Dr. Hoff is publisher and editor of the Norwegian weekly FARMAND, from which this article has been translated and condensed. He also wrote the book, Oekonomisk Kalkulasjon i Sosialistiske Samlunn; in English, Economic Calculation in the Socialist Society (London: William Hodge & Co., 1949).
Karl Marx is rightly looked upon as being the spiritual father of socialism (and communism). But it is the forceful appeal in the demagogic Communist Manifesto, not Das Kapital and his analysis of socialist theory, that gives him paternity rights. His theoretical conribution was his account of dynamic private enterprise, for the achievements of which he nursed considerable admiration, and not his labor theory of value, the weakness of which Marx himself recognized.
Marx was more concerned with tactical and political questions than with the theory and practice of socialism. He discussed how a capitalist order should be transformed into a socialist one, whether it was advisable to employ
revolutionary or parliamentary tactics, by what means the capitalists could best be expropriated, what industries should be nationalized to begin with, and how rapidly the process of socialization could be carried on. Marx declared that no sensible person would think of working out recipes before the kitchen was ready, or words to that effect. The result was that in socialist circles it was considered downright heresy to discuss how the socialist communities should work in practice.
But, Russian economists have now begun to discuss the law of value.
At the meeting of the American Economic Association, held in December 1958, a clear indication was given of how the tide has turned. Attention was drawn to the fact that the change began with an article by a team of Russian economists headed by L. A. Leontiev, in the Russian journal, Pod Znamenem Marxisma, No. 7-8 1943.1 Russian economists constantly hark back to this article when they discuss economics with foreign economists visiting the Soviet Union.
Professor Carl Landauer (
This is explosive material indeed! The Marxists have always ridiculed the concept of "eternal truths." But if they now acknowledge that eternal truths exist in the economic field, why then should they deny their existence in other fields?
Now "value calculation" does not actually conflict with Marxist theory, for Marx concerned himself far more with criticizing capitalism than with explaining how the socialist system should work.
But the Russian team of authors goes farther. It asks how the value shall be determined in the
No one can doubt that the abandonment of the labor value theory is due to practical experience. "For the Soviet economist, the value theory is not a mere academic affair. Value is the ‘single denominator,’ which must be used in Soviet bookkeeping for the `comparison of the expenses of the firm in a given period with the whole mass of production for the same period,’" says Professor Landauer, quoting from the Russian article.
"If values reflected only labor cost," Landauer says, "they would not be usable for correct bookkeeping." The Leontiev team, Landauer adds, is saying virtually the same thing as did Boehm-Bawerk and
The professor goes on to say there was in the beginning an attempt to represent the team’s article as a symptom of the Soviet Union‘s decreasing hostility to capitalism, but he claims that those who do this are on the wrong track. The Soviet economists several times express their conviction that the capitalist system must be abolished. They can hardly say anything else. The main point, however, Landauer goes on to say, is that the labor value theory has now been abandoned by the Soviet Union, a fact which "will free price analysis in Soviet planning from a severe handicap."
A Practical Problem
It was not academic interest in economic theory that induced Leontiev and team to proclaim respect for the "value-law" in the socialist system. A contributory cause was the fact that some Russian factories managed to operate at a profit, whereas others ran at a loss. There may be many reasons for this, but one of them is that certain factories enjoy a favorable location with respect to supplies of raw materials, availability of labor or markets, while others were badly placed.
As the State owns all land and no rent is charged for use of land, this prime factor is not taken into account. Nor is interest charged on capital, the argument being that the State owns the factories so that such accounting is considered superfluous. However, as there is no need to pay interest, the managers of state-owned concerns are tempted to hoard materials—after all, it costs nothing. The consequence is that a "value problem," or a calculation problem, was found to exist there, too. The question of interest was looked upon by the authorities as separate and subsidiary. But the significance of the fact that some concerns operate at a profit and others at a loss was understood to the full.
The Soviet authorities have endeavored to solve the problem—though not very successfully—by stipulating "regional transfer prices," by granting subsidies to the poorly placed factories, and by fixing "special settlement prices" to suit the various cases.
Economics of Agriculture
Khrushchev, himself, as a consequence of the poor results achieved in agriculture, has become aware of the need for calculation. In his notorious report of December 15, 1958, the Russian Premier declared: "It is impossible to carry on agriculture without a thorough analysis of the costs of producing the goods and without exercising control by means of the ruble." In so saying, Khrushchev is simply corroborating what sensible economists have always maintained.
In Russia there are a confusing number of price levels, that is, if the word "price" can be applied to numerical designations which are arbitrarily determined and have nothing whatever to do with markets. For retail prices alone, seven different price levels exist, of which probably the only reliable ones are those ruling on the black markets.
Of far greater importance than prices of consumer goods, however, no matter what the system, are the prices of raw materials and means of production. Where there are no markets—and there are none for means of production in socialist states, because the State, by definition, is the sole owner—there can be no market prices for the means of production. And where there are no market prices, there are no reliable calculation data.
The "transfer prices" which the Soviet authorities have employed are completely artificial. The drastic alterations continually being made in "relative prices" and the skepticism with which they are greeted by the Soviet authorities themselves show how worthless they are.
Further proof of the skepticism about prices in Soviet Russia is found in the comparisons which are being made constantly with prices in countries where private enterprise exists. The supreme socialist authority, Stalin himself, once declared that the price of cotton in the Soviet Union had to be set higher than the price of grain in the Soviet Union "because this is the case on the world market."’-’ This reference by Stalin to foreign price relations is not merely a confession of a fundamental defect in the socialist system. It reveals also that the existence of capitalist societies with price data constitutes an enormous advantage for the socialist states.
There is widespread anxiety among Russian economists because their economy lacks serviceable criteria and stimuli for rational economic choice. The foremost politicians have likewise been seized by a desire for rationality. However, Soviet economists have been warned against "revisionism."
Nevertheless, the Soviet economists now evince a tendency to criticize, but their criticisms are presented cautiously and obliquely. This is primarily an intellectual and academic trend, and there is nothing to indicate that Soviet Russia is endeavoring to bring about a return to the "market mechanism." This is understandable, as such a statement would be tantamount to a proclamation that socialism has failed. On the whole, therefore, discussions on allocation of resources have taken place sub rosa.
Summary and Conclusion
In a socialist society, the private ownership of means of production has been abolished, and as a result there are no markets for the factors of production. Without markets for production factors, one cannot obtain real calculation data, i.e., prices which reflect on the one hand the varying demand, on the other the scarcity of existing resources, which is also a variable, depending as it does on technical developments.
Because Marx did not concern himself with the way in which the socialist system would work in practice, socialist economists in the early days regarded discussion of such matters as rank heresy. A few nonsocialist economists, men who have thought deeply about the problems of calculation and value, are the ones who have brought to light this fundamental defect of socialism.
As early as 1854 the originator of the marginal utility theory, the German economist, H. H. Gossen, declared that only through private enterprise would it be possible to produce a yardstick by which to determine how much might rationally be produced with existing resources.
Other economists who have given the problem their attention include the Dutchman, N. G. Pierson, the French Professor Bourguin, Max Weber (in his Wirtschaft and Gesellschaft), and Professor Boris Brutzkus. The one who merits the greatest praise, however, is Professor Ludwig von Mises. His contention was submitted quite casually, almost in passing, but it was found extremely provocative and sensational. "Because the socialist community is unable to calculate," he declared, "socialism is impossible."
As recently as twenty to twenty-five years ago, revelation of this flaw in the socialist program was greeted with a blend of indignation and irritation by socialist economists. One of the more polite criticisms leveled against it was that it was nothing more than abstract theorizing devoid of all practical significance. In view of this it is something of a sensation that Soviet economists to an increasing extent are being forced to admit that the nonsocialist economists were right. This admission does not stem from an academic urge to tell the truth, but from convincing object lessons. In Soviet Russia the muddle and lack of rationality in economic management have gradually become so obvious that the Russian economists themselves are no longer able to close their eyes to the situation. The same applies to the Russian political leaders.
To illustrate our point, we once asserted that in a socialist community there was a risk of molybdenum being used in the manufacture of toy swords. Some people thought we were joking and that this was a silly thing to say. However, at the plenary meeting in June 1959, Khrushchev raged against the results achieved by the system and said, among other things:
"Here, brass chandeliers are manufactured with the sole object of making them as heavy as possible. The heavier each chandelier, the more the factory earns on carrying out its production program."
Brass is not molybdenum, but the irrational use of metals provides a good analogy to our example.
The increasing recognition—and admission—by Soviet economists and politicians that the value problem also exists in the socialist system gives ground for hope. Not for hope that this great defect can be eliminated; it cannot as long as Soviet Russia remains socialist, because that weakness is inherent in socialism. But it gives hope that the Soviet economists will be allowed to draw attention to the great flaw in socialism and in so doing pave the way for rejection of the socialist system.
1 English translation reprinted in full in the American Economic Review, September 1944.
2 Reported in Economic Problems of Socialism in the USSR, Moscow, 1952, p. 24, according to the American Economic Review, February 1959, p. 62.
Ideas on Liberty
A Major Issue
Most fundamental… is the question of whether we are going to protect the opportunity of the market system to continue to be the primary "decision making mechanism" for our economic system. The alternative is to substitute political planning, political management and political price fixing.
From the Secretary’s 1959 Annual Report to the American Farm Bureau Federation