Appendix A

APPENDIX A THE PRICE-MECHANISM IN A PRIVATE CAPITALIST SOCIETY IN PRIVATE capitalist societies it is the tnore or less free fortnation of prices that provides the data necessary· for calculation. Many objec tions are made against their price-mechanism, interalia that it is unjust, because it is influenced by the distribution of income, which is itself said to be inequitable. This. is an ethical, sociological question that we shall not discuss here. What interests us in this connection is the potential and actual efficiency of the mechanism which exists irrespec tive of the form of-society and of the given, but continually changing, distribution of income. It may be stated at once (we shall revert to the question later) that the functioning and technical efficiency of the price mechanism is in our day being undermined. In spite of this, in the capitalist societies it is still prices, or rather, price-alterations, that act as the anonymous conductor of the economic orchestra. They play. the same part as the central authority in socialist societies. It is price-alterations that keep production and business in capitalist societies from being conduc~ed "blindly" and "without plan" .

It is price-alterations that provide the necessary indications that deter mine to what alternative uses "scarce resources" shall be allocated in order to satisfy consumers'. effective demand. It is price-alterations that indicate what goods, what qualities and what quantities shall be produced and distributed. A fall in prices may becaused by severalfactors: on the supply side, lower costs of production, new inventions, rationalization, greater competition, and expectationof a development in these direction~~ On the demand side, lower purchasing power or reduced interest in the commodity in question, or expectations of lower prices. The causal relationship is complicated, but the result is easily analysed: falling prices mean that there is being offered, or expected to be offered, more of the goods or services in question than the market can or will absofb at previous prices. Rising prices indicate the opposite.

If prices rise more than costs the result· is greater profit. If prices fall more than costs the result is falling profit. The incentive to expand or reduce production, activity and demand will thus be increased or lessened. On the demand side the most important result of rising prices is a restriction in the number of those who can or want to buy. (This is not altered by the fact that rising prices and expectation of higher prices may temporarily stimulate demand and production.) 19 1 192 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY Thus an automatic rationing is taking place without the use of ration cards or official directives. This rationing, and the efficacy of price alterations to restrict and expand consumption, however, vary greatly with the elasticity of demand of different goods. Prices, or price-alterations, set in motion forces that tend to bring about equilibrium and harmony between supply and demand, between production and consumption. This point of equilibrium is not a con stant level. The level itself is constantly shifting, but as long as free competition 1 and free price-formation are not entirely abolished, the tendency will be this: buyers will outbid each other and sellers will undersell each other, and both will be stimulated to make the deal, as otherwise they will risk someone else stepping in (see p. 193). The gap between actual market price and the "ideal" normal price, where consumption and production per time-unit are equalized, is likewise continually changing. The quicker the tendency towards the new point of equilibrium, the more effectively does the price-mechanism function. Provided the price-mechanism is allowed to work, even insignificant and finely graded alterations are registered, which makes the price-mechanism also a wonderful instrument for making quantita tive comparisons.

The ability of price-formation to regulate is not confined to con sumption goods, but extends to raw materials, semi-manufactured goods and means of production at every stage of production. That is to say, not only.do there exist calculation-data for the factors of pro duction and for consumption goods at every stage of production, but these data-with the reservations already taken and to be made--- simultaneously register (1) the goods for which there is a demand (and in what quantities and of what qualities) and (2) the scarcity of the means of production in relation to the uses necessary for the produc tion of the goods demanded. The dry price-datum is really the result of innumerable computations, measurements and valuations. It represents the final expression of a conflict between factors so different in nature as (on the supply side) costs in the form of scarcity of resources and man-hours used and (on the demand side) subjective valuation of needs. Professor Louis Baudin has written the following, almost poetical, description of prices' synthesizing ability: "It (the price) synthesizes a number of factors, so that there is difficulty in identifying them and even more in foreseeing them: IJ. E. Mead has given the following simple definition of perfect competition: "competition is perfect when two conditions are fulfilled; (1) when there is no artificial restriction upon the movement of factors of production from occupation to occupation in search of the highest reward, and (2) when no single unit of control -i.e. no single individual or company which is deciding to buy or sell something can by its own action appreciably ,affect the price of the things bought or sold".

Economic Analysis and Policy, London, 1956, p. 96.

THE PRICE-MECHANISM quantities, qualities, possibilities, calculations of interest, memories, fears, hopes. A price is not only the result of statistical figures. It includes all the vibrations of man's thoughts and soul, since ever they have exercised an influence on the market."! Before continuing, let us just repeat that there is to-day in· capitalist societies·a tendency to do away with the price-mechanism, or at. any rate to reduce its significance. This tendency takes various forms. That sector of the society's life in which activities are undertaken without regard to prices and markets, the so-called social sector, is continually growing. Fear of war, together with the policy of isolation adopted by the socialist communities, have forced other countries to put obstacles in the way of the international exchange of goods and services, which similarly hampers the free formation of prices (to say nothing of international division of labour). In addition business men have usually a tendency to interfere with the functioninK of the price mechanism, partly to assure themselves a fixed income, partly to protect "vested interests", and partly to eliminate competition and thereby the insecurity inherent in it. The natural tendency to take advantage of monopoly elements and to make cartels and price agree ments has lately been strengthened because the authorities in some countries show a tendency to order the formation of cartels, or, at any rate, to punish those who sell cheaply or in other ways follow the rules of the price game. (U.S.A. under New Deal and 'Norway to-day.) This means in fact that we have entered a new phase of economic development. For there is a· great difference between a private monopoly or cartel. and a .legal-official one. Where an agreement regulating competition is voluntary, it is as a rule abolished, broken or modified, when conditions alter. 2 Competition, whose imperfection has so often been described, has in reality a quite astounding vitality despite all onslaughts. Competition may be camouflaged and go underground, but it is difficult to kill. If it is forbidden to compete in price, there will be competition in terms of credit and conditions of payment. Secret discounts and concessions may be given and even quite objectionable methods used. 3 Therefore, the actual effect of private agreements to control com petition is not so great as is usually assumed. The situation, however, becomes quite different when groups of manufacturers and traders turn to the State to have a price-reduction forbidden by law. Laws lLa Monnaie et fa Formationdes Prix, L Paris, 1936, p. 591.

2See 1. W. F. Rowe: Market andMen, A Study of Artificial ControlSchemesin some primaryIndustries,London, 1936. 3There was a drastic example of this when Norges HandelsstandsForbundhad to decide how many units go to the dozen, and pronounce a practice introduced by certain German firms as improper competition, namely to invoice thirteen units as a dozen. (See HandclsstandsMdncdsskrift, NO.9, 1937, p. 182.) 194 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY which make alterations in price a crime or offence punishable with large fines are a much more effective and lasting method of hampering the functions of the price-mechanism, than any private attempts. The propensity to control and regulate inherent in every govern ment similarly tends to disturb the function of the price-mechanism. The last few decades have been characterized by an obvious tendency to switch from a price-and market-economy to interventionism and publicly fixed prices, also called "valuation-economy". The interven tion of the authorities in the domestic production of goods by means of controlled prices, and in the international production of goods by means of agreements for quotas and clearing, marks the first stage in the abolition of the right of free disposal of the means of production and of the actual right of ownership to them. According to the definition of sodalism given, this "valuation-economy" is an obvious step towards socialism.

The fact that price-formation and competition are in practice becoming· more and more imperfect does not, .of course, detract from their proverbial efficacy to regulate supply and demand. We shall not embark on a discussion of the theoretical possibilities of perfect com petition, partly because this would involve a discussion of definitions and terms! which would take us too far away from our subject, and partly because any reference to ideal conditions would be irrelevant, since we are discussing the possibility of economic calculation in a socialist community in the world of reality. On the other hand, it may be mentioned in passing that it is illogical to demand the substitution of a socialist central authority for the price mechanism on the grounds that the price-mechanism is becoming more and more imperfect, considering that this growing imperfection is mainly due to the development towards socialism.

For all its alleged imperfections the price-formation is still acknow ledged as one of the chief factors in the economic activities of the capitalist sodety, and the terms "price-society" and "price-economics" are still used as synonyms for "capitalist society". The importance of the price-and market-mechanism has even been affirmed by socialist economists. 2 Dr. Heimann writing (see also Chapter IV) of the price-system has said that: "It records the least deviation in valuation with the accuracy lSee, inter alia, Joan Robinson: Economics of Imperfect Competition, and the sub sequent discussion in the EconomicJournal. 2The expression "socialist economist" occasionally employed in this book, is in no way used to draw a distinction between "socialist economics" and a"bourgeois economics". As Sombart has rightly said, there are correct and incorrect economic THE PRICE-MECHANISM 195 of a seismograph, and directly by means of this occasions the adaptation of the processes of production to the new situation."!

"The decisive task of the economic system is to allocate labour and capital to the individual branches of production in pro portion to the strength of the existing need for their products. In capitalist economic systems this task is fulfilled by the market, and no concentration in cartels and trusts can alter it. . . ." "The market is what is really economic about the modern economic system. To do away with it would be a leap into the dark .... " "The market, of course, is to-day capitalist in action. But is that alone reason enough to abandon it? Is Socialist Thought going to be so unhistorical and undialectic as to take over from Capitalism only its technological elements and its business organization, and to do away with its method of conducting its economy?" 2 Dr. Heimann considers that price-formation is the real heart and soul of the science of economics. He writes: "that order has been established and maintained in the seeming confusion of atomic industries, and how this effect has been achieved, this is the real object and kernel of economic science.

. . ."3 In Lamentfor EconomicsBarbara Wootton says that economic theory has been too much occupied with markets and equilibria, but in her Plan or No Plan she has given an admirably clear description of the potential efficacy of the price-mechanism. For all her later reserva tions about the fairness of the market-economy, the price-mechanism seems to enjoy her entire respect, especially when she says: "Here-it may be said right away that no society which has attempted to dispense altogether with all use of the price mechanism has had any success sufficient to commend it to detailed study."4 theories, and it is here that the dividing line must be drawn. Nevertheless it is useful to use the term "socialist economist" of those who thus describe themselves, and "Marxist economists" of those who base themselves on the Marxist theory of value. The characterization has partly the advantage that it leads to economy in words, and partly prevents the views of such economists being dis missed as coming from "liberal economists", "Manchester economists", "orthodox"

or "reactionary" economists. This may be important in a period, when these appelations have been invested with so much odium that the use of them sometimes seems to be regarded as a sufficient counter-argument in itself. lMehrwert und Gemeinwirtschaft,p. 169. 2"Sozialisierung" in Neue Blatter fur den Sozialismus, Tiibingen, 1930, Vol. I, PP·25-26. 30p. cit., p. 174, footnote. 40p. cit., p. 55.

196 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY And to quote Professor A. P. Lerner: "But even if all decisions about what people should consume are made by a.single dictator or by a very small oligarchy which can reach all decisions by agreement in the council chamber, an elaborate pricing mechanism will still be necessary to make possible the comparison of the marginal productivities of all original means of production and intermediate products in all stages of the manufacture of all commodities in order to achieve the purely technical maximization of the output of commodities in the proportions decided upon."! and "The proposition that I wish to establish is that when the State has decided what it is going to do as to fulfilment or non-fulfilment of individuals' choice, setting up its own system of priorities, it will not be able to achieve its ends with any reasonable degree of efficiency without the use·of a price system." 2 (Dr. Lerner on the price-mechanism is also quoted on p. 147.) Dr. Felix Weil is of the opinion that fictitious, arbitrary prices are "a worthless gamble" (see. p. 18 I), while Leon Trotsky succinctly puts it that "economic accounting is unthinkable without market relations". 3 When the demands of producers and middlemen for raw materials, intermediate goods and means of production are met in the capitalist society, the former owners of the goods and means of production receive their share of the product. This does not mean that demand for consumer goods unilaterally determines the value of means of production and goods at earlier stages of production. There exists an interrelationship which is not confined to prices and incomes. The price of the product sold· is only one of the factors with which pro ducers and middlemen must calculate. There are, in addition, various costs. (See Chapter II.) Besides taking into consideration those data which are already given, a business man will, to a greater or lesser extent, also have regard to the future. The longer the period of production and turnover, the greater attention he will have to pay to the possibility of future changes and thus of increased risk. In a progressive dynamic society with democratic rights the possibilities of such changes are both numerous and heterogeneous. Populations change both in size and composition; l"Economic Theory and Socialist Economy" in Review of Economic Studies, 1934-35, p. 60.

2See "A Rejoinder" in "Economic Theory and Socialist Economy" in Review of Economic Studies, 1934-35, p. 152 • 3See SovietEconomy in Danger, New York, 1933, p. 33.

THE PRICE-MECHANISM 197 tastes alter; savings vary both in extent and rate of growth; the amount of investment varies and so does the pace of technical develop ment. There are other elements of uncertainty such as political develop ments, the possibility of alterations in the value of money itself, as well as developments in the trade cycle (which is partly a result of these changes and of expectations of their effect). There exists a reciprocal relationship between several of these factors, which are themselves dependent on expectations about· the future. The anticipated attitude of competitors will also play its part; so that estimation of others' expectations also becomes a market-determining factor. To what extent such expectations will have any influence, the extent to which they will behased on irrelevant factors· such as season of the year, state of the weather, glandular secretions. or emotions like fright and hope, cannot be stated with any certainty, since the expecta tions vary in kind and strength from one individual to the other, and even with the same individual from period to period.

We shall not discuss here the interesting question of whether or not the economist should concern himself with motives of reason and emotion, and with the ethical or unethical motives that lie behind price-reactions and .market phenomena, or whether he should he content to stick to the final price-data.! The fact that price-determining motives and factors are varying and of many kinds, the fact that in all societies, irrespective of structure, estimates of the future contain elements of uncertainty, and the fact that the price-mechanism in our time is being more and more restricted in scope, should not obscure the fact that it is the price-mechanism which plays the part of the great conductor in the capitalist economy. Further, it must he stressed that in capitalist societies there do exist markets where, despite more or less· imperfect competition,· prices are quoted that form a basis for economic calculation. Prices not only for consumer goods, but also for natural assets, raw materials, inter mediate goods and means of production of all kinds, and not only "spot", but also "forward" prices. Forward prices make it possible not only to measure uncertainty in regard to the future, but also to eliminate it.

Price-formation also makes itself felt in respect of manpower. Here, its ability to regulate is, however, smaller. This is not only due· to monopoly tendencies through labour unions, but because manpower differs in certain important respects from other objects dealt in. It is enough to mention its slow rate of reproduction. (It takes from lSee, interalia Ludwig von Mises: Grundproblemeder Nationalok.onomie,Jena, ~933, pp. 168-169.

198 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY fifteen to sixteen years before a new-born child becomes old enough to work, and in addition it is doubtful whether changes in wage-rates influence the birth-rate.) Another factor is the low mobility of man power, partly due to emotional and psychological factors (dislike of breaking up a home and of leaving home and country), and partly to a political tendency towards self-sufficiency and isolation expressed in the growing number of obstacles put in the way of both emigration and immigration. The importance of price-formation is also limited where it comes to credit, loans and the right to dispose of capital. Special factors enter into play when it comes to the formation of price for capital. A detailed discussion of this problem would result in a full-scale dis cussion of the theory of distribution and the trade cycle, upon which we cannot embark here, but the question of interest has been touched upon in Chapter VII. Here it must suffice to state that competition is less perfect, or, rather, still more imperfect, when it concerns credit, than when it concerns goods, but that interest rates exist in the capitalist societies as given data.

Many objections have been raised against private capitalism and the price-mechanism. They will be dealt with in Appendix B; but there is one that directly concerns the price-mechanism and should be dis cussed here. We refer to the objection that in capitalist societies prices are used as indicators of profitability. People produce for profit, it is said. This statement is correct. If the commodity to be produced, or resold, is not demanded at a price that covers costs, it will not be produced or bought at that price. On the other hand, to imply that production for profit does not mean production to satisfy needs, is entirely false. The contrary is the case. The producers' and traders' every effort is directed towards anticipating and satisfying the needs of the buyers, in the last resort the needs of the public, such as they are expressed in effective demand. The success of producers and traders will depend on their ability to do this. Their ability to anticipate correctly will decide whether the result will be profit or loss, which in the long run will decide whether they can stay in business or not. l IProfessor Boris Brutzkus goes so far as to say that the producer and trader in a capitalist country, strictly speaking, does not need to keep books or to calculate, as prices will give him all necessary indications. If he does not take heed of prices, he risks losing his fortune and his position. In socialist countries where the state is the only owner of the means of production and the only distributirig agency, this automatic purging process does not exist, so that, as Brutzkus says, "economic calculation is of far greater significance in the socialist, than in the capitalist society" .

(EconomicPlanningin Soviet Russia, p. II.) THE PRICE-MECHANISM In the discussion of the merits and demerits of the price-mechanism it has been maintained that market economy is "democratic", inasmuch as every penny used for voluntary purchases represents a vote cast in the great election of what the public wants. This is a graphic, but misleading metaphor .. The voting is not democratic; nor is it based on the principle of equality. The voting is not by heads, but according to the number of voting-papers, .or banknotes. It is the amount of pur chasing power at his disposal which determines the degree to which the individual consumer can influence the type and size of production. It may be said that this is unjust, but that is a moral judgment that we cannot go into here and which does not affect the price-mechanism's . efficacy for regulating production and sales according to effective demand at any given· time and at any given distribution of income.

(See p.. 94, footnote 2.) An additional word or two are still required about the view that there is an antithesis between· production for profit and production to satisfy needs. If there is any point in this assertion (apart from its propagandistic value) it must mean that there is presumed to exist another scale of values than that of the buying public expressed by its demand. If we try to analyse that scale of values we generally find that it is a so-called "social scale of values" with the necessities of life at the top and expensive 'luxury articles at the bottom. Such an order of preference would, perhaps, be right in a society where everybody was short of nearly everything. Once the demand for the necessities of life has been covered, people will, however, be found to have wishes and needs that vary from individual to individual and which no "social" scale can cover. In reality these special, in dividual desires make themselves felt long before the requirements of the primary physiological needs of life are satisfied. Even the physio logical needs vary from individual to individual, and from season to season. A young man may be prepared to give up his lunch so that he can take his girl to the cinema; she may be prepared to sacrifice one or two meals in order to have a permanent wave; while a third may be ready to do without both girl and lunch in order to hear a symphony concert.

To use a given piece of ground for grain production is not neces sarily a more "social" employment than to use it for a cosmetics factory or a farm for silver foxes. If there were overproduction of grain the first use would be quite irrational. Barbara Wootton, who has made use of an analogous example, says that this belief in an "intrinsic value" makes every university-trained economist see red, and that this relativity of all values is "extremely repellent" to non-economists, who 200 ECONOMIC CALCULATION IN THE SOCIALIST S'OCIETY find it incredible (to take the textbook example) that bread is not in some absolute sense more valuable than diamonds. Nor are they satisfied with the concession that existing monetary. values may be compatible with moral principles or social needs, a concession which, as she says, "merely leads into the misty spheres of moral philosophy". 1 This tendency to look at prices from a moral aspect is a contri butory factor in the present-day trend of so many countries more or less consciously to prevent the price-mechanism from functioning.

Market-economy is being replaced by valuation by price-regulators, which leads to values being determined not by the many, but by the few. The logical and psychological consequences of certain people having the power to determine values in the economic field is that they will also arbitrarily determine what is to be regarded as artistically and scientifically valuable. This retrogression to mediaeval jttsfttm pretiumviews is, in my opinion, one of the reasons why during the last decades the world has relapsed so rapidly into conditions of the Middle Ages in non-economic fields as \vell. lOp. cit., p. 39.