The Economics of Soviet Planning
The Best Use of Economic Resources
These two books concern the “resource allocation problem.” Granted that there ought to be economic activity at all, where precisely should we set the nation’s land, labor, and capital to work? Should we make these exports or those import-substitutes? In what proportions do people want round and square buttons? Should we concentrate industry in the north or the south? Should this piece of fertile land become a city, should that semi-desert be cultivated at all? Should this hilly tract be ploughed by horses as usual, or should there be fewer tanks in the army in order that there may be tractors here too? Ought this moderately intelligent student to be a doctoral candidate, or shouldn’t he be out earning his living? To what price must this machine come down before we forget our traditional manual skill and use it instead? Should we save 19 per cent or 20 per cent of the national income next year? Every economy, whether run by the market or by central command, must and does answer literally billions of such questions. But they can be answered better or worse.
For all their extreme differences of tone and origin, Bergson (Harvard) and Kantorovich (Leningrad) are brothers under the skin. They both represent, above all, a major triumph of reason in human affairs—the same triumph. For a very long time Western economists, using the light that was in them, have criticized Soviet procedures for resource allocation as wasteful. Indeed such criticism began when the Soviet economy was but a twinkle in Engels’s eye: with Böhm-Bawerk’s Karl Marx and the Close of his System (1896). If Böhm’s choice of title was a shade premature, it can still be said that we are today witnessing the close of that part of Marx’s system he attacked.
This part was Marx’s theory of value and its usefulness for the day-to-day running of, a socialist economy. As it turned out, this theory was of little use to Lenin and Stalin. A theory that allows consumer demand no place, that recognizes only the cost of labor (neither capital cost nor land cost nor “opportunity” cost), that fails to differentiate this labor into grades, that assumes the average cost is constant when output changes, that does not recognize the bare existence of the resource allocation problem—such a theory might possibly explain human history across the centuries, but it does not tell the central planner what to do tomorrow. Marx never said what central planning should look like, but it could not possibly have grown the haphazard, irrational monster it is in USSR if Marx had been a “Western” economist. The exact extent of such irrationality is impossible to measure. Kantorovich thinks it very great: adherence to his principles, he claims, would increase the output of certain Soviet industries by 30 to 50 per cent. Bergson, again, will give scarcely any sector of the economy a clean bill of health.
Communists with practical responsibilities to discharge have at length nerved themselves to make the necessary adjustments in their theory, or at least their practice. Practical adjustment in Russia has by no means followed Kantorovich’s centralizing precepts, but rather those of a still greater economist: Marshall Tito. In other words simple decentralization is the order of the day in Yugoslavia and profit seekers are encouraged to carry on business in the (socialist) market place. In Hungary, East Germany, and Czechoslovakia this reversion to the market has advanced further than in USSR. In the adjustment of theory, on the other hand, the towering genius of Kantorovich gives the USSR some claim to priority, but here too the Hungarians lead on the whole, followed by the Poles, who find practice so hard to change. Different as the practical and theoretical developments are, they both correspond with what most Western Sovietologists have always advised; i.e., this advice has itself failed to keep theory and practice in step.
In this context Bergson represents a deviant Western point of view: he always knew—in fact, he helped to write them—the rules of rational resource allocation, but astoundingly used to maintain that in fact the Soviet economy observed them. Kantorovich knows very well that this is not so—indeed, he lives there; and has made himself the great pioneer of one of the possible ways of correcting the situation.
Bergson’s book is something of a disappointment. By a supreme act of self-sacrifice, he has immersed himself for long years in the “mere” recalculation of the Soviet national income according to Western definitions. Without this work all talk about who is gaining on whom in the Cold War would have been idle. For the state of economic competition between USSR and USA is whatever competent and objective statisticians say it is. It follows that the long, hard slogging of Bergson’s inquiry into Soviet national income was the most important work being done anywhere in the West on the Soviet economy. It told us that, for example, the Soviet national income was gaining on the American by about 4 per cent each year. But the rationality of resource allocation is a basic assumption in Western national income measurement, and the statistician feels undressed without it.
So Bergson now examines the assumption that as a national income statistician he has long felt himself obliged to make. He criticizes all Soviet economic institutions and their day-to-day working from the point of view of rational resource allocation alone: “exploring Soviet working arrangements for resource use” (p. 7). The work is far from well written, abounding in circumlocutory language and over-cautious thought. The reader may easily forget what the author is really after, lose his patience, and lay the book guiltily by. If he persists, however, and is sufficiently prepared in the subject matter he will, while learning no great new thing, be rewarded with hundreds of valuable minor insights and pieces of information.
One might feel that for a work of this kind the author needed different talents from those he has shown in the past. But no. We continue to miss a profound understanding of Marxist ideology, an empathy with Kremlin politics, and a general feeling for people and institutions. The author’s genius is to understand a formal schema correctly, and to dig for its elements in data arranged on different principles, or indeed no principles.
When he began his task of recalculating the Soviet national income this “formalism” was an act of blinding originality. For the task he has now set himself it is no less suitable: he sets out the principles of Western welfare economics and asks, how well do the Soviet decisions actually taken correspond to these standards? This is thus a deep but narrow book. Bergson is hardly concerned with why the decisions are taken whether in terms of Marxist theory or of Kremlin politics. Nor does he try to enlarge Western theory from this fresh material. He has written a piece of applied welfare economics about a far country.
He certainly covers the ground very thoroughly. Is the rate of migration from collective farms to towns the correct one? When a consumer good reaches the stores (never mind why it was produced) is it correctly distributed between consumers? What is the effect of Communist party interference in the enterprise on resource allocation? Do the reorganizations of the party matter from this point of view? How is the Soviet substitute for the rate of interest used, and what is its effect on choice of technology? etc. etc. Bergson’s findings are that prices and production are irrational throughout the economy. The Russians get bad marks on every question. The author thus tacitly abandons the position he notoriously took many years ago, and maintained in the face of much scholarly disagreement.
Seldom was there a more imposing or intrinsically valuable self-criticism. Yet it is a dry subject, very factually presented. It is after all exceedingly obvious that Soviet resource allocation is irrational. With Soviet admissions of this fact growing in volume, why write a 400-page book about it? The question is, what ought to be done to change it? It is as if a first-class doctoral student had been crippled by his supervisor. Who confined Bergson’s talents in these channels? Why wasn’t he allowed, in the words of the Scottish golf professional, to “jist unwind hisself and gi’e the ball a knock?”
This is what, in the more adventurous atmosphere of Soviet economics, Professor Kantorovich has done. A mathematician, not an economist, he began in 1939 with the mathematics of rational resource allocation within a single enterprise. From this to the whole economy was a step of imagination alone: the mathematics remains identical. The book before us was written during the war, but was too revolutionary to be published until 1959. It rejects the decentralized solution of market socialism practiced in Yugoslavia. There the enterprise does virtually whatever will help it to make a profit in the market, and there is scarcely any central plan worth the name. What Kantorovich proposes instead is intellectually more taxing and original, though politically somewhat more acceptable. He has evolved the mathematics necessary for achieving rationality by central computation. That is, all the data that enterprise managers, workers, and consumers use to arrive at their several decisions on the market are fed into a central archive, where a computer applies Kantorovich’s procedures to the data. It thus simulates the market, improving on it.
The Soviet claim to priority over the USA in the invention of these procedures is incontestable. The changes required for a system of planning by computors in Soviet (as opposed to US) economic institutions are minimal, and in any case the author has the mathematician’s characteristic disdain for such sublunary matters. Hereby he falls, seemingly, into error; for instance he leaves a place in the hierarchy of command for the present intermediate planning bodies (p. 148), without exactly explaining why they should continue to be necessary. He accepts, too, that the central planners should still determine all the final quantities of goods sold to consumers—which is what the Yugoslavs have thrown overboard. In this way he confines his mathematical computations to only a part of what they might do: finding the cheapest combination of inputs (of labor, capital, imports etc.) for the predetermined output plan. Thus he explicitly avoids the consumer’s sovereignty, and keeps the government in business as the manager of the economy.
Apart from the mathematics itself, Kantorovich’s real innovation is in the theory of value. Labor is no longer the only cost, as Marx argued, but capital, land, equipment, and raw material rank independently. An ideologically decent veil is drawn over this by treating all these other things as labor savers, convertible into labor at this or that rate. The object of the mathematics is to calculate precisely these conversion rates, and establish the cheapest way of producing on this basis. The rates are in fact nothing more than rational prices: primarily, however, they are calculated so that they can be fed into computers for the information of central planners and not necessarily charged to enterprises for hard cash.
The actual changes in the USSR since 1963 are on the whole more revolutionary than those proposed by Kantorovich. Intellectually, however, they are a good deal less exciting, since they consist in the establishment of oldfashioned, decentralized consumer’s sovereignty. To the extent that this is so they go much further than the proposals of Kantorovich’s rival, the decentralizer Liberman, whose cautious scheme, grossly inflated by Western journalists, has been outdone by the actual measures taken by responsible officials. To be sure, the consumer is as yet only sovereign over such details as the quality of cloth or the design of textiles, while the broad outlines of the plan—e.g., shall we make woolen or cotton textiles, how many square yards shall we make—are still laid down a priori by the center. But this is only a beginning, and more decentralization will probably follow. On the other hand the infinite quantities of accurate and punctual information required for Kantorovich’s computers are simply not available—nor does he pretend they are. His whole scheme remains, whatever his less discreet admirers may claim, music of the future.
Soviet Economics January 20, 1966