planners could ostensibly concentrate on the macroeconomic relations. Theoretically and 4 Karel Kouba, "The Plan and Economic Growth," Czechoslovak Economic Papers (Prague: Czechoslovak Academy of Sciences, V. 6, 1966), p. 8. ^Ota Sik, Plan and Market Under Socialism (New York: International Arts and Sciences Press, 1967). 1 1 0 I practically, the market plays a role, albeit a very subordinate one, compared to the Yugoslav model. Market i instruments, such as prices, costs, taxes, interest, et cetera will be utilized. These questions will be dealt ; with subsequently in the following chapter and under j qualitative aspects relating to centralization-decentral- ization. Within the recent reforms, we can discern a move ment towards mathematical programming side by side with j the "traditional" planning methods, as noted earlier. By "traditional" methods is meant primarily the system j of material balances. Input-output tables are not con sidered as "traditional"; but as a rudimentary tool in j assuring consistency of plan indices and belong to an early stage in the development of mathematical programming. An interesting way to approach this aspect of j planning is to compare the "traditional" and mathematical ! ! programming methods. Traditional and mathematical programming. First, mathematical programming "offers the decision-making body broader and more organized opportunities for making Ill c h o i c e s . For example, in "traditional" planning, alternatives are not presented for investment permits. Although there is scrutiny of alternatives, selection is made in consecutive stages rather than simultaneously. Mathematical programming provides the framework for simultaneous comparisons of alternative choices. Second, economic activities (that is, such processes as production, investment, construction, importing) can be combined in many ways. The alternatives may not be either one activity or the other but rather in their proportions. Using the "traditional" method it is not possible to select the best combination whereas it is the advantage of mathematical programming that it can perform this task. Third, there is a practical advantage in mathemati cal programming. Theoretically, it was possible to compare many alternatives on the basis of identical wage rates, identical tariffs, et cetera. In practice, where alternative proposals were drawn up they were prepared independently on the basis of different data. With 6 Kornai, op. cit., p. 109. 1 1 2 mathematical programming, all the alternatives are incorporated in a single model, forcing the programmer to calculate on the basis of uniform data. Fourth, under the "traditional" method the aim of optimization was subordinated to achieving equilibrium in the plan. The 'objective function,' the optimality criterion expressed in the index of economic efficiency, is more or less lost. . . . The very approximation in the course of plan coordination to a single feasible and possible plan which is set up in the balance system and satisfies the 'taut' constraint system requires so great an effort, that no energy is left for selecting the optimal one from among what is really a large number of feasible programs.7 Under mathematical programming both optimization and equilibrium are given "equal rights." In comparing mathematical programming with "traditional" methods, mention should be made of stochas tic models, which Kornai asserts will contribute to a more objective treatment of uncertain data, one of the most difficult problems in economic theory. Recognizing the advantages but limitations of mathematical programming, both "traditional" and 7Ibid., p. 116. 113 mathematical methods are utilized. Further, general programming at the upper level must be linked with con crete and detailed programming at the lower levels. This brings us to another aspect of mathematical programming which is being considered in Hungary, known as two-level planning. Two-level planning. This method grows out of the need to optimize for the whole economy. One alternative is to have a highly aggregated model which is over simplified and restricts the possibilities of choice. The other alternative is to have a very large-scale model to overcome the problems of aggregation and oversimplifi cation. But in this case there are no computers adequate to carry out the computations. Because such an economy-wide program cannot be solved with present computers, Kornai calls this the O "overall control information problem" (OCI). A possible solution is to decompose the overall program into separate "sectors" with coordination by the center which distrib utes material and labor among the sectors. The center ^Ibid., p. 344. 114 and the sectors would supplement and correct each other. This solution is called two-level planning. Kornai 9 describes this method as a zero-sum two-person game. The famous two-level planning model by Kornai and Liptak is based upon the idea of decomposition of a linear program developed by Dantzig.^® The Dantzig technique demonstrates how central planning can be attained without complete information at the center. It decomposes linear programs into: (a) subprograms corresponding to its almost independent parts, and (b) a master program which ties together the subprograms.^ The relation to game theory arises from the fact that every linear program is formally equivalent to a two-person zero sum game.^2 ^Ibid., pp. 366 ff. ■ ^ G e o r g e b. Dantzig, Linear Programming and Ex tensions (Princeton, N.J.: Princeton University Press, 1963), pp. 448-469. ^ Ibid. , p. 448. ^■2For such games, in turn, a numerical approxima tion method for finding solutions was proposed by G. W. Brown and G. von Neumann, "Solution of Games by Differen tial Equations," Contributions to the Theory of Games, ed. by H. W. Kuhn and A. W. Tucker (Princeton, N.J.: Prince ton University Press, 1950), pp. 73-79, in Annals of 115 Because of deficient information, central planners cannot determine an optimal program. Relative losses would be incurred due to decisions taken independently of the sectors. The center attempts to decrease such losses by playing a "game" described below. At the same time, the sectors cannot achieve an optimal program or a correct evaluation of resources and quotas allocated to them without direction and coordina tion from the center. If the sectors were to pay a "penalty" for surpluses allocated to them due to faults in their estimation of resources and quotas, they would want to make the loss as small as possible. In sum: It may thus be seen that both sides strive to reduce a specific kind of relative loss. The center's aim is that as little as possible should be lost of the optimal returns of the economy, the sector's that the optimal evaluations should be surpassed by as little as possible. The minimax solution is achieved when both players succeed in eliminating this relative loss.13 Mathematics Studies No. 24. See also, G. W. Brown, "Iterative Solution of Games by Fictitious Play," Activity Analysis of Production and Allocation, ed. by Tjailing C. Koopmans (New York: John Wiley & Sons, Inc., 1951), pp. 374-376. 13 Kornai, op. cit., pp. 367. 116 Kornai regards two-level planning as an abstract model of a centrally planned economy. Its main proper ties, in sum, are the following: 1. It is neither completely centralized nor completely decentralized. 2. The element of competition exists in that domestic and foreign products compete and the various sectors compete for centrally managed resources and products. This competition will not, however, lead to an optimum allocation of resources. The reallocation of resources must be left to an institution invested with the proper authority, able to survey the whole domain of the national economy and sufficiently impartial to have no interest in allocating a resource to one sector rather than another.14 3. General cybernetic principles, which may be drawn up for the socialist economy, may also be regarded as a system of control, information flow, feedback, et cetera. 4. A simulation of the market process on the electronic computer takes place. The center acts as an auctioneer, auctioning off resources to the sectors, 14Ibid., p. 383. 117 allocating them to the highest bidder. Instead of prices being given to the firms, as in the Lange model, outputs and inputs are given and shadow prices determined by the lower levels. A game is played whereby the center issues output and input figures to the lower levels and the sectors report back a set of shadow prices based on optimal local plans. These prices vary in each locality. The center then revises output and input targets to secure uniformity. Through a series of successive approxima tions an optimal program is obtained. An optimum allocation would depend on frank and objective information sent up from the lower sections. If overbidding takes place, penalties could be imposed. We have allocated relatively larger space to this theoretical model than the previous models mentioned, although the Yugoslav macroeconomic planning plus market mechanism and the New Economic Management models conform to present practices. The greater attention to two-level planning reflects our concern with the path in which socialism is moving. The influence of cybernation on planning is manifested by the Kornai concept and can be considered as a force for changing present conditions. 118 It is also manifested in the actual programs envisioned in the Soviet Union. As Campbell states, the Soviet Union is . . . thinking about not simply mechanizing the balancing process by using computers and input- output but about incorporating optimizing features via linear programming. The Russians are now planning to set up a network of very large computer centers controlled from one master center in Moscow in order to improve their ability to handle and process economic information and utilize it in some such way. In the Soviet bloc, the use of mathematical pro gramming which would simulate a real market and retain central planning and the greater use of an institutional market and decentralization appear to be taking place simultaneously. During this experimental period, develop ment and growth might be affected adversely until greater experience is gathered in both the simulated and real markets. Which alternative will win out— the decentral ized variant and greater use of the market or the "com puterized Utopia" cannot be predicted. Whether Campbell is correct in stating that the decentralized version must win out because of the obstacles in the way of operating ^Robert W. Campbell, Soviet Economic Power (London: Macmillan, 1967), p. 52. 119 a "computerized Utopia, remains to be seen. A combination of both a real consumer and labor market and central planning via multilevel planning seems most likely. How it will affect development and growth through greater efficiency depends upon the speed with which computers can be produced and the mastery of mathe matical techniques as well as recognition of scarcity and opportunity cost concepts. Choice of Time Period for Planning While all types of plans are interconnected, they may be differentiated by their period of operation. This dimension of planning is particularly pertinent to growth and development. Operational plans are short-run, whether by day, month, three months, or year. Long-term plans are for five or seven years and longer term plans are generally fifteen to twenty years. In discussing development planning, in contrast to full employment planning, we must focus on the longer period, although the interrelationship with operational planning is necessary for continuity. Certainly, long 16Ibid., p. 172. 1 2 0 term planning for capital investment affects the short- run volume of output. Planning for training of manpower affects the supply of labor in the short run. In both the Soviet bloc and Yugoslavia, the choice of five- and seven-year plans is based on the fact that such a period is necessary for building large industrial enterprises, transportation, and hydroelectric stations. However, such plans are inadequate, avers Horvat, for achieving optimum development. For example, current economic and political problems may cause economic policy in the short run to be oriented to a quick solution, which may be detrimental to long-run economic develop ment. In Yugoslavia, it was found that planning for one to five years introduces a "discontinuity into economic development."^ Five-year plans are inflexible; and attempts to overfulfill plans lead to the greatest effort in the fourth year followed by a diminution of effort. Investment cycles are thus systematically built into the 17 Branko Horvat, "Methodological Problems of Long- Run Programming of Economic Development," Eastern European Economics (New York: International Arts and Sciences Press, Spring 1964), Vol. II, No. 3, 21. 1 2 1 economy, with consequent instability and hindered development. Furthermore, small changes in current economic activity can bring large changes in the long run because of the cumulative nature of economic development. If, for example, there is insufficient training of manpower, future economic development is greatly hindered. A twenty-year program includes the following socioeconomic tasks: transforming agriculture and closing the gap between rural and urban areas; updating health standards; increasing housing; eliminating illiteracy; modernizing communication; overcoming disproportions in regional development. The Soviet economist, Bor, also explains that five-year plans are inadequate for reconstructing the 18 material and technical basis of production. For example, a ten-to fifteen-year plan in the USSR was formulated to reconstruct all sectors of the economy on the basis of electrification. 18 Mikhail Bor, Aims and Methods of Soviet Planning (New York: International Publishers, 1967), p. 40. 1 2 2 In view of the "scientific revolution," a concept to which we shall return, the need to restructure the economy on the basis of cybernation would further point to the necessity for very long-term plans. Choice of Optimality Criteria While the aims of long-run development plans may be described as "advancing mankind," such an aim cannot be quantified. Quantifying the aims of economic policy raises a knotty practical and theoretical problem of determination of an optimality criterion. Kornai asserts that economists, particularly in Hungary, are agnostic as regards advances on this front although he himself is more optimistic. Kornai alleges that theoretically it is possible to separate the purposes of the system of constraints 19 from the objective function. We shall discuss this subject further, as developed by Kornai. Following this overall approach to optimality criteria, we shall enumer ate several varieties of optimality criteria, such as: (1) the optimum division of consumption and investment; 19 Kornai, op. cit. , p. 398. 123 (2) maximization of final consumption or national income; (3) maximization of net foreign exchange; (4) minimiza tion of total input; (5) minimization of time; and (6) maximization of utility. Kornai on the objective function and constraints. Before elaborating on the Kornai model, it is well to note that there are similar planning models in the Netherlands. Tinbergen had pioneered in this respect in On the Theory of Economic Policy (1922). His approach amounts to formulating 'target values' for certain endogenous variables of the model and then solving this model to obtain the corresponding values of those exogenous variables which are controlled by the government. Theil's approach amounts to translating policy objectives into quadratic objec tive functions . . . and then maximizing such a function or its expectations subject to the con straints implied by an econometric m a c r o m o d e l .21 In mathematical form, Kornai shows the objective 20 Henri Theil, Applied Economic Forecasting (Amsterdam: North-Holland Publ. Co., 1966), pp. 78-125; idem, Optimal Decision Rules for Government and Industry (Amsterdam: North-Holland Publ. Co., 1964), pp. 256-304. 21 Theil, Applied Economic Forecasting, p. 84. 2 2 Kornai, op. cit., pp. 397-402. function as follows: k n S (x^ x2, x3, ,xn) = £ £ d± s± j (xj ) ^ max!, where d^ = the weight of the ith aim of economic policy, s^j(Xj) = the function expressing the contribution of the jth activity to the ith aim of economic policy. x^....xn = programs determining activity levels. The assumption is that there are k different aims of economic policy, such as raising the standard of living, improvement of external trade, or development of defense. The system of constraints may be shown as follows Assume the number of activities in the economy is n; activity levels are determined by the program x^, x^, ... xR. The system of constraints are composed of m inequal ities : 125 where b1 to refer to technological, natural and capacity restraints, et cetera, a^ to an are the functions whose parameters are the various programs and whose value is the assimilation of the specific b referred to. The objective function expresses the preferences of the planners (taking into consideration consumer preferences to some degree). The system of constraints refers to technological factors, scarcities of nature, et cetera. Kornai considers the constraints as "neces sary" and the objective function as "the more the better," or the "wishes" of economic policy. Practically, there are a number of problems. First, the problem arises of separating "necessary" from "wish." The issue of raising living standards is an example. Is it a constraint or is it part of the objec tive function? But whether the necessary increase in living stand ards was of, say, 2 per cent annually, with every thing above this belonging to the realm of wishes, or whether it was of 1 per cent, or of 3 per cent— it will hardly be possible to answer such questions.23 23Ibid., p. 399. 126 Second, the difficulty of measuring the contribu tions of an activity to an aim of economic policy, as for example, raising the cultural level of society, must be recognized. Kornai then suggests the possibility of using some artificial "weighting." Such artificial weighting is necessary not only because of the incommensurability of economic and noneconomic phenomena. The aims of an 'economic' character are in fact not narrowly economic— they necessarily involve political, cultural, moral, etc., con sequences .24 Third, therefore, is the difficulty of assigning relative weights to the various aims of economic policy. In practice, procedures to determine optimality criteria include both "traditional" and newer mathematical concepts. Thus, "the objective function can be employed only to express the requirements of economic policy which lend themselves to measurement by conventional methods," where "conventional" measurements are in physical or technical units or money based on actual prices or com putational prices. In contrast to "conventional" methods are "constructed" units of measurement which are 24 Ibid., p. 399 (footnote). 127 . . . the various 'points,1 'utility units,' 'pref erence weights,' etc., meant to serve the purpose of quantifying (by means of interviews or other methods) the preferences which would not be meas urable by means of conventional units of measure ment. 25 Since the statement of aims of economic policy could only be carried out by means of the "constructed" units, and such a system would not be sanctioned by the planners, according to Kornai, the objective function would be "degraded" from its pure form and the aims of economic policy "will be expressed within the framework of the system of constraints by stipulating realization of the target of economic policy set by higher economic administration."2^ Such targets will be a combination of "necessary" elements (constraints) and the "wishes of society." In practice, targets are often stated in the form of an equality or inequality, as for example, consumption in 1970 should be equal to or greater than some set amount. Another aspect of the consideration of an optimal ity criterion is obtaining of partial optima and then 25Ibid., p. 401. 2®Ibid., p. 402. 27 proceeding to a solution for an economy-wide optimum. 28 Henryk Fiszel also discusses this aspect. Varieties of optimality criteria. Despite Kornai's stricture about the practical use of optimality criteria in economy-wide planning, many varieties of criteria have been discussed. Some of them are (1) the optimum division of consumption and investment; (2) the maximization of final consumption or national income; (3) where trade is a vital concern to an economy, as in Cuba, the maximization of net foreign exchange income is strategic; (4) another possible objective function is the minimization of the total input of "social labour"; 29 (5) V. M. Giushkov suggests time as a minimand; and 27 Jerzy Mycielski, Krzysztof Rey, and Witold Trzeciakowsky, "Decomposition and Optimization of Short- Run Planning in a Planned Economy," Structural Inter dependence and Economic Development, ed. by Tibor Barna (London: Macmillan and Co., Ltd., 1963), pp. 28-38. 28 Henryk Fiszel, "The Overall and Partial Optimum, Problem of Economic Dynamics and Planning, Essays in Honour of Michael Kalecki (Oxford: Pergammon Press, 1966) pp. 129-132. Zauberman, op. cit., p. 173. 129 (6) maximization of utility, as suggested by Pugachev. The first of these is of strategic importance for develop ment planning. Optimum division of consumption and investment. Branko Horvat has attempted to analyze the optimum division of consumption and investment for rapid growth 30 and maximization of economic welfare. Inquiring into limits for accelerating economic growth, he identified: (1) the "physical limit," which is the problem of the maximum rate of productive investment; and (2) the "valuational limit,” which is the problem of the optimum rate of saving. Maximization of consumption is a function of the maximization of production, which involves the rate of investment. The economy, conceived of as a "giant pro ductive capacity," can be expanded at a maximum rate but not at a higher rate than maximum. "The potential effect of the optimum adjustment of the growth rates of factors 30 Branko Horvat, Towards a Theory of Planned Economy (Beograd: Yugoslav Institute of Economic Re search, 1964), pp. 175-204. 130 is defined as the absorptive capacity of the economy."3* Additions to total output associated with additions of investment input take place until such additions result in reductions of output. At this point the marginal productivity of investment is zero. It was believed that only an extraordinary high level of investment would drive the marginal productivity of investment towards zero, and would imply an extraordinarily low level of consumption. However, Horvat demonstrates that maximizing production involves maximizing the rate of growth of consumption. He demonstrates that only 1 or 2 per cent of "social product" has to be added to existing invest ment funds rather than pushing investment to the point where the marginal productivity of investment is zero. To demonstrate that only 1 or 2 per cent is needed, the 32 model below is used. The present share of gross investment in social product (s) equals 15 per cent; gross capital coefficient equals 3; and the rate of growth (r) therefore equals 31Ibid., p. 178. 32Ibid., pp. 190-192. 131 5 per cent per annum. Each year 1 and 2 per cent of national income are added to investment funds, causing an additional increase in output and increase in the rate of growth the following year, assuming the capital coefficient remains unchanged. Horvat does not use the concept of the marginal propensity to consume nor the accelerator. It is assumed apparently— in the writer's view— that in a "planned economy" like Yugoslavia, for example, the investment rate is the independent variable, manipulated and controlled by the "Planning Authority" and therefore fluctuations are abstracted away, at least in this model. As shown in Table I, it indicates that the level of consumption in patterns II and III have surpassed the level of consumption in pattern I in the tenth year. The greatest difference in consumption levels between patterns I, II, and III is 6 per cent, a lag of only one year. The average investment-output ratio is 12 per cent in pattern II and 18 per cent in pattern III. Empirically, says Horvat, in Yugoslavia and the Soviet Union, this is the maximum rate of expansion. Therefore, production maximization is maximized not only theoretically but as 132 TABLE I PATTERN I PATTERN II PATTERN III Year - P 3 CU ■ P 3 O m c o ■ri -P Qt C O c o u -p 3 O. -P 3 O in a o •H ■ P a C O c o u • p 3 Oj • P 3 O in c o ■H ■ P Qj C O a o u 0 100 15 85 100 15 85 100 15 85 1 105 15 89 105 16 88 105 17 87 2 110 15 94 111 17 92 111 19 90 3 116 15 98 117 18 96 118 21 93 4 122 15 103 124 19 100 126 23 97 5 128 15 108 132 20 105 136 25 102 6 134 15 114 140 21 111 147 27 108 7 141 15 120 150 22 117 161 29 114 8 148 15 126 161 23 124 176 31 121 9 155 15 132 173 24 132 194 33 130 10 162 15 138 187 25 140 216 35 140 Source: Branko Horvat, Towards a Theory of Planned Economy, p. 190. 133 a practical proposition. He states that the maximum possible rate of growth is achieved when investment expands at an annual rate between 10 and 15 per cent, according to empirical observation. 33 In Kornai1s view, the division of national income into consumption and investment cannot be determined precisely or exclusively as an economic optimization problem due to the following: (1) it is not possible to measure the effect on national income of allocations to develop the labor force, as, for example, by increasing real wages 1-2 per cent. This is due to the fact that labor discipline, initiative, striving or motivation are not solely due to economic factors but to political, sociological, cultural and moral factors as well; and (2) the distribution of national income, especially between consumption and investment, is a complex political, economic, sociological and moral problem and requires a political decision. The optimum division between consumption and investment, in Horvat's view, as discussed above, involves 33 Kornai, op. cit., p. 483. 134 the maximization of investment, which results in the maximization of consumption. The absorptive capacity of the economy is a function of four policy variables and their changes: personal consumption (which would be affected by the real wages), health, knowledge, economic and political organization, and other relevant charac teristics of the economy (whatever they might be). Thus, it seems that Kornai's complex political, sociological and moral problems are incorporated in Horvat's absorp tive capacity of an economy, and do not obstruct Horvat's search for an optimum division of consumption and invest ment. Perhaps Horvat's exposition could be reformulated in terms of mathematical programming, with an optimality criterion and constraints on the factors of health, knowledge, economic and political organization, provided they could be somehow quantified. Since the socialist economies have socialized investment and exercise large control over that variable, the search for an answer to this vital question of the optimum division of consumption and investment, which involves growth and raising living standards, goes on unabated. 135 The Pugachev model. Pugachev suggests maximizing utility derived from consumption and derives a formula for the optimum path of consumption and the growth rate 34 of capital stock. Tintner describes the model as follows: Let x(t) be consumption available at time t; u x(t) is the utility derived from x(t); Q(t) is a weighting function (discount factor), a monotonically decreasing function of t. The objective is to maximize: (t) u [x (t) ] dt Let the stock of capital be y(t). Assuming a constant coefficient of production k(t) in the consumption industry, k(t)/m in the capital indus try , we have: x (t) = k (t) y (t) dy(t)/dt = [l-k(t) ]y (t)/m It follows that: Q(t) ^du[x(t) ]/dx(t)^ = Ck t//m 34 Gerhard Tintner, "Mathematical Economics in the Soviet Union," Communist Affairs (Los Angeles, Calif.: Research Institute on Communist Strategy and Propaganda, Vol. 5, No. 5, September-October 1967), pp. 7-8. 136 is a necessary condition for the maximum of the integral. C is here a constant of integration. From this formula the optimum path of consump tion and the growth rate of capital stock may be computed. Choice of Criterion of Comparative Economic Efficiency The rate of investment is a crucial variable in development, as noted above with respect to optimality criteria. In addition, the need to make decisions rationally as between investment projects, that is, allocation of given investment and the whole issue of the interest rate requires theoretical clarification. One of the theoretical problems revolves around the criterion of comparative economic efficiency, which is a marginalist concept and has been termed variously the "pay-off period," the "recoupment period," et cetera. Initially, within the Soviet Union, no formal criterion was used in ranking investment projects. Since the return to capital was not conceived as the motivating force in a socialist country, maximization of a return could not be a guide to investment decision making. Zauberman adds, however, . . . that it was something more than mere ideo logical inhibitions that militated against the 137 explicit use of criteria and the concept of return on capital. In the heroic phase of growth, time dimensions of decision making were, perhaps, affected by dialectics. Time horizons were ex tended beyond sight and because they were so grand and so remote the planner felt no possibility, and in a sense no need, to allow for the passage of time. In such an environment the return on investment on individual projects, the elasticity of yield with respect to capital, appeared hardly measurable.35 In fixing an output target for a particular sector in the plan, there usually exists more than one variant of feasible investment projects to produce the output target. If one variant has both lower initial capital investment cost and also lower annual expendi tures than the other, the choice is clear. However, if one variant has a higher capital investment cost and lower annual expenditure cost than the other a choice must be made in accord with some criterion of efficiency or "effectiveness." The variant with higher capital investment cost is chosen only if the additional invest ment can be "recouped" by savings in annual expenditure within a period equal to or smaller than the "normal" recoupment period established for a given sector. The Zauberman, op. cit., p. 139. 138 formula for the period of recoupment is as follows: where t equals the period of recoupment, is capital outlay on variant 1 with larger initial cost and K2 is capital outlay on variant 2 with lower initial cost. C2 and are annual operating costs of the two variants, where C2 is the larger expenditure. If t ^ t (normal recoupment period) then variant 1 is chosen. If t t then variant 2 is chosen. The reciprocal of t, 1/t, is the "coefficient of comparative economic efficiency." This is also regarded 36 by Zauberman as the normative net marginal efficiency of capital or normative net incremental output/capital ratio, with qualifications. The formula can be extended to include more than two technically feasible variants. There are many theoretical and practical problems 36 Ibid., pp. 141-142. 139 37 connected with this criterion. Kantorovich argues that the recoupment period is fixed conventionally and not objectively. The values of and and the values and K , he states, are calculated on the basis of cost or of current prices and therefore do not reflect the actual national expenditure which affects the period of recoupment, t. He alleges that C and K should be evaluated in accord with objectively determined valuations (Kantorovich's o.d. valuations or shadow prices deter mined through linear programming). In a planned economy, Kantorovich states, the problems of efficiency of capital investment are solved in the process of formulating plans of development and adopting economic measures as parts of the plan. The allocation of investment as well as the rate of invest ment is supposed to insure the best development of the economy in conformity with the requirements of society. Therefore, the indices used in planning cannot be arbitrary but should be determined from the "state of the L. V. Kantorovich, The Best Use of Economic Resources, English edition by G. Morton (Cambridge, Mass.: Harvard University Press, 1965), pp. 150-175. 140 economy" and its tasks; or put another way, the indices should be determined from the given resources in relation to the targets. Both Novozhilov and Kantorovich relate allocation of given investment to input of social labor. Kantorovich states, "The first necessary condition is the use of the machine during its entire period of operation should produce a saving in labour amounting at least to the cost 38 of labour entailed in its manufacture." Novozhilov concludes that the problem of the effectiveness of investment consists of finding the mini mum total outlay of labour. However, the methods of calculation chosen by Novozhilov and Kantorovich differ. Novozhilov argues that a method must be found for comparing effectiveness of labour outlays by reducing to a "common 39 effect" the variants with different effects or benefits. 38Ibid., p. 154. 39V. V. Novozhilov, "Cost-Benefit Comparisons in a Socialist Economy," The Use of Mathematics in Economics, English edition, ed. by A. Nove (Cambridge, Mass.: MIT Press, 1964), pp. 79-83. The reduction to a "common effect" appears to be similar to the calculation of the elasticity formula, in percentages rather than absolute numbers, to compare elasticities of demand. 141 A detailed examination of the formulas used would add more to cost than benefit since no doubt by this time newer, more advanced and more varieties have been evolved. Furthermore, the problem of the normal recoupment period exists. The choice of a single rate for the economy as a whole as a tool for macro-choice-making is counterposed to different rates for each sector. How this rate is to be determined is also debated. The significance of the above discussion is the recognition of scarcity, of relating the allocation of investment to sectors and projects to the overall optimal ity of the economy, and of the need for a rational price system. It thus points up the direction in which theories are moving. We shall discuss some of the evaluations of this concept of comparative economic efficiency after consid ering the general criterion of efficiency. Choice of Computation of Interest While the above criterion is the coefficient of comparative economic efficiency, the following appears to be a criterion of general or absolute efficiency. 142 40 Kornal conveniently summarizes the disputes as to the rental on capital or interest based on opinions in the USSR and Hungary. Such terms (in addition to rental on capital) as "efficiency coefficient" and "general economic coefficient" are used. Kornai distinguishes two approaches: (1) views relating the computation of rents to the production of national income; and (2) views relating to distribution of national income. In the first group there are the following views: 1. The computational rental on capital is equal to the average efficiency of investment, r = Y/K, where K is the volume of the "production fund" in Kornai's terminology, which covers fixed and working capital, and r in our terminology would be the interest rate. In this formulation Kornai argues that the growth of national income will depend only on investment, independently of the labor force available, and is there fore incomplete. 2. The interest rate should equal the efficiency of the least efficient investment which is essential and 40 Kornai, op. cit., pp. 477-486. 143 which can be covered out of the production fund. Kornai states that this is an approximation to equating the rental with the marginal efficiency of the production syf Y fund, where r = . Here too the labor force rs OCK omitted. Additionally, choice based on simple ranking, where the variant at the head of the list is chosen according to some index, is not practical. Firstly, some variants are not independent of each other. The most favorable may require another less favorable variant. Secondly, there are external factors, such as insufficient foreign exchange, which limits the adoption of the most favorable variant in order of ranking. Mathematical programming, however, does deal with constraints and therefore can determine if an activity is economical, in the sense of the most favorable in the given circum stances. 3. The interest charged on existing production funds or new investment should be based on a system of shadow prices in an economy-wide linear programming model. "It is generally known that the shadow prices of resources in linear programming problems express the 144 41 marginal returns of these resources." While Kornai believes this solution is the best under existing conditions he cites the drawbacks in this approach, due to the assumption of linearity, problems of aggregation and the problem of selecting the objective function, et cetera. The views in point 3 above are held by L. V. Kantorovich and V. V. Novozhilov. 4. A Hungarian economist, M. Turanszky, has attempted to establish a relationship between the interest rate and the "labour-releasing effect of the CCY production fund." It would be equal to OCY oCL The optimum point would be where the available production fund and labor force are just used up. How ever, based on Hungarian statistical data, the ratio cannot be determined, according to Kornai. To attain numerical solutions, Turanszky is working here with arbitrary assumptions, representing, e.g. the labour-releasing effect of the production fund by that of the mechanization of plant cultivation, etc. His numerical inferences are therefore, not- 41Ibid., p. 479. 145 withstanding the appropriateness of the basic idea, lacking in foundation.*2 5. Interest would equal the rate of growth in productivity of labour. Kornai asserts it may be that the interest rate and the rate of growth in labour pro ductivity are identical but it is not necessarily so; nor is it advisable. The interest rate will equal the rate of growth of labour productivity if the labour force is stationary. There are also a variety of views related to the distribution of national income. Before citing these views it is interesting to note Kornai's admonition that the approach is erroneous to begin with. The question of a "rational rate" between interest and the wage rate should be dealt with from the side of production and not distribution, since . . . it is here that the possibilities of substi tution, the ratio between marginal efficiency of production fund and marginal productivity of labour, etc. will become manifest. The distribution of national income is essentially independent of this; under the conditions of a socialist planned economy it will largely depend on the decisions of the organs of economic m a n a g e m e n t . ^ 42 Ibid., pp. 479-480. 4 Ibid. , p. 481. 146 The following are prominent views related to distribution of national income, which deal with the imputation of rents and wages. 1. The interest or rental should equal the quotient of that part of national income allocated to accumulation, defense and administration on one hand and the investment fund on the other. The remainder of national income is personal consumption and should be imputed to labor. Or, put another way, investment, defense and administration should be covered out of returns of investment and consumption out of returns of labour. But the r/w ratio is thus arbitrary, since one can justify public educational expenditures out of the "returns" of the investment fund or the cost of public administration out of labour fund. 2. Interest should equal the part of national income allocated to accumulation of the production fund. This view is put forth by V. S. Nemchinov and others, and is equivalent to applying the hypothesis of a "stand ard distribution of income." By "standard distribution of income" is meant the following: . . . accumulation is to consumption as the prod uct of the multiplication of the marginal effi- 147 ciency of the production fund and of the produc tion fund itself is to the product of the multi plication of the marginal productivity of labour and of the labour force (calculating both partial derivates at the full utilization of the factors of production).44 where oc is the accumulation share of the national income (l-<£) is consumption K is the production fund L is the labor force K is the upper limit of the production fund L is the upper limit of the labor fund. income is applied, the rental will equal the growth rate of the production fund (assuming a uniform rate of growth). Kornai states that this hypothesis was applied in his programming computations and are acceptable if it is understood that the computations were based on a K = K, L = L 1-cK* L L k If the hypothesis of a standard distribution of 44 Ibid., p. 255. 148 hypothesis only and that the computations should be revised in consideration of the fact that they were provisional in character. Kornai's overall conclusion as to the determina tion of a computational rental on capital is that mathematical programming is the most workable method. Evaluation of comparative and absolute criteria of efficiency. The comparative criterion of efficiency appears to be related to allocation of a given investment fund to various investment projects. The absolute criterion of efficiency presumably is related to the determination of the given investment fund out of national income or output. Whether the latter also relates to the "normal" pay-off period or a standard interest rate for the whole economy is not clear. The above discussions indicate that some progress is being made as far as rational investment choices. They also indicate that much more progress is necessary, a fact not lost upon Western or Marxian economists. We shall touch upon some comments by both economic schools. 149 John P. Hardt^5 states that the criteria need to be specified, whether minimization of cost or maximiza tion of growth. For example, there may be short-run needs for electric power on the part of the producers' goods sector which could be satisfied more quickly by steam-condensing stations than by hydroelectric projects. From the viewpoint of minimization of cost, the latter should be chosen, but from the viewpoint of maximization of growth the former should be chosen. Hardt suggests that optimizing on both costs and growth could be improved by greater refinement of the concept of time in the analysis of efficiency of investment. 46 Blackman, in commenting upon Hardt*s article, notes that cost might be minimized but the maximum level of the preferred output might not be achieved if demand is not considered. Moreover, the question of what con stitutes cost is unclear, in the formulation of the 45 John P. Hardt, "Investment Policy in the Soviet Electric-Power Industry," Value and Plan, ed. by Gregory Grossman (Berkeley: University of California Press, 1960), pp. 297-311. James H. Blackman, "Comment," Value and Plan, op. cit., pp. 312-322. 150 recoupment period. Blackman states: "It is not the cost of capital assets, per se, that indicate optimal resource allocation but rather the rate of return.In the choice among various investment projects, interdependence of projects is of crucial importance. And if prices were scarcity prices, "... a centrally planned economy might be expected to have an edge over decentralized societies 4 8 in coping with interdependence." However, the use of the recoupment period as the comparative criterion of efficiency of investment seems too slender a reed for coping with interdependence. Blackman would also replace the marginal efficiency of investment curves of orthodox capital theory by a general system of simultaneous equa tions . Novozhilov was well aware of the interdependence of investment projects and that the selection of one variant of an investment project is usually associated with some increment in the cost of production of other projects (opportunity cost). How strongly Novozhilov 47Ibid., p. 313. 48 Ibid., p. 315. 151 felt about the recoupment period is shown by the following comment: The naive belief that once we have rejected con ventional interest on investment and begun to use the pay-off period, we have rejected capital ist methods of comparison of investment and prime cost, thereby creating socialist ones, in no way gives a correct approach to the solution of this important question of socialist economy.^ Of course, the pay-off period is essentially the inverse of the interest rate because the return on the additional investment is the value of the annual operating costs saved. The acceptance of this interest rate, in Campbell's view,5® does not mean that a rational alloca tion of capital has been achieved. No "reasonable" recoupment period has been set and different pay-off periods are used for different uses of capital. However, it should be noted that many Soviet economists do favor determining one pay-off period for the entire nation. To compound the problems inherent in the issue of the interest rate as an allocative device for scarce Novozhilov, op. cit., p. 76. 5®Robert W. Campbell, Soviet Economic Power (London: Macmillan, 1967), pp.55-57. 152 capital, Branko Horvat^ differentiates between an inter est rate as the marginal productivity of the "last unit only" and another interest rate with respect to the whole economy. As capital is added, external diseconomies with respect to the whole economy may outweigh the benefits from the additional factory, for example, even though the additional factory may be earning a profit. An interest rate for the whole economy, or the general or absolute criterion of efficiency, as Kornai described it, is still in the process of formulation. Meanwhile, the rate of interest equal to an arbitrary rate of growth is commonly advocated. Such arbitrariness also exists in Western practice. It is relatively simple and instructive to criti cize Soviet investment principles from the vantage point of the marginal calculus, to argue, as I have done, that projects should be selected by comparing internal rates of return with the appropriate rates of interest. But it is important, at the same time, to recognize that Western theories of optimal invest ment, themselves, suffer from various limitations. Once the real world of uncertainty is confronted, theory is powerless to provide a balance between lucrativeness on the one hand and security on the other. In Western practice, the problem of imper fect foresight is attacked by adding a risk premium ^Horvat, op. cit. , p. 187. 153 to the market rate of interest, but the size of the premium essentially is i n d e t e r m i n a t e . ^2 Choice of a Growth Model The expanded reproduction model of Marx and Lenin forms the basis for growth models in the Soviet bloc. However, according to Zauberman, the Marxian model . . . tends to change from that of a definitive formulation of immutable laws to the status of a, doubtless important, help to insight into the nature of economic g r o w t h . It would be impossible as well as unnecessary to cover all the theoretical growth models developed up to this point. We shall merely touch on the highlights in the re-examination of the Marxist model as it pertains to planning for development. This will be followed by a Nemchinov model, which differs from the usual Marxian formulation and incorporates some Keynesian-type features. A brief survey by Zauberman on Soviet growth theory will then be made. As a comparison with the West, a short view of Western growth theories will then be included. 52 Blackman, op. cit., p. 314. ^Zauberman, op. cit., p. 24. 154 Marx-Lenin growth model. The rate of capitalist accumulation is the crux of the Marxian expanded reproduc tion model. As we discussed in Chapter II, Lenin elaborated his version of Marx's schema and concluded from the concept of the rising organic composition of capital (constant capital growing faster than variable capital) that growth in the production of means of production is the most rapid; then comes the production of means of production of means of consumption; and the slowest is the rate of growth in the pro duction of means of consumption.^ In Marxist-Leninist theory this concept was considered a "law" common to all economic systems; so that the producer goods sector would grow faster than the consumer goods sector and that the heavy industries such as energy, minerals, metals, chemicals and building materials and construction would grow fastest. In the Marxian model, some simplifying assump tions were made: (1) that all means of production are used up in a short period and wholly replaced in the next; and (2) constant returns to scale. In Lenin's 54 Ibid., p. 19. From Lenin, Collected Works (Moscow: 1960) , Vol. 1, 87. 155 version, the assumption is that the organic composition of capital must increase or that K/Y must increase as a result of technological progress. While the two ratios are different, in the real world one would expect a significant change in the relation between investment and output to affect also (though not necessarily in the same degree) the organic composition of capital and the relative outputs of producer goods and consumer g o o d s . ^5 As one of many examples of a model of expanded reproduction we have chosen Nemchinov's. The Nemchinov model. Nemchinov states that one of the primary economic proportions formulated by Marx and Lenin can be formulated in the following inequality, which is considered the first fundamental condition of a growing economy. 55 A. Nove, "Towards a Theory of Planning?" Soviet Planning, Essays in Honour of Naum Jasny, ed. by Jane Degras and Alec Nove (Oxford: Basil Blackwell, 1964), p. 196. 56V. S. Nemchinov, "The Use of Statistical and Mathematical Methods in Soviet Planning," Structural Interdependence and Economic Development, Tibor Barna, ed. (London: Macmillan and Co., Ltd., 1963), pp. 171-187. 156 Y1 - C2 ^I* where is the income in capital goods sector. C is the material costs of consumer goods sector. 2 I is the magnitude of real investment. This differs from the usual Marxian formulation, asserts Nemchinov, which is as follows: Y1 H vi + mx where is the same as above, v^ is the wage fund. is the fund of surplus product in capital goods sector. The main difficulty concerning this condition consists in the fact that fixed funds are in cluded in the material cost in the form of depreciation, while in investment they are represented by their full value.^7 Nemchinov then stresses that in the above inequality the left-hand side cannot be much greater than the right-hand side, as a disproportion or a "violation" *The author's symbol. All other symbols are Nemchinov's. 5 7 I b i d . , p . 182. 157 of the second condition of a growing economy would develop, that is: (v + pm) ^ P2 where v = wages fund. pm = part of surplus product to be consumed (nonwage or welfare fund). 1?2 = total product of the sector of consumer goods production ("closely related to C2"). The volume of consumer-goods production cor responds to the value of wages plus the part of the surplus product that is to be consumed. There appears to be an ambiguity in that v^ is the "fund of remunera tion for labour." Yet, Nemchinov states, "Since = v^ + m^ and is closely related to C2, an exces- 58 sively large Y^ would violate this second condition." Nemchinov then notes another "national economic proportion" underlying the rate of development, namely, I/Y or J / a Y 58 Ibid., p. 182. 158 Accelerator and multiplier theories are attempts to explore the role of this proportion. Never theless, the viewpoint of Soviet economists on this question differs substantially from that of their western colleagues. In western theories of economic growth, decisive roles are played by the time factor (lags), the multiplier, and the accelerator. Soviet economists uphold the theory of 'economic development' and not the theory of 'economic growth.' The basic provision of the Soviet theory is that the rates and the nature of economic development depend on the initial structural proportions of the economy. The rates of development depend on what may be termed the 'structural potentials' of each preceding p e r i o d .^9 What is meant by the "structural proportions"is not expounded by Nemchinov but Bor refers to productive, 6 0 sectoral, reproductive and territorial structures. Productive structure is the ratio between invest ment in "productive" projects as industry, farming, non- residential construction, and transport and investment in "nonproductive" projects as homes, schools, hospitals, et cetera. Sectoral structure refers to distribution of investment within the sectors of "productive" and "non productive" projects. ^ Ibid., p. 183. ^Mikhail Bor, Aims and Methods of Soviet Planning (New York: Internat'l. Publ., 1967), pp. 137-138. 159 The reproductive structure applies to the ratio between the amortization and accumulation funds. Within the accumulation or new investment funds, further propor tions exist between reconstruction and modernization funds. By territorial structure is meant the distribu tion of investment among the Union Republics. According to Zauberman, apparently the structural potentials of each preceding period refers to the fact that ". . . in a closed system output of the two depart ments is partly a function of availabilities of producer and consumer goods produced during the preceding cycle. Continuing with the Nemchinov model, he stipu lates that in each year investment corresponds to the potential of expanded reproduction (M) such that M = V]_ + mx - C2 and that P2 corresponds to the value of wages plus the part of the surplus product to be consumed. P2 = v + pm. Zauberman, op. cit., p. 21. 160 A paramount concern, then, is determining an optimum relationship between investment and consumption, and rates of growth of national income and investment. The above model, says Nemchinov, can be simulated on the computer with varying structural parameters to yield the cor responding rates of development, or the other way round. This requires the calculation of coeffi cients of accumulation and consumption of each sector; the labour content of a unit product; and the capital intensity of an incremental unit of product.62 The above sketchy model is indicative of the similarities to post-Keynesian-type analysis. Also, Nemchinov incor porates the idea of the capital goods sector not being "excessively large." Other growth models. Zauberman refers to the model developed by the econometricians Plyukhin and Nazarova. In their model the relative sectoral growth rates tend toward convergence and are stable. Empiri cally, he declares, this appears to be the situation in the Soviet Union where there is a narrowing in the gap Nemchinov, op. cit., p. 184. 161 between the "tempi of the two grand sectors." In an evaluation of a more sophisticated model than the one sketched above, Zauberman shows the influence of J. von Neumann on Nemchinov. The attraction of von Neumann's approach to price for Soviet thinking lies in the implied assumption of constant returns to scale and therefore the equality of marginal and average cost. Secondly, von Neumann concentrates on the supply rather than the demand side. Price in the von Neumann model is ". . . seen as the average sum total of values of goods absorbed in production plus interest; and the average- cost-plus approach of this kind to pricing is precisely the one congenial to the Soviet economist." As a commentary on the growth theories stressing the high priority growth of heavy industries, the experience of China and Cuba is contrary to the Soviet traditional theory. In both China and Cuba there is emphasis upon agricultural development rather than upon ^Zauberman, op. cit., p. 33. 162 heavy industry.**^ Growth theories in the West. As a contrast to growth theories in the Soviet bloc, we shall very briefly 65 sketch some trends in growth theories in the West. Hahn and Matthews survey the vast field of theories of economic growth and divide the field into the following: (1) growth without technical progress; (2) growth with technical progress; and (3) linear economic models. In the area of growth theory without technical progress, the well-known Harrod-Domar model is the origi nal Western model from which subsequent theories have stemmed, such theories being close to static Keynesian theory. The equilibrium growth rate in this class of models is determined from the demand side, and the rate ^Adrian A. Basora, "Cuba: Castroist Command," Comparative Economic Systems, ed. by Jan S. Prybyla (New York: Appleton-Century-Crofts, 1969), pp. 428-441. Jan S. Prybyla, "Communist China's Economic System 1961- 1966," op. cit., pp. 368-383. 6 5 Thomas F. Dernburg and Duncan M. McDougall, Macroeconomics (New York: McGraw-Hill Book Co., 1968), pp. 279-289. F. H. Hahn and R. C. A. Matthews, "The Theory of Economic Growth," Surveys of Economic Theory, Vol. II (London: Macmillan, 1966), 1-124. 163 of growth is solved by the parameters of the system, the saving ratio and the capital-output ratio. In the neo-classical growth models, without technical progress, unlike the above, it is assumed that employment must grow at the same rate as the labor supply in order to have equilibrium, and investment equals full employment saving. The amount of labor and capital required to produce a unit of output are not fixed, as was assumed above. Contrasted to the above model, where equilibrium is determined from the demand side, the neo-classical models emphasize the supply side in determination of the rate of growth. The maximum permanently maintainable rate of growth is equal the rate of growth of the labor force (n). Output can increase at a faster rate than n by increasing K/L, at full employment. However, given constant returns to scale, and diminishing returns to capital, the maintenance of a growth rate faster than n would require a rising K/Y (v), and this is incompatible with a constant level of s/v, since s is subject to an upper limit of unity. Some growth theories assume a one-good economy and capital can be measured in units of the good. Labor, 164 assumed to be homogeneous, Is measured in its own natural unit. Two-sector models, in which consumption and capital goods are produced, complicate the picture and introduce more variables: relative prices, sectoral capital-labor ratios and relative amounts of labor allotted to the two sectors. One proposition resulting from a neo-classical, two-sector model, under certain assumptions, where the rate of profit is equal to the rate of growth, is a steady-state growth path that maximizes consumption per head. In "steady-state growth" the rate of growth of all relevant variables remains constant over time. In the Harrod model, a high propensity to save means a high steady-state rate of growth; in the neo classical model, the steady-state rate of growth is independent of s. A higher s will have a higher v in the neo-classical model and higher absolute income per man but not a higher rate of growth. The second set of models surveyed by Hahn and Matthews includes technical progress. In the previous models growth would be the result of population increases and/or capital accumulation. Technical progress can be 165 regarded as incorporated in new capital, or the effects of technology can be separated conceptually from capital accumulation. In the latter case, and if the balance between capital and labor is left unchanged (neutral technological progress), the effect is similar to that of population growth. Models including technical progress incorporate concepts of increasing returns, diminishing returns to land, the departure from the assumption of complete homogeneity of capital, neutral and nonneutral technical progress, the view of technical progress as a learning process, hypotheses concerning the stimulation of technical progress due to shortage of labour and other factors. A third set of models surveyed by Hahn and Matthews are the linear economic models. There are extensive theorems in this field which describe proper ties of optimum paths, which we can merely mention, and are unable to explore, such as the Neumann-type models, the closed Leontief model, the "sausage-machine" models, and turnpike theorems. They indicate the voluminous nature of models in this area. 166 The Neumann model is concerned with the maximum rate of balanced growth. In this model, the profit rate equals the growth rate. Von Neumann showed that if there are prices and an interest rate associated with a balanced growth path, a competitive economy would expand along such a growth path. In a two-sector model, when the production possibilities are of the linear programming type, we get Neumann-type model. When the coefficients of production are fixed in both sectors, we get a Leontief dynamic model, which is a special case of the Neumann model. In summarizing, Hahn and Matthews deplore the unfortunate dichotomisation between "Keynesian" and "Neo- Classical" growth models. Relation of Western and Soviet growth theories. The above sketch of Western growth theory may well explain the problem of diminished growth or the change from extensive to intensive growth in the Soviet bloc. In the theoretical analyses of growth in the Marxian models, 66 Ibid., p. 110. 167 the concept of diminishing returns does not appear, perhaps due to ideological bias. The decline in exten sive growth may be explained by diminishing returns not sufficiently offset by technological change. While not explicitly recognizing diminishing returns in Soviet growth theories,the stress on technological improve ment would indicate an implicit recognition of the need to offset diminishing returns. The ability of a socialist economy to mobilize and utilize saving for development in itself may be insufficient. It also must have the capacity to generate technological progress and to innovate. The Role of Technology This study has utilized a historical perspective. Such a perspective is particularly apt in discussing technological change. The crucial role of technological 67 Novozhilov appears to be implicitly recognizing diminishing returns when he states, "Any further increase in accumulation will withdraw from the economy more than it gives back." (Novozhilov, p. 164) Novozhilov expresses it in terms of economy of labour; that is, if there is too much investment, over a long time, less "economy of labour" results than its requirements of additional labour during the same period. 168 change in development is recognized by all economists and need not be belabored. In this section, we shall examine the meaning of the scientific revolution, the capacity of socialist countries to progress technologically, and the different approaches to technological progress and innovation in the Soviet Union, China and Yugoslavia. The industrial and scientific revolutions. C. P. Snow's distinction between the industrial revolution and the scientific revolution is an illuminating way to indicate the great change in the nature of technology itself. Snow states that the industrial revolution is . . . the gradual use of machines, the employment of men and women in factories, the change in this country from a population mainly of agricultural labourers to a population mainly engaged in making things in factories and distributing them when they were made.^8 The time span of the industrial revolution is from the middle of the eighteenth century to the early twentieth century. The scientific revolution, in Snow's opinion, started about thirty or forty years ago and is 68 C. P. Snow, The Two Cultures: And a Second Look (New York: The New American Library, Inc., 1963), p. 33. 169 the organized application of "real science" to industry, the time when atomic particles were first made industrial use of. I believe the industrial society of electronics, atomic energy, automa tion, is in cardinal respects different in kind from any that has gone before, and will change the world much more. It is this transformation that, in my view, is entitled to the name of 'scientific revolution.'69 Whether we call this age the "scientific" or "cybernetic" or "atomic" revolution, or the "Age of Aquarius," is of no moment. However, the writer agrees with the concept that this reflects a qualitative change. How socialism will adjust to or utilize the "scientific revolution" is of paramount importance in the furtherance of socialism as a system which is a successor to capital ism rather than a substitute for capitalism in industrial izing underdeveloped nations at a fast tempo. Capacity of socialist countries to progress tech nologically. In a rather negative way, Alec Nove postu lates that the Soviet economy may be particularly well adapted to automation, a crucial part of the "scientific revolution." He cites the following reasons: (1) long ^Ibid., p. 34. 170 runs of standardized products can be assured, and planned in advance without incurring risks of uncontrollable competition or trade union opposition; (2) scientists should be able to produce the necessary equipment in view of their accomplishments in space and the immense educa tional investment in pure science; (3) the system is well adapted to rapid growth in output of basic products, as these products are relatively homogeneous and easy to plan. Large-scale investment in these basic industries are incorporated in long-term plans. In these sectors, unlike consumer goods, adaptation to consumer demand and diversification of goods to satisfy consumer demands is not crucial. The above conditions merely indicate that planners wish to develop and utilize the newest technology that long-run planning and control over investment makes possible. An analysis of the role of technology would require additionally an understanding of the macro and micro mechanisms which impel technological advance. 70 Nove, op. cit., pp. 193-204. 171 Under competitive capitalism, competition and the motivation of gain and fear of failure act as agents to assure technological progress. What, then, is the mechanism under socialism? Both in the Soviet Union and Yugoslavia, material incen tives are utilized. Incentive funds in the enterprises are used to stimulate employees and managers to introduce new ideas on advanced equipment. Technical development plans exist at the enter prise level in the Soviet Union, which include programs for technological advance. In Yugoslavia, the workers' control is a means of involving the employees in initiat ing new methods of work. Competition on the market presumably also exists to encourage innovation. The manpower input-output tables, discussed subsequently, which also serve to correlate education to the demand for particular skills, is a mechanism for assuring structural adaptation of the supply of skilled labor to the demand. While all the above measures and means do serve to enhance technological progress, the question remains whether the motive of gain individually and outstripping 172 the West nationally will suffice to insure technological progress once equality with the West is reached. The fear of failure, which theoretically faces a firm that does not keep up with technological progress is not clarified in the Soviet Union. Some views from the West regarding innovation in the Soviet Union, China and Yugoslavia may serve to clarify this issue. An evaluation of innovation in the Soviet Union. An interesting evaluation of technical innovation in the Soviet Union was made by the Organization for Economic 71 Cooperation and Development. The drive for technical progress in the Soviet Union has come from the central government. Traditional centralized planning successfully mobilized resources for high priority research and development in the fields of weaponry, space, atomic energy, iron and steel. However, in the field of con sumer goods there was a considerable lag behind the R. Amann, M. J. Berry, "Science and Industry in the U.S.S.R.," Science Policy in the USSR (Paris: OECD, 1969) , pp. 381-491. 173 United States, despite the moral climate in favor of science and technology. The obstacles to technical innovation in the nonpriority fields have been numerous and are cited by the OECD: 1. Insufficient availability of development facilities as compared to research facilities. 2. Reluctance of the factory to cooperate with research and development organizations due to the neces sity of meeting physical output plans. 3. New processes where minor changes economized resources and did not interfere with the plan would be adopted, but not major changes which endangered plan. 4. Administrative barriers between research and development system and industrial production. The research institutes discovered new knowledge and created experimental and industrial prototypes. The scientists did not see the project through till the final stage of production and neglected its application. Prototypes of new products were not adequately proved in trial runs, which created bias against innovation in the factory. Because technical progress is enshrined in the "basic economic law of socialism," a concerted effort is 174 being made to overcome obstacles to innovation. These efforts, since 1955, include the following: 1. Correction of imbalance between research and development, not by reallocation from research to develop ment but by increasing both research and development through allocation away from capital investment. 2. Overcoming barriers between research and development establishments and industrial enterprises through factory control of research institutes. 3. Modification of the system of production- oriented planning in the direction of production and technology-oriented planning. This modification takes the following forms: (1) greater use of material incentives and funds within enterprises for rewards for technical innovation; (2) enterprises are more independ ent and can obtain bank loans for capital expansion rather than depend upon central budgetary outlays; (3) new products are incorporated into plans for enter prises; (4) the efficiency and usefulness of a research project are measured in terms of potential returns versus research and development cost. Social gains (external ities) such as improved labor and living conditions, 175 better safety, are recorded separately. Although various methods and means are being utilized to increase innovation, meaningful economic reforms depend upon meaningful prices to measure benefits and costs of innovation. Material rewards, which are based on profits, also depend on meaningful prices, which reflect demand and scarcity. Technology and innovation in China. Contrary to Soviet policies, Chinese planners are not as concerned with inefficiency at the factory level as a result of 79 central planning.' The factory is conceived of as more than an economic unit. If, due to erroneous planning, workers have excess time, they use the time to improve their skills, read, write, innovate and modernize. Barry Richman states, "This type of activity makes more sense than meets the eye in a country where illiteracy Barry M. Richman, "Capitalists and Managers in Communist China," Harvard Business Review (Boston, Mass.: Graduate School of Business Administration, Harvard University), Vol. 45, No. 1 (January-February, 1967), 57-79. 176 has been widespread, the level of industrial skill generally low, etc."7^ Richman also found emphasis on bottom-up planning and initiative. Managers and specialists spend time doing menial jobs. On the one hand, the abolition of the distinction between mental and physical labor can be conducive to innovation in that managers who work side by side with the workers can perfect work processes. On the other hand, it is uneconomical in that specialists and managers are in short supply. The combination of part-work and part-study schools plus specialized research and development depart ments and "mass research" emphasize the "Three-in-One 74 Movement." This movement may mean combining political leadership, workers and experts or joint aducational effort by college teachers, scientific and research 75 personnel and workers. According to Prybyla, the anti- 73Ibid.. p. 62. 74 Prybyla, op. cit., pp. 377-378. 75prybyia, "The Economic Cost of the Cultural Revolution," op. cit., pp. 393-411. 177 intellectualism of the Cultural Revolution which promotes the adulation of "stupidity" will put a brake on economic progress in the future although the economy was not adversely affected as of 1967. We may conjecture that Prybyla is himself affected by adulation of the intellec tual. Technology and innovation in Yugoslavia. With respect to initiative and innovation from the bottom-up, we shall discuss workers' control in a subsequent chapter. At this point we merely quote Vanek. When it comes to 'small' inventive and innovative activity emerging as a side-effect of the produc tive process itself, the incentives, unity of pur pose and ease of communications offered by labor management (and by income sharing, which is an integral part of labor management) are conditions unequalled by any other system. Vanek additionally makes a point about the advan tage that socialist economies have over capitalist economies in proliferating innovations throughout the whole economy. 7 6 Jaroslav Vanek, "Decentralization under Workers' Management: A Theoretical Appraisal," The American Eco nomic Review (Menasha, Wise.: American Economic Associa tion), Vol. LIX, No. 5 (December 1969), 1013. 178 Centralization-decentralization with respect to initiative and innovation. Although there is an excess supply of works on models of varying degrees of centralization-decentralization with respect to decision making as to inputs, outputs, prices, investment, and with respect to information flows, there is a scarcity of analysis concerning a similar model as to innovation, research and development and technological progress. The importance of the latter for development and growth may far outweigh the former concern with centralized- decentralized control over economic variables. The sphere for centralized control might be tentatively demarcated for areas where duplication is to be avoided, in crash programs as space, where highly specialized scientific research workers are very rare and where the scale of operation is too large for individual firms or groups of firms. In all other areas, decentralization of initiative and innovation might be more efficient. The experiences in the Soviet Union, Yugoslavia and Cuba may prove enlightening in providing a model for decentralization- centralization of research and development and 179 technological progress. Law of Planned (Proportional) Development Now that we have worked through a maze of facts and concepts, and tried to show the choices facing planners as well as the role of technology, we shall turn to what Soviet theoreticians consider a fundamental law, the "law" of planned development. From the discussion of Lange's economic laws in Chapter III, it is impossible to fit this statement into the category of a "law." It asserts that in a planned economy correct proportions will be adopted, which may merely mean that whatever the authorities deem to be the correct proportions are in fact "correct." The most one can say at this point is that a search for optimum proportions exists. 77 It may also mean, as Nove points out, merely the necessity of consistency in planning, of obtaining input-output proportions. However, there can be incorrect proportions between industry and agriculture, for example, and consistency in an input-output sense. 77 Nove, op. cit., pp. 193-205. 180 The "law" also has been related to the Marxian expanded reproduction model, interpreted by Lenin, as noted above. The correct proportions mean that the growth rate of Department 1 must exceed the rate of growth of Department 2. While such a condition may well have contributed strategically to rapid growth in a closed economy, there seems to be no theoretical reason why it must be so for "normal" growth. The modifications of that model were discussed above. Perhaps the "law" may refer particularly to the structural proportions examined heretofore. Another proposition about planned (proportional) development is that proportionality in development requires the establishment of key links of the national economic plan. These links can be an entire sector of the economy or subsector. . . . the postulate of the key link implies the demand to single out at each given moment the most important sections of the plan which are decisive for fulfilling the programme as a whole.78 78 Bor, op. cit., p. 59. 181 We shall return to some generalizations concerning this "law" at the conclusion of this chapter. Now we must turn to a consideration of the short run and static aspect of macroeconomic efficiency— that of full employment. FULL EMPLOYMENT EFFICIENCY The full employment of resources is apparently subsumed under developmental planning in the Soviet bloc countries outside Yugoslavia. This stems from the fact that the socialization of investment, and with it central ized control over investment, affects both development and full employment. We shall call the Soviet bloc, Model X, and the Yugoslav model, Model Y. Since Cuba is in its very earliest stages, it is premature to generalize about the means used to attain efficiency. References to the Cuban model will appear in the chapter on qualitative aspects of socialist socioeconomic theory. Model X It is the purpose of this study to abstract and generalize rather than to examine in great detail empirical planning mechanisms. Furthermore, it is extremely difficult, indeed misleading, to describe the 182 myriad details of planned reforms which are undergoing continual change. In this section, we differentiate planning for development as the long-term plans and the operative or shorter-term planning for full utilization of resources. The sketchy model of growth above indicates that consumption equals the wages fund and that part of the surplus consumed. The surplus product not consumed equals investment. Presumably, centralized control over the surplus and investment may achieve a full employment equilibrium. Additionally, planning of the demand for labor is based on manpower input-output tables. Some of the most important used in the USSR are the following: 1. A manpower input-output table for industry, construction and transport for each Republic, which is considered of basic importance for the demand for labor in the "key sectors"; 2. A manpower input-output table for collective farms for each economic area, Republic, and region, which is necessary for planning of shifts between agri culture and industry; 183 3. A skilled manpower input-output table for each Republic; 4. An input-output table for specialists, presumably a professional category. The above tables are coordinated with education and training plans at vocational, higher, and specialized schools. Furthermore, the relationship between enterprises and planning agencies through economic controls are such that the inputs and outputs of the enterprises tend to conform with planned targets in the operational plans. Input-output tables as well as a system of material balances are utilized for this purpose. The interaction of the center and the enterprises involves the whole question of centralization- decentralization. The economic controls theoretically combine centralization of planning and management of "pivotal problems" with "independence in the performance 79 of current economic functions." In other words, finan cial and physical resources as well as targets are 79 Ibid., p. 200. 184 assigned to the firms in accord with the central plan but the firm has independence in the choice of means for attaining the targets. We shall return to this question in the next chapter. Model Y In Model Y the market is primary and planning means "perfection of market choices in order to increase the economic welfare of the community— an ideal planning will lead to a maximum rate of growth of economic welfare."80 Thus, we can note an inversion of what is con sidered primary in Model Y as compared to Model X. In the Soviet bloc, notwithstanding the new forms, central planning is primary and the market subordinate. In the Yugoslav variant, planning perfects or supplements the market much as in the managed capitalist economies, although there are greater degrees of intervention in the Yugoslav economy than in France, for example. In addition to fiscal and monetary policy to attain full employment, the regulation of the distribution 80 Horvat, op. cit., p. 33. 185 of enterprise income, the financing of investment, and the key role by the banking system, the use of economic, political and social organizations to reconcile Federal and individual plans are utilized. Thus, in contrast to the regulation of price and output of each enterprise by the CPB, macroeconomic instruments are relied upon to achieve full employment equilibrium. Without detailing the process of distribution of enterprise income, we shall merely indicate that it con sists of the following: (1) the distribution of total income between the enterprise and the economy; and (2) distribution within the enterprise of the enterprise income. The tendency has been for greater and greater control by the enterprise of the distribution within the enterprise, including investment fund control. The financing of investment is the principal instrument of central planning. Investment policy is part of monetary policy in so far as it concerns the supply and demand for money for fixed capital investment. It must be remembered that without a stock and bond market monetary policy differs from that of a private enterprise economy. The interest rat?, which 186 theoretically plays such a star role in monetary theory, here assumes a very subordinate role. Investment policy is also part of fiscal policy in that the taxation policy of the government directly channels a large part of the revenues into the social investment fund for expenditure by government bodies, institutions, and economic enterprises. The Central or "Social" Plan allocates investment as between various sectors of the economy: agriculture, light industry, heavy industry, et cetera. The banks allocate investment within the sectors through the use of the investment credit funds. Thus, the banks play a crucial role in this model. To understand how this method differs from both pure central planning and the pure market system of allocation, it would be clarifying to briefly describe the different methods. Under pure central planning, allocation of investment among sectors and within each sector would be accomplished by specific physical and credit allotments and price controls. In a pure market and private enterprise economy, capital would be allocated wholly according to the market mechanism. In a regulated 187 market and private enterprise system, allocation of investment is regulated by fiscal and monetary measures plus the market mechanism. In the Yugoslav system, banks exercise much greater control over allocation of the investment within sectors than either central planning or regulated market systems. Also, the allocation of investment as among sectors takes place through a central plan, unlike most regulated market-private enterprise systems. In allocating investment, a balance is sought between the greater knowledge of aggregative variables possessed by the planners versus the greater knowledge of specific operations in the firm possessed by the workers' councils. In the Yugoslav variant, plans did not serve to 81 coordinate the activities of the economy, Bajt asserts. Coordination had to be achieved via the market, ex post. High rates of growth aggravated the situation. (In 1957- 81 Aleksander Bajt, "Yugoslav Economic Reforms, Monetary and Production Mechanism," Economics of Planning (Oslo, Norway: Norwegian Institute of International Affairs, etal.), Vol. 7, No. 3 (1967), 201-218. 188 1960, the rate of growth was 10 per cent and in 1963-1964 it was 11.8 per cent.) When rates of growth were high, bottlenecks resulted from the following: (1) indivisibil ities of factors of production; (2) distorted price structure, with some free prices and some administered prices, with resultant disparities between various sectors of the economy. Thus, when growth rates are high, greater coordination is required, in Bajt's opinion, to prevent bottlenecks. The paradox of decreasing growth rate, unemploy ment and increasing price levels occurred in 1965. Bajt believes this paradox cannot be explained by demand pull alone, since only 65 per cent of productive capacity was utilized. The problem of built-in destabilizers must also be examined. As productivity increased, wages increased disproportionately. Second, the monopoly power of enter prises caused cost-push inflation. Third, the share of enterprise income going to wages and salaries increased as determined by the enterprises themselves. Reforms were undertaken in 1965, which stabilized the rate of inflation: devaluation of the dinar; restrictive credit policies; correction of the price structure administratively and through devaluation. 189 The problems of full employment and price stability in this model are evidently similar to those imperfectly competitive economies which are "fine tuned" through government intervention in the market. While full employment is asserted to exist in the Soviet bloc, in practice the underemployment problem is a major one. The new economic reforms with the stress upon economic rationality and greater decentral ization have not yet provided conclusions as to their efficacy. However, a detailed examination of the myriad problems facing the Communist economies in practice would lead us far astray in our search for a general socio economic theory. CONCLUSION While more complete conclusions concerning efficiency in planning must await an examination of microeconomic issues, some tentative generalizations can be offered on the basis of the facts, concepts, and clues discussed in this chapter. Additionally, theories should suggest new methods, means and "laws." We shall therefore 1 9 0 make some modest suggestions in that direction. As noted earlier, references to Cuba have been omitted thus far, except as to the emphasis on optimizing income from foreign exchange. Therefore, the conclusions are based on the Soviet bloc and Yugoslav economies. Clues, Facts and Concepts One outstanding trend or clue in the method of planning is the growth of mathematical programming supplementing traditional methods. Zauberman, impressed with this fact, declares: With the growing awareness of the 'snags1 the scope of mathematical planning is being set in a growingly ambitious way. Soviet plan-program ming theory becomes 1cybernetically' oriented (in Soviet use the word is a very vast conceptual portmanteau). This is broadly understood to require stating the perspective plan problem in terms of a homeostatic control-system with changing structure: it would be based on exchange of control-information between elements of the system and would 'tune' itself to the 'external load' and to some compromise value of a number of extremal criteria; it would be organized as a set of sectoral, probabilistic, linear and nonlinear, extremal and extrapolational problems knit together by a master. Different elements of such a system have been investigated on a theo retical level. . . . 2 8 2 Alfred Zauberman, "A Few Remarks on Trends in 191 Secondly, mathematical economists are departing from mere assertions with regard to public ownership as the answer to questions of growth and development. The trend is towards quantitative analysis of aims (optimal ity criteria), the recognition of the need for a rational determination of investment priorities, optimum division of consumption and investment, and a rational price system based on scarcity and opportunity costs. Thirdly, on the basis of the Soviet experience of development, as well as that of other nations, the "law" of planned proportional at present is best under stood as a set of rules or postulates rather than a "law." Generalizations Drawn from Above Clues, Concepts and Facts What generalizations can we draw from these clues, concepts or facts? Since the author has endeavored to adopt a broad historical approach to the evolution of socioeconomic theory, we might assay, first, such a Soviet Plan-Programming," Economics of Planning (Oslow, Norway: Norwegian Institute of International Affairs), Vol. 7, No. 3 (1967), 279. 192 comprehensive viewpoint here. However, since the trend toward the market and/or perfect computation is involved in this discussion, a more complete conclusion can be better presented after Chapter V. The writer will later develop a relationship between the scientific revolution and a higher stage of socialism, based on the distinction made by Snow and the cybernetically-oriented planning in the Soviet bloc. Related to this question will be the issue of socialism as a successor to or substitute for capitalism. On a less grand scale, we can perceive a theory of planned development, based on the experience of the Communist countries— as well as developing non-Communist countries— evolving, founded on the following features: (1) The postulate of the greater tempo of the capital goods sector than the consumer goods sector (which may be supported for closed economies trying to catch up from an abnormal state of underdevelopment); (2) a modi fication of such proportions in open economies like Cuba; (3) modification of such proportions in economies in the next stages of development; that is, closing of the gap between the two sectors' rate of growth; (4) empirical 193 studies of the "organic composition of capital," with respect to whether technology is neutral, capital-saving or labor-saving; (5) the concept of structural propor tions, with its emphasis on types rather than quantity of investment and their ratios, as a contribution to the theory of development planning as distinct from growth theories; (6) the incorporation of the "key link" approach; and (7) the mathematical approach together with the traditional approaches above. As to point (7), we are referring to the vital search for an optimum division of income into consumption and investment and an optimality criterion and growth models. In this regard, we note that mathematical techniques are neutral as to economic systems. However, in a private-enterprise economy decisions to invest are based on expected profits and are made atomistically. In an economy where investment has been "socialized," the decision to invest is made centrally with varying degrees of decentralization and may be based theoretically on some optimality criterion such as maximization of in come. The emergence of hypotheses regarding the optimum division of income and the optimality criteria is not 194 fortuitous, but is a necessary consequence of the socialization of investment. (The relation of public ownership and control to socialization of investment is another issue which will be discussed below.) At this junction, we note that centralized control over the sur plus and investment is purported to be an essential aspect of socialism. Given the new mathematical approaches, it is obvious that such control plus the know-how would result in the search for an optimum division of income and an optimality criterion. It would, furthermore, elevate the "law” of planned (proportional) development from a set of rules to a theory, if not a law, of planning. Suggested New Approaches, Methods, and Questions In developing a general theory, new methods, means, approaches, questions and laws are revealed. The crucial means for economic development and stability are control over saving and investment, and the capacity of an economy to progress technologically and to innovate. Related to these means is the overall approach to plan ning, that is, the degrees of centralization and 195 decentralization. An important aspect of planning and investment allocation is the increased role of mathe matical methods in developing solutions to optimality criteria and formulas for comparative and absolute criteria of investment efficiency, or a rate of interest. We shall therefore make suggestions and/or raise ques tions as to the following: (1) planning and centraliza- tion-decentralization of investment; (2) centralization and decentralization with respect to innovation, research and development and technological progress; (3) the rate of interest; and (4) growth theories. Planning and centralization-decentralization of investment. Socialized investment and the attendant degrees of control over investment is an advantage alleged for stability and growth. However, to what degree centralization of investment is necessary for such stability and growth and to what degree enterprises at the operational level can control investment funds out of their own profit is as yet unresolved. All socialist theoreticians agree that the macro proportions of income division into consumption, investment, government administrative expenditures and collective consumption 196 must be determined centrally. The division of investment intersectorally and interregionally likewise must be ascertained in the central plan. However, how to allocate investment funds intrasectorally to enterprises is being debated theoretically and experimented with pragmatically. A comparative study of Yugoslav macroeconomic planning with increasing decentralization of investment, and the Soviet system of control over investment should supply insights as to the best division of control with respect to investment, in order to attain growth and stability. The need for a model of centralization-decentral- ization with respect to technological progress and innovation. The high rates of growth in the Soviet bloc have been due to capital accumulation, reallocation of labor from agriculture to industry, and greater partici pation of the population in the labor force rather than 83 to increases in productivity of resources. Exceptions exist in the field of mass education of labor and in the high priority areas of the military, space, atomic ®^Ceunpbell, op. cit. , p. 129. 197 energy, et cetera. In the language of the Marxian economists, extensive growth was responsible for the initial high growth rates but the need exists to shift to intensive growth. In order to achieve this shift to increased productivity of resources, the crash programs for research and development in high priority areas through central planning need to be supplemented with theories and practices for decentralization to spur initiative and innovation from below or a bottom-up approach to technological progress. In a model of centralization-decentralization, the areas best adapted to central planning should perhaps be determined on the basis of scale of research and development, avoidance of duplication of efforts, and scarcity of highly skilled scientific and research workers. All other areas of innovation might more effectively be delegated to lower levels. Within the decentralized sphere, the means to stimulate initiative and innovation in "small" inventive activities are so varied in practice in the Communist nations that theories can be formulated and validated 1 9 8 on the basis of empirical observations. What is similar in these nations is the stated aim of improving the living standards of all the people. If the workers and peasants are theoretically the recipients of this benefit, due to increased productivity, then their initiative and creative spirit must be relied upon, at least in the area of "small" activities. Such creative spirit would presumably be substituted for Schumpeter's daring and dashing entrepreneurs. We shall enlarge on these activities in the chapter on qualitative aspects of a socioeconomic theory. Suffice it to say at this point that the Yugoslav experience with workers' control, the Chinese reliance on ". . . the tremendous creative power of the working p A class armed with Mao Tse-tung's thought," the So1 Let emphasis on material incentives, all provide a colossal laboratory for comparisons, observations and the formula tion of a model for centralization and decentralization of technological progress. The initiative and cooperation "Grasp Revolution, Promote Production and Win New Victories on the Industrial Front," Renmin Ribao (People's Daily), Editorial (Peking: Foreign Languages Press, 1969), p. 8. 199 of the workers would have to play a gigantic role in lieu of the mechanism of competition on the market, in those nations where reliance on the market is minimal. The rate of interest. The role of interest in socialist theory requires clarification. It may be con sidered from four viewpoints: (1) distribution of income to factors of production; (2) allocation of given resources; (3) growth of income and output; and (4) the monetary sphere. 1. The relation of the interest rate to distri bution of income as a return to a factor of production is unambiguous. As property income it belongs to "society" or the "government," excluding marginal inter est payments on personal savings accounts. Ambiguity in socialist theory has arisen from the failure to distin guish interest as a return to a factor of production, from interest as an allocative device. Progress is being made, however, in charging firms an interest rate for capital, although the owners of the capital are the "government" or "society." 2. Beginnings have been made in utilizing interest as an allocative device. The comparative 200 criterion of efficiency of investment, it is evident, serves to allocate given investment to alternative projects and sectors. As we noted in views from the West, this interest rate does not allocate investment efficiently in that a "normal" recoupment period, or its reciprocal, a "normal" interest rate has to be arrived at for the whole economy. Does the absolute criterion of efficiency of investment serve as the "normal" interest rate? 3. The absolute criterion of efficiency is related to the rate of growth. The numerous views on the calculation of the rate of growth or rate of interest in the Soviet bloc appear to be related to various theories of growth. For example, the calculation of the interest rate being equal to Y/K or average efficiency of the production fund means that growth depends on invest- p 5 ment and omits the labor force, and seems related to the Domar growth theory. The calculation of a rate of growth based on mathematical programming indicates the growing level of sophistication in this area. However, 85 Kornai, op. cit., p. 478. 201 for a systematic economic theory, the comparative and absolute criterion of efficiency of investment should be interrelated theoretically. Additionally, both should be related to pricing of capital goods. This attempt is made by Dobb®^ and will be discussed in the next chapter. 4. What is unique about the interest rate, in a socialist economy, in addition to its income distribu tion aspect, is that it is unrelated to the demand and supply of money or the financial market. Nevertheless, some effort at relating monetary theory to the discussion should be attempted. In a systematic theory of socialism, the fact that the interest rate is independent of the demand and supply of money or the stock market would have some significance as far as stabilization or destabiliza tion of the economy. Moreover, as decentralization becomes greater and firms borrow directly from national ized banks for capital investment, at a rate of interest, the need for integrating the monetary with the real sphere of capital becomes essential. Maurice Dobb, Welfare Economics and the Econom ics of Socialism (London: Cambridge University Press, 1969), pp. 192-196. 202 Growth theory. Despite the growing sophistica tion of growth theories and the implicit recognition of diminishing returns, an explicit recognition would lead perhaps to greater fruitfulness. This view may be biased in favor of Western semantics and therefore trivial. The experiences in Cuba and China seem to negate the theory of the need for greater growth in the capital goods sector as compared to the consumer goods sector. The general principle for development in China is to ". . . take agriculture as the foundation and industry 87 as the leading factor." Such widening practical experiences in development may lead to more valid growth theories. The above topics related to macroeconomic issues of efficiency through growth, development and full employment. We shall now turn our attention to alloca tive efficiency through best use of given resources. 87 "Grasp Revolution, Promote Production and . . ." p. 10. CHAPTER V QUANTITATIVE ASPECTS OF SOCIOECONOMIC THEORY — ALLOCATIVE EFFICIENCY THROUGH BEST USE OF GIVEN RESOURCES1 INTRODUCTION In this chapter, we shall examine the common economic problems of scarcity and attaining efficiency in the use of scarce resources to satisfy planners' targets as well as consumer demand. First, we shall examine actual pricing in oligopolies in the West and pricing in the Soviet Union. While there are similarities in practice, there is divergence in theory. The labor theory of value holds For this chapter the writer has drawn princi pally upon Eckstein and Fromm, "The Price Equation, American Economic Review (December 1968); Feiwel, ed., New Currents in Soviet-Type Economies; Ota Sik's Plan and Market Under Socialism; L. V. Kantorovich, The Best Use of Economic Resources; Joan Robinson, Economic Philos ophy; A. Nove, ed., The Use of Mathematics in Economics; 203 204 sway in the Communist countries. We shall, therefore, examine the new views of the labor theory in the West and the East and then show the ideological and opera tional aspects of the theory. This will bring us to a survey of the mechanisms for allocating resources in the Soviet bloc, in Yugo slavia, and in Cuba, in theory and practice. Finally, we shall sum up the various clues, con cepts, and facts and attempt to draw generalizations therefrom as well as suggestions leading to a general socioeconomic theory of socialism. The conclusions will incorporate some of the material in the preceding chapter. SIMILARITY BETWEEN ACTUAL PRICING IN WESTERN OLIGOPOLIES AND IN THE SOVIET BLOC A recent study by Eckstein and Fromm on oligopoly pricing, using target-return and supply-demand equations, concluded that the combined equation provides a better Branko Horvat, Towards a Theory of Planned Economy; Leo Huberman and Paul Sweezy, Socialism in Cuba; and Edward Boorstein, The Economic Transformation of Cuba. 205 statistical explanation of pricing than a purely com- petitive formulatxon. While there is nothing startling about this conclusion, the target-return equation or "full cost" pricing is interesting in that it bears a striking family resemblance to Soviet markup pricing. The equation for the target-return equation is p = 7r— + ULCn + UMCn xn where 7r is the target rate of return K is the firm's capital stock x1 1 is standard output ULCn is standard unit labor cost (constant dollars) UMCn is standard unit material cost. "Full cost" pricing is a variant of the above: p = (l+M (ULCn + UMCn) 2 Otto Eckstein and Gary Fromm, "The Price Equa tion," American Economic Review (Wisconsin: American Economic Association, December 1968), No. 5, Part 1, pp. 1159-1184. 206 where A is the markup factor p = standard unit variable cost multiplied by a markup factor. The supply-demand price mechanism is shown as -£iR = <X (d-x) P s where is rate of price change P d = short-run demand x = short-run supply or production s = sales. Eckstein and Fromm discuss price changes as follows: Given the institutional character of modern corporate management, and the emphasis on long- run security and expansion of the company, management is less likely to attempt to equili brate supply and demand in the short run. It will not change prices frequently. When demand rises, more of the burden of market adjustment will fall on rationing and backlogs or orders, particularly since purchasers have fewer alter native sources of supply. When demand falls, more of the adjustment will be on lower produc tion, less cutting of prices. . . . ^ 3 Ibid., p. 1165. 207 As a comparison with the above is the surplus product markup school in the Soviet Union. Presumably beginning with 1968, profitability will be calculated in relation to capital. There will not be a uniform markup 4 rate but it will vary from industry to industry. (Other markup versions will be discussed later.) The price formula is as follows: M p = c + v + k— K where p = price of the commodity c = branch average materials costs including depreciation charges M = total surplus value (or surplus product) to be distributed among goods v = total wage bill for workers engaged in material production. (The prices of the inputs and capital equipment to be depreciated in c is calculated in the same way.) 4 Morris Bornstein, "Soviet Price Theory and Policy," New Currents in Soviet-Type Economies, ed. by George R. Feiwel (Penna.: International Textbook Co., 1968), p. 232. 208 k = average amounts of fixed and working capital per unit of the commodity K = total fixed and working capital used in material production. The markup formulas, as we stated, bear a family resemblance. However, in the study of pricing in firms in the United States, the supply-demand equations as well as the target-return or markup equations explain prices. Whether the new contract relations between firms and retailers and trading agencies would indicate a similar relationship, taking into account turnover taxes on consumer goods to obtain clearing prices, is uncertain. LABOR THEORY OF VALUE AND PRICES While the above familial similarities in actual pricing exist in the West and East, the theoretical foundations are dissimilar. All Communist countries adhere to the labor theory of value, although they are reexamining its application to pricing. In the West there is also a reexamination of the labor theory of value. We shall therefore discuss the new views of the theory. Additionally, we wish to explore the theory 209 as an ideological and operational proposition. New Views of the Labor Theory and Prices in the East As noted, within the Communist countries the relationship of relative prices and the labor theory is being reexamined. The labor theory holds that the value of a commodity is equal to its amount of socially necessary labor. In calculating exchange value the quantity of newly added labor, the previous labor in the raw materials, and the labor incorporated in the fixed capital consumed in the commodity must also be included. Firstly, in reexamining the labor theory of value, the term "socially necessary" is redefined in such a way by Ota Sik of Czechoslovakia that it includes the influence of utility. As Sik puts it: . . . ascertaining in an abstract way that price is a form of expressing value is only part of the answer and must be followed by finding out the ways to overcome the contradiction between value and use value, of other relationships determining the development of p r i c e s . ^ 5 Ota Sik, Plan and Market Under Socialism (New York: International Arts and Sciences Press, 1967), p. 243. 210 There can be an "unsocial expenditure of labor," states Sik, when the production of use values are not in the proper proportions, that is, in accordance with demand, or when productivity is not constantly increased utilizing potential technology. Secondly, within the Soviet bloc there are three main schools of the New Economic Reforms dealing with relative prices and the labor theory of value: the traditionalist, the surplus product markup school, and the opportunity cost school. While all uphold the labor theory of value they are seeking different ways of determining prices.*’ 1. The traditionalist school believes there should be small changes to improve the structure of producer goods prices. They recognize that the use of prices for economic control requires many deviations of prices from value to promote the efficient operation of enterprises. 6 Bornstein, op. cit., pp. 224-256. 2. The surplus product markup school would add proportional markup to "sebestoimost" (c+v). They would raise the level of wholesale prices of producer goods without changing the level of wholesale or retail prices of consumer goods. This would be accomplished by shifting part of the surplus product (profits and turnover tax) from consumer goods to producer goods. Within this school there are different views on the markup: a) Relate markup to labor cost p = c + v + v ^ = c+v(l+^) where c = branch average material costs including deprecia tion charges per unit of commodity v = branch average wage cost per unit M = total surplus product V = total wage bill of workers in material production. (Prices of material inputs and capital equipment depreciated in c would be calculated in the same way.) b) Relate markup to total sebestoimost (c+v) as base. 212 c) Relate markup to capital as base. p = c + v + k| where k is average amount of fixed and working capital per unit of the commodity and K is total fixed and working capital used in "material production." The theory behind this formula is that the surplus product depends not only on live labor but on its productivity, which depends on capital; therefore, it would help in economizing on capital. d) This view is a compromise between (a) and (c), and relates part of surplus markup to labor cost and part to capital. p = c+v(l+— ) + kM2 V k where M^ corresponds to the portion of total surplus product devoted to social-cultural expenditures and M2 corresponds to the portion devoted to investment, defense and general administrative expenditures. All the above in (1) and (2) are cost-oriented pricing, neglect demand, and relate to the "prices equal costs of production” of Marx in Volume III of Capital: 213 So far the market price of a commodity coincides with its value. On the other hand, the oscilla tions of market prices, rising now over, sinking now under the value or natural price, depend upon the fluctuations of supply and demand. The deviations of market prices from values are con tinual. . . . If instead of considering only the daily fluctuations you analyze the movement of market prices for longer periods . . . you will find that the fluctuations of market prices, their deviations from values, their ups and downs, paralyze and compensate each other.^ 3. The opportunity cost school advocates effi ciency prices which reflect scarcities and include capital and rent charges. This line of thought is that of V. V. Novozhilov and L. V. Kantorovich. While they are attacked for rejecting the Marxian labor theory of value and recognizing land and capital as factors of production, Kantorovich states the following: . . . it is indisputable that only by fully cal culating the cost of labour, by taking into con sideration the conditions of using labour or the calculation of the factors that save labour, can one obtain valuations with which the problem of labour allocation can be solved correctly. There is no doubt that such an objective method of cal culating could hardly disagree with the law of value when this is correctly applied in a socialist 7 Karl Marx, Value, Price and Profit (Chicago: Charles Kerr and Co., n.d.), pp. 67-68. 214 society. The analysis . . . of the importance of the use of equipment and natural resources in produc tion and their inclusion in expenditure and the valuation of production may on superficial acquaint ance remind one of certain themes of vulgar bour geois schools of political economy about the three equally important sources of value: labour, land and capital. The radical difference lies in the fact that the construction developed here is in full agreement with the labour theory of value, labour being considered the only source of value. Natural resources and equipment appear only as factors influencing productivity of labour and the saving of labour. For this reason, the calcu lation of expenditure of these factors and their valuation must be looked upon only as means for an optimal allocation of labour in order to attain its highest productivity, and also as a basis for the comparison of labour costs incurred under various conditions. Thus, these factors can in no way be independent sources of value. Only their indirect effect on the productivity of the labour force is included in the calculation.® The "otsenki" (o.d. or objectively determined prices) are shadow prices obtained from the formulation of an optimum plan through the use of linear programming techniques. The final output mix is given. How it is given is outside the scope of Kantorovich's considera tion. Also, the resources available are given. o L. V. Kantorovich, The Best Use of Economic Resources, English edition ed. by G. Morton (Cambridge, Mass.: Harvard University Press, 1965), p. 107. 215 For example, Kantorovich takes a number of enterprises producing two types of products with different comparative costs in labor. The proportions in which the two products are required are given. The optimal plan would exist where the products are manufactured in the largest quantity. The dual of this would be the lowest prime cost. The enterprises concentrate on the product for which they have the higher productivity ratio, leaving one group marginally producing some of each. The o.d. or "otsenki" corresponds to the com parative labor cost of the marginal group. Kantorovich is aware of errors of commission and problems of omission. In the former are the assumption of linearity, the stochastic nature of some initial data, and noneconomic factors. In the latter are problems of demand and the wage structure. However, he is optimistic about mathematical models answering these problems. New Views of the Labor Theory in the West As pointed out in an unpublished manuscript on "Karl Marx as an Economist" by Gerhard Tintner, the methods of linear programming, input-output theory, and 216 activity analysis are closely related to the labor theory of value. Such methods assume (1) that labor is the only ultimately scarce resource; (2) are independent of demand; and (3) average costs are constant. In discussing the Leontief model Hicks asserts, Thus, in spite of the 'fixed coefficients' at which products are transformed into one another, the fact that there is (ultimately) only one scarce factor keeps the 'labour theory of value1 in operation, with the system operating under constant cost.® Also, Hicks states there may be a choice of method in producing commodities. The method chosen is independent of the demand for the products. Thus, the Leontief system produces under constant cost even if methods are variable. This, it will be recognised, is again a generalisa tion of the labour theory of value. If all labour was applied directly to the making of finished products (and labour was the only factor) there might be a choice of methods but efficiency would dictate that the most efficient method should be used for each product— as Marx (for instance) knew very well. The choice of the method would be independent of the demand. What Samuelson has 9 J. R. Hicks, "Linear Theory," Surveys of Economic Theory, Vol. Ill, prepared for AEA and Royal Economic Society (New York: St. Martin's Press, 1966), 107. 217 shown is that the same continues to hold so long as labour is the only primary factor of production even if labour is applied indirectly as well as directly Ragnar Frisch states that there is no contradic tion between a utility theory of value and a cost theory of value. The concept of utility in the form of value in use was present in the classical economists and in Marx. Related to this question is an interesting remark by Frisch on the role of prices to steer the economy in accord with CPB's preferences. He states: . . . I shall leave completely aside such much talked about principles as the principle that prices 'ought to' be proportional to marginal cost, or the principle that they 'ought to' be just high enough to clear the market. . . . These principles are entirely inadequate for a discussion of the price fixing problem in a socialistic society. They can only serve to throw the discussion into a barren procrustean bed.H Frisch further states that the price theory school based on shadow prices derived from a solution of 10Ibid., p. 107. 1;LRagnar Frisch, "Rational Price-Fixing in a Socialist Economy," Economics of Planning, Vol. VI, No. 2 (1966) (Oslo, Norway: Norwegian Institute of Inter national Affairs et al.). 97-124. 218 mathematical programming for the economy as a whole is a necessary but not sufficient means of implementation for steering a socialist economy. A future article is expected to deal with this question. Unfortunately, it has not yet been printed. Leif Johansen likewise asserts there is no con tradiction between the labor theory of value and marginal utility theory. He succinctly says: For goods which can be reproduced on any scale (i.e., such goods as have been the center of interest of Marxian value theory), it is very easy to demonstrate that a complete model still leaves prices determined by the labour theory of value even if one accepts the marginal utility theory of consumers' behavior. In my opinion, such a combination may give a very precise meaning to the Marxian thesis that the value of a product is determined by its labour content, provided it has a use value. ^ This concept is akin to that of Ota Sik noted above. 12 Leif Johansen, "Labour Theory of Value and Marginal Utility," Economics of Planning, Vol. Ill, No. 2 (September 1963), pp. 89-103. 219 Labor Theory of Value— Ideological and Operational While there is some convergence in regard to the labor theory of value, perhaps some of the divergencies are due to the ideological versus the operational aspects of the theory. Although a thorough discussion of ideology would take us far afield a slight detour might be apropos. 13 As Karl Mannheim pointed out, the concept of ideology has changed historically and has been defined in various ways. In discussing ideology we are referring to Mannheim's total concept of ideology as contrasted to the particular concept. The former is a function of the generally prevailing social situation and is the ideology of an era or of a class. The latter is a func tion of an individual's existence and interests and operates on the psychological level. The total concept of ideology operates on the "noological" level; that is, it refers to the total structure or conceptual framework Karl Mannheim, Ideology and Utopia (New York: Harcourt, Brace and World, Inc., 19 36). 220 of a mode of thought. The differences with respect to the labor theory of value reflect the conflict between two divergent economic views, between two social systems and modes of thought. We shall define ideology as the intellectual effort to define and relate goals, common purposes, and points of view that influence a society. For the purposes of this discussion, we shall consider that an ideological proposition differs from an operational proposition in that it can not be refuted. Since an ideological proposition can not be 14 tested, as it is "true by definition of its own terms," what is its purpose? We are aware of the vast philosophi cal and methodological discussions around this issue. Suffice it to say that, notwithstanding the nonoperational aspect of an ideological proposition, such a proposition serves a purpose, which is best stated by Joan Robinson: . . . a society cannot exist unless its members have common feelings about what is the proper way 14 Joan Robinson, Economic Philosophy (Garden City, N.Y.: Doubleday and Co., Inc., 1964), p. 2. 221 of conducting its affairs and their common feelings are expressed in ideology.^ Later she declares that every economic system "requires a set of rules, an ideology to justify them, and a conscience in the individual which makes him strive to carry them out."^ Certainly then ideology is purposive and related to what a society ought to be. While it is necessary to separate the ideological from the nonideological aspects of economics, we need not conclude that ideology is to 17 be discarded, as Meek does. Further, in the evolution of a new economic system ideology has an especially substantial role. Let us therefore examine the labor theory of value and the theory of the "surplus" and attempt to separate the ideological and operational phase in both the macro and micro view. ^Ibid. , p. 4. 16Ibid., p. 13. 17 Ronald L. Meek, Economics and Ideology and Other Essays (London: Chapman and Hall, Ltd., 1967), pp. 196- 225. 222 The macro view. The statement that labor and nature are the source of all use values, where capital is defined as dead or past labor, is a definitional statement strongly affected by ideology. A similar statement is that natural resources and capital are factors influencing the productivity of labor or the saving of labor. The statement that land, labor and capital are independent factors of production, which, when combined, create use values is a definitional-ideological state ment. With respect to the former statement, the proposition that where there is no private property in capital and land, labor receives all the "value" directly or indirectly, the division depending on political decisions, is an operational proposition. Stated differ ently, labor receives wages directly and shares collec tively and indirectly in the "surplus." It should be noted that the term "surplus product" or "surplus" is used in the Soviet bloc. Roughly it may be defined as the difference between total product and the wage fund plus used-up capital. In a socialist society, following 223 Marx's prescription,the surplus would consist of a portion of the "total social product" for net investment, reserve or insurance funds as provision against acci dents, dislocation caused by natural calamities, adminis tration costs, communal needs, welfare funds for those unable to work. The statement that land, labor and capital are independent factors of production which create the output is the accepted proposition in the West. Related to that statement is the operational proposition that where there is private property the owners of capital and land receive rent, interest and profit, according to the marginal productivities of the factors. The labor theory of value and relative prices. Again, the proposition that labor, with nature, is the only source of value, and that capital makes labor productive is a definitional-ideological proposition. (Note Kantorovich's statement above.) 18 Karl Marx, "Critique of the Gotha Programme," Karl Marx and Frederick Engels, Selected Works, Vol. II (Moscow: Foreign Languages Publishing House, 1962), 21-22. 224 A rather amusing ideological contrast is the following: . . . we should note here that people are capital — human capital. You students are investing in increasing your productive talents and knowledge. At graduation, you are akin to a machine that has just been completed. You are a capital good in that you represent a capability of yielding services now and in the future. On the other hand, the statement that prices are proportional to labor costs, assuming labor is the only scarce factor, is an operational statement. The modifying terms used by Hicks and Samuelson are that labor is "ultimately" the only scarce factor and that labor is the only "primary" factor of production (whether applied directly or indirectly). It should be noted here ironically that Kantorovich criticizes the Leontief model, which assumes labor is the only scarce factor, and declares it is necessary to take into consideration factors other than labor which are available in limited quantity, such as natural resources and productive capacities. 19 Armen A. Alchian and William R. Allen, Univer sity Economics (Belmont, Calif.: Wadsworth Publishing Co., Inc., 1967), p. 358. 225 Novozhilov also states: However, the legalisation of scarcity as a factor in some sense increasing outlays made the problem of finding a theoretical basis for such calcula tions more urgent. It was one thing, or the other; either some real labour outlays underlay the extra charge for scarcity, or such an extra charge dis torted the measurements of real costs. If the first was correct, then what was this outlay of labour, and how was it to be measured? If an extra charge for scarcity did not reflect labour outlays, then it should not be taken into consid eration in the measurement of outlays. These are purely theoretical problems since in practice no hesitation is felt in taking scarcity as a factor which increases c o s t . ^ O Conclusions. The author is not sure whether the above "throws the discussion into a barren procrustean bed" or is fruitful in any way, but offers the following conclusions. Firstly, the author agrees with Joan Robinson that every economic system requires an ideology. Or, from a Marxist "class" point of view, one could also say that if the ruling elite are "capitalists," people may be considered capital; if the ruling elite are V. V. Novozhilov, "Cost-Benefit Comparisons in a Socialist Economy," The Use of Mathematics in Economics, English edition ed. by A. Nove (Cambridge, Mass.: MIT Press, 1964), p. 34. 226 "proletarians," then capital may be considered past labor. Secondly, the ideology behind the concept of "value" serves to further a point of view influencing society's income distribution vis-ci-vis property versus labor income. Thirdly, the ideology behind the concept of "value" need not interfere with operational propositions about pricing. With the newer mathematical techniques the cost side of prices is coming to the fore in the West. On the other hand the issue of scarcity is coming to the fore in the East. Further, there is acceptance on the part of some Western economists of the concept of labor as the "ultimate" scarce resource (Hicks) or the "primary" factor of production whether applied directly or in directly (Samuelson). The writer is not raising the question of the "truth" in the discussions of the labor theory of value, but is pointing to the factors that are relevant to the discovery of fruitful theories in the spirit of the following quote: He will no longer be inclined to raise the question as to which of the contending parties has the truth on its side, but rather he will direct his attention to discovering the approx imate truth as it emerges in the course of historical development out of the complex 227 social process. . . . Even though he does not discover 'truth itself,' he will discover the cultural setting and many hitherto unknown 'circumstances' which are relevant to the dis covery of the truth.21 MECHANISMS FOR ALLOCATING RESOURCES As we have shown, there are various reforms taking place with regard to prices and the labor theory of value; but outside of Yugoslavia, prices do not primarily perform an allocative function. However, the predominantly physical allocation of resources in both Yugoslavia and the Soviet bloc countries is considered outmoded. Within the Soviet bloc there are divergent movements to reform the system of allocation, and the Yugoslav model is a unique market socialist model. Due to the relatively short span since the Cuban revolution, it is difficult to discern any mechanism, either physical planning or market, in that model. Rationing and revolutionary- military type allocation of labor appear to exist. Mannheim, op. cit., p. 84. 228 We shall examine these tendencies without going into details as to any of the reforms since rapid changes would soon make detailed descriptions obsolete. Furthermore, since there is a veritable deluge of material both in the East and West, explaining why central planning by physical directives fails to achieve high rates of growth, we will omit this aspect. Before proceeding with the discussion of the mechanisms for allocating resources in the Soviet bloc, Yugoslavia, and Cuba, we should clarify the function of prices in a socialist society. From our studies of the competitive market we are wont to think of the function of prices as only allocative. In Chapter II we mentioned other functions such as control and evaluation, that is, record-keeping and statistical aggregation functions; income distribution and shifting consumer tastes. Another way of classifying or categorizing prices is to differentiate according to the following: (1) prices for informational or record-keeping function; (2) prices for centralized decision-making which may be considered "accounting prices" to construct an index or coefficient which serves in investment decisions, such as the 229 criterion of comparative economic efficiency; (3) the actual price paid to enterprises; and (4) the prices at which products are sold (differing in accordance with the turnover tax), which are clearing prices. Soviet Bloc We shall distinguish between three trends concern ing pricing and the market or alternative mechanisms: the perfect computation model; the opportunity cost school; and the Liberman proposals. Perfect computation. The rapid development of mathematics and the possibility of developing adequate computers has shifted attention from the market to the study of technologically determined relationships. The mathematical formulation of the analysis of optimal resource allocation is known as linear programming, or where nonlinear equations are involved, a more general term would be mathematical programming. As we discussed in the preceding chapter, a perfect computation model is not practicable at present, given the state of knowledge and the number and quality of computers. 230 A perfect computation model need not be wholly centralized, as Kornai indicated in his two-level planning discussed in Chapter IV. It is true that such perfect computation would be a departure from an institutional market; but it would combine centralization and decentral ization. The "overall control information" problem recognized by von Hayek and now by Soviet economists would be solved theoretically by decomposing the center into sectors wherein the center and sectors would supplement and correct each other. Perhaps Fedorovich's and Dorodnitsyn's proposals for creating a completely mechanized and automated system of planning is highly centrist, as Smolinski and Wiles 22 indicate. However, equating perfect computation with centralism is not necessarily correct, in the sense that there may be multilevel planning. The opportunity-cost trend. Another trend is epitomized by Kantorovich. He has held that prices of 22 Leon Smolinski and Peter Wiles, "The Soviet Planning Pendulum," New Currents in -Soviet-Type Economies, ed. by George R. Feiwel (Scranton, Penna.: International Textbook Co., 1968), pp. 296-315. 231 consumer goods, in particular retail prices, should be determined according to different principles from those of capital goods. He considered the former pricing principles outside the scope of his work. Presumably an institutional retail market for consumer goods would continue to exist with the turnover tax serving to create clearing prices. Kantorovich visualizes competition in a different setting from that of an institutional market: Thus, in the process of compiling a plan according to this method (i.e., method of adjusting multi pliers) a particular kind of competitive battle takes place between the different technical methods with price oscillations, and this reveals those methods the use of which in the given circumstances would be most advantageous. This battle proceeds here only in the process of calculation and hence bears obviously no relation to the larger losses which inevitably accompany real competition in a capitalist society.23 What Kantorovich refers to as a "particular kind of competitive battle" is similar to the two-level plan ning of Kornai. Given centralized planning of output, where quantities are fixed, the CPB issues output targets and allocation of the main inputs. The lower levels or Kantorovich, op. cit., p. 323. 232 sectors work out the least-cost method. In each of these sectional plans optimal prices would be calculated. The divergence of prices between sections would indicate the need for adjustments in output targets and allocations of supplies. A process of mutual adjustments would con tinue until uniformity was reached. How well the process of adjustment of quantity and prices converging would work in practice is problemat ical. It does not seem too dissimilar to the tatonnement process. Kantorovich is highly critical of the competitive mechanism under capitalism, which leads, he states, to disproportions and overproduction, unemployment, and periodic cycles. He is also critical of economists in the Soviet bloc for their methods of improving the planning system by allowing "spontaneity" and competition between factories. He believes they are underestimating the progress made in planning and the great potentialities for further improvements. His prices, as mentioned earlier, are shadow prices (objectively determined prices) or "otsenki." The shadow prices are derived from the optimal plan. 233 For example, in the case of two variants of producing a given output, one more labor-saving than the other, the "hire-valuation" for the electric power or for a machine as a scarce factor is calculated. This valuation is equal to the man-hours of labor saved through the use of one additional unit of electric power or the saving of manual labor cost through the use of an addi tional machine-day in the operation when both methods are used indifferently. In the case of "differential rent" calculated for each grade of land, it is equal to the additional labor needed to grow a unit of the crop on the poorest type of land. This is called "indirect labor." The cost of growing a crop is then equal to the direct plus the indirect labor. The "indirect labor" is really an oppor tunity cost in that it represents the cost to society as a whole of using the scarce resource and measures the alternative cost of what an alternative use is deprived of by not being able to use the resource. Kantorovich's opportunity costs are similar to Novozhilov's concept of differential outlays of labor or differential labor costs which arise due to scarcities 234 in the means of production, insufficiency of good natural conditions, and the limit of capital investment. There fore, production under less favorable conditions increases the amount of socially necessary labor. While Novozhilov speaks of "feedback costs" it is really an opportunity 24 cost concept, Nove points out. Although Kantorovich is cognizant of the need to produce a final output of goods in accordance with planners' and consumers' wants, he leaves the problem to others. His concern is with the question of how to produce rather than what to produce. It may be briefly stated that if economic activity is of secondary importance in questions of what to produce (final production), in a question of how to produce, of the choice of the most economic methods of achieving the required output, these indicators are essential.25 In commenting on Kantorovich's "otsenki" Dobb states that the method can be applied to a number of partial plans with given targets and inputs but it is 24 Nove, "Introduction," The Use of Mathematics in Economics, op. cit., p. xiv. 2 S ^Kantorovich, op, cit., p. 184. 235 difficult to view the method as being generalized into a global price system. Furthermore, as far as long-term planning, the prices relevant to such decisions relate to future years and with development taking place, the situation and prices will be different from the present. Whether Kantorovich's "dynamic otsenki" derived from a process of successively drafting and improving the plans can provide the answer is problematical, in Dobb's . . 26 opinion. Liberman proposals. A third trend is that of the Liberman proposals, wherein the volume and composition of output, and destination and dates of delivery would be centrally planned. The plant manager would receive one instruction: maximize profit. The enterprises are independent in choosing the means to meet plant targets. The enterprises are "profit makers" but not "profit takers." The question of prices becomes most urgent in determining profitability (on whatever basis it is Maurice Dobb, "Some Further Comments on the Discussion about Socialist Price-Policy," On Political Economy and Econometrics Essays in Honour of Oskar Lange (Oxford: Pergammon Press, 1965), pp. 73-85. 236 figured). According to Alfred Zauberman, the Liberman proposals have been abandoned because of "the enlighten- 27 ment due to the theory of optimisation." The consumer in resource allocation or "demand planning." While most of the theoretical discussions discussed above revolve around the question of resource planning and allocation of resources to achieve given targets, there is discernable a trend toward "demand planning." In practice, a consumer retail market has always existed in the Soviet bloc, but not consumer sovereignty. The consumer market is the logical outcome of the nature of the differentials in wages as incentives. If workers could not freely spend their incomes their incentives in wage differentials would be lost. With regard to consumer demand, Zauberman states: In fact, among the new fields of economic enquiry, that of consumers' behaviour has been one to which the most intensive theoretical effort has been devoted.2 8 Zauberman, "Changes in Economic Thought," New Currents in Soviet-Type Economies, op. cit., p. 403. 28Ibid., p. 404. 237 Although "the development of the theory and research in consumer demand is gradually winning its 29 place in the sun," the mechanisms for determining consumer demand are not yet determined. Barta, for example, considers the use of automatic computers and modern mathematical methods as a mechanism for analyzing consumer demand. On the other hand, Ota Sik of Czechoslovakia speaks of the necessity for socialist market relationships in order to aim at the "qualitative development of use values." He defines the market under socialism as follows: . . . economic relationships where there is a con stant confrontation and direct mutual balancing of people's interests as producers and as con sumers, furthering a socially necessary expenditure of labour— these relationships are what we mean by socialist commodity-money relationships.^ 29 Vladimir Barta, "Problems of Research in Consumer Demand in Czechoslovakia," Czechoslovak Economic Papers, No. 4 (Prague: Academy of Sciences, 1964), p. 61. 30 Sik, op. cit., p. 167. 238 Additionally, Ota Sik sees the market not only as a means of satisfying consumer demands in the consumer goods field but also the necessity for a market in the capital goods sphere in order to reconcile the trends in the production of capital goods to the trends of consumer needs. His model would be that of consumer sovereignty as well as consumer choice, modified by a macroeconomic central plan. This brings us to a discussion related to the above trends, that is, the relative importance of the market and plan. The relation of the market and plan. Within the Soviet bloc the market is clearly subordinate to the plan theoretically and practically. Only in the perfect com putation model is there no institutional market. In Czechoslovakia the theories propounded by Ota Sik were much closer to the Yugoslav model than that of the Soviet bloc. How the intervention will affect the economic reforms remains to be seen. The theoretical discussion of the market and planning, outside of the wholly theoretical perfect com putation model, all recognize the need for a market to 239 some degree. There is no dispute with regard to the necessity for a consumer retail market, and adjusting prices of products to the demand through turnover taxes, although there are differences of opinion as to the practical expediency of changing prices. A market for labor, in the sense of free choice of labor, has also existed in practice except for short periods. Manpower balances are utilized for allocation of labor and wage incentives to attain this allocation exist. A major dispute concerns a market and pricing of capital goods: Should prices be short-period market prices reflecting scarcities or based on long-period "normal" costs, or shadow prices derived from program ming? In the capital goods sector the problem is not simply allocating given supplies between alternative uses but adaptation of supplies as far as long-period planning is concerned. Joan Robinson states that the tatonnement process is fine for the price of fresh eggs but wasteful for long-lived investment. Errors must be found out 240 31 before investment is embodied in brick and steel. Furthermore, in discussing the relationship of the market and the plan, the question of centralization and decentralization arises. A mathematical optimization solution unfortunately does not exist to solve the problem. Trial and error or "social engineering" is required to arrive at an answer to the question of an optimum degree of centralization-decentralization. Perhaps such a process is going on within the Soviet bloc. While this process is changing in determining the "correct" amount of decentralization, we might examine some of the elements of centralization-decentral- ization as of approximately 1967, in the USSR, realizing 32 that changes occur from time to time. The central plan determined the "basic propor tions" and rates of economic development. It also determined the indices for the enterprises as follows: 31 Joan Robinson, "Consumers' Sovereignty in a Planned Economy," Essays in Honour of Oskar Lange, op. cit. pp. 513-521. 32 Mikhail Bor, Aims and Methods of Soviet Planning (New York: International Publishers, 1967) 241 sales volume as the "main nomenclature," the more important type of output in physical terms, the wage fund, sum of profit and level of profitability, volume of centralized capital investment, payments from and to the budget, main targets for the introduction of new equipment and indices for material and technical supplies. The individual enterprises may utilize the wage fund to increase efficiency, and lower costs. Instead of output targets they have sales volume, so that unsold goods do not count. They enter into agreements with enterprises which act as consumers, sales agencies, and trading agencies in regard to the quantity, range and quality of products, and the delivery schedules. . . . the enterprise is obliged independently, without any sanction from higher-level bodies, to take out of production obsolete products and replace them with new products in high demand, provided trading organizations have filed orders to this effect. The enterprise is also entitled to put out products over and above the targets speci fied by the plan, provided there is an ensured market for these products.^3 Enterprises' jurisdiction extends to determining the use of working capital, use of depreciation deductions ^ I b i d . , p . 204. 242 for repair and replacement of obsolete productive assets. They can dispose of excess material resources, decide on building houses for employees, cultural institutions, kindergartens, et cetera. Given the wage fund, the enterprise can apply any system of pay, bonuses, personnel structure and expenses of management. Enterprises retain a large part of profit to improve equipment, provide material incentives, improve working and living conditions of employees. What to produce, how to produce, and how to dis tribute the output. Another way of looking at the market and plan is to consider the fundamental questions of what to produce, how to produce and how to distribute the output. What to produce, as between consumer and invest ment goods, is determined centrally within the plan, as discussed in the previous chapter. Within the investment sector, the allocation of investment would be according to the criterion of comparative economic efficiency. Although we have discussed this previously, it is appro priate to add to the discussion at this juncture since it refers to the allocation of given resources. Joan 243 Robinson considers the recoupment period the "cost of 34 waiting," which she believes has a common-sense meaning. When output is growing there is a technical superiority of present in comparison to future resources, because present resources can be invested to increase future productivity. The growth rate of the economy thus measures the cost of waiting. Over the lifetime of an investment, if the growth rate is 10 per cent, the addi tional cost at present for a hydel rather than a thermal installation, as Joan Robinson states, must demonstrate a saving on future operating costs of at least 10 per cent on the initial outlay if it is to be justified. Thus, presumably the allocation of given invest ment is to be guided by rules rather than by "subjective" evaluations of authorities. Within the consumer sector, the concept of con tracts between producers and consumer outlets are being worked out at present, as noted above. However, the adjustments between the capital goods sector, as a derived demand, or inputs, in accord with the adjustments 34 Robinson, op. cit., pp. 513-521. 244 of targets to final demand for consumer goods, is not clarified. It should be understood that there is no acceptance of complete consumer sovereignty in the social ist economies, apart from the question of allocation to consumption and investment centrally, inasmuch as exter nalities, collective consumption, et cetera, have to be taken into account. However, aside from such well recognized issues, the theoretical problem of adjusting centralized determination of outputs and inputs to con sumer demand remains. The trend toward greater market research and recognition of elasticities of demand, et cetera, is a sign of attempts to bridge the gap. The question of how to produce is handled both centrally and by individual enterprises. Centrally, through the use of programming and intersectoral input- output analysis, the problem of combining inputs to produce outputs is analyzed. Dynamic programming is being developed. One simplistic example is the problem of producing the maximum output of autos over a long period. The relationship of auto building with other sectors must then be considered. Alternative ways of solving such a problem is using more steel to produce autos or more steel 245 for plants building autos to produce more autos in the future. Dynamic programming should determine the best procedure to obtain optimum results. As briefly discussed, Kantorovich was concerned with this problem of how to produce efficiently in conformity with central planning, where output targets and input allocations are given. On the question of distribution, the "law" of distribution according to work done asserts that only labor resources receive income and that inequalities will persist according to the quality and quantity of work done. Given the macroeconomic distribution between wages and the "surplus" and the distribution of the surplus among administration expenditures, defense, collective consumption, welfare payments, the micro- economic question of distribution of wage income according to some criterion remains. Asserting that wages are according to work done is not a very rigorous analysis of wage determination. Differences in wages exist in accordance with planners' preferences. Wages are not determined on the market. 246 There is some relationship of wages to "productivity" but no theoretical analysis of the precise relationship. The determination of the overall level of prices such that the total value of the goods and services sold to the public is equal to total purchasing power being spent, given the money income earned in wages and in welfare payments, and allowing for personal saving, is also a macroeconomic question. Yugoslavia The Yugoslav model does not fit any known theo retical scheme although it comes closest to the Lange decentralized socialist model. There were indications that Czechoslovakian theoreticians were discussing the Yugoslav path to socialism as applicable to their country, as the references to the work of Ota Sik indicates. Market and plan. This model is one of market socialism within the framework of a macroeconomic plan. The Federation Plan, as well as the Republic and Communal Plans, determines the "global" or macroeconomic propor tions . Outputs and prices, and a large part of the distribution of income of the enterprises, are determined 247 autonomously by enterprises with some modifications. Price ceilings exist on products where shortages, monopoly, and speculation exist as well as on some basic raw materials, house rents, fuel and transportation. Planning is conceived of as perfecting the market 35 as follows: 1. An optimum division of the "social product" as between investment and consumption is required. 2. An optimum distribution of income is required; that is, maximum economic equality. 3. A stable full employment equilibrium must be achieved and sustained. 4. Consumers' sovereignty must be supplemented by planners' sovereignty. 5. Individual valuations must be supplemented by social valuations. 6. The price system needs adjustments to attain the most efficient economic production solutions; that is, where monopolies exist, external economies and diseconomies 35 Branko Horvat, Towards a Theory of Planned Economy (Beograd: Yugoslav Institute of Economic Research, 1964) . 248 not taken into account by the profit-maximizing firm; where there is need for new industrial locations; where there are large and sudden changes such as acute shortages of certain commodities. 7. The supply and demand for labor must be equilibrated. This refers to long-term planning to educate a supply of labor to meet the needs of industrial ization. What to produce, how to produce, and how to dis tribute the output. After allocation of the national income to consumption and investment, administration, welfare, collective consumption and social reserves, the given investment is allocated to sectors. A much greater control over investment is vested in the enterprises than in the Soviet bloc. Discussions concerning efficiency of investment are very similar to the discussions in the Soviet bloc. Within the consumption sector, the final mix of goods is determined theoretically by the consumers through the market, which is an imperfectly competitive market. The question of how to produce is autonomously determined by the firm; that is, inputs and their combina- 249 tions are not determined by the central plan. However, the banking system is responsible for harmonizing the macroeconomic decisions and the microeconomic decisions of the firm, through the granting of investment credits. Increasingly, mathematical techniques are being utilized by firms and in the macroeconomic plans to achieve efficiency. Distribution of income according to labor exists in the socialized sectors of the economy. Some property income exists in agriculture and to a limited extent in industry. The concept of wages is not yet fully developed either theoretically or practically in that the control of enterprises by workers' councils creates a situation where workers are also considered managers. "Needless to say, such complex changes will also give rise to many novel features, thus far unknown in practice and theoret ical literature. 36 Milentije Popovic, "Novel Aspects in the Develop ment of Social Relations in Yugoslavia," New Developments in Yugoslav Social Relations (Beograd, Yugoslavia: Yugo slavia Kidriceva 70, Information Service, 1961), p. 24. 250 Cuba We did not include Cuba in our discussion of macroeconomic efficiency in that the theoretical level of planning is very low at present and of too recent an origin. In assessing the Cuban economy we must make note of its outstanding characteristic: In no other socialist country are exports and imports equal to more than 30 per cent of GNP. No other socialist country inherited such a specialized agriculture or an industry so depend ent on imported materials.^ The "heroic” phase of the revolution, 1959-1963, was characterized by attempts at agricultural diversifi cation, industrialization, and acquiring new trading partners. These attempts were due to the situation of Cuba, peculiar to "colonies," wherein sugar accounted for one-quarter of the gross national product and four-fifths O Q of its exports. 37 Edward Boorstein, The Economic Transformation of Cuba (New York: Monthly Review Press, Modern Reader Paperbacks, 1968), p. 219. 38 Leo Huberman and Paul Sweezy, Socialism in Cuba (New York: Monthly Review Press, 1969), p. 66. 251 While these attempts did not succeed, there were modest increases due to utilization of unused resources. Sweezy and Huberman point out that before the revolution probably less than half of arable land was cultivated; 25 per cent of the labor force was unemployed. There were ample inventories of materials and finished products in the firms as well as dollar holdings at the time of the revolution. Additionally, luxury foreign-exchange expenditures were cut which resulted in substantial saving of needed foreign exchange. As a result of the existence of unused resources, ample inventories, and foreign exchange at the time of the revolution, the problem of scarcity was not recognized and the leaders believed both agricultural diversifica tion and industrialization could be achieved. However, with the loss of skilled personnel who went into exile, the embargo by the United States, the increasing deficits in the balance-of-payments, scarcity of resources became a factor to be reckoned with. What the Cuban economy did begin to accomplish in a "heroic" manner was the mobilization of human resources for education to increase their usefulness for 252 the development of the country. Additionally, measures to improve the health of the people were instituted. The first period was characterized by Boorstein as follows: When the whole economic administration operates with little attention to the need for rules, organ ization, coordination, and systematic plans, the term por la libre is also applied to it. The gen eral method of administration is el por la libre— free wheeling.39 In other words, neither the coordination and control of the market nor a planned economy existed. With the recognition of scarcity, and particu larly scarcity of foreign exchange, a new strategy for development was essential. This involved the allocation of resources predominantly to sugar and cattle— that is, agriculture rather than industry. Cuba enjoyed a com parative advantage in sugar, and increasing sugar exports was considered the main solution to the deficits. After some years it was hoped that the cattle industry would aid in increasing exports and decreasing imports of foodstuffs. 39 Boorstein, op. cit., p. 135. 253 The emphasis on allocation to sugar is seen by the target of 10 million tons of sugar in 1970. The largest sugar harvest had been 7.2 million tons. In addition to the new strategy for development, plans were adopted— on paper. In actuality, rationing was used as the mechanism to allocate resources. Also, food imports were increased. One of the problems of planning at this point, according to Boorstein, was that the plans were copied after Soviet and Czechoslovak plans rather than made relevant to the particularities of Cuba. The Cuban economy, still imbued with revolutionary fervor, also resorts periodically to the mobilization of labor from urban areas to help in harvesting to overcome shortages of labor. With respect to the 10 million-ton target, Sweezy and Huberman believe such a goal to be uneconomic, and indicate diminishing returns. . . . the first million and a half tons beyond seven million would call for 300 million pesos of investment, or about 200 pesos per ton of addi tional capacity; while the next million and a half beyond 8.5 million would call for 720 million pesos, or 480 pesos per ton of additional capacity.40 40 Huberman and Sweezy, op. cit., p. 175. 254 Despite the pessimistic outlook regarding the priority goal, Huberman and Sweezy assert that technology, particularly the innovation of an efficient mechanical harvester and an irrigation system, will help solve the problem of seasonal labor shortages and modernizing agriculture. SURVEY OF ALTERNATIVE THEORETICAL METHODS OF PRICING OF INPUTS IN A CENTRALIZED-DECENTRALIZED MODEL An illuminating theoretical survey of methods of pricing of inputs is made by Maurice Dobb4^ and is sum marized at this point inasmuch as it ties together many concepts commented upon in Chapters IV and V. The Dobb Solution Dobb attempts to relate pricing and allocation of inputs to final demand, within a centralized model of output and investment. The demand for labor and land should be treated as derived demand, and given prices of final output on a consumers' market, the problem of 41 Maurice Dobb, Welfare Economics and the Econom ics of Socialism (Cambridge: At the University Press, 1969), pp. 153-183, 188-207. 255 allocation is solved by comparing marginal productivities of these factors and pushing factors towards a more productive use from a lower use. While this is similar to the Western academic approach, Dobb suggests an inno vation in the pricing of capital goods in a socialist economy, where there is no capital market. Cost of capital goods could be measured by the sum of all labor expenditures at all stages of production only under the following assumptions: (1) no growth; (2) absence of scarcities of natural resources; (3) unique input-combinations, with no substitution; and (4) absence of alternative uses of capital. Moreover, under such simplifying assumptions, where there is independence of various branches of production, the composition of the total plan would be an adding together of various indus trial or branch plans. Although Dobb does not so state, the implication is that Soviet pricing of capital seems to have been based upon such unreal assumptions. Dobb thereupon proceeds to drop the above four assumptions. If assumption (1) were dropped and growth were occurring, it would be necessary to apply larger quanti ties of labor inputs at 'earlier' stages than at 'later1 256 stages, "the reason being that the earlier stages are already producing with an eye to the larger output of final products tomorrow or the day after or the day after A O that." in such a situation there would be an excess of the total value at equilibrium retail prices of final output over its wage cost, the excess being a function of the rate of growth. If the period of production differed between differ ent industries, the excess of final price over wage-cost should ideally be distributed between different products not in proportion to wage-cost, but in proportion to the sum of dated wage-costs, with each item weighted appropriately according to its remoteness in time from the emergence of final output; the basis for this weighting being the rate of growth. . . . ^3 The rate of growth attached to the wage cost is (l+g)n where g is the annual growth rate determined by the central planners and n the number of nears it takes for the emergence of an end-product from the time any item of wage-cost is incurred. (As in the von Neumann model, the rate of interest or profit is equal to the rate of growth.) 42Ibid., p. 191. 43Ibid., pp. 157-158. 257 The rationale of the pricing of capital in this fashion, where growth is occurring, is that the increase of final output requires the allocation of additional labor at some earlier date, this marginal amount equal to g, if the growth rate is to be maintained. This involves an opportunity cost because it diminishes the possi bility of growth in alternative production for the period in which the labor is 'advanced' in time or 'stored up' in the final product. Therefore, a product should not, . . . ideally, be increased in supply unless the social value placed upon it (in this case a use- value to consumers) justifies the reduction in the general growth-potential that its increase entails. If assumption (2) were dropped, and scarcity of land referred to limitations in supply of fertile land or accessible location of land, then the relevant calcu lation "is the labour expenditure at the margin of 45 extended use of the natural resource in question." However, where scarcity of natural resources means absolute inelasticity, then the limitation appears as a 44 Ibid., p. 158. 45 Ibid., p. 160. 258 scarcity price or rent, or an "ad hoc sales tax" on the final product. If assumptions (3) and (4) were dropped, then the task of planning becomes much more complicated under such conditions of substitutions of inputs and alternative uses of capital, and merely combining various branch or industry plans is inefficient. In the long run, capital can and should be produced to meet all the uses and demands for it. But in the short run plan, available supplies of capital are fixed. In such planning, the concept of opportunity costs are essential, as suggested by Kantorovich or Novozhilov. Dobb suggests that each scarce input be assigned a temporary scarcity price or quasi-rent. As such this type of price implies of course the previous attainment of an equilibrium (optimum or near-optimum) allocation of each scarce good in question, and has little or no meaning apart from the latter. It will be clear that a crucial fac tor in determining this equilibrium-allocation will be the relative output-quantities of the various end-products; so that every change in these output-quantities will result in a change in the prices (or rents) of scarce inputs, which will in turn cause some adjustment in the uses to which these inputs are put.46 46Ibid., p. 166. 259 After reviewing several problems connected with different accounting prices (long- and short-term) and actual prices, Dobb concludes that, in practice, capital goods should be priced on the basis of a uniform costing system, utilizing dated labor as discussed earlier with a planned growth rate. In cases of relative scarcity of capital inputs persisting through the planning period, there would be "some kind of mark-up on the standard price, expressive of the estimated degree of differential -47 scarcity." Although there would be departures from the uniform rule, Dobb hopes that the special cases requiring ad hoc price-fixation would be relatively small, and therefore allocation and pricing by the center for each specific capital good would not be necessary. Such uni form pricing for most capital goods would make feasible centralized allocation. However, Dobb may be overly optimistic in asserting that special cases requiring deviations from the uniform pricing rule would be rela tively small. His optimism is based on the notion that 47Ibid., p. 173. 260 the relative scarcity of a capital good can be overcome by switching resources to its production, even in the short run. The argument against using a growth rate for pricing which is arbitrarily determined by the central planners is countered by the rationalization that individual decisions on the market are quite as arbitrary. Should the search for an optimum rate of saving, as discussed in the preceding chapter, be successful, so much the better. 40 The Novozhilov Solution In the Novozhilov solution, price fixing and costing depends on determining a given rate of investment or level of investment funds as a matter of policy. Output targets are given centrally. The coefficient of effectiveness of investment is utilized. The given total of investment funds is allocated between various invest ment projects, according to a scale of priorities. Allocation is given to a project with a higher coefficient 48 Ibid., pp. 203-206. 261 in preference to a lower. At the point where the avail able investment fund is depleted, the coefficient will have a certain value at the margin, "r," called the "standard coefficient." The normal price of each good is then prime cost (wages plus raw material plus deprecia tion) plus rK, where K is the value of invested capital. The economic significance of rK is that it is an opportunity cost concept. It measures the additional labor that would be required if K were not employed in this particular production, r measuring its effectiveness in some other marginal use. This Novozhilov price would be used as an actual price for all industrial inputs. Where consumer prices are market determined, this Novozhilov price would be the standard and not the actual price. If the market price were above the standard, the rule would be to increase supply, and conversely. In investment decisions, the higher the price above the standard in a particular industry, the higher the priority for new investment in that industry. 262 Two-Level Planning As noted in the previous chapter, quantities are fixed from above and prices are determined at lower levels. These are shadow prices based on local optimal plans, utilizing linear programming methods. These shadow prices are Kantorovich's objectively determined prices or "otsenki." Conclusion Dobb contends that the above solutions are feas ible and consistent with central decisions and planning. At any rate, they can be regarded as feasible if the degree of approximation to an ideal result with which one is content is not too exacting. ^ In the pre-war debate on socialism, the opinion was held that a solution was theoretically possible but not practical. In the present survey, the solutions are feasible but have theoretical deficiencies. To gain operational forms the solutions lose optimality. But if what is optimal is difficult, if not impos sible, to define at all precisely, and in an im perfect world even more difficult to reach under any feasible set of arrangements or institutions, 49Ibid., p. 207. 263 does such an objection seriously matter? Common- sense would suggest that it does not.^® CONCLUSION Clues, Practices, Concepts, Trends As we stated earlier, it is difficult to separate practices, theories, and trends into neat compartments. We shall cite these aspects, lumping them together, in order to generalize and draw conclusions. First, we shall list several clues, trends, and concepts based on this chapter and then draw conclusions and generalizations not only from Chapter V but from the previous chapter. What are some of the clues, practices, concepts and trends as indicated in this chapter? 1. There is economic diversity within the Commu nist bloc as well as similarity, just as in the political area. There is similarity in that the market plays a role as well as central planning. The degree in which the market operates varies from a large role in Yugoslavia 264 to a lesser, subordinate role in the Soviet bloc. In a newly emergent socialist country like Cuba, one can merely discern the evolving of a macro development plan with rationing and mobilization of labor as interim measures. 2. Actual markup pricing is similar in oligopoly pricing and Soviet pricing; but oligopoly pricing may be more sensitive to laws of supply and demand than Soviet pricing. While enterprises under the New Economic Reforms are to react to demand in the sense of changing quanti ties , there seems to be no mechanism for price changes other than through the turnover tax. While oligopolies do not change prices frequently, perhaps oligopoly product prices change more frequently than Soviet product prices. A study similar to Eckstein's and Fromm's applied to products under the Soviet reforms would be very enlighten ing. 3. As in macroeconomic planning, mathematical techniques are coming to the fore in the determination of prices, as in Kantorovich's "otsenki"; but traditional pricing, with some changes, especially in producer's goods, still exists. 4. The labor theory of value is adhered to 265 ideologically in the Communist world. At the same time, attempts are made to utilize the theory operationally. The growing use of mathematical methods in the West and East, such as linear programming and input-output theory, are closely related to the labor theory of value. 5. Progress is being made theoretically and practically in the areas of consumer demand and efficient combination of inputs with respect to given outputs. However, the interrelationship between consumer demand, planners' targets, and inputs in the Soviet bloc is not clarified. Thus, the firms, through contractual relations with retailers and trading agencies, may modify and change outputs in accordance with consumer demand, thus modifying planners' targets. However, changes in outputs usually require changes in inputs. Theoretically, with given outputs, the question of how to produce at least cost may be solved by mathematical methods, as shown by Kantorovich. The question of how to adapt inputs to changing outputs, in conformity to changes in consumer demand, is not clarified. In practice, adjustments throughout the planned period are made in the provisional input-output tables and in the material balances. 266 In Yugoslavia, where inputs and outputs are determined by the firms, there is lack of coordination of investment decision-making by the firms and the various levels of decision making, that is, the communes, repub lics and Federation. 6. Growing out of the recognition of scarcity, the need to allocate resources to satisfy consumer demand as well as plan targets, to produce quality as well as quantity, and to overcome bureaucracy, the key problem, it is becoming evident, is the determination of the best combination of centralization and decentralization. It is not only the "information" problem but the fact that the center can manage certain macro aspects efficiently while other aspects must be left to enterprises in order to insure initiative, innovation, and efficiency. In the simulated market or other perfect computation models the question of centralization and decentralization remains, as noted in the two-level or multilevel planning. Generalizations Concerning Economic Efficiency Perusing the vast area of macro and microeconomic efficiency, we can begin the process of intellectual tatonnement in the sense of groping for a general socio 267 economic theory of socialism. 1. Trends and clues from the Soviet bloc, Yugo slavia, and Cuba indicate diversity as well as similarity. An analysis of Chinese experiences would no doubt demon strate further diversity. Thus, within the Communist bloc itself the path to socialism is varied. And, as we declared at the outset, we have omitted from considera tion the whole social democratic movement from the theoretical and practical standpoint. If we were to include the social democratic path to socialism then our conclusion as to the diverse paths to socialism would be reinforced. 2. Drawing on the Marxian theory of historical materialism, a relationship between the scientific revo lution and socialism may be posited. The following is a sweeping and visionary adumbration of this relationship. It has been postulated that with central planning and public ownership the Soviet Union was able to bring the industrial revolution to Russia. In a sense, socialism was a substitute for capitalism as an engine for rapid industrialization. This period may be regarded as a pre socialist phase or the industrialization phase of socialism. As the Communist countries catch up with the industrialized nations; as purely mathematical procedures for allocating scarce resources optimally are substituted for the market processes; as technology makes computers available for that purpose in sufficient amount and of necessary quality; as cybernation is utilized by each firm and in planning for the nation as a whole; we may envision another phase of socialism which grows out of and utilizes the scientific revolution. We are using Snow's definition of the scientific revolution as the organized application of "real science" to industry. It would create an industrial society of electronics, atomic energy, and automation. To parody Karl Marx's famous saying; The "hand mill" gives you a feudal society; the steam mill gives you a capitalist society; will the computer give you a socialist society? Despite Karl Popper's admonition, all we can say is "Let history proclaim the verdict." The theory of historical materialism can thus be tested, and rejected, accepted or modified. 269 We shall make some suggested approaches toward analyzing this relationship between the scientific revolution and socialism in the following section. 3. After revolutionary changes take place, in the sense of a fundamental change in the institutions of the market and ownership and control of the means of production, a period of evolutionary or piecemeal changes occur in the functioning of an economy to achieve economic efficiency. Once some immediate benefits for the many are achieved by expropriation of the few, the economy must face the problem of scarcity of resources in order to assure that greater egalitarianism does not mean equal ization of poverty. The evolutionary changes taking place progress from a high degree of centralization toward varying degrees of devolution. 4. When viewing the two extremes as complete centralization of decisions on the one hand and complete market autonomy on the other, one is tempted to equate greater decentralization simply with greater scope of the market. But in the light of the new mathematical tech niques, there can be a great degree of devolution in the 270 sense of multilevel planning without an institutional market. On this question of mathematics in relation to the institutional market, Paul Medow states optimisti cally and succinctly: . . . since it has now become possible to identify optimal scarcity prices through the use of elec tronic computers, a need for competitive institu tions can no longer be inferred from the relevance of such prices to the general problem of allocating scarce means.51 While the knowledge of "technical coefficients" . . . has freed the analysis of resource allocation from its traditional dependence on market processes, the availability of 'technical coefficients' for an entire economy has also brought about a funda mental reappraisal of the actual relevance of optimal prices to the aims of the economic process. It has made it possible to apply a purely mathe matical procedure for allocating scarce resources in an optimal way.52 5. In the theory of planning the search for an optimality criterion is one of the most significant theoretical areas. The greater the degree of control Paul Medow, "The Humanistic Ideals of the En lightenment and Mathematical Economics," Socialist Human ism, Erich Fromm, ed. (New York: Doubleday and Co., Inc., 1965), p. 377. 52Ibid., p. 376. 271 over investment and the "surplus," the greater the need and opportunity to find such an optimality criterion. Moreover, there are sufficient experiences, of a varied nature, so that a theory of planning, as noted before, may be discerned which can supercede the assertions embodied in the "law" of proportionate development. The experience of Cuba, for example, which depends heavily on trade, can contribute to a more generalized theory than that based solely on the experience of a self- sufficient economy like the Soviet Union. Thus, for example, the proposition that the capital goods sector must grow faster initially than the consumer goods sector may be valid only in a closed economy. 6. While dynamic aspects of theory, particularly growth theories and theories of planning, are evolving from the simple Marxian model to more sophisticated ones, a static macro equilibrium theory is completely neglected. If we were to attempt to compare a "Socialist" model to a "Keynesian" or "Classical" model, we would be in a position humorously stated by Anatole France in "The Revolt of the Angels": "As to the kind of truth one finds in books, it is a truth that enables us sometimes to 272 discern what things are not, without ever enabling us to discover what they are." 7. In the field of microeconomic theory, the labor theory of value with respect to relative prices is gaining attention in the West as mathematical methods are developing. Opportunity cost and scarcity concepts are recognized in the Soviet bloc. The merging of the two concepts theoretically has not been achieved. Whether mathematical methods have solved the problems of scarcity with respect to labor cost, as questioned by Novozhilov, is at least an open question. However, it is clear the interplay between the distinctive attitudes of the East and West is bringing forth a more fruitful approach to the labor theory of value. 8. Just as a static macroequilibrium model is lacking, we also cannot discover any static general equilibrium model as developed in the Soviet bloc or Yugoslavia. (The Lange decentralized socialist model is, of course, close to the Yugoslav.) Perhaps a generalized theory of micro allocation of scarce resources to satisfy consumer and planners' demand can be developed for a perfect computation model 273 similar to the elegant purely competitive model. And just as the pure competitive model never existed in reality, a pure computational model would be an ideal. Still, interest in static equilibrium models is minimal in the Communist nations. 9. It is clear that the Communist economies are tackling the problem of scarce resources practically and theoretically, with varying degrees of success. "Tradi tional" methods as well as advanced mathematical techniques to maximize output and minimize cost are utilized. A general theory at this particular phase of development would have to amalgamate the old— traditional planning and the market— with the new— the purely mathematical methods for allocating scarce resources and for allocating national income in an optimal manner. Suggested Approaches and Concepts Since the clues, tendencies and concepts have enabled us to discern, in many instances, what things are not rather than what a general socioeconomic theory of socialism is, we should suggest some approaches which might lead to such a theory. 1. A macro static equilibrium model, while not 274 as intriguing as the dynamic theories of growth, would help show functional relationships between variables. 2. The interrelationship between the consumer market, which would register consumer desires, and the allocation of resources through the plan to meet planners' targets and consumer demand, require clarification in all the Communist countries. The suggested solutions enumerated by Dobb— the Dobb, Novozhilov and two-level planning solutions— may be tested empirically for feas ibility. Additionally, the mechanism on the market indicating consumer preferences should be chosen; that is, whether flexible relative prices or changing inven tories . 3. Prices and "rental on capital" which can be determined through mathematical programming are not clearing prices. How such shadow prices and clearing prices would be interrelated requires clarification. 4. Even if Kantorovich's "otsenki" were utilized and each local solution would yield a system of "otsenki" and differences between local solutions were made uniform through a series of mutual adjustments, the problem of long-period prices for investment remains. Kantorovich's 275 "otsenki" would be short-period solutions reflecting temporary scarcities. While Kantorovich then suggests a dynamic system of "otsenki," for five-year or fifteen- year plans, it is questionable whether price changes could be made for longer periods where long-term investment projects are concerned. 5. The labor theory and opportunity cost theory need synthesizing. Dobb's comment that Novozhilov's pricing principle does not measure "labour-expenditures actually incurred, but of potential labour expenditures that would be imposed elsewhere if the input in question C *5 were to be put to a submarginal use," may be interpreted as a start for the synthesis of the labor theory and opportunity cost theory. 6. While we have adumbrated a relationship between the scientific revolution and socialism in its next phase, a rigorous analysis of these new "forces of production" which, according to the Marxian theory, would conflict with the relations of production, that is, the market relations and the relations of the planners, 53 Dobb, op. cit., p. 165. 276 managers and workers, is required. Rather than assertions to the effect that a planned economy will make use of science in industry and planning for the economy as a whole, a rigorous analysis of what would impel such a utilization is essential. The fact that mathematical methods and computers are now being increasingly utilized; that there is a will to overcome scarcity, especially due to competition with the West; that because of socialized control over the "surplus" and investment, it is possible to utilize automation within each factory as well as for the overall economy— these factors in themselves are insufficient for an anal ysis that there is a causal relationship between a system of socialism and the full utilization of the new "forces of production." Since this concept is based on the assumption that historical materialism provides valid insights, a fruitful approach might be to analyze the use of the "surplus" in a feudal society for conspicuous consumption and armies for the nobility and the use of the "surplus" by "capitalists" for increasing productive capacity. The use of the "surplus" in a theoretically "classless" 277 society, as defined by Marx, should then be analyzed. If the "surplus" is to be utilized to increase goods and leisure for all the people in as egalitarian manner as possible, to make labor enjoyable, then the cooperation, participation, initiative, and innovation by people in their own interests could be the mechanism substituting for competition under capitalism. Such involvement by people in the interests of all would impel the research, development, and utilization of scientific advances to industry and the economy as a whole. This concludes an examination of a problem common to all economic systems— that of scarcity and the means to increase economic efficiency to overcome scarcity— and introduces the social aspects of the socioeconomic theory of socialism. Such a relationship between ends and scarce means that have alternative uses has been the domain of eco nomics— ". . . economics in that sense is very well covered by the linear theory.The logic of choice has been increasingly mathematized. Thus, Hicks declares, economics 54 Hicks, op. cit., p. 111. 278 is pure techniques. But he also states that economics is a social science concerned with the operation of human beings. The author concurs with this and therefore turns to the question of the relevance of economics to the humanization of an industrialized socialist society, particularly in the light of the above discussion con cerning the mechanism of adapting the scientific revolu tion to socialism with respect to the cooperation of the people. We would further agree with Paul Medow that economics should . . . assist the political sphere in selecting the particular ends that the economy is to serve and in identifying the limitations that may safely be imposed upon its influence . . . to view the sub ordination of industrial economics to an increas ing humanization of social life as the primary function of a new conception of central planning. 55 Medow, op. cit., p. 371. CHAPTER VI QUALITATIVE ASPECTS OF SOCIOECONOMIC THEORY OF SOCIALISM INTRODUCTION1 The transformation of economics into an exact science, utilizing rigorous mathematical techniques, need not imply its death as a social science in the broadest sense. Similarly, the transformation of pre-socialist, underdeveloped economies into industrialized and eco nomically efficient economies to produce material wealth need not imply the abandonment of other qualitative goals of socialism. What is more, such abandonment would mean The following sources have been utilized: Erich Fromm, ed., Socialist Humanism; Henry Smith, The Economics of Socialism Reconsidered; Dr. Pavle Kovac, Development of Self-Government in Yugoslavia, New Developments in Yugoslav Social Relations; Karl Marx, Economic and Philo sophic Manuscripts of 1844; Edward Boorstein, The Eco nomic Transformation of Cuba; Saul W. Gellerman,Motivation and Productivity; and Andre Gorz, Strategy for Labor. 279 280 the deterioration . . . into a system which can accomplish the indus trialization of poorer countries more quickly than capitalism, rather than of becoming a society in which the development of man, and not that of eco nomic production, is the main goal.2 Moreover, if a socialist society adapts to and utilizes the scientific revolution to produce abundance, the social relations must change and conform to the level and nature of the forces of production, according to Marxian theory. Recognizing the insight of this view, we posit changing man in changed technological conditions. We shall therefore discuss in this chapter the aims of socialism in the sphere of social relations and the means to attain these aims. The social relations are limited to the spheres of production, consumption, and distribu tion, and abstract from political, familial, and psycho logical relations. The issues related to social relations in produc tion, distribution, and consumption are distribution of 2 Erich Fromm, "The Application of Humanist Psycho analysis to Marx's Theory," Socialist Humanism, ed. by Erich Fromm (New York: Doubleday and Co., Inc., 1965), p. 215. 281 income, workers' control and de-alienation, motivation, and a socialist model of consumption. We are leaving the issue of public ownership to the next chapter. While Soviet economists emphasize only productive relations in the sense of forms of ownership, the Czechoslovak econo mists have a broader definition which includes a complex of relationships in production, exchange, distribution, and consumption. They stress the fact that socialist relations are constantly changing as changes in the material base takes place.^ We shall have recourse to concepts, practices, and trends which can serve as clues to determine the direction the Communist bloc is moving to attain the qualitative aims of socialism. The author might be accused of attempting to create a Utopian model based on the utterances of Commu nist theoreticians, just as Sir Thomas More created a Utopian model allegedly based on the Inca civilization of Peru. That, however, is not our purpose. We shall merely Czechoslovak Economic Papers, V. 6, Review of Political Economy of Socialism by Karel Kouba. 282 examine and draw some conclusions concerning some aspects of social relations in theory and practice as they relate to the qualitative aims of socialism. AIMS OF SOCIALISM Before examining the aims of socialism in a qualitative sense, we must reiterate that some of the Communist nations are only now beginning to achieve the material conditions for a socialist society. Socialism in these countries has been and is a socialism of great scarcity having little relationship to the socialism of abundance conceived by Marx. The problem then is the construction of a society where man is not a means but an end. In a socialism of scarcity the question is whether Marx's goal of socialist man is a feasible one. It should also be clarified that the full emergence of socialist man in Marx's conception would have to await the post socialist system of communism, a society of super abun dance. To this end, let us reexamine what Marx did contend: No social order ever disappears before all the 283 productive forces for which there is room in it have been developed; and new higher relations of production never appear before the material condi tions of their existence have matured in the womb of the old society itself. Therefore, mankind always sets itself only such tasks as it can solve. . . .4 In view of the "material conditions," the aims of quantitative growth of output and industrialization are the priority tasks "society" has set in the Communist bloc. However, other long-run aims of socialism, given "material conditions," can be gleaned from the following quotation from Marx: In fact, the realm of freedom actually begins only where labour which is determined by neces sity and mundane consideration ceases; thus, in the very nature of things it lies beyond the sphere of actual material production. . . . With his (civilized man's) development this realm of physical necessity expands as a result of his wants; but at the same time, the forces of pro duction which satisfy these wants also increase. Freedom in this field can only consist in socialized man, the associated producers, ration ally regulating their interchange with nature, bringing it under their common control, instead of being ruled by it as by the blind forces of nature; and achieving this with the least expend iture of energy and under conditions most favour able to, and worthy of their human nature. But 4Karl Marx, "A Contribution to the Critique of Political Economy," Preface, Karl Marx, Selected Works in two volumes, ed. by V. Adoratsky, Vol. I (Moscow: Co-operative Publishing Society of Foreign Workers in the U.S.S.R., 1935), 356-357. 284 it nonetheless still remains a realm of necessity. Beyond it begins that development of human energy which is an end in itself, the true realm of freedom, which, however, can blossom forth only with this realm of necessity as its basis. The shortening of the working-day is its basic pre requisite. 5 The development of socialist man, the "associated producers" is thus seen by Marx as the condition of socialism. As we stated in Chapter II, Marx did not make a detailed blueprint for rationally regulating the relations of man and nature in the overcoming of scarcity (the recognition of necessity) so that the least input of labor would be used. He did, however, set forth the broad goals of socialism. "Conditions worthy of their human nature" is interpreted by Fromm and many Marxists as nonalienated or de-alienated conditions. The following are some of the concepts of alienation developed by Marx. Alienation of labor exists in the relationship of the worker to the product of his labor: when labor is a commodity; when labor's product is appropriated by 5 Karl Marx, Capital, Vol. Ill (Moscoe: Foreign Languages Publishing House, 1959), 799-800. 285 the capitalists; when the more the worker produces the less he possesses in the sense of "becoming poorer in his inner life"® as well as material privation. Alienation exists in relationship of labor in the process of production when the worker does not fulfill himself in his work since it does not fulfill a need but is only a means to satisfy needs. Alienated labor exists when man is alienated from his own body, and his "human life" and when each man is alienated from others. The concept of alienation, introduced by Hegel and developed by Marx, has now been rediscovered in the West and East. Theoreticians from Yugoslavia, Czecho slovakia, Poland, and Cuba are concerned with the humanist aspect of socialism as well as problems of alienation. Ivan Svitak of Czechoslovakia, for example, states, "But the essence of socialism is not the growth of material wealth; it is the full development of man and 6 Karl Marx, "Economic and Philosophical Manu scripts," Marx's Concept of Man, ed. by Erich Fromm (New York; Frederich Ungar Publishing Co., 1967), p. 96. 7 his liberation." M. Fritzhand of Poland declares, "Marx never reduced communism to the radical transformation of only the economic conditions of human existence; instead he saw in communism the radical transformation of the whole of human existence."® And from Yugoslavia Predrag Vranicki avers that industrial development is the prime task but it is not a specifically socialist problem "since increases in production are likewise the problem of capitalism. The vital problem of socialism is to be found in the realm of social relations."9 While self-management in Yugoslavia is considered a de-alienated structure, "... the occult power of the market and of money, and the hierarchy of status are 7 Ivan Svitak, "The Sources of Socialist Human ism," Socialist Humanism, ed. by Erich Fromm (New York: Doubleday and Co., Inc., 1965), p. 26. g Marek Fritzhand, "Marx's Ideal of Man," Social ist Humanism, op. cit., p. 157. 9 Predrag Vranicki, "Socialism and the Problem of Alienation," Socialist Humanism, op. cit., p. 285. 287 bound to have an alienating effect on the unstable structure of contemporary man."^ In a speech by Fiedel Castro, while agreeing with the principle that it is essential to build the productive base of socialism and overcome underdevelopment before attaining communism he stated it is necessary at the same time to develop the communist consciousness of the people. And . . . a communist society means that human beings are able to achieve the degree of understanding and brotherhood which man has sometimes achieved within the closed circle of his family. To live in a communist society is to live in a real society of brothers; to live in a communist society is to live without selfishness. . . . As we said before, communism certainly cannot be established if we do not create abundant wealth. But the way to do this, in our opinion, is not by creating political awareness with money or with wealth, but b^ creating wealth with political awareness. • • • The above quotations give us some clues as to the thinking in some Communist countries, influenced by the writings of Marx. We shall avoid the controversy as 10Ibid., p. 285. ^From a speech at Santa Clara, July 26, 1968, excerpt printed in the Guardian (New York: Weekly Guard ian Associates, Inc., January 11, 1969), p. 2. 288 to whether this was the "young” or the "old" Marx who was concerned with alienation and humanism. Suffice it to say that a renewed interest in the subject of the develop ment of man is manifesting itself, in the East as well as the West. Since economics is concerned with alternative choices, the selection of institutions, structures, motivational patterns, income distribution, the pattern of consumption, all come within the province of a theory of an emerging economic system— a system which also is attempting to change man. In accordance with Marxian theory, however, such choices are shaped by the mode of production of the material means of existence which . . . determines the social, political and intel lectual life processes in general. It is not the consciousness of man that determines their being, but, on the contrary, their social being that determines their consciousness.^ If the Marxian analysis is correct, then we should expect to find the above choices conditioned by a mode of production of material wealth which is ". . . 12 Marx, "A Contribution to the Critique of Polit ical Economy," op. cit., p. 356. 289 still stamped with the birthmarks of the old society 13 from whose womb it emerges." Let us now examine issues raised by workers' councils, motivation, income distribution, and consump tion patterns in a socialist society. We are not alleg ing that if the choices in these regards do show a relationship with the transitional stage of development of socialism that we are validating the Marxian analysis as noted above. The further testing of the theory will have to await the development of socialist man in a classless society— a very long-run process. The following is merely an examination of socioeconomic means toward attaining socialist man in a classless society. While the above lofty quotations may simply be rhetoric, an examination of such "de-alienated structures" as workers' councils, motivation, income distribution, and consump tion priorities may serve as clues for understanding a changing economic system. As noted earlier, we shall omit political aspects as beyond the scope of this dissertation, though, unfortunately, this severely limits our analysis. ^Karl Marx, "Critique of the Gotha Programme," Marx and Engels, Selected Works, Vol. II, 23. 290 SOCIEOECONOMIC MEANS 1. Workers' Councils Workers' control involves a new kind of demo cratic power. It is related to social ownership of pro duction and the political power of the workers and development of man in Yugoslavia, but is also raised as an issue in countries like France, Belgium and Sweden. Workers' control thus means different things in such varying situations. We are not concerned here with this issue outside of the Communist bloc and shall therefore limit ourselves to our field of analysis. The concept of workers' control arose in the course of the Russian revolution and was adopted by the Communist International at the third Congress.14 Workers' control broadly means the decision-making powers of the workers in the management of enterprises. The workers' 14 Ernest Mandel, "The Debate on Workers' Control," International Socialist Review (New York: International Socialist Review Publishing Association, May-June 1969), pp. 1-24. 291 council is the chosen structure for such decision making, and is the body elected by the enterprise workers. While workers' councils were established in Poland in 1956, their significance faded with the limita tions of their powers.^-5 In Czechoslovakia, in the Action Programme of the Communist Party of Czechoslovakia adopted by the Plenary Session of the Central Committee on April 5, 1968, it called for greater democracy through 16 a structure similar to that of workers' councils. What the outcome of this will be under the present circum stances is an open question. We shall now discuss the workers' councils as they presently exist in Yugoslavia. Functions of the Workers' Council The functions of the workers' councils are directly related to the degree of autonomy of the enter- John Michael Montias, Central Planning in Poland (New Haven and London: Yale University Press, 1962), pp. 307-311. ^"Action Programme of the C.P. of Czechoslvakia," Marxism Today (London: Communist Party, July 1968) , pp. 205-212. 292 prises. The council determines the economic policy of the enterprises, including approval of the economic plan of the enterprise. It has full authority over hiring and firing. It elects the management board from the workers of the enterprise. A substantial number of the members of the board must be engaged directly in produc tion. The director organizes and manages the activities of the enterprise in accord with the decisions of the workers' council and management board and in conformity with the laws. The director is appointed on the recom mendation of a special commission and one-half of the commission members are named by the workers' council and the other half by the municipal people's committee. The workers' council may demand the recall of the director. The concept of workers' self-management is applied not only to industry, but to wholesale and retail sectors, agricultural cooperatives, foreign trade and transport organizations, and public utilities. Purpose of Workers' Councils The involvement of workers in decision making or the development of worker-managers theoretically serves as a means of changing man from a passive, alienated 293 individual to a more active, de-alienated, innovatory individual in the productive process. It is also a means used to overcome bureaucracy by involving all levels of production workers in decision making. However, as noted previously, a built-in infla tionary bias developed in Yugoslavia as workers in each firm increased wages beyond productivity. Moreover, monopolistic tendencies developed. Thus, the self-interest of workers in each firm is not in harmony with the social interest. An interesting antidote suggested by George 17 Macesich is that of broadening the profit-sharing base. Instead of sharing in the profits of the enterprise, the profits of the firms within the commune could be pooled and shared by the worker-managers within the commune territory. This would expand self-interest to include the communal interest. The Yugoslavs also rely on communal governing bodies coordinating the interests of the people as workers 17 George Macesich, "Comparative Systems: Nation alized Industry-Discussion," American Economic Review (Wisconsin: American Economic Association, May 1965), pp. 76-77. 294 in higher wages with the interests of people as consumers in lower prices. Other Forms of Worker Participation In the Soviet Union there are no workers1 coun cils. To increase worker participation in management, production conferences are held regularly to examine 18 production problems. Workers are elected at union meetings as representatives to these conferences. Addi tionally, management, the factory committee, the Communist Party and Society of Inventors and Rationalizers are represented. These conferences do not appear to be decision-making conferences but rather help the enter prises run more smoothly, reduce losses in production, and increase profits. Unions have some powers in regard to adjusting wages and other remunerations as well as the accumulation and disposal of sums from the public consumption funds. Victor Grishin, "School of Economic Management for Working Masses," World Marxist Review (Ontario, Can.: Progress Books, November 1965), Vol. 8, No. 11, 9-21. 295 The issue of workers' control and participation is also related to motivation, to which we now turn. 2. Motivation In this transition period it is to be expected that controversy would arise as to the means used to develop socialist man, how fast to proceed in this development, and what is feasible to expect in the way of changing man in a changing society. Referring back to Chapter III, we discussed Lange's concept of the "laws of human behavior" as they relate to different economic systems. The questions of motivation and incentives are pertinent to theories of human behavior. It is in the areas of motivation as well as in the extent of workers' control that heated theoretical and practical controversy has erupted. Firstly, the question of motivation is related to the use of the market in determining demand and in allocation. And the market has been considered by Adam Smith and his followers as consonant with the belief that the pursuit of personal gain is a "natural" type of behavior. It was the thinking of Marx that in the post- 296 capitalist socialist phase such behavior would still persist although it would not be a law of nature. There fore, in a society where socialism is the substitute for capitalism, it is argued, material self-interest would continue to be the prevailing motivation. The problem then is one of changing man's motivation subject to the need for efficiency. Secondly, the question of motivation is related to work as a fulfilling end in itself or merely a means to achieve other ends. At this stage of development, Ota Sik emphasizes that labor is not yet a "vital need." In order that labour may become a vital need it must be creative work, that is, work that permits a certain spiritual soaring of man's capacity, the development of his initiative and his overall talent. Of course, such labour does exist on a certain level (scientists, technicians, artists, etc.). But the prevailing part of labour does not yet have this character and cannot at the present level of development. Another, Westernized, way of putting it is that the marginal disutility of work is not yet close to zero.^O 19 Ota Sik, Plan and Market Under Socialism (White Plains, N.Y.: International Arts and Science Press, Inc., 1967), p. 172. 20 Henry Smith, The Economics of Socialism Recon sidered (London: Oxford University Press, 1962), p. 130. 297 Furthermore, a significant shortening of the work day would be essential for enabling man to use his time for education in order to perform different skills according to his propensities. Such a situation is not yet possible in the developing countries. With further automation and cybernation, however, labor could poten tially become fulfilling for a greater number of people released from routine, mechanized activities. The emphasis on consumption, which is an end for which workers mainly expend labor, would be shifted to produc tion when labor is a means of fulfillment. Where emphasis is on consumption then distribution according to productivity serves as an incentive. Such incentive would presumably not be necessary when emphasis shifts to fulfillment in productive work. In the Soviet bloc countries the question of material incentives is being tied to the issue of decen tralization. The greater the autonomy of the firm in determining output and inputs the more will wages and bonuses depend on profitability. The relation of the market and incentives, of uncreative labor and incentives, of decentralization and incentives, are all valid interrelationships. However, whether the material incentives must be emphasized rather than the nonmaterial incentives is a matter of research in human relations and testing of hypotheses with regard to motivation and productivity. How much emphasis should be placed on individual gain, a firm's gain or a whole industry, region, et cetera, must be determined not only from the point of view of efficiency but of changing man, to accord with the stated aims of socialism. If cooperation of the "associated producers" is to be developed, when one firm develops techniques for increas ing productivity and shares the technique with others, all the workers may get a material reward instead of limiting it to one firm. If all are made better off and none worse off, Pareto optimality criterion would be followed. In this transitional stage of development, the need for the market and its relation to personal gain is recognized in varying degrees, and the role of labor as a means rather than an end is also acknowledged. How ever, the emphasis on material incentives versus moral incentives differs within the Communist bloc, with Cuba 2 9 9 and China subordinating material incentives to moral incentives. Before discussing this issue further let us attempt to distinguish between types of motivation. Types of Motivation We may distinguish three types of motivation: self-interest, indirect self-interest, and social interest. However, to draw a distinction between direct, indirect self-interest, and moral or unselfish motivation is well- nigh impossible. For example, the Cuban workers, while volunteering for extra work, may be doing so for reasons of revolutionary ardor to help their country develop. If such work gives them a sense of dignity and importance— the feeling that the land is "theirs" instead of belonging to "foreigners"— it is self-interest as well as socially motivated. If increases in productivity by each worker raises the output of the firm and all share in the benefits, it is indirect self-interest. Similarly, if more efficient production in all firms in a region or commune, for example, raises the standard of living of all, indirect self-interest as well as social interest is involved. Such a discussion belongs properly to 300 psychology. However, a clear distinction can be drawn for our purposes between material and nonmaterial incentives. The use of material and nonmaterial incen tives applies to the individual as well as groups of varying sizes from the firm to the industry or region or commune or nation as a whole. The socialist countries will no doubt serve as a huge laboratory in testing hypotheses about motivation and productivity. In the meantime, the writer will have recourse to research on motivation on a much more limited scale, since material from the Communist countries is not available to her. Research on Motivation and Productivity Whereas self-interest as a motive has generally been associated with material gain, research has unearthed other motives in addition to the money motive. Such research was done by Mayo and the Harvard studies, 21 Michigan studies, and Pittsburgh studies. These studies are relevant to this discussion on material incentives. Saul W. Gellerman, Motivation and Productivity (American Management Association, Inc., 1963). 301 In the Harvard studies, Mayo found that a "collapsed attitude toward life" was prevalent among workers doing monotonous work and where the workers had no control over their own workday. He termed the atti tude "anomie." This term is similar to "alienation." . . . it was characterized by feeling rootless, unimportant, and confused by the indifference of one's environment.22 Material incentives failed to increase productiv ity; but where workers were permitted to have close associations with each other at work and when work was organized to permit the formation of groups and concern was shown for the dignity of the worker, productivity increased. The experiments in Cuba of forming groups to harvest— imbuing them with the opposite of anomie, feelings of importance, the need to change the environ ment— might fall within this category. The Pittsburgh studies dealt with professional workers. This study concluded with a distinction between 22 Ibid., p. 26. 302 motivators and hygienic factors. The hygienic factors were money, security, and working conditions. The motivators were influences which had uplifting effects on performance and were related to good feelings about the special jobs the men performed. The hygienic factors are prerequisites for motivation but are not motivators in themselves. "They can only build a floor under morale," or are negative factors in that if they are inadequate they affect men's attitudes but are not posi tive motivators. Opportunities to handle more demanding work and becoming more skilled and having more responsi bility were positive achievement motivators. An interesting study about the money motive and production workers was done by William F. Whyte of Cornell University. His conclusion was that money is only one of many motives, that the production worker is not simply an economic man but a socioeconomic man. Myths die hard. It is quite clear that money's reputation as the ultimate motivator is going to be a long time a-dying. The evidence against it is already strong, but it will probably have to become stronger and be preached, sold, and debated for years before the myth finally gives way.^ 23Ibid., p. 64. 303 Other incentives are the opinion of peers, comfort on the job, and long-range security. Whyte concludes that power is the most important motivational tool. The power to regulate one's working methods, to set one's goals and standards, and even to have a role in determining one's rewards: This more than money would seem to be the key to sustained productivity increases.24 Incentives within the Communist Nations In view of the above research on motivation and productivity, the increasing emphasis on material incen tives within the Soviet bloc and Yugoslavia raises perplexing questions. For example, Victor Grishin states: Success in building Communism depends in large measure on the correct use of methods of developing the productive forces of the country, the employ ment of both moral and material incentives as applied both to the individual worker and to the collective as a whole. The Party proceeds from the Leninist proposition that the building of Commu nism should rely on the principle of material incentives. As Lenin pointed out, it should rely "not on enthusiasm alone, but— along with the enthusiasm engendered by the great revolution— also on personal interest, personal incentive and economic expediency." . . .25 ^ Ibid., p. 71. 25 Grishin, op. cit., p. 12. 304 While emulation through public recognition of labor which lends dignity to work is practiced, the dominant emphasis appears to be on material motivation in Yugoslavia and the Soviet bloc. In Cuba emphasis is on nonmaterial incentives. However, Castro stated: There remains to us the recourse that cane cutting be one of the best paid types of work; if it is one of the hardest, it is correct that it be one of the best paid.26 Bearing in mind the research on motivation and productivity discussed above, and the diversity within the Communist nations on this question, we raise the following questions: Firstly, has empirical evidence within the Soviet bloc and Yugoslavia led to the conclusion that money is the primary motivator? Secondly, have those economies given sufficient weight to nonmaterial incentives; that is, have they permitted sufficient participation and power by workers in planning and organization of work; have they rewarded Edward Boorstein, The Economic Transformation of Cuba (New York: Monthly Review Modern Reader Paper backs, 1968), p. 285. 305 achievement with greater responsibilities; have they provided for approbation or disapproval by their peers? Thirdly, is the level of development such that the "hygienic factors" as money, security and working conditions, are as yet inadequate; that the "floor under morale" is still lacking and therefore the positive motivators such as achievement and responsibility are subordinated? Fourthly, is the emphasis on nonmaterial incen tives in Cuba and China a function of their revolutionary youthfulness? Fifthly, when material incentives are emphasized as well as personal or enterprise gain, in what ways would it or would it not conflict with the needs of society as a whole? We do not pretend to know the answers to the above questions. From fragmentary evidence we can attempt some partial answers. With respect to the first question we plead ignorance. With respect to the second question we would say that there is evidence that in the Soviet Union the initiative of the workers is not as yet suffi ciently "stimulated." Grishin says: 306 To insure technical progress and the steady advance of industry we must search for the most effective ways of stimulating initiative of the masses in the sphere of labor and technology, in order that the unions may best fulfill their func tion as a school where the workers could learn to run their factories efficiently and well, and to acquire a Communist attitude to life and w o r k .27 (Italics writer's emphasis.) With regard to the third question— as far as the level of development with respect to the "hygienic fac tors"— there is no doubt that this is a vital factor in utilizing money motives. However, the writer would cite Edward Boorstein, as an economist who worked in Cuba as a planner, imbued with socialist ideology: Material incentives must be used; and yet there must be an unremitting effort to create a society in which they will no longer be necessary. Here again, there is a basic unity: the highest ideal ism has its roots in reality and the highest prac tical sense has vision and i d e a l s .28 As far as the fourth question is concerned, superficially, it would appear that when the "heroic" period of the revolution is passed and revolutionary fervor has died down, more mundane motivations are uti lized. However, other factors may be involved in that the 27 Grishin, op. cit., p. 12. 28 Boorstein, op. cit., p. 289. 307 Soviet bloc countries, influenced by the Western standard of living, may be more likely to adopt market incentives than an Asiatic country like China. Whether in fact Cuba and China will de-emphasize moral incentives as they progress remains to be seen. In China there are divergent views, with Mao Tse-tung emerging as the dominant power in China after the Cultural Revolution. His emphasis is on collective incentives through sharing in the profits of the co- 29 operatives. In answer to the fifth question, no doubt any incentives to raise individual and group productivity would raise output for the nation as a whole. However, one effect of utilizing personal and firm gains for motivation may be the inflationary pressures witnessed in Yugoslavia. If wages and bonuses are tied to firm profits, bureaucratic maneuvering for higher prices could result in similar abuses which existed with physical output norms in the Soviet bloc. The gap between indi vidual and social interest would continue to exist. 29 Jack Gray, "The Economics of Maoism," Bulletin of the Atomic Scientists, op. cit., pp. 42-51. 308 3. Distribution of Income Distribution of income was discussed earlier; but it also has relevance for the present section treating qualitative dimensions of socialist economics. The dis tribution of income is connected both with efficiency and the behavior of man or changing man in a changing society. We noted that in order to achieve efficiency material incentives are utilized in varying degrees. The material incentives are, of course, related to income distribution in that inequalities in income exist in accord with quantity and quality of labor. If the maximization of equality is sought in a socialist society, limited by the needs for efficiency in production, a socialist economy must establish criteria towards that end in the deter mination of income. Moreover, as a transitional society moving towards communism, it ostensibly must prepare man to accept "distribution from each according to his ability, to each according to his needs." Criteria for Distribution of Income Within all the socialist countries the distribu tion of income is substantially uniform with respect to 309 the following criteria: (1) distribution according to quantity and quality of labor; (2) distribution in accord with planner's targets; (3) distribution according to collective needs; and (4) distribution according to personal needs. However, again there is diversity as to the emphasis placed on these criteria. Cuban and Chinese planners, putting greater weight on changing man, emphasize distribution out of collective funds rather than differ ences in income according to work. To what degree this diversity is merely a matter of rhetoric is an opan question. Distribution of income with respect to quantity and quality of work. Distribution of income with no personal income accruing to property resource owners is of course related to the public ownership of the means of production and the "classless" society. However, it should be noted that there are slight modifications of this criterion in the sense that personal plots exist in the Soviet bloc and private property exists to a larger degree in Yugoslavia. At present, it is limited as to a certain acreage on farms and as to the number of workers 310 in industry in Yugoslavia. This criterion does lead to inequalities of income accruing to workers of different skills but theoretically not to the degree of inequality consonant with private property. Managers, considered as highly skilled workers, receive relatively high salaries. The worker/manager wage ratio varies at different times and in different places. In order to induce people to become managers and assume great responsibilities, salaries are com mensurably higher than for workers. However, large gaps between managers and workers1 wages would create a new class or elite hardly distinguishable from their "capi talist" counterparts. Theoretically, then, a socialist society must seek a balance between the need for managers who are in scarce supply and a "classless" society. In China attempts have been made in this connection by periodically sending managers back to work to prevent the formation of such an elite. According to Ray Wylie, that also was the purpose of the Cultural Revolution. In launching the Cultural Revolution, it seems that Mao has attempted to prevent the emergence of a bureaucratic elite by reaffirming the egalitarian- 311 ism of the early Revolution.^® In Yugoslavia, workers' control presumably acts to keep the manager/worker wage ratio from getting too high. Distribution of income with respect to planners1 targets. Income is distributed to allocate workers and managers to those areas or sectors in accord with the national plan. For example, grading zones are set up for this purpose in the Soviet Union. There are five grading zones in the Soviet Union. In the fifth zone (Far North) wages are 50-70 per cent higher than in the first zone (central, southern and western regions of the European part of the USSR). The application of grading zones enables the government to attract the labour force to newly developed, sparsely populated regions.31- Ray Wylie, "Revolution within a Revolution?" Bulletin of the Atomic Scientists, op. cit., p. 31. G. N. Khudokormov, ed., Political Economy of Socialism (Moscow: Progress Publishers, 1967), p. 230. 312 In Yugoslavia, while wages are determined by bargaining and the market, the firms, unions and all economic bodies involved are to harmonize their interests to the various economic plans. Distribution of income with respect to collective needs. Distribution from collective consumption funds supplements distribution according to labor where there are indivisibilities, social costs and social benefits such as free education, free medical services, student scholarships, free or partially free vacation resorts and sanatoria. Such distribution also serves the purposes of reducing gaps in income due to wage differentials and ”... contains the rudiments of communist distribution according to needs.”^2 Additionally, such distribution is related to material incentives in that scholarships, free vacations at resorts are given to workers as rewards for achievement. The greater the distribution out of collective funds compared to personal income distribution according 3 2 I b i d . , p . 2 2 3 . 313 to labor, the greater the acceptance of the communist principle of distribution according to need rather than individual productivity. A very large increase in free goods presupposes a highly abundant society. It is also, however, a function of the planners' predisposition towards changing man. In Cuba, for example, Castro speaks of the elimination of rents on housing by 1970. Distribution of income with respect to individual needs. This criterion is related to the above in the sense that distribution is out of collective funds but it is different in that distribution is in accord more particularly with individual needs, rather than collective needs. This category applies to those who are unable to work, such as children, the aged and invalids. Uniqueness of distribution of income under socialism. In determining what is unique about the dis tribution of income in a socialist society, we would con clude that in large part distribution accrues to work, not property, and that distribution serves as an allocative mechanism in accordance with a national plan. (The 314 market also plays a role, as in Yugoslavia.) As far as collective and individual needs are concerned, empirical studies would have to be made to ascertain whether the relative share of total income allocated for such needs is greater in the socialist countries than in the "capitalist" countries. Some evidence from a Western source is the following quotation: Strictly socialist systems are slower to create consumer wants, but better adapted to meet, for example, the needs of the old and the poor, and in practice really do perform better in these areas. We have to admit that it is almost exclusively in the 'free world' that we observe the extremes of poverty and affluence side by s i d e . 33 Furthermore, Robert F. Dernberger, a member of the Center for Chinese Studies at the University of Michigan, states: If we use the tests of efficiency and productivity as success indicators, China is an underdeveloped country with a still unrealized potential for development. If we use the test of distribution rather than production as a success indicator, however, the Chinese have achieved a significant 33 Robin Marris, book review of The New Industrial State by J. K. Galbraith, The American Economic Review (Menasha, Wise.: American Economic Association, March 1968), Vol. LVIII, No. 1, 246. 315 breakthrough. The distribution of income has not only been made much more equitable than in the past, but China has weathered 20 years without a major famine. During the agricultural crises it was touch and go, but they did not starve to death.34 Although income distribution is potentially more equal in a society without property rights it is not automatically so. Political control and power by the "proletariat" in fact as well as in theory would be a further condition to insure that a new economic elite based on political power does not emerge. 4. Maximization of Education: Investment in Human Resources That problems of economic growth in underdeveloped countries are not economic problems alone but also the question of ignorance, apathy and cultural patterns is being recognized by Mao Tse-tung and by Western econo mists. That education is a means for developing man is a truism. The use of education to overcome ignorance was 34 Robert F. Dernberger, "Economic Realities and China's Political Economics," Bulletin of Atomic Scien tists, op. cit., p. 42. 316 and is being carried out in all socialist countries on an unprecedented scale in underdeveloped countries. Education appears to be a function of the ideological accent on labor resources as the ultimate source of values. Whether by sending teams from urban centers to rural areas to wipe out illiteracy or the Maoist method of education, there is an accent on education in Cuba and China as there was in the Soviet Union. Concerning education in China, John M. H. Lindbeck, Director of the East Asian Institute at Columbia University, declares: The Chinese embarked on the greatest educa tional experiment in history, one designed to con vert China in the brief span of one generation from a country of illiterate peasants into a society with a literate population informed by the essential principles of modern science and the practical technological skills that are asso ciated with these. Considering its initial level of retardation, the Chinese accomplishment over the past decade and a half is thus far unprece dented and, if sustained, could place China within ten to twenty years among the leading contributors to world science and technology.^ 35 John M. H. Lindbeck, "An Isolationist Science Policy," Bulletin of the Atomic Scientists, op. cit., p. 67. 317 The use of education to develop man beyond mere literacy to scientific expertise is one facet. Another facet is the process of identifying individual and communal interests. This concern is apparent in our discussions about workers* control, motivation and distribution of income and involves education in a broader sense than school training. Education is a means utilized in varying ways to attempt a reconciliation of individual and communal interests. The use of physical directives, extreme centralization, bureaucracy and coercion has been found inadequate. The greater involvement by the people to overcome bureaucracy through self-management in Yugoslavia is an educational process. In China, Mao Tse-tung also castigates state bureaucracy and evolved the concept of greater communal participation in running industry. (Whether in fact Mao is substituting the "cult of the personality" similar to Stalin is an open question.) Villages are induced to mechanize out of their own resources, to operate local industry, to diversify agri culture . By developing and operating industry themselves, peasants, it was thought, would appreciate the benefits 318 of industrialization as they could see their lot improved. That was the theory behind the Great Leap Forward and the Communes. The Cultural Revolution was to have been an educational process also. Educating the educators. One aspect of education as a means to change man is the vital question of who will educate the educators. An interesting answer was attempted after the Chinese revolution in dealing with Communist Party leaders in the villages who helped the people "fanshen." William Hinton defines the term "fanshen" as follows: Literally, it means 'to turn the body,' or 'turn over.' To China's hundreds of millions of landless and land-poor peasants it meant to stand up, to throw off the landlord yoke, to gain land, stock, implements, and houses. But it meant much more than this. It meant to throw off supersti tion and study science, to abolish 'word blindness' and learn to read, to cease considering women as chattels and establish equality between the sexes, to do away with appointed village magistrates and replace them with elected councils. It meant to enter a new w o r l d .36 36 William Hinton, Fanshen (New York: Vintage Books, 1968), p. vii. 319 To educate the educators who led in the "fanshen" movement, open meetings were held in the villages for the purpose of criticism and self-criticism. Rewards and punishments were meted out at these meetings by the villagers themselves. Fascinating as the topic of education is, especially to dissertation writers, we cannot go too far afield. All we attempted to do was to indicate that education is a means to change society as well as man. It is high on the list of priorities in the socialist countries, a subject we shall discuss next. 5. The Ordering of Priorities— Towards a Socialist Model of Consumption In the first section of the dissertation we dis cussed output from the viewpoint of its growth, its division into consumption and investment, and its relative composition in accord with planners' targets and consumer needs. In this section, we are concerned with the ordering of priorities within the final output of consumer goods and services from the viewpoint of the optimal development of the individual in a classless society. 320 It should be noted that in all theoretical discussions in socialist societies the concern is with "needs" rather than "wants." The author believes it is more than a semantic difference. It indicates firstly that the vital needs are still unsatisfied; and secondly, that the emphasis is not upon stimulating wants, which are evolved from needs. When considering a socialist model of consumption, we cannot assume existing behavior of consumers but rather a so-called shift in behavior due to greater equality of distribution, the use of nonmaterial as well as material incentives, the existence of a large sector of collective funds for collective needs, the changing of work from drudgery to a "prime want" and its effect on consumption, the manipulating of needs by planners rather than profit-taking, growth-oriented firms. As in all other areas, we again reiterate that in this phase of actual socialist development we can only discern clues of a socialist model of consumption in that the productive capacity is still very limited and that the Communist countries have not yet fully emerged from the "womb" of capitalism. Moreover, as the ordering 321 of priorities is connected with the above factors, we find diversity rather than uniformity within the Communist nations. An interesting and appropriate comment on wants is that of Georgescu-Roegen: . . . what makes 'want' a dialectical concept is that the means of want satisfaction can change with time and place: the human species would have long since vanished had our wants been rigid like a number.37 While wants have certainly increased as produc tivity increased, we cannot therefore assume an infinity of wants. Human propensities can also change in the direction of satisfactions different from those existing in an affluent capitalist society. Let us, therefore, examine the possible effects on human propensities of distribution of income, incen tives, the existence of large collective funds, the de alienation of work, the manipulation of needs by planners rather than profit-taking, growth-oriented firms. With changing propensities and satisfactions a changing 37 Georgescu-Roegen, Analytical Economics (Cam bridge, Mass.: Harvard University Press, 1960), p. 31. 322 priority or hierarchy of needs may develop— towards less conspicuous consumption and smaller personal wants relative to collective wants. We are making no value judgments as to such a "proletarian" model. Distribution of personal income and changing propensities. The distribution of personal income in accord with work would theoretically lead to greater egalitarianism than distribution of income to property and labor resource owners. If such is the case there would be a small gap between the living standards of various income groups. It can be assumed that consumer preferences are interdependent.®® Under that assumption there would be less of an emulation effect the less the differences in consumption standards. The less the emulation effect the less the escalation of needs and wants. As the socialist societies depart from the con cept of greater egalitarianism and an elite is formed, 38 James S. Duesenberry, Income, Saving, and the Theory of Consumer Behavior (Cambridge, Mass.: Harvard University Press, 1967). 323 based on privileges, either politically or because of managerial skills with commensurately much larger incomes, the results would be similar to a capitalist society. There would be little change in the mix of goods from that of an affluent capitalist society where wall-to-wall mink carpeting is a status symbol. The propensities for such luxury items would continue. Incentives and changing propensities. Related to equal distribution of income is the question of material incentives. While all socialist economies utilize material incentives, as we have shown, such incentives accentuate difference in incomes and in spending habits among workers/managers and highly skilled/unskilled workers. As long as the emerging socialist society bears the "birthmarks of capitalism" material incentives are recognized as necessary for productivity but the differ entials may be wide or narrow. There are alternative choices in that regard as well as making incentives individual, group or communal incentives. Collective funds and changing propensities. The transitional stage from capitalism to communism is 324 conceived of as increasing the realm of collective funds and decreasing the area of personal income distribution. As society becomes more productively abundant more goods and services are to be added to the free goods. This presumably paves the way to man's acceptance of distribu tion in accordance with need rather than productivity. The decisions on which goods successively become free are political rather than economic decisions, in many instances. As we noted earlier, externalities, indivisibilities, social costs and benefits are factors in the determination of collective goods. In connection with changing propensities should be added the factor of privatization of life. The greater the allocation to private goods in relation to collective goods the more are individuals privatized— removed from their fellow men. The choice between automobiles or communal trans portation is a case in point. De-alienation of work and changing propensities. As work becomes a "prime want" it is hypothesized that man will transfer satisfaction from consumption to creative production, to the creative use of leisure time— a substitution effect, we might call it. 325 Before this state of bliss is reached, however, that is, in the present stage of development, the Yugo slavs, concerned with alienation and bureaucracy, are experimenting, as we noted, with workers' councils and « self-management to directly involve people in a type of participatory democracy. However, because of the low level of income and the emphasis on individual material incentives, one can draw no conclusions as yet on the substitution effect. In China, the attempt was made through the cultural revolution to prevent crystallization of a new class of technocrats and Party administrators, which would create alienation and prevent "the sense of respon sibility of the mass of the population on which economic vigor in the last analysis depends," states Jack Gray. Further, Gray states: If these new cleavages in Chinese society are pre vented, and the ring held for the development of collective entrepreneurship, then Mao believes that 'a great spiritual force will be transformed into a great material force': the masses of China will at last become aware of the infinite possi bilities of material progress through modern technology and large-scale social organization, and will launch a massive war for the control and 326 exploitation of nature, before which they have lived precariously throughout h i s t o r y .39 At this juncture material progress is in the area of hygienic needs. Whether a de-alienated classless society will turn towards an infinity of wants or "true needs" is an open question. Manipulation of needs by planners. By changing needs from "false" needs to "true" needs, society may contribute to the optimal development of man. It is conceivable that there are scientific standards for judging vital or hygienic needs, such as food, clothing, shelter, security and good working conditions. One might term them "proletarian" needs. Such studies are pro gressing in the Soviet Union. The Nutrition Institute of the USSR Ministry of Health has established long-term, scientifically- substantiated, nutrition standards for the USSR as a whole and for its economic zones. Similar per spective norms have been elaborated by the State Economic Council of the USSR for the consumption of staple manufactured goods, housing (living 39 Gray, op. cit., p. 50. 327 space in square meters, etc.), communal facilities and services.40 However, outside of the vital needs, the question arises, who is to decide on what are "true" and "false" needs? Marcuse puts it succinctly: In the last analysis, the question of what are true and false needs must be answered by the indi viduals themselves, but only in the last analysis; that is, if and when they are free to give their own answer. As long as they are kept incapable of being autonomous, as long as they are indoctrinated and manipulated . . . their answer to this question cannot be taken as their own. By the same token, however, no tribunal can justly arrogate to itself the right to decide which needs should be developed and satisfied. Any such tribunal is reprehensible, although our revulsion does not do away with the question: how can the people who have been the object of effective and productive domination by themselves create the conditions of freedom?4^ In developed capitalist societies people's wants and needs are manipulated by advertising, by firms seeking to maximize profits or growth. In socialist societies, outside of possibly Yugoslavia, such manipulation for 40 V. S. Nemchinov, "The Use of Statistical and Mathematical Methods in Soviet Planning," Structural Interdependence and Economic Development, ed. by Tibor Barna (London: Macmillan and Co., Ltd., 1963), pp. 172- 173. 41 Herbert Marcuse, One-Dimensional Man (Boston: Beacon Press, 1966), p. 6. 328 profit maximization does not take place. However, planners do arrogate to themselves the right to manipulate and set standards. Economic reasons exist for planners' decisions regarding needs in the present as compared to needs in the future or allocation as between consumption and investment in an optimum manner. Similarly, individual valuations require supplementation by social valuations, according to Branko Horvat.^ Social valuations are necessary for the following reasons: (1) if choices on an individualist basis would lead to a decrease of the potential welfare of the commu nity; (2) social valuations are a reflection of the preference scale of the community; and since these preferences reflect the choices of more than one individ ual, consumer communal preferences are superior to isolated individual preferences. Examples of the imposition of social valuations on individual valuations 42 Branko Horvat, Towards a Theory of Planned Economy (Beograd: Yugoslav Institute of Economic Re search, 1964). 329 are subsidies for publishing books, compulsory education and free health services. Horvat takes issue with economists who imply that economic theory and policy should be based exclu sively on individual choices, treating social valuations as arbitrary. Instead, says Horvat, individual choices are determined through interactions with other individual choices and are shaped by custom and tradition; that is, they are interdependent, as we noted above. Thus, if social valuations were arbitrary, indi vidual valuations would be even more so. As a result, it would be impossible to rationalize the conduct of the economic affairs of mankind. Just as the problem exists for determining an optimum centralization-decentralization model, a similar problem is that of determining an optimum social- individual valuation of needs and wants. The ideal of a people free of "effective and productive domination" either by profit-making firms or by arbitrary planners seems unattainable at present. The determination on economic and sociological criteria of the spheres of 43Ibid., p. 32. 330 individual versus social choices does appear more feasible. Social valuations need not imply planners' valuations but could entail a democratic process. How such a process could be attained is beyond the scope of this dissertation. A model for consumption in a socialist society remains very much an open question. The potential exists for developing a hierarchy of needs for the nation as a whole, based on scientific standards, social and pri vate evaluations. Outside of the primary concern for meeting hygienic and educational needs, the evidence of a new ordering of priorities is as yet too insufficient for drawing conclusions. CONCLUSIONS Let us now look at some of the clues in practice and theory with reference to the qualitative aims of socialism and the means of attaining these ends, and attempt to draw conclusions and generalizations. Considering the grim realities of inhumanity practiced during the Stalin period, the lack of "brother hood” between the Soviet Union and China, we might be 331 accused of quixotism in discussing exalted topics like socialist man in a classless society. None the less, the forces of nationalism, of politics, and the Cold War must not blur our vision so completely that we fail to seek a pattern in the socialist countries with respect to the qualitative aspects of socialism, from a theoreti cal point of view. Clues, Trends, Concepts, Practices From this section of the study we note the following: 1. Just as in the question of economic efficiency we found dissimilarities among the socialist countries so too we find diversity in the means used to attain qualitative goals. Theoreticians in the Soviet bloc, Yugoslavia, Cuba, and China all stress the need to build the "material base" of socialism as a prime requisite for the transition from capitalism to socialism to commu nism. However, they differ in the approach to changing man, his motivations, the order of priorities of consumer goods, workers' control, degrees of inequalities of income. 2. Just as the questions of economic efficiency 332 were related to the industrialization phase of socialism, so too are the various means with relation to qualitative ends connected with the early phase of socialism. The use of material incentives and an unequal distribution of income are related to the influence of the market and capitalism. That is, personal gain is a pervading influence. The new system contains the "birthmarks" of the old. While material incentives are in existence throughout the socialist countries, nonmaterial incentives are also being developed in varying degrees. China and Cuba are opting for the preponderance of nonmaterial and group incentives. In the area of education, the emphasis on wiping out illiteracy in Cuba and China attests to the under development of these countries. However, education is high on the order of priorities, not only for literacy but for scientific expertise. 3. There is evidence that an interest in the humanistic ideals of Marxism and concern with alienation exist in some areas of the Soviet bloc. 4. Evidence exists that new structures are 333 emerging. The workers' councils and self-management are a unique form in Yugoslavia. That attempts to copy workers' councils were considered in Czechoslovakia is a clue that a movement toward greater control by workers does exist. 5. Distribution of income is unequal, but essentially in accord with quantity and quality of labor. The distribution of income is egalitarian after the Communist revolution takes place in that "fanshen" occurs in all Communist countries, and extremes of poverty and wealth are done away with. Thereafter, there is a ten dency to develop an elite among technocrats, Party administrators, and managers. The scarcity of managers is one important contributive factor. 6. A countertendency against elitism may be discerned in the Cultural Revolution in China. Similarly, the concept of self-management in Yugoslavia was developed toward that end. Whether either succeeds remains to be seen. 7. A socialist model of consumption, as the perfect computation model, is still unrealized. However, certain clues do appear. Firstly, the mix of goods is 334 more of a "proletarian" order in that hygienic or vital needs for all are the first priority. The stimulation of wants through advertising does not exist, except possibly in Yugoslavia. There are indications that stimulation of wants and emulation will exist in the Soviet Union as it seeks to copy the United States. The relative share of communal goods with respect to private goods is large. Private goods in this context refers to goods bought with personal income. The concept is that of constantly enlarging the communal sector and adding to free goods in preparation for a communist society. Among communal goods, as we stated, there is an accent on education and culture as a high priority in the hierarchy of needs. 8. Planners play a large role in the manipulation of the hierarchy of needs. Generalizations 1. There is an underlying assumption in socialist theory that man's nature is not eternally given but changes as the institutions and structures change. The changes in man's nature would lag behind changes in the environment. Such changes presumably could occur very 335 slowly— more slowly than changes in technology, in mechanisms for achieving efficiency. At this juncture economists and other social scientists can not make any scientific statements about the effects of the radical changes in the socialist countries upon man's nature. Firstly, the time span is too short. Secondly, the overwhelming economic problem of scarcity, the priority emphasis on industrialization left little room for atten tion to problems of social relations. 2. However, economists ought to be able to make less sweeping statements about the social and economic effects of changes in motivation, changes in degree of workers' control and participation, of manager-worker wage ratios, and work-leisure ratios. 3. Economists ought to be able to test the hypothesis: as the standard of living rises, wage differ entials according to efficiency become less important, and prestige, achievement for oneself and for the commu nity, approbation or disapproval of peers, become more important. 4. We may further hypothesize: as economic development proceeds, there may be a separation of the 336 mechanisms for achieving efficiency and material incen tives, based on personal gain. This may be so on the following grounds: that marginal disutility of work would approach zero; that vital needs will become free goods; that workers' control and participation would be prac ticed; that alienation will be overcome; that although satisfaction of needs or wants may be limitless there would be decreasing marginal utility of personal material goods and increasing marginal utility of alternative wants, as creativity, knowledge, power, human relations. We are not postulating that this in fact will happen in a socialist society but that theoretically it would plausibly occur, according to Marxian theory. The socialist countries may serve as a huge research labor atory in ascertaining whether economic efficiency can be achieved without the motivation of personal material gain. The evidence is that the goal of development of socialist man, motivated unselfishly, in a classless society, is severely limited by the needs for efficiency at this stage of development. Managers are in scarce supply and wage differentials according to productivity 337 are practiced. 5. A new concept with regard to nonmaterial motivation and elitism is emerging in China: that a revolution must be a continuing process. While the initial revolution expropriates the landowners and capitalists a new elite of power and privilege may arise, necessitating periodic cultural revolutions. A different approach is that of the withering away of the state, during the socialist phase, rather than waiting for communism. The concept is being developed in Yugoslavia as a move to prevent bureaucracy and elitism. 6. As we noted in the chapters on efficiency, competition between methods in planning how to produce is envisaged rather than the competition of the market mechanism in the Soviet bloc. A substitute for the competitive control mechanism to induce innovation and lower costs is thus required. We theorized that coopera tion and participation by the "associated producers" would be a necessary substitute. By developing a direct interest in the production of the "surplus," democratic participation and control in its disposition, the 338 initiative and innovatory powers of the managers and workers could be realized. No doubt the immediate returns in form of bonuses and wage differentials are a stimulant but, as we noted, conflicts between individual and communal interests are created. Therefore, it appears to this writer that a central and connecting issue in the socioeconomic theory of socialism is that of the role of man. The economic and mathematical techniques for efficiency must be supplemented by the initiative and innovation of labor and managerial resources to execute and implement economic plans. Only to the extent that people have a controlling voice in the plans, in the allocation as between consumption and investment, between wages and the "surplus," in allocation to communal funds, in social evaluation as well as individual evaluations of needs and wants, in production— to that extent will cooperation of the "associated producers" replace the competitive market mechanism. 7. Extreme mobility of labor to move freely into management, into higher education, into highly technical, scientific jobs, into the political spheres— a classless society rather than an encrusted elite forming a new 339 class of power and privilege— is another necessary condition for the cooperation of labor in attaining maximization of output as well as developing man. 8. If through material incentives some are made better off while others are not made worse off— where efficiency is increased through material incentives— a Pareto-like optimum is achieved. However, if through privilege and power a few are made better off and most are worse off because alienation and nonparticipation leads to loss of initiative, innovation and productivity, an optimum cannot be achieved. Similarly, if material incentives lead to some firms and individuals gaining but society losing through inflation, shoddy quality goods, an optimum is not achieved. 9. In examining the means for developing man, we perceive conflicts among the means used: between the workers' councils as de-alienating structures and the practice of tying workers' income to the profit within each firm as an alienating device. The unwillingness to develop workers' control in the Soviet bloc conflicts with emphasis on technology and innovation which requires cooperation, initiative and participation of the workers in production. High manager-worker, skilled-unskilled worker wage ratios militates against egalitarianism achieved by distribution of income in accordance with labor. It would tend to increase luxury items in the mix of final consumption goods, causing an emulation effect, stimula tion of wants and a consumer-oriented society. 10. The unique aspects of a socialist consumption model would be, assuming consumption is interdependent, the more egalitarian a society, the less the emulation effect and the less the emulation of wants; the less the advertising the less the stimulation of wants; the greater the fulfillment in work the less the consumer goods wants. The direction of such a model would be away from consumer ism and towards other alternatives for man's fulfillment, after the basic needs are met. Suggested Approaches and Concepts Since this study merely purports to lead towards a socioeconomic theory of socialism we offer the following approaches and concepts in generalizing such a theory: 1. There is a marked tendency among the theoret icians in the socialist countries to hurl quotations of 341 Lenin and Marx at each other with regard to motivation, workers' control, et cetera. Economists ought to be able to conduct research studies showing the economic and social effects of changes in motivation and workers * control. It would be in keeping with the allegation that Marxist methodology is scientific. The best combination of individual and collective incentives, of moral and material motivations for workers and managers needs to be determined on the basis of experimentation. And, as Tintner suggests, in discussing the Koopmans' model of decentralization, . . . the incentive of a capitalist entrepreneur to maximize profits in a competitive market economy and the incentive of a manager in a collectivist economy to maximize bookkeeping profits are psy chologically different. Problems of this nature are probably more adequately treated by methods of social psychology or sociology than by eco nomics. It should be realized, however, that, perhaps in practice, there is not much difference between the manager of a large capitalist corpora tion and the manager of a state trust or national ized enterprise. It is likely that the problems faced by these managers are very similar (Schumpeter, 1950), but these problems are quite different from the case analyzed by Koopmans.*4 44 Gerhard Tintner, Methodology of Mathematical Economics and Econometrics (Chicago: University of Chicago Press, 1968), pp. 98-99. 3 4 2 This problem might also be relevant to the two- level planning model. 2. The socialist theoreticians should integrate theories concerning social relations in production, distribution, and consumption with theories of economic efficiency. We have tried to show that a mechanism must be developed in the absence of the competitive market mechanism, if central planning is primary and the market plays a small and subordinate role, in order to assure innovation and the application of innovation to industry— the adaptation of the scientific revolution to a socialist society. The author postulates that the participation, control and cooperation of the people in both the macro- economic and microeconomic aspects could serve as that mechanism. That is, participation in the allocation of the "surplus," social and individual evaluation of needs, participation in managing enterprises, in formulation of plans, would constitute a form of industrial democracy. This might insure economic progress as well as consistency with socialist ideology and the concept of the "proletar ian dictatorship." Barring such democratic participation, further growth and development may become more and more 343 difficult to attain, notwithstanding the many reforms. And the concept of "dictatorship of the proletariat" would be empty words. The other alternative to the use of such a mechanism is the competitive market solution where macro- economic planning performs a supplementary role to the market. Judging how the various alternatives perform, using economic efficiency with respect to growth, full employment and allocation as well as the development of man in a classless society as success indicators, may yet be possible in the diverse economies of the Communist world. It would depend on whether central planning and full participation and worker control would be one of the variants. 3. For a fuller development of the effects of power and privilege on efficiency, on developing or retarding cooperation and initiative, interdisciplinary studies in all the social sciences are necessary. Thus far, the question of public ownership of the means of production has not been explicitly related to the aims and means of a socialist society. We merely pointed up Lange's assertion in that regard. Since it is a key criterion of a socialist society, we choose to examine it in a separate chapter, to which we now proceed. CHAPTER VII PUBLIC OWNERSHIP AND THE AIMS AND MEANS OF SOCIETY INTRODUCTION The underlying assumption of public ownership of the means of production is that the classes benefited by public ownership are strongly preferable to the classes expropriated. In accordance with Communist ideology, the working class and poor peasantry are made better off; the capitalists and landowners are made worse off. Certainly, then, it is not a Pareto welfare optimum. Small wonder that the issue of public ownership has been and is so emotion-laden. On the one hand, it has been deemed to be the cause of inefficiency and totalitarian ism. On the other hand, it has been considered the magic formula for efficient planning and transforming society and man. Furthermore, as we noted in Chapter II, Marxists such as Rosa Luxemburg believed at one time that political economy would be unnecessary, given public ownership. 345 346 Marx's view is contained in the following quota tions : The distinguishing feature of communism is not the abolition of property generally, but the abo lition of bourgeois property. But modern bourgeois private property is the final and most complete expression of the system of producing and appro priating products that is based on class antag onisms, on the exploitation of the many by the few. In this sense, the theory of the Communists may be summed up in the single sentence: Abolition of private property. Further on, Marx alluded to a rather indistinct form of public ownership: When, in the course of development, class dis tinctions have disappeared, and all production has been concentrated in the hands of a vast associa tion of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organized power of one class for oppressing another.^ (Italics writer's emphasis.) Stalin posed the question of public ownerhsip as central to the "law of balanced development." The productive forces of our country, especially in industry, were social in character, the form of Karl Marx and Frederick Engels, "Manifesto of the Communist Party," Karl Marx: Selected Works, Vol. I (Mos cow: Co-operative Publishing Society of Foreign Workers in the U.S.S.R., 1935), 219-220. 2Ibid., p. 228. 347 ownership, on the other hand, was private, capital istic. Relying on the economic law that the rela tions of production must necessarily conform with the character of the productive forces, the Soviet government socialized the means of production . . . . . . The law of balanced development of the national economy arose in opposition to the law of competition and anarchy of production under capital ism. It arose from the socialization of the means of production, after the law of competition and anarchy of production had lost its v a l i d i t y . - * In the 1967 edition of Political Economy of Social ism, we find the same approach: New economic laws, the economic laws of social ism, emerge and function on the basis of the socialised ownership of the means of production and socialist productive relations. In a somewhat different fashion Lange averred that the type of ownership of the means of production which is predominant determines the goals toward which the productive forces are directed and the means of attain ing the goals, due to the incentives of the owners of the means of production. That is, private owners are Joseph Stalin, Economic Problems of Socialism in the U.S.S.R. (New York: International Publishers, 1952), pp. 10, 11. 4 G. N. Khudokormov, gen. ed., Political Economy of Socialism (Moscow: Progress Publishers, 1967) , p. 52. 348 motivated by individual profit and self-interest; presumably social ownership presupposes social incentives in the interests of society as a whole. Since this approach seemed fruitful we chose to investigate the question from Lange's point of view. Firstly, we shall examine the different concepts of public ownership, particularly the Yugoslav version. Secondly, we shall seek to determine the relationship between public ownership and the aims and means of socialism. Included in the means are methods, instru ments, and institutions. Public ownership, of course, is itself an institutional means, as well as a criterion of an economic system. Finally, conclusions will be drawn as to those relationships. Before proceeding with an analysis of public ownership, we should note the fact that in all Communist theoretical discussions the issue of the dictatorship of the proletariat is posed together with that of public ownership. The political issue of state power in the hands of the workers was one of the issues that distin guished Communist from that of Social Democratic theory. Marx and Engels advocated the seizure of state 349 power by the proletariat. Engels stated, "The proletariat seizes the state power and transforms the means of production in the first instance into state property."^ Engels also discussed the capitalist state taking over the means of production, which he considered an economic advance, . .a preliminary step towards the taking over of all productive forces by society itself." However, Engels warned that . . . since Bismarck adopted state ownership, a certain spurious socialism has made its appearance — here and there even degenerating into a kind of flunkeyism— which declares that all taking over by the state, even the Bismarckian kind, is in itself socialistic.6 It would, therefore, appear that public ownership theoretically is the basis for transforming society subject to the requirement that a dictatorship of the proletariat exists. And further, the dictatorship of the proletariat is to be a temporary affair and when the state ultimately "... becomes really representative of Engels, in Marx and Engels, op. cit., p. 181. 6 Ibid., p. 179, footnote. 350 7 society as a whole it makes itself superfluous." Much of the early dissension among the followers of Marx and Engels centered around the issue of political power with agreement on the need for public ownership. At present, also, dissension exists within the socialist countries on political as well as economic issues. Yugoslav theoreticians favor the withering away of the state before the era of communism and consider the Soviet Union a model of state capitalism. China's Maoists favor continual cultural revolutions to prevent the emergence of a new elite and to ensure the hegemony of the workers. The Soviet bloc countries stress the need for the dictator ship of the proletariat until the advent of communism. Notwithstanding the intriguing question of political power which is so germane to the theory of socialism, it is not within the province of this study. However, we reiterate our previous conclusion that the cooperation and participation of the people in decisions concerning the allocation of the economic surplus and in planning seem crucial for the workings of a noncompetitive, 7 Ibid., p. 182. 351 nonmarket model. In other words, if ownership of the means of production is to be truly "social," then control and power must be socialized, not bureaucratized. Other wise, Lange's formulation that ownership of the means of production ". . . determines the main economic incentive of the owners of the means of production" would be meaning less. Abstracting, then, from the political question, we shall turn to the subject of this chapter. CONCEPTS OF PUBLIC OWNERSHIP While all socialist countries agree that social ization of the means of production is the basic criterion of a socialist economy, we find differences in the meaning and emphasis on socialization. In China, public ownership is accepted as essential for transforming society, but is considered only a first step. The emphasis on public ownership is not as great in China as it is in the Soviet bloc as far as transforming society; although it is the initial "key" to changing society from capitalism to socialism. While the socialization of the means of production takes 352 a few years, the transformation of people's thinking takes a very long time. Therefore, say the Maoists, "continue the revolution, for ever make revolution. This continuing O revolution requires struggle-criticism-transformation." The use of Mao Tse-tung's thoughts, it is averred, can become a material force to change society. Revolutioniz ing man's thinking is as essential as building the produc tive base of society. In Yugoslavia, theoreticians are grappling with the particular concepts of public ownership. State ownership is considered insufficient to assure a socialist economy. It may lead, they claim, to "state capitalism," a term applied to the Soviet system. The concept of "social ownership" is applied to the socialized sector in Yugoslavia. It is neither collective ownership by the enterprises run by the workers* councils nor state ownership. The fact that enterprises can dispose of their share of capital resources or invest in other enterprises Q Peking Review (Peking: Peking Review, No. 30, July 25, 1969), p. 10. 353 but cannot sell their capital and use the funds to increase the personal income of the workers indicates that the enterprise does not legally own those resources. Additionally, enterprises cannot dispose of their total income or earnings. Such disposition is controlled by the Federation and the communes. Dr. Horvat discussed "social capital" in which the difference between collective or private ownership g by the enterprise and social ownership is elaborated. After the necessary capital is provided by the banks, if the essential criteria have been fulfilled and the factory is built, it is handed over to the collective. The capital loan is not repaid in the traditional way, as in private enterprise or if the enterprise were owned by the workers' council. That is, traditionally, the debt would be gradually repaid with interest and if the fixed capital has not become obsolescent, it is owned by the enterprise. In the case of "social capital" the enterprise permanently pays interest on the fixed capital 9 Branko Horvat, Towards a Theory of Planned Econ omy (Beograd: Yugoslav Institute of Economic Research, 1964), pp. 219-224. 354 measured by its productive capacity. In those instances where enterprise internal funds are used to finance an investment the firm must pay the bank interest on the capital invested at the given rate. "Social ownership" differs from state ownership in that the enterprise may appear against the state as a party in court. While the state, through appropriate government bodies, provides some investment funds, it does not own the capital resources nor does the surplus or profit belong to the state. The enterprise, after meeting legal financial obligations to the community as a return to the "socially owned" means of production, determines the allocation of the surplus which belongs to the enterprise. In effect, this form of public owner ship is more decentralized than in the Soviet bloc. In the Soviet Union, two forms of socialist property are distinguished. The overwhelming sector is state owned. A small portion of land, farm machinery, farm buildings, commonly-owned cattle, raw materials' and goods' processing establishments are cooperative property. 355 State property is the property of the whole people and all means of production in state enter prises belong to society as a whole. Co-operative and collective farm property constitute group property belonging to individual groups of working people. Because of this distinction certain differences in practice arise: 1. The output of state enterprises is the property of the state. The output of co-operatives and collective farms is the property of the collective ". . . which disposes of its income as it sees fit."1- * - 2. State enterprises are administered by the state which hires and fires management. Co-operative enterprises are administered by the collective through the chairman and board elected by the members. 3. Income is distributed through state funds and is guaranteed by the state in state-owned enterprises. In co-operative and collective farms distribution is made in cash and in kind from collective funds. Income is not guaranteed by the state but only by the given collective. Political Economy ^ Ibid., p. 48. 356 Throughout the Communist countries varying degrees of private ownership, different forms of co operatives, joint ownership between the state and private owners exist. Lange, followed by Yugoslav theoreticians, theorized that . . . socialism does not need to abolish the private ownership of the means of production in small-scale industry and farming, provided large-scale produc tion is not more economical in these particular fields.12 We find therefore in Yugoslavia that private enterprise is limited to small-scale production where the number of workers hired may not be more than five and to agriculture where ten hectares (twenty-five acres) is 13 the maximum that one owner can hold. Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism (New York: McGraw-Hill Book Co., paperback edition, 1964), p. 107, footnote. 13 Savka Datcevic-Kucar, "Decentralized Economic Planning; Yugoslavia," Planning Economic Development, ed. by Everett E. Hagen (Homewood, 111.: R. D. Irwin, Inc., 1963), pp. 183-216. 357 PUBLIC OWNERSHIP AND THE AIMS OF SOCIALISM Growth and Standard of Living The stated immediate aim and the means to achieve the goal, is called the "basic economic law of socialism." The aim is the satisfaction of the working people's needs, both material and cultural; the means to achieve the aim is the constant growth and improvement of socialist production. The subordination of production to the one purpose of satisfying the needs of society is conditioned by the social ownership of the means of produc tion, organised along socialist lines. The pri vate ownership of the means of production involves the subordination of production to the interests of a privileged minority, the owners of the means of production; the social ownership of the means of production, however, implies the subordination of production to the purpose of satisfying the needs of each and every member of society.^ The supposed causal connection in the "law" is between the aims and means to achieve the aims. In a prior discussion we questioned the use of the term "law." We reiterate that it is a statement about aims and means rather than an economic "law" in the sense used by Lange. 14 Political Economy of Socialism, op. cit., p. 69. 358 Moreover, although social ownership implies that production is for the purpose of satisfying the needs of all the people, "... the capture of power by the proletariat is the first condition for the emergence of 15 a socialist economy." An analysis of the implication of social ownership as far as aims would require setting up hypotheses which could be tested empirically; that is, to determine whether in fact the aims are effectuated. Otherwise, the stated goals are merely empty assertions. Most modern societies profess noble aims and in reality diverge from them. It is not our purpose in this study to validate or refute such hypotheses. However, we suggest the following: 1. Growth in national income may be accompanied by a growth in the standard of living of all the people. In other words, increased productivity and growth may be a means to attain a higher standard of living of all the people but it is not imperative. Increased income may ~^Ibid., p. 60. 359 be channeled into other areas. 2. Transference from private to public ownership in an underdeveloped country creates conditions for rapid growth. As Baran put it, the problems a socialist state is equipped to solve are the mobilization of the economic surplus, and its allocation and utilization for growth and industrialization.I** 3. Transference from private to public ownership results in redistribution of income from the rich to the poor so as to maximize social welfare. 4. Transference from private to public ownership results in greater social welfare, since the divergence between private and social costs and benefits can be more thoroughly bridged. This issue is related to external ities. Lange put it neatly thus: An economic system based on private enterprise can take but very imperfect account of the alterna tives sacrificed and realized in production. Most important alternatives, like life, security, and health of the workers, are sacrificed without being accounted for as a cost of production. A socialist economy would be able to put all the alternatives into its economic accounting. Thus, it would eval uate all the services rendered by production and 16 Paul A. Baran, The Political Economy of Growth (Prometheus Paper Back, 1960), pp. 267-277. 360 take into the cost accounts all the alternatives sacrificed; as a result it would also be able to convert its social overhead costs into prime costs. By doing so it would avoid much of the social waste connected with private enterprise. As Professor Pigou has shown, much of this waste can be removed by proper legislation, taxation, and bounties also within the framework of the present economic system but a socialist economy can do it with much greater thoroughness.^ The subject of externalities will be discussed further with regard to means. Development of Socialist Man in a Classless Society As discussed above, a qualitative aim of socialism is the development of man in a classless society. To state that public ownership results in a classless society, as defined by Marx, would be tautological. By definition, in Marxian analysis, a classless society is one where there are no private owners of the means of production who employ labor. The issue, then, is the development of socialist man. A summary recapitulation of what Marx and Engels envisioned as socialist man is in order. Socialist man Lange, op. cit., p. 104. would be freed of the antagonism of man against man; he would control rather than be controlled by nature; he would be in control of the social organization of society his work would be "life's prime want"; he would be so educated, mentally and physically, that he need not be tied to one kind of work due to the division of labor; he would be motivated to work according to his abilities and would be satisfied to receive what he needs. In a stirring passage, Engels declared: Man, at last the master of his own form of social organization, becomes at the same time the lord over nature, master of himself— free.1® The achievement of this lofty aim depends, in the first instance, upon a very high level of economic development, to be theoretically achieved in a post socialist society. Whereas Soviet economists accentuate the productive growth in the present, Mao Tse-tung and his followers place equal emphasis on changing man and the "material base" in the present phase of socialism. All that can be said, then, is that development of socialist man is articulated in public ownership 18 Engels, in Marx and Engels, op. cit., p. 188. 362 economies and is not so stated in private enterprise economies. However, if the development of socialist man is to be brought down to meaningful reality from the stratosphere of slogans, then institutions, methods, and tools must be evident for its attainment, at least in embryonic form at the present level of economic develop ment. How these means relate to public ownership we shall attempt to discuss below. Difficulties in Relating Aims to Public Ownership The above discussion reveals many problems in the approach suggested by Lange, of relating public ownership to the aims of a society. Firstly, as is well known, it is oftentimes impossible to distinguish between aims and means. For example, equitable distribution of income is a means and an end. Secondly, in all of the Communist literature, as we said, the issue of public ownership is directly interrelated with the requirement of a dictatorship of the proletariat. While the choice of the institution of 363 public or private enterprise can be properly integrated into a socioeconomic theory, the dictatorship of the proletariat has not been. Therefore, the compelling questions of the power of labor and the power of the Marxist-Leninist parties in relation to the state, and how such influences affect the aims of a socialist society, are topics outside the province of this disserta tion, sharply limiting our analysis. Thirdly, the stated goals of reformed or managed capitalism in developed countries and those of the socialist countries, aside from the aim of developing socialist man, are similar. A difference in emphasis on raising the living standards of all the people— after expropriation of the property resource owners— in the socialist countries should be noted. Growth and rising living standards in the developed private enterprise countries as well as in the socialist countries have been attained. The same is not true of many underdeveloped private enterprise economies. One might draw an analogy between the field of unionism and the goals of the developed capitalist coun tries. Just as nonunion firms would incorporate union 364 demands to prevent unionism capitalist nations might have incorporated "socialist" aims to save their countries from Communism. Such a thesis would be difficult to demonstrate conclusively, however. Fourthly, the statement above that with private ownership and the motive of profit maximization, produc tion is "subordinated to the interests of a privileged minority" whereas social ownership "... implies the subordination of production to the purpose of satisfying of each and every member of society" is a sweeping generality. The latter part of the statement implies relatively equal distribution of income and a mechanism for each and every member of society to signal needs and for society to respond in a socialist society. The purely competitive market mechanism fulfills the function of satisfying consumer wants, abstracting from the question of equitable distribution of income. This mechanism can exist with either public or private ownership, as Lange showed. Central planning, however, has as yet not fulfilled the function of responding to consumer wants. As to the "needs of each and every member of society," theoretically, a distinctive feature of socialism 365 is that distribution of income is more egalitarian and thus there is less bias in favor of the needs of the rich. Whether in fact distribution of income is more egalitarian is verifiable empirically. Fifthly, in a socialist society, where all alternatives can be accounted for, and where the compre hensiveness of the items entering into the price system is greater than a private enterprise economy, presumably there is less divergence between private and social costs and benefits. However, since legislation and fiscal policies can supplement the price system in a private enterprise economy, it is a matter of "greater thorough ness" in a socialist economy. Whether this difference in degree can be shown empirically is an open question. PUBLIC OWNERSHIP AND THE MEANS TO ATTAIN SOCIALIST GOALS Utilizing Lange's thesis that public ownership determines the means of attaining socialist goals, we shall first examine the means of achieving growth and living standards. In that connection we shall discuss planning methods, economic policies, and institutions as 366 they are facilitated by and interrelated with public ownership. In relating public ownership to the means of developing socialist man, we shall analyze motivational patterns, workers' control and education. Public Ownership and the Means to Attain Growth and Higher Living Standards Since planning for development encompasses the outstanding method for achieving growth, let us examine this factor initially. Planning. Previously, we mentioned the interest ing coincidence of Zauberman comparing French "indicative" or "indirect" planning with Soviet "normative," "direct," 19 or "imperative" planning, and Mikhail Bor comparing French "economic programming" with Soviet "economic plan- 19 Alfred Zauberman, Aspects of Planometncs (New Haven: Yale University Press, 1967), pp. 247-302. 20 Mikhail Bor, Aims and Methods of Soviet Planning (New York: International Publishers, 1969), pp. 216-246. 367 We shall attempt to analyze, on the basis of this material, in what way the institution of public or private ownership is . . . relevant and indeed decisive, for the numbers and effectiveness of the instrument-variables the planning State has at hand, and for its degrees of freedom in solving the underlying system of equa tions . 21 As Zauberman has indicated, other private enter prise countries could have been selected; but France is a good "representative" example in that it has exerted tremendous influence on Western planning. The Soviet Union, of course, has always been considered representa tive of "centralized" or "direct" planning. We are not attempting an exhaustive comparison, but will merely highlight the similarities and differences. Indicative versus imperative planning. We have chosen the terms "indicative" and "imperative" as the best choice, in our opinion, to describe French and Soviet planning. Zauberman, op. cit., p. 247. 368 In comparing the planning in both economies, Zauberman stressed the convergence of techniques, although he pointed out that imperative planners control a greater set of variables and parameters. Bor, on the other hand, stressed the differences between French "economic program ming" and Soviet "economic planning," although he also recognized the similarities in techniques. The common features of both forms of planning, as far as techniques, are as follows: 1. The use of successive approximations and rounds of scrutiny at successive stages. 2. The charting of the growth process over time in terms of a few strategic macro-aggregates. 3. The use of "balances," for goods and services, manpower, and finance in France, and material, manpower and financial balances in the USSR. 4. The balance method is complemented by input- output models. 5. The use of more sophisticated mathematical techniques as linear and dynamic programming. 6. The adoption of very long-run horizons as a broad frame with shorter-term plans fitted into the long- 369 run horizon, which is constantly readjusted. There are, of course, some differences in the techniques of planning in both countries, but the con vergence of techniques is apparent. Bor emphasized, however, differences in planning due to the socialization of the means of production. In fact, Bor stated that "it is wrong to assume that there is no element of planning inherent in capitalist produc tion. However, there has never been, nor can there be, 22 planned economic development under capitalism." His argument is based on the following factors: 1. Indicative planning ("programming") does not aim to control all elements of the economy in accordance with "harmonious" economic development, but only the strategic, dynamic sectors of the economy. (It is interesting to note, however, that the French strategic industries— power generation, oil, chemicals and engineer ing— are similar to the "leading links" in the Soviet Union.) 22 Bor, op. cit., p. 220. 370 2. Indicative planning is only advisory, not legally binding for the nonnationalized enterprises. 3. Indicative planning pertains to general trends of sectoral production whereas imperative planning includes intrasectoral planning. However, under the new economic reforms, planning of output of goods "especially for the sectors producing goods not in excess demand, is to be shifted to the system of contracts between enter prises, so that the corresponding items in the plan is an 23 estimate, not a directive." (Italics writer's emphasis.) 4. Under imperative planning economic fluctua tions would not be cumulative. Since Lange's discussion on this point is much 24 clearer than Bor's, we shall refer to his explanation. In a socialist system mistakes and misdirection of investment can occur but such mistakes can be localized and need not spread cumulatively over the whole economic system. A private entrepreneur has to shut down when there are large losses. In a socialist economy correc- 23Ibid., p. 222. 24 Lange, op. cit., pp. 105-106. 371 tions also have to be made. However, The decisions of the Central Planning Board being guided not by the aim to secure a maximum profit on each separate investment, but by considerations of making the best use of all the productive resources available in the whole economic system, an amount of investment sufficient to provide full employment for all factors of production would be always maintained.25 5. Under indicative planning each firm produces and invests to maximize profit, not in accordance with targets in the national plan. However, the government stimulates the enterprises in the direction of the plans through tax relief, privileged loan terms, licensing, et cetera. On this point, Bor makes the following comment: If a capitalist refuses to follow the recommenda tions of a programme (which correspond to his general class interests but do not always suit his particular line of business), he is deprived partially or completely of substantial aid. Therefore, when the entrepreneur finds he cannot invest more profitably than in the direction recommended by the state, he complies with the state programme; and conversely, he is completely indifferent to state recommendations in the contrary case.^® 25 Ibid., p. 106, footnote. ^®Bor, op. cit., p. 225. 372 Yugoslav planning and public ownership. From our discussions of the Yugoslav system, it is apparent that the number of instrument-variables the Yugoslav state has at hand is less than that of the Soviet Union, since firms determine outputs and inputs and because a large number of prices are determined by the market. Whether in fact there is a greater degree of coordination or comprehensiveness of planning in Yugoslavia than in France, for example, is an intriguing question. To begin with, we may reasonably posit a con vergence of techniques in planning in Yugoslavia and France, although the level of sophistication may differ. Concerning the nontechnical side of planning, we cannot make an exhaustive comparison without unduly enlarging this section of our study. We shall therefore only touch a few highlights. Planning in both economies is similar in regard to the essentially macroeconomic nature of planning coupled with the market mechanism. It differs in the degree of government intervention which can be seen from the following: 1. The French indicative planning does not have 373 the force of law which the Federation Plan has in Yugo slavia. The number of vertical plans are greater and the intermeshing of the Federation, Republic, Communal and enterprise plans are obligatory in Yugoslavia. There is thus greater pressure for compliance with the central plan. 2. The Yugoslav economy is more homogeneous or "nonantagonistic" than France. That is, the division into labor and property owners is more negligible in Yugoslavia. Workers and management are "nonantagonistic." That, of course, does not negate other possible clashes of interest. This homogeneity, however, permits the high degree of intervention of the Planning Authority within the firm and in the market. The regulation of the dis tribution of the firm's income in the plans is therefore much greater, for example, in Yugoslavia than in France. 3. The formation of social investment funds and their allocation is a crucial tool of Yugoslav planning. There is a greater measure of intrasectoral control of investment in Yugoslavia than in France. 4. While prices are theoretically determined on the market in Yugoslavia, there is provision for price 374 controls over various commodities in accordance with the planned targets and to combat inflation. This is done to a much greater degree than in France. Externalities and public ownership. The issue of externalities is related to planning and public owner ship in that production based on public rather than private enterprise "would be able to put all the alter natives into its economic accounting," in Lange1s words. It is perhaps another way of saying, as Zauberman does, that State planning has a greater control over the number and effectiveness of instrument-variables. The State could thus avoid the social costs and waste of private enterprise. Such costs are one category of externalities. K. William Kapp has defined social costs as ". . . all direct and indirect losses suffered by third persons or the general public as a result of private 07 economic activities." Since Pigou wrote The Economics 27 K. William Kapp, The Social Costs of Private Enterprise (Cambridge, Mass.: Harvard University Press, 1950), p. 13. 3 7 5 28 of Welfare, there have been extensive recent discussions on this subject. Pigou's distinction between marginal private net product and marginal social net product enabled Pigou to cite cases where private activities resulted in social losses. Pigou defined marginal social net product as "... the total net product of physical things or objective services due to the marginal incre ment of resources in any given use or place, no matter to whom any part of this product may accrue." Marginal private net product was defined as . . . that part of the total net product of physical things or objective services due to the marginal increment of resources in any given use or place which accrues in the first instance— i.e., prior to sale— to the person responsible for investing resources there. Some of the cases of divergence between marginal private and marginal social product which Pigou cited are relevant today, as building a factory may destroy the amenities of a neighborhood; running automobiles may wear out public roads. An interesting example used by 28 A. C. Pigou, The Economics of Welfare (London: Macmillan and Co., Ltd., 1932). 29Ibid., pp. 134-135. 376 Pigou was that of foreign investments. For certain sorts of foreign investments more serious reactions come into account. Thus, when the indirect effect of an increment of investment made abroad, or of the diplomatic manoeuvres employed in securing the concessions for it, is an actual war or preparations to guard against war, the cost of these things ought to be deducted from any interest that the increment yields before its net contribution to the national dividend is cal culated.^ Kapp cited the following social costs: impairment of the physical and mental health of workers in produc tion; air and water pollution; premature depletion of energy resources; social costs of technological change. The latter social costs may become the most important externality as the scientific revolution progresses. The economic system best adapted to dealing with such tech nological progress will probably best survive. Another category of externalities is where marginal private net product is less than marginal social net product because benefits are rendered to third parties where payment cannot be exacted for those services. An outstanding example is the case of scientific research which, if not patented, may benefit others than those 30Ibid., pp. 186-187. 377 bearing the costs of the research. Private enterprise economies utilize taxes and legislation to compensate in part for the effects of externalities, which entails political decisions. Such political decisions might involve difficulties, as Myrdal 31 has pointed out. Myrdal raises the possibility that in a private enterprise economy the interests of the corporations exert influences not balanced by the power of labor and consumers. Through interlocking directorates, the relationships between top leaders in fields of business, politics, higher education, et cetera, a "power oligarchy" is created. The rich can use their wealth to make contributions to political parties to defend their interests. The communications industry influences people's attitudes and choices and since "freedom of communications" is a basic principle of democracy, such activities cannot effectively be constrained. If the vested interests hire such services they can influence people against needed 31 Gunnar Myrdal, Beyond the Welfare State (New Haven: Yale University Press, 1960), p. 108. 378 legislation and fiscal policies. In economies based on public ownership where there are no vested interests based on public ownership, the possibilities exist, as Lange stated, of considering all the alternatives sacrificed and gained in production more thoroughly. However, in place of vested interests based on private property, bureaucracy may arise, ob structing the evaluations by labor and consumers, as citizens, of social costs and benefits. Again, public ownership is subject to the requirement that workers have power as laborers, consumers, and citizens to let their preferences be known, and heeded. Monetary policies and institutions. Monetary policies are exercised in varying degrees in private enterprise as well as socialist economies. The degree of government control over monetary policies affecting aggregate demand is plausibly greater where banks are nationalized. Given the relationship between credit, investment, and national income and employment, the greater the control over such key instrument-variables as credit and investment, the greater the control over growth and stability. 379 Another financial institution affecting investment is the stock market. The absence of the stock market in a socialist economy, and the effect of such absence, would make a fascinating study in itself. Suffice it to say that the lack of a stock market sharply reduces the speculative motive for holding money. In a private enterprise economy the stock market may thus affect the instability of investment. Keynes put it as follows: When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yields, cannot be claimed as one of the outstand ing triumphs of laissez-faire capitalism— which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different o b j e c t . Fiscal policy. It is self-evident that in econ omies where public ownership exists in the "commanding heights" that the state has greater degrees of freedom John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace and World, Inc., 1935), p. 159. 380 over fiscal policy than in private enterprise economies. The control over saving or the economic surplus and government expenditure on investment, as well as other expenditures, is thereby greater under central economic planning, as emphasized earlier. Public Ownership and the Means to Attain Socialist Man For the purpose of this discussion, we posit the view of those economists who hold that the means to attain "socialist man" depend in the first instance on a superlatively high level of economic development. The link between public ownership and the means to attain socialist man in a classless society is more tenuous than that between public ownership and planning for growth and rising living standards. However, some relationship may be posited between public ownership and de-alienation, workers' control, education and motiva tion. These in turn relate to the development of social ist man. In so far as de-alienation of work is germane to making labor "life's prime want," the issue of workers' control is pertinent and will be examined. However, for 381 work to become "life's prime want,” labor must be more creative. For work to become creative necessitates the absence of routinized, drudging labor. This will ostensibly occur with the growth of the "scientific revolution." Whether in fact socialist societies, with public ownership and comprehensive planning, will adapt to and utilize the scientific revolution was discussed earlier. Public ownership and de-alienation. The dimension of de-alienation concerning us here is that of the non antagonistic relations of man to man. According to Marxian theory the expropriation of private property in the means of production leads inexorably to the end of the "exploitative" relations between man and is therefore, ipso facto, de-alienating. However, a "spurious" socialism with public ownership may exist and the state, as owner, may be "exploitative." Thus, again, public ownership only makes possible the use of the economic surplus for the workers. The surplus may actually be used in the interest of a managing or administrative elite or for other purposes not in the interests of labor. Again, the issue is one of 382 power. Furthermore, even if economically the surplus were to be utilized as labor would dictate, de-alienation would require exercising control in the firms, participa tion in plan making, which brings us to the subject of workers' control. Public ownership and workers' control. Workers' control of production provides one means for man to control the social organization of society and become "master of himself— free." Of course, it is clear that this is only one aspect of control as it relates to the economic categories of production, exchange, and distribu tion. How does public ownership pertain to workers' control? Empirically, workers' control through workers' councils has evolved in one economy based in the main on social ownership, namely, Yugoslavia. It has not evolved in the other socialist countries, although there were tendencies towards it in Czechoslovakia. Workers' control, of course, could be exercised in ways other than workers' councils. How much worker participation exists in the Soviet bloc countries is a debatable point. The Cultural 383 Revolution may be viewed as a means to arouse greater worker participation and control as against the encrusted bureaucracy, but the information on this is not con clusive. Logically, with no private stockholders in a company, a vacuum exists which could be potentially filled by workers' control. Whether it does or not depends on political factors. We can therefore conclude that with public ownership workers' control is a possibility. The actualization of control depends on factors other than public ownership, such as the political policy of the Marxist-Leninist party in control, the interpretation of the dictatorship of the proletariat, and the extent of bureaucracy. Public ownership and education. Education of man to develop his latent physical and mental abilities is one of the prerequisites of socialist man. Addi tionally, there is education in the broader sense of revolutionizing man's thinking. Instead of the economic man of capitalism seeking to maximize his individual returns, in a competitive market, socialist man will 384 emerge ostensibly in a collectivist society. How does public ownership pertain to education, in its narrow and broader aspects? Obviously, education in the developed countries based on private enterprise is offered on an unprecedented scale. This is not true of the underdeveloped private enterprise economies. The case for educational opportunities in the socialist countries vis-a-vis the underdeveloped private enterprise economies is clear. The case for public ownership in relation to education rests on validating the hypothesis that the privilege of higher and quality education due to wealth does not exist in socialist countries; there, higher and quality education is ostensibly a function only of a person's ability and potential. With regard to the broader aspect of education, public ownership of means of communication implies control by the state. Changing man's thinking then depends on the ideology and premises of the political leadership. Thus, with public ownership in both the Soviet Union and China, there are differing approaches to changing man's thinking. The Soviets stress the development of the "material base" and material incentives; the Chinese 385 Maoists stress changing man's thinking and view the thoughts of Mao Tse-tung as a material force in doing this. Despite the differences within the socialist countries, they are similar in that there is a maximum concentration on education. Public ownership and motivation. Motivation and incentives, as we have pointed out, can be considered as material and nonmaterial with varying degrees of personal and collective interests. The material incen tives have generally been connected with the market mechanism. Since public ownership may exist with both a market and "planned" economy, there would seem to be no direct relationship between public ownership and incentives. That material incentives play such a large and increasing role in the Soviet bloc economies would further indicate the lack of relationship despite the following assertion: Private property inculcates in people egoism and selfishness irrespective of their will. Social property brings people together and inculcates 386 33 in them a sense of collectivism and comradeship. Nevertheless, it is also empirically observable that moral incentives are stressed increasingly in China and Cuba, where public ownership exists, and is not stressed in private enterprise, market economies. Theoretically public ownership, as noted above, makes possible a greater degree of planning and a lesser role for the market, with variations as to the relative role of each. The smaller the role of the market, presumably the less the role of material incentives. However, one cannot assert the greater the role of plan ning the lesser the role of material incentives, except possibly for administrative centralized planning by directives. It is precisely the nature of the new economic reforms in the Soviet bloc that indirect methods, using material incentives, rather than directives, are being employed. Hypothetically, incentives of achievement or acclamation of peers could be used despite the greater role of the market. But then anything is possible hypothetically. 33 Political Economy of Socialism, op. cit., p. 44. 387 It is evident, then, that we must look elsewhere in exploring if any theoretical relationship between public ownership and incentives exist. To find a link we must seek a connection in the realm of the "super structure" rather than in the "base." Public ownership makes possible the transformation of people's consciousness through the power of the state, which owns and controls the means of production. That power, embodied in a political party, can be utilized to control education and means of communication, and thereby set policies favoring a greater or lesser stress on market-oriented incentives. The socialization of the means of production thus only makes it possible for a cultural transformation of values from self-interest based on pecuniary gains to a more collective orientation. It does not guarantee such a transformation. Moreover, we stress again that a complete trans formation is not envisaged until the advent of a super abundant economy of communism. 388 SUMMARY AND CONCLUSIONS We have explored the question of the existence of a relationship between the form of ownership of the means of production and the aims and means of an economy. Unfortunately, a simple regression cannot be run and empirical correlations determined. However, based on reasoning and some empirical evidence, we can summarize and draw some conclusions. Firstly, with respect to aims, we have outlined the difficulties, inasmuch as stated aims and reality diverge. To draw the line between mere speculation about socialist aims we suggested some hypotheses which could be validated (or at least be subject to prospective validations). Further, we conclude that public ownership is subject to the requirement that power in fact resides in the workers to insure both the aim of growth and a rising standard of living for all the people. Secondly, in so far as the means to attain growth, we can conclude that public ownership results in greater comprehensiveness and coordination of planning and control 389 over saving and investment than private enterprise. Since planning occurs in predominantly private enterprise economies, it is thus a matter of degree of difference in planning. Similarly, with regard to externalities, public ownership and greater comprehensiveness of planning may permit a more thorough control of social costs and benefits from the viewpoint of society as a whole rather than from the point of view of individual private firms. Again, however, it is a matter of degree, when comparing private enterprise and socialistic economies. Addi tionally, politics enter into the picture. In discussing the means for the attainment of socialist man, we delimited the scope of economics. We found, however, that we would have to further delimit the scope and horizon of economics to make any really meaningful generalizations. Sociology and political science, as a minimum, would have to be integrated with economics, and a synthesis of the social sciences accomplished, to truly analyze the relations between public ownership and de-alienation, workers' control, education, and motivation. In erecting a theory of a 390 new social order surely such a conclusion should not be unexpected. In abstracting from politics and power, the most that could be said is that public ownership makes possible changing man from the economic, calculating man of market capitalism to socialist man, but the prob ability depends on a superabundant economy, and on the noneconomic factors of political power, and the meaning and practice of the dictatorship of the proletariat as a socialist democracy or dictatorship of a party and bureaucratic elite. Much of the turmoil and travail in the Communist countries revolve around these issues. CHAPTER VIII SUMMARY AND CONCLUSIONS SUMMARY Prior to an evaluation of hypotheses and summation of other conclusions, we shall briefly recapitulate the preceding chapters. Chapter II— Stages in the Development of a Political Economy of Socialism This chapter dealt briefly with contributions and ideas, within the Marxist tradition, pertaining to Communist theories. Beginning with the ideas of Marx and Engels, we then examined the contributions to economic theory in the Soviet era, particularly under Stalin, with a lengthy excursion into Lange's theoretical decentralized socialist model, and finally, the period since Stalin's death and the recognition of the need for retheorizing. During the era before the actual emergence of socialism, Marx and Engels' contribution to the economic 391 392 theory of socialism comprised four dimensions: (1) socialism as an economic system evolving out of capitalism; (2) the institution of public ownership of the means of production; (3) conscious control through economic planning; and (4) the two-sector growth model. In the period between the Russian revolution and the present decade, attention was focused on industrial ization and development. Lenin and Stalin applied and modified Marxian theory to an underdeveloped economy in the era of imperialism. The "law" of proportionate development, based upon the Marxian two-sector growth model, was the theoretical outgrowth of the practical needs and goal of rapid industrialization. Stalin was concerned in the main with long-run development and macroeconomic allocation between the sectors of consumption and investment, and concentration on the "key links." He viewed the market as related to the necessity for exchange between the agricultural and industrial sectors, a market which would continue to exist until all forms of ownership would be that of state owner ship. Stalin recognized the need for economic accounting and prices reflecting costs. However, in Stalin's 393 thinking, the economic theory of socialism was separated as a "science" from that of economic policy. It was in the latter category, however, that the most important developments were occurring, in the area of planning, growth theory, and mathematical techniques for efficient production. Planning techniques, which led to the input-output methods, were developed during this era. In the Soviet bloc, work was begun on mathematical economics by theoreticians such as Kantorovich and Novozhilov, although they were not given recognition. The method of linear programming was developed by Kantorovich independently of Dantzig. In Poland, the theoretical model of Lange for a decentralized market socialism was written as an answer to economists who claimed that a socialist economy could not efficiently and/or practically allocate resources to satisfy alternative wants. Although the Langian model was not integrated into socialist economic theory, it subsequently influenced thinking in Yugoslavia and the trend toward devolution in the Soviet bloc. The excommunication of Yugoslavia from the Soviet 394 bloc gave rise to a unique model of socialism— of macro- economic planning and the market and the institution of social ownership of the means of production and workers' control. The era of centralized or "administrative" planning in the Soviet Union was a period of rapid extensive development, of large structural changes. However, as the Marxian economists asserted, obstacles or "fetters" became apparent, which retarded intensive economic growth. With the growing complexity of the new indus trialized economies, a new stage in the methods of plan ning, involving greater decentralization, was imperative. Yugoslavia had pioneered the way. The death of Stalin made possible greater freedom in retheorizing. The acceptance of mathematical methods made the search for better practices and theories more fruitful. In the subsequent chapters, we then examined the literature to unearth evidence as to the search for and the evolving of an economic theory of socialism. Chapter III— Foundations for a Socioeconomic Theory of Socialism; An Overview Chapter III served as a bridge between the 395 historical sketch of the development of a political economy of socialism to this decade and the survey of trends and clues in the Communist economies at present, which point to a further evolution of a socioeconomic theory of socialism. It was noted in this chapter that a fully sys tematized and general theory of socialism is premature at this juncture, due to the early stage of development of socialist economies, and the nature of economic theory per se. It was for these reasons that the title of the dissertation incorporates the word "towards." For a view of the nature of economics or social economy, we utilized Lange's approach in discussing eco nomic laws, theories and models. Lange differentiated between laws common to all economic systems and those specific to a particular mode of production. The "organizing principle" was identified by Lange as the ownership of the means of production, which determines the ends and means of a society. The Lange approach provided a framework in our research. In this chapter we then outlined the framework we would follow. The organization of the study centered first on society's 396 need to economize in order to meet the problem of scarcity, a relationship common to all economic systems at present. To develop theories specific to different economic systems, and to broaden the concept of economics as a social science, we then outlined an organization of the study, which included the social relations of production, distribution and consumption. Both the economic efficiency issues— mainly quantitative in nature— and the social issues— mainly qualitative— were then to be related to the "organizing principle." This overview of the study further served the function of making Chapter III a bridge between the historical sketch and the following chapters. Chapter IV— Quantitative Aspects of a Socioeconomic Theory— Developmental and Full Employment Efficiency In Chapter IV, we were interested in the macro- economic aspects of attaining economic efficiency through the full use of resources and developmental planning. Issues and choices pertaining to development were exam ined, such as: alternative methods of planning, periods of operation of planning; optimality criteria, views on interest and theories of economic growth. The role of 397 technology and the "law" of proportional development were then discussed. It was shown that planning methods have changed and diversity in those methods exist within the socialist countries. Yugoslavia has moved farthest in the direction of a decentralized, market economy, with macro- economic planning. In the Soviet bloc, reforms are in the direction of devolution, indirect planning, with utilization of economic incentives rather than physical directives In conjunction with such tendencies is the increasing use of mathematical programming, coupled with traditional techniques. The Kornai and Liptak model of two-level planning, based on the idea of decomposition of a linear program, developed by Dantzig, was elaborated. The search for an optimality criterion is par ticularly tantalizing in a socialist economy, although Western economists are also involved in such a quest. The relevance of such an optimality criterion to socialism lies in the extensive degree of control over economic variables, especially investment and saving or surplus. It was indicated, however, that the quest is not ended. An example of a difficulty is determining an optimum 398 division between consumption and investment. Such division requires a political decision, inasmuch as it involves complex political, economic, sociological and moral problems. The author investigated the highly debated issue of the interest rate and found about as much fuzziness in the Marxist literature on the subject as exists in Western economic theory. However, the explicit recog nition of an economic return to capital, divorced from an income return to the owners of capital, indicates progress. The indicators of return on investment, in Soviet usage, are the criterion of general or absolute efficiency and the coefficient of comparative economic efficiency. For an exposition of the former criterion we utilized Kornai's lengthy survey of the views in the Soviet bloc. The coefficient of comparative economic efficiency serves to allocate given investment. In assessing theories of growth in the Soviet bloc, we indicated that the Marxian model had served to give insight into the nature of economic growth. (The two-sector growth models in the East and West are indebted to this model.) However, the need for greater refinement 399 in growth theory is recognized. More recent and sophis ticated models have shown the influence of Keynesian-type models and the von Neumann model. The interaction of the ideas in the East and West can be seen in the theories of economic growth. However, Marxists such as Nemchinov have accented the importance of structural proportions rather than time lags, the multiplier and accelerator. The role of technology in growth was discussed. In addition to the socialized control over investment and the surplus, a socialist economy must be innovative in order to grow and develop. In this connection, the concept of the "scientific revolution" was introduced. An assessment of the Soviet Union's progress along the technological front was made. In brief, where central planners mobilized resources for large-scale research and development, the greatest successes were achieved. The record is not as good in the area of consumer goods or in eliciting initiative and innovation from below. The Chinese accent on initiative from below, on the unity of worker-scientist-political leadership, was commented upon. The Yugoslav experiment in workers' participation in affecting initiative was also reviewed. 400 The need for a centralized-decentralized model for innovation, based on the diverse experiences in the socialist countries, was dealt with. The writer then examined the "law" of planned (proportional) development and concluded it is a theory of planned development concerning the "correct" propor tions between the following: (1) consumption and invest ment; (2) "productive" investment and "nonproductive" investment; (3) amortization and accumulation funds, and the proportions within each of these sectors and among the territories. After the above discourse on developmental efficiency, a very short discussion on full employment followed, contrasting the Soviet and Yugoslav approaches. Clues, concepts and facts concerning developmental and full employment efficiency were summarized, general izations drawn and some new approaches and methods suggested. The most significant conclusions will be discussed with reference to an evaluation of the hypotheses and other conclusions, following this summary of the content of the study. 401 Chapter V— Quantitative Aspects of a Socioeconomic Theory— Allocative Efficiency Through Best Use of Given Resources Chapter V dealt with allocative efficiency through the best use of given resources. Initially, we reviewed the similarity between actual, rather than theoretical, mark-up pricing in Western oligopolies and in the Soviet bloc. We then discussed the theoretical foundation of pricing in the Communist countries, the labor theory of value. New views of the labor theory of value in the East and West were then stated and shown to be converging in the areas of mathematical economics, as linear programming and input-output. A discourse on the ideological and operational aspects of the labor theory of value demonstrated the divergence between the East and West ideologically. Mechanisms for allocating resources in the Soviet bloc, Yugoslavia and Cuba were reviewed. In the Soviet bloc, three trends in pricing and the market were dis tinguished: (1) the perfect computation model; (2) the opportunity cost trend; and (3) the Liberman proposals. Except for the first trend, a consumer's institutional market is considered. A central issue within the Soviet 402 bloc is determining the__relationship of the plan and market, of centralization-decentralization. The situation as of 1967 in the Soviet Union, regarding the dichotomy between the decisions centrally made and decisions within the province of the enterprises, was discussed. The market socialist model of Yugoslavia, within a framework of macroeconomic planning, was then touched upon. Branko Horvat's concept of planning, as perfecting the market, was explained. The greater role of the market in Yugoslavia, as compared to the Soviet bloc, was made apparent. The Cuban economy was then discussed in regard to the heroic accomplishments in education and health. The nature of the one-crop sugar economy, which existed in Cuba during its "colonial" status, was brought out. The main mechanism for allocation appears to be rationing of goods. Periodic mobilizations for organizing brigades to harvest the crops is also utilized, which depend upon the revolutionary fervor of the people. "Free wheeling" exists with neither we11-developed planning nor a market mechanism. The original development strategy of both agricultural diversification and industrialization 403 had to be discarded in favor of allocating resources to sugar production, in which Cuba had a comparative advan tage. Following this summary of the Communist economies* allocative mechanisms, we utilized Dobb's survey of alternative theoretical methods of pricing of inputs in a centralized-decentralized model, to tie together many concepts covered in Chapters IV and V. Included in the survey were the following: (1) the Dobb solution, with a uniform rule for pricing most capital goods, based on "dated labor" and a growth rate determined by the central planners; (2) the Novozhilov solution, involving the criterion of comparative efficiency of investment at the margin; and (3) the two-level planning of Kornai and Liptak. In the first two solutions, a consumer market would exist and inputs would be allocated to adjust quantities of outputs to the consumer market. As in Chapter IV, clues, concepts and trends were summarized, generalizations drawn and new approaches and methods suggested in the whole area of economic efficiency. Again, we shall return to some of these conclusions in a later section. 404 Chapter VI— Qualitative Aspects of a Socioeconomic Theory of Socialism In this chapter, we delimited the domain of economics, as a study of the relationship between material ends and scarce means that have alternative uses, to include the aim of developing socialist man and the means to attain that aim. Recognition was given to Marx's stricture that the full emergence of socialist man would have to await the superabundant society of communism and that the present phase of socialism would retain the "birthmarks" of the capitalist society. Moreover, because socialism is a society of great scarcity and not an opulent, post-capitalist society, the constraints in changing man would be magnified. However, the writer attempted to discern whether there was any evidence that the "social existence" of men under the present stage of socialist was determining men's consciousness or propen sities. Included in their "social existence," for the purpose of this discussion, were social relations in production, consumption and distribution. Related to the conditions for changing man under socialism is the provocative concept of alienation, which we briefly treated. The means to achieve de-alienation 405 of man and develop socialist man were then dealt with. The democratic participation of man in production deci sions through workers' councils, motivation (material and nonmaterial, individual and communal), distribution of income, education, the ordering of priorities and socialist consumption patterns, were discussed. In conclusion, the author indicated clues, trends and practices, the generalizations therefrom, and suggested approaches and concepts, to which we shall return. Chapter VII— Public Ownership and the Aims and Means of Society Following the Lange thesis discussed in Chapter III, we sought to demonstrate a relationship between the ownership of the means of production and the goals and means of a socialist society. It was noted that public ownership, as a criterion of socialism, was subject to the Communist theoretical requirement that the working class have state power; that is, that a dictatorship of the proletariat exists. The writer then stated that there were diverse interpretations of public ownership among the socialist 406 countries. While the socialization of the means of production takes only a few years, the transformation of people's thinking takes a very long time. In China, transforming man's thinking, through the use of the thoughts of Mao Tse-tung, is as essential as building the material base of society, made possible by the socialization of the means of production, whereas in the Soviet Union, building the material base takes precedence. In this chapter, the author then discussed the economic and social aims. The economic aims of socialism were dealt with by postulating certain propositions about growth and the standard of living. If such propositions were valid then the "basic economic law of socialism" regarding the aim of socialism is a valid statement and not mere rhetoric. The social aim of socialism— development of socialist man in a classless society— was then discussed. It was noted that a social aim is articulated in public ownership economies and is not so stated in private enterprise economies. The author then proceeded to examine the means to attain the above aims, in relation to public ownership. 407 In the matter of economic ends, the means discussed were planning methods, including the issue of external ities, economic policies and institutions. In the matter of social ends, the means discussed were motivational patterns, workers' control, education and distribution of income. We then drew some conclusions about the "organiz ing principle" of a society. A conclusion which Marxists would probably agree with would be that public ownership is a necessary but not a sufficient condition for utiliz ing the means to achieve the ends of a socialist society. However, the conclusions we drew were less decisive. To begin with, it was concluded that public ownership is subject to the requirement that the power, de facto as well as de jure, reside in the workers to assure that the benefits of growth accrue to labor. As far as the means to attain stable growth, public ownership results in a greater degree of coordina tion and planning, and permits a more thorough control of social costs and benefits from the viewpoint of society as a whole rather than from the point of view of independ ent private firms. Thus, it is a matter of degree of 408 difference between private enterprise and public enter prise economies. Whether such differences could be shown empirically is an open question. As to the means for attaining socialist man, the author concluded that the scope and horizon of economics would have to be greatly delimited and a synthesis of the social sciences accomplished to analyze the relation between public ownership and de-alienation, workers' control, education and motivation. Public ownership makes it possible to change the economic iu«n of market capitalism to socialist man. However, on the assumption that man's propensities do change with changing society, the development of socialist consciousness depends on political factors and a superabundant economy. HYPOTHESES Three hypotheses were set forth initially in our research and we shall now set out to examine and evaluate those hypotheses, which were as follows: 1. That generalizations and conclusions can be drawn from the practical experiences and theoretical formulations within the Communist economies which indicate 409 that a general socioeconomic theory of socialism is emerging. 2. That divergencies in theory and practice exist in the Communist economies, within a unified frame work. 3. That various forms of decentralization are growing out of the needs of the socialist system in attaining efficiency. Hypothesis Number 1 The writer believes there is evidence that a general socioeconomic theory of socialism is emerging, on the following grounds: Possible integration of political economy and economic policy. New patterns of reality are apparent, with new questions posed and answers provided, which make possible the advance of economics as a science. The Soviet view of the science of political economy, enunciated by Stalin, as a science investigating the laws of development of men's relations of production, hindered the advance of the science because it so narrowly limited its scope. The province of economics in the Soviet Union included and still includes: (1) the forms of ownership of the means of production; (2) the status of the various groups in production and their interrelationships; and (3) the forms of distribution of products, which are entirely determined by the above two points. On the other hand, the continuous growth and perfection of socialist production, on the basis of better techniques of planning and production, are the means to achieve the rising material and cultural stand ards of living, according to the basic "law of socialism. It is precisely in the field of improving techniques of how to produce, of planning, of interrelating consumer needs to production, of making the labor theory of value operational, that new patterns of reality are recognized and new questions arise. Up to the present time, however these basic issues are still considered economic policy and are not integrated into economics as a science. Scarcity also is considered an economic policy problem and not a theoretical problem. The work of Novozhilov, Kantorovich and others, however, demonstrate the growing awareness of scarcity in a theoretical sense. Considering the many provocative questions raised 411 — and we shall list them below— it would appear plausible, although not inevitable, that a union of concepts hereto fore limited to political economy and theoretical concepts connected with allocation, planning and growth will be effectuated. Moreover, the "laws" of development of men's relations of production show some signs of broadening out from property ownership relations to those of con trol, of individual and collective stimuli, and of socialist consumption paradigms. Enlarging the scope of economics to include theoretical concepts mentioned above would not kill political economy as a science, as Stalin believed, but, on the contrary, would aid in its birth. Evidence of emerging theory in regard to develop mental and full employment efficiency. The questions posed in this area and some of the answers tentatively formulated make possible the advance of economics, and are in the following areas: (1) plan and market, cen tralization and decentralization; (2) use of mathematical techniques in planning; (3) the "law" of proportional development; (4) optimality criteria; (5) the interest 412 rate; and (6) technological progress. The single most pressing issue is that of demarcating the plan and the market. The varying methods of planning, of degrees of centralization-decentralization may serve as empirical evidence in developing theories concerning those issues. The willingless of Marxist theoreticians to embrace new mathematical techniques enlarges the choice of models as far as plan and market and degrees of decentralization. The Kornai and Liptak two-level planning model adds another dimension to the theory of planning, with centralized determination of inputs and outputs and decentralized pricing. The testing of the "law" of planned proportional development in different conditions should enrichen theories of development. The concept of structural proportions and the "key link" approach have already contributed to developmental theory. The growing atten tion to growth models, such as von Neumann's, should lead to further fruitful theories. With socialization of investment, the search for optimality criteria appears to be vigorous, if not con clusive. 413 The discussions about the hitherto ideologically inhibited subject of the interest rate augur an advance in capital theory, although much fogginess is still apparent. It is in this area that theories specific to socialism should emerge, because socialism is less of a monetary economy than capitalism, due to the absence of a speculative and money market. The survey of interest theory made by Kornai is evidence of a small beginning in this area. The varying approaches in the Communist nations in the area of technological progress and the concern with the rate of intensive growth may lead to a model of centralization-decentralization of innovation. The intense interest manifested in cybernetics and utilizing science in industry militate in favor of developing theories with respect to innovation in the firms and for the economy as a whole. The author shall discuss some of the negative aspects below. Evidence of emerging theory in regard to alloca tive efficiency. There is evidence of questions arising and tentative answers in the following areas: (1) the 414 labor theory of value; (2) least cost techniques; (3) consumer demand; and (4) pricing. The discussions and questions arising from the operational aspects of the labor theory of value appear to enhance the advance of economics, due to the use of mathematical methods, such as linear programming and input-output. Opportunity cost concepts may become integrated with the labor theory of value. The contributions of Kantorovich on how to produce at least cost, utilizing mathematical techniques, also point to progress in economic theory of the firm. Concern with consumer demand and studies of elasticities of demand indicate growing sophistication and concern in this area. The acceptance of an institu tional consumers' market seems well-nigh universal in the Communist countries, except in the perfect computation model, which still belongs in the realm of science fic tion. Such an institutional market is related theoreti cally in part to the issue of distributing incomes of workers in accordance with productivity. For workers to be motivated to produce through income differentials, it is reasoned that workers as consumers must have freedom 415 of choice to spend such incomes. There are controversies as to varying prices and/or quantities to clear the market for each good. Furthermore, the pricing and allocating of inputs in accord with consumer preferences are also being examined theoretically, as Dobb's survey indicates. Moreover, theoretical contributions regarding shadow pricing and opportunity costs, in addition to the various mark-up pricing, are evidence of advances in economic theory. Evidence of emerging theory in regard to qualita tive aspects. The author noted an enhanced interest in humanism and the issue of alienation. As the productive potential of capitalism and socialism continue to expand, socialist theoreticians are becoming more concerned with the humanistic aims of socialism. No doubt the abysmal era of Stalinism has contributed to this interest. The ever-present problems of bureaucratization have led to deeper thinking on the meaning of public and social ownership, as in Yugoslavia. And, because public ownership alone does not lead to de-alienation, and does tend toward bureaucracy, the need for both ownership and 416 control of the means of production has resulted in the theory and practice of workers' councils in Yugoslavia and theories of continual cultural revolutions in China. Discussions, controversy, and new practices con cerning motivation are evidence of advances in this field. We shall return to these aspects under hypothesis 2. It is in this area of the qualitative aspects of socialism that the theories or laws of human behavior specific to socialism may be "discovered." Factors inhibiting the emergence of a socioeconomic theory of socialism. The above developments merely indi cate a potential trend towards a systematic socioeconomic theory of socialism. Continued dichotomization of political economy and economic policy, nationalism, and dogmatism may act as obstacles in preventing the actual ization of such a trend. At present, the interesting questions posed above are not incorporated in a text on political economy, published in the Soviet Union.^ 1G. N. Khudokormov, gen. ed., Political Economy of Socialism (Moscow: Progress Publishers, 1967). 417 The writer also postulates that nationalism within the Communist countries prevents the necessary process of generalizations of diverse experiences and testing of hypotheses. As we shall show below, diversity exists within a unified framework in the socialist coun tries. Such diversity is recognized in principle, in that different paths to socialism are considered desir able. Notwithstanding this principle, some deviations among the nations are cause for heated verbal invectives and overt hostility, in practice. It is indeed apparent that changes are taking place in the ready acceptance of mathematical techniques and, with them, of marginalist concepts. There is also a less dogmatic attitude toward the labor theory of value. However, to the extent that dogmatism does continue, economics will not develop as a science. The writer refers to the assertions with regard to the superiority of public ownership and planning to private enterprise in place of analysis, as in the text on political economy mentioned above. Also, the frequent allusions to the sayings of Marx and Lenin, for example, in discussing motivations, is a case in point. Sociological experiments 418 in the area of motivation and productivity and motivation and de-alienation would contribute more than quotations. It would also be more in keeping with the method advocated by Marx; that is, a scientific method. A dogmatic attitude persists with relation to the market in the Soviet bloc. Although the importance of consumer demand is recognized to a greater degree with the success of industrialization, the balancing of planners' and consumers' sovereignty is not theoretically developed. Mechanisms for signalling consumer preferences are still weak. The market is considered a necessity under social ism so long as there are different forms of ownership of the means of production (state and collective) and labor is not yet the prime vital requirement of everyone. The function of the market as a device to allocate resources in accordance with consumer preferences (however modified) is not theoretically clarified. That it cannot perform this function independently of central planning of outputs and inputs is obvious. However, given the existence of a labor and consumer market, the interdependence of the 2 Ibid., p. 134. 419 plan and the market is far from clear. In Yugoslavia, the demarcation of the plan and market is clearer except in the sphere of investment. The area of decentralization of investment is in a constant state of experimentation pragmatically. However, a theory is lagging far behind. The many functions which prices perform under socialism, even if dogmatism were eradicated, make a neat, rigorous theory of pricing, similar to that of the pure competitive model, very difficult. As Dobb stated, and to which we referred in the body of this study, a perfect and precise theory of pricing may not materialize but a feasible one may. We shall discuss some negative aspects with regard to an emerging theory of technological progress below. Hypothesis Number 2 All the Communist nations operate within a unified framework, consisting in the main of: (1) an ideology based on Marx and Lenin; (2) the institution of public ownership of the "commanding heights" of the economy; (3) comprehensive macroeconomic planning as a minimum, 420 with varying degrees of central planning; (4) the polit ical criterion of a dictatorship of the proletariat. Within this framework we note the most important socio economic deviations, such as: (1) different concepts of public ownership; (2) different concepts of control; (3) variations as to plan and market; (4) various develop ment patterns; (5) different approaches to motivation; and (6) varying emphasis on the relation of man's con sciousness and society. Public ownership. There is evidence that the concept of public ownership, which was not precisely defined by Marx, is undergoing change. Not only is private ownership permitted in varying degrees but the concept of public and social ownership is different, as we discussed in the Yugoslav case. Workers' control. In order to overcome bureauc racy and alienation, and to increase initiative and participation, the concept of social ownership or owner ship by associated producers is linked to the idea of workers' councils in Yugoslavia. This form of workers' participation is not permitted in the Soviet bloc, where 421 limited participation takes place mainly through the trade unions. While workers' councils per se are not developed in China, the battle against bureaucracy and for workers' participation takes the form of a cultural revolution. Rules for managers to work side by side periodically with workers is a form of participation of management in the work process and an anti-elitist measure. Market and plan. The divergence between Yugo slavia and the Soviet bloc, as far as the market is concerned, is obvious. Agreement on the need for a con sumer market exists at present but the degree of consumer sovereignty differs. In the planning arena, Yugoslavia has been decreasing central controls and allowing decen tralization to increase, even in the investment area. Although the new reforms in the Soviet bloc also allow devolution, which we shall treat in the next section, there is much greater control by the center. Within the Soviet bloc, theoreticians disagree as to how great a role computers can play in simulating a market. Proportionate development patterns. The case of Cuba, with its open economy, is in contrast to the 422 relatively closed economy of the Soviet Union. The strategy of development in Cuba was changed to concen trating on sugar and cattle instead of increasing the rate of growth of the production of the means of produc tion most rapidly. The Chinese policy of concentrating on both agriculture and industry likewise differs from the traditional Soviet approach. Motivation. The diversity within the Communist nations in regard to motivation has been noted, with China and Cuba emphasizing nonmaterial and communal incentives and the Soviet bloc and Yugoslavia emphasizing material and personal incentives. Consciousness and society. Marx's famous dictum regarding the primacy of social existence in the deter mination of the consciousness of man is followed by all Communist theoreticians. However, in Mao Tse-tung's thoughts, intense and active effort must be given to changing men's consciousness in this stage of socialism as well as changing society. Men's revolutionary con sciousness is reckoned as a force of production. While Eastern and Western economists have been considering 423 capital and technology as the crucial variables in development, Mao Tse-tung has added this third dimension of men's revolutionary consciousness. How important this factor is in development remains an open question. It does, however, account for the emphasis on communal incentives and the willingness of the Maoist leadership to risk destabilizing upheavals such as the cultural revolution. As we noted above, such deviations could be viewed as experiments in a vast laboratory, the laboratory being all the Communist nations. Additionally, the diversities surely lay to rest the myth of a Communist monolith. Hypothesis Number 3 The movement to decentralization could be regarded, not as a convergence to Western-type economies, but an outgrowth of the needs of economizing efficiently in a socialist system per se. (That does not negate, of course, the existence of convergence of techniques for achieving economic efficiency, particularly the mathematical techniques.) From this view, the era of centralization is but a temporary phase following a revolution and requiring large structural and institu- 424 tional changes. We use the term "decentralization" to mean a large degree of autonomous decision making. The examination of the literature reveals that various forms of decentralization are growing out of the needs of the socialist system. The case of Yugoslavia is the predominant example. The new reforms in the Soviet Union are another. Within these reforms, the move to decentralization in the area of stimulating initiative and innovation is a third example. The theoretical two- level planning model is a fourth example. Yugoslav decentralization. The degree of autono mous decision making is large, covering inputs, outputs, most prices and a large degree of investment decisions, and partial distribution of income of firms. Such decentralization was adopted in response to the failure of the centralized Soviet model in Yugoslavia. That the Yugoslavian economy is that of market socialism is apparent. In so far as it is far from a purely competi tive market it deviates from the Lange model; that is, it is composed of monopolist rather than purely competi tive firms. 425 Whether the costs of decentralization, such as inflation and unemployment, outweigh the benefits of greater autonomy of the firms is one of the intriguing unanswered questions. It should be noted also that some of the instability may be a function of underdevelopment and insufficient productive capacity. The industrial sector may not be equipped to absorb the underemployed and workers released from agriculture. The mechanism for coordinating the interests of workers as producers in the firm and as consumers in the communes has not yet succeeded in eliminating inflation due to the fact that workers' councils raised wages more than productivity increased. The coordinating mechanism was to have been the self-governing bodies of the communes, which include representatives from workers' councils as well as the community. New economic reforms. The devolution in the Soviet bloc is evidenced by the increase in the number of variables within the decision-making province of the enterprise. The central plan indices as to number of employees, average wage and wage fund have been replaced by the single indicator, the wage fund. Firms may enter 426 into agreements with enterprises which act as consumers, sales agencies, and trading agencies in regard to the quantity, range and quality of goods and delivery schedules. Firms may also independently stop producing obsolete articles and substitute products in greater demand. Moreover, enterprises may now determine the use of working capital, use of depreciation funds, deductions for repair and replacement of obsolete assets. A larger part of profit is retained within the firm than formerly and may be used to improve equipment, provide material incentives and improve working and living conditions of workers. Within the new economic reforms the need for improving technological initiative on the level of the firm was found essential to increase the rate of intensive growth. As we noted, research and development is being tied in more closely with the firms. Factories had been reluctant to cooperate with research and development organizations because of the need to meet physical output targets and because of the fear that innovations were too risky and would interfere with those targets. Presently targets are in terms of value of sales and 427 profits. Presumably, if research and development help develop sales of new products or lower costs, it will be in the interest of the firm to cooperate. The use of profit funds as rewards for innovation in the enterprise should encourage greater innovation. How extensive and meaningful the new economic reforms are in terms of decentralization is difficult to evaluate. If the ideal decentralized system is a purely competitive market system, then this system is vastly imperfect and inefficient. If viewed more realistically, we should consider the following factors in an evaluation: (1) the information problem; (2) the incentive problem; (3) the pricing and allocation problem. As far as the information problem, the new eco nomic reforms succeed somewhat in that firms have more decision-making power in relation to the information within the operational sphere of the firm. The recogni tion of lack of initiative from the bottom-up is at least a step in the right direction, in overcoming the gap between technological advances within the centralized, high-priority sphere and the lack of progress in the decentralized area of the enterprises themselves. 428 However, success criteria such as sales volume and profits instead of physical output may be also conducive to stifling innovation through fear of risking their non fulfillment. This is particularly true if the accent is on personal material gain tied to fulfillment of any targets. As we have stated, the absence of the competi tive mechanism provides a vacuum which requires a vigorous substitute. As far as the pricing problem, where there is no choice of inputs or outputs on the part of those executing the plans, there is no need for an accounting system or prices in the general sense, "as terms on which alter natives are offered." In this system there is some choice of inputs and outputs, though circumscribed. Prices must then reflect scarcities and opportunity costs, so that the profit criterion has meaning. As we have attemp ted to show, there is progress in pricing theory, although some of the contributions are still in the theoretical stage, as Kantorovich's "otsenki." In reality, pricing is very similar to Western oligopoly pricing. Giving consumers some sovereignty as well as 429 choice is partially solved by the direct contractual relations of firms and trading agencies and by the substitution of sales volume for physical output targets. However, as we noted, the signalling device of prices on the consumer market or changes in inventory is not clarified. The two-level planning model. The two-level planning model indicates the theoretical interest in the problem of the information flow between the center and the lower levels in planning. It also demonstrates that it is possible to have decentralization with centralized output and input targets. In the Dantzig decomposition method, the central planners announce prices and the lower units propose quantities bought and sold. In the Kornai and Liptak method, the center announces the quantities and the lower levels propose the prices of the inputs. The method used by Kornai converges to an optimum reallocation of resources but it is a slow con vergence . Although we have drawn some conclusions in eval uating the above hypotheses, there are additional conclusions which flow from this study, which we shall 430 now adduce. OTHER CONCLUSIONS The Role of Ideology The ideology of socialism, viewed as a set of ideas, goals, values and framework of a laborist and classless society, can perform positive functions or be a hindrance to society. It can enhance development by imbuing labor with a consciousness of worth and respect. If the educational system inculcates people with that ideology, the gap between the reality and the idea of workers' power and the responsiveness of the state to the needs and wishes of the laboring population, becomes apparent. This, in turn, may lead to movements for closing such a gap. If ideology is an obstacle to the testing of ideas in a scientific manner, it can be a hindrance to development in practice and in theory. The Scientific Revolution and the Interdependence of Quantitative and Qualitative Aspects of a Socioeconomic Theory of Socialism If socialism is to be a successor and not merely a substitute for capitalism in the underdeveloped world, 431 it must be a system capable of adapting and utilizing the scientific revolution. This involves the need for a mechanism for technological progress and innovation. As we have stressed throughout this study, the partici patory nature of workers1 control may serve to increase initiative and small innovations directly connected with the work process. To the extent that workers' management is successful and man is de-alienated, the worker is compelled to broaden his vision beyond his own firm and industry and to include in his vision the entire economy. The state in a genuine classless society, on the other hand, is accountable to its members. Through participa tion of workers and responsiveness of the state, the allocation of the economic surplus may be determined. Such control of the economic surplus, in the interests of the many and not the few, may serve to insure coopera tion in automating society, and in applying science to industry. The above is merely an adumbration of a possible substitute mechanism for competition of the market, to insure technological progress. The author's purpose in expounding this idea is, further, to point up the crucial 432 need for socialist theory to integrate the purely socialist ideas of de-alienation and the classless society with the reality of the oncoming era of cybernation. The competition with the West will serve as an exogenous force to motivate the continuance of central ized, high priority, large-scale research and development programs. The above concept of workers* participation in planning from the firm up through the center, and workers' de-alienation can be viewed as endogenous forces. Competition within the economy is not to be destroyed, however, but is to be a competition of ideas and technical methods (as used by Kantorovich). There is, in other words, an interdependence of the qualitative social means and ends with the quantitative economic means and ends. Socialism as a Transitional Stage to Communism Socialism, according to Marxian theory, is a transitional system leading to communism. We speculate that the greater the use of the market and market instruments and self-interest, the longer the stage of socialism. The propensities of men change more slowly than the forces of production. Therefore, the less effort in altering those propensities, the greater the length 433 of time needed for the "birth marks" of capitalism to fade away. Pigou quotes from Marshall's Principles of Economics this interesting observation relevant to the subject. No doubt men are capable of much more unselfish service than they generally render; and the supreme aim of the economist is to discover how this latent social asset can be developed more quickly, and turned to account more wisely."^ Perhaps Mao Tse-tung and Marshall would agree on this "supreme aim of the economist." The Maoist concern with transforming man and discovering how to develop his "latent social asset" may result in shortening the transitional stage of socialism. The outcome would depend on how successfully China becomes a society of abundance as well as of socialist consciousness. The changes in the consciousness of man are lagging behind the changes in the forces of production, in the Soviet bloc. And the less the concern with transforming man, the longer may the transitional stage of socialism continue in the Soviet bloc. 3 A. C. 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On Political Economy and Econometrics: Essays in Honour of Oskar Lange. Oxford: Pergammon Press, 19 65. Lange, Oskar. "The Role of Planning in Socialist Economy." Comparative Economic Systems. Ed. by Morris Bornstein. Homewood, 111.: R. D. Irwin, Inc., 1965. 453 Lenin, V. I. "Karl Marx." V. Adoretsky, ed. Karl Marx Selected Works, Vol. I. Moscow: Cooperative Publishing Society of Foreign Workers in the U.S.S.R., 1935. _________. "On the So-Called Market Question." Collected Works, Vol. I. Moscow: Foreign Languages Publishing House, 1960. Maksimovic, Ivan M. "Professor Oskar Lange on Economic Theory of Socialism and Yugoslav Economic Think ing ." On Political Economy and Econometrics: Essays in Honour of Oskar Lange. Oxford: Pergam mon Press, 1965. Marx, Karl. Address of the General Council of the International Working Men's Association on "The Civil War in France." Selected Works, Vol. II. New York: International Publishers, 1933. _________. 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Creator Perlmutter, Edith Laura (author)

Core Title Towards A Socioeconomic Theory Of Socialism

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest

Language English

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Advisor Elliott, John E. (committee chair), Backer, Edward H. (committee member), Tintner, Gerhard (committee member)

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