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T H E ECONOMI C WE E K L Y A N N U A L

Soviet and American Economic Organization
A Comparison
Andr ew Gui l der Fr ank
The advent of the Soviet H-bomb stirred economists, Congress, and the Press to compare industrial
output and economic growth in the Soviet Union and the United Stales.' More recently, Sputnik has drawn
our attention to the extent of Soviet education compared to our own.
This concern with "how much" is well within the American tradition. For the future, however
f ,
it
may he more important for us to devote increasing attention to "how" as well as to "how much". "How" the
Soviet economy is run, "how" the Russians come to be educated at all, and comparison of the Soviet "how"
with our own demand our attention as well. It is this second approach, then, which underlies the present
paper :
How do the Soviets organize their economy, and how does Soviet economic organization compare with
our own?
Once we are better acquainted with the "how", we shall in the concluding section of this article, in-
quire as well into the "why" of the similarities and differences between Soviet and American economic organi-
zation.
n p o compare, we need a basi s of
compar i son. The basi s t o be
used here, a conveni ent yet i mpor -
t ant one, i s t he quest i on: " How
does t he soci et y provi de f or t he
f undament al deci si ons necessary t o
r un a compl ex economy?" The
f undament al deci si ons, or questi ons
t o be answered, or pr obl ems t o be
sol ved, may be di st i ngui shed as
f ol l ows:
(1) What por t i on of t ot al out -
put shal l be consumed and what
por t i on saved and rei nvest ed?
Thi s quest i on wi l l be r ef er r ed t o
as t he consumpt i on/ i nvest ment
deci si on.
(2) Gi ven t he consumpt i on/
i nvest ment r at i o, j ust what con-
sumer and i nvest ment or pr o-
ducer-goods shal l be produced?
I n ot her wor ds, preci sel y what
shal l t he pr oduct - mi x be?
(3) Gi ven t he pr oduct - mi x, how
shal l t he sel ected pr oduct s be
produced? Ho w shal l t he avai l -
abl e resources or f act or s of pr o-
duct i on be combi ned t o produce
t he sel ected goods? Thi s quest i on
may be l abel ed t he " f act or - mi x"
(4) Once t he product s ar e pr o-
duced, whi ch consumers shal l r e-
cei ve what pr oduct s; or what
shal l t he di st r i but i on of consu-
mer goods be?
See, f or i nst ance, War r en Nut t er
wr i t i n g i n t he ' Amer i can Econo-
mi c Revi ew' , May 1957 and 1958;
Joi nt Economi c Commi t t ee of t he
Congress, ' Sovi et Economi c
Gr owt h, A Compar i son wi t h The
Uni t ed St at es' ; and such publ i ca-
t i ons as ' U S News and Wor l d
Repor t ' .
(5) How shal l t he t ot al pur -
chasi ng power i n t he hands of
buyers be equat ed t o t he t ot al
amount of goods avai l abl e f or
purchase? Thi s i s t he pr obl em
of aggr egat i on.
(6) Who shal l recei ve what
sl i ce of t he t ot al i ncome pi e, or
what shal l t he di st r i but i on of
i ncome be?
( Not e t hat t asks ( 4) and (6) di f f er ;
t ask (6) i nvol ves onl y t he di vi si on
among t he soci ety' s member s of
t ot al pur chasi ng power ; t ask (4)
r ef er s t o t he addi t i onal deci si ons r e-
qui r ed t o det er mi ne who get s what
par t i cul ar goods). Al l these pr ob-
l ems are, of course, i nt er r el at ed;
and each economy sol ves t hem
si mul t aneousl y. But we can under-
st and t he ent i r e process bet t er i f
we vi sual i ze t he economy as t hough
i t sol ved t hem separat el y and i f we
t ake t hem up i n t he or der j ust pre-
sented. Our answers t o t he ques-
t i ons wi l l t hen per mi t us t o expl ore
whet her t he si mi l ar i t i es and di f f er -
ences i n met hods of economi c or ga-
ni zat i on may not be expl ai ned by
si mi l ar i t i es and di fferences i n ob-
j ect i ves bet ween t he Sovi et Uni on
and t he Uni t ed St at es.
How Does the Economic
Organization Compare?
We may conveni ent l y begi n t he
anal ysi s by aski ng how t he Sovi et
Uni on and t he Uni t ed St at es decide
how t o di vi de t ot al out put bet ween
consumpt i on and i nvest ment . The
Sovi et sol ut i on t o t hat quest i on de-
t er mi nes t he r emai nder of t he
Sovi et economi c or gani zat i on i n
i mpor t ant ways. I t i s al so i n de-
ci di ng t he consumpt i on/ i nvest ment
r at i o t hat t he Sovi et Uni on and t he
U S pr obabl y exhi bi t t he most
appar ent and act ual di f f erences;
t hough, I suggest, t he act ual di f f e-
rences are not near l y as gr eat as
t he appar ent ones. The Sovi et s de-
f i ni t el y det er mi ne t he consumpt i on/
i nvest ment r at i o cent r al l y; and i t i s
di f f i cul t t o ascer t ai n j ust what , ot her
t han t he st r ong desi re f or gr owt h,
gui des t hei r sel ect i on. The c o n '
sumpt i on/ i nvest ment r at i o i s not
t he out come of i nt er act i on among
pr evi ousl y det er mi ned pri ces, pr o-
duct mi x, f act or mi x, pr of i t abi l i t y,
or i nf l at i on. On t he cont r ar y, i t
appears t hat t he consumpt i on
i nvest ment r at i o i s t he mai nspr i ng
deci si on whi ch i t sel f gi ves ri se t o
t hem. How t he deci si on i s i mpl e-
ment ed wi l l t hen appear i n our
exami nat i on of these ot her mat t er s.
Does Amer i can det er mi nat i on of
t he t ot al consumpt i on/ i nvest ment
r at i o di f f er subst ant i al l y f r o m t he
Sovi et one? Appar ent l y, yes. At
f i r st gl ance i t appears as t hough
t ot al Amer i can i nvest ment i s t he
r esul t of many r el at i vel y decent-
r al i zed deci si ons whi ch producers
make i n response t o mar k et con-
di t i ons. These i nvest ment deci si ons
ar e r el at ed t o mar ket pr of i t s and
t o condi t i ons on the f i nanci al mar -
ket . But these deci si ons pr i mar i -
l y det er mi ne t he al l ocat i on of t ot al
i nvest ment among par t i cul ar goods
and par t i cul ar fi rms. The level of
i nvest ment , on t he ot her hand, i s
ver y much i nf l uenced by t he gover n-
ment . Whenever t he gover nment
r egar ds t he pr i vat el y det er mi ned
l evel of i nvest ment as unsat i sf ac-
95
January , 1959
THE ECONOMIC WEEKLY ANNUAL
t or y ( whet her t oo hi gh or t oo l ow)
i t uses It s var i ous monet ar y, t a xi ng
and spendi ng (fi scal ), powers t o
change t he amount of i nvest ment .
Economi cal l y speaki ng, i t i s mere
happen-chance t hat t he pr i vat el y
det ermi ned l evel of i nvest ment i n
t he U S is usual l y mor e near l y
sat i sf act or y t o the people and t hei r
gover nment t ha n has been t he case
i n the Soviet Uni on dur i ng t he l ast
gener at i on. Thus, t he U S govern-
ment ma y be sai d t o det ermi ne
total i nvest ment sometimes by per-
mi t t i n g pr i vat e producers' decisions
to stand sometimes, such as in
most post - war years, by amendi ng
pr i vat e decisions t hr ough mu d
monet ar y and f i scal measures; and
sometimes, not abl y dur i ng t he
t hi r t i es and ear l y fort i es, by empl oy-
i ng mor e di rect measurers anal o-
gous t o t he Sovi et mat er i al s pl an.
As f or anot i ng nat i onal i ncome t o
defense, whi c h requi res r est r ai nt s
on consumpt i on si mi l ar t o those
posed by i nvest ment , t he Soviet
Uni on and t he Uni t ed States equal l y
per mi t the gover nment t o have f i r s t
c l a i m on t he nat i onal out put .
Product Mix
Di sposal of t he cons umpt i on/
i nvest ment decision i nt roduces t he
pr obl em of sel ect i ng the par t i cul ar
types and quant i t i es of consumer
and producer goods t o be produced.
I n l ar ge compl ex economies such as
those of t he Sovi et Uni on and the
Uni t ed States, t he number of deci-
sions i nvol ved i n t hi s selection pro-
cess is much too l arge f or a cent r al
a ut hor i t y t o handl e. In t he U S
t he product mi x f or t he hul k of t he
goods and the l ar ge ma j or i t y of
the decisions i nvol ved are r el at i vel y
decent ral l y made. The Ame r i c a n
product mi x occurs i n t he cont ext
of a mar ket . The Soviets resort t o
a pl anni ng agency t o " pl a n" a l a r g-
er share of t he pr oduct mi x. The
pl anned pr oduct mi x i s communi -
cat ed t o t he vari ous enterprises;
nonetheless, each i ndi vi dual enter-
prise must purchase i t s i nput s, and
dispose of i t s out put on a mar ket .
I ndi vi dua l enterprises t ypi cal l y de-
vi at e consi derabl y f r o m pl anned
out put i n response t o ma r ke t and
ot her pressures. Moreover, in set-
t i ng up t he mat er i al s pl ans, cent r al
pl anner s are dependent f or t hei r
i nf or ma t i on on ent erpri se decisions
as t o wh a t i nf or ma t i on about out-
put possi bi l i t i es and needs t o com-
muni cat e t o t he center.
Bo t h cent r al gover nment and pro-
ducer decisions about t he product
mi x must i n some ways reflect con-
sumer preferences as expressed
t hr ough t he ma r ke t a nd pol i t i cal
processes, f or surel y nei t her t he
pl anner nor t he ent erpri se coul d
l ong af f or d t o produce goods whi ch
t he consumers do not choose t o
buy. I n ot her words, t he Sovi et
consumer exercises some degree of
consumer soverei gnt y i n det ermi n-
i ng the pr oduct mi x j us t as does
t he Amer i can consumer. The
Soviet consumer exercises t hi s
soverei gnt y over a smal l er por t i on
of t ot al nat i onal product because a
smal l er share of Sovi et out put
t ha n Amer i can out put i s channel ed
i nt o consumer goods, and because
Soviet producer goods are t ypi cal l y
used t o make s t i l l mor e producer
r at her t han consumer goods. Ad -
mi ni s t r at i ve pr i ci ng and t he sellers'
mar ket l i mi t Russi an consumer
soverei gnt y s t i l l f ur t her . But these
mat t er s are bet t er deal t wi t h i n our
compar i son of t he Soviet and Ame-
r i can mar ket .
Factor Mix and Factor Reward
I n discussing how f act or s of pro-
duct i on or resources are al l ocat ed
to uses and users, it is conveni ent
t o di st i ngui sh between mat er i al s
and l abour. I n t he Uni t ed States
bot h ki nds of pr oduct i ve fact ors
are gener al l y al l ocat ed among users
t hr ough ma r ke t bar gai ni ng between
owners and pot ent i al users of these
fact ors. The more compet i t i ve t he
mar ket , t he bet t er do prices reflect
t he public' s want s and t hus the
more l i kel y i s i t t hat t he r esul t ant
f act or al l ocat i on i s i n t he publ i cs
i nt erest . Compet i t i ve condi t i ons do
not, however, pr evai l uni ver sal l y.
The Ame r i c a n l abour mar ket ,
par t i cul ar l y, seems to be beset by
ei t her monopol y, monopsony, or
bot h at t he same t i me. Thus, t he
most desirable use of resources is
not uni ver sal l y achi eved. Addi t i on-
al l y, f act or prices f r equent l y di ffer
f r om those whi c h woul d be esta-
bl i shed by bar gai ni ng alone, ei t her
compet i t i ve or monopol i st i c. We
mi ght cal l these prices "admi ni st er-
ed", t hough t hey ma y not be ad-
mi ni st er ed cent r al l y.
Tur ni ng t o f act or al l ocat i on i n
the Soviet Uni on, i t i s i mmedi at el y
obvi ous t hat fact ors are al l ocat ed
bot h t hr ough t he cent r al l y appoi nt -
ed mat er i al s and fi nanci al pl ans
and t hr ough a f act or mar ket .
The year 1940 saw t he i nt r oduct i on,
and 1956 t he repeal, of several mea-
sures i mposi ng severe l egal rest ri c-
t i ons on wor ker occupat i onal
choice. Nonetheless, act ual al l oca-
t i on of l abour bot h wi t h i n i ndus t r y
and between i ndust r y and agr i cul -
t ure, has t hr oughout the Soviet
peri od been organi zed pr i ma r i l y
t hr ough a free l abour mar ket . The
Soviets have rel i ed mos t l y on mar -
ket i ncent i ves bot h t o r ecr ui t l abour
i nt o i ndus t r y and t o al l ocat e i t
wi t h i n i ndust r y. They r el y heavi l y
on pi ecework wages t o provi de
wor ker i ncent i ve on t he j ob. A l -
t hough l abour al l ocat i on di rect i ves
and admi ni st er ed wages have gene-
r a l l y been i ncl uded i n t he pl an,
enterprises have much mor e oft en
t han not honoured t hem i n t he
breach. Onl y t r ai ned personnel,
whi ch i s mor e scarce t ha n or di nar y
l abour, i s l ar gel y al l ocat ed cent r al -
l y. Managers, engineers, and peo-
ple j us t out of professi onal school
are praced i n t hei r j obs.
Materials Plan and Factor Market
The f ol l owi ng addi t i onal obser-
vat i ons ma y be made: I n t he Soviet
Uni on, since many wor ker s l i ve i n
company housi ng, wor ker s ' freedom
of movement i s pr obabl y l i mi t e d
mor e i n t hei r capaci t y as buyers
on t he sellers mar ket f or housi ng,
t ha n i n t hei r capaci t y as producers
i n whi ch t hey are themselves sellers
on a sellers mar ket . In t he U S, on
t he ot her hand, wo r k e r s movement
is more l i kel y to be rest ri ct ed bo-
cause t hey are sellers of l abour i n
a buyers mar ket , i n whi ch supply
exceeds demand and t he resul t of
qui t t i ng a j ob ma y be unempl oy-
ment . It may be possible t o expl ai n
many of t he 1940 Soviet l aws whi c h
at t empt t o ci rcumscri be l abour
mobi l i t y and t o enforce l abour dis-
ci pl i ne by obser vi ng t ha t t hey were
designed to place the pressure on
wor ker s t here t hat the buyers mar-
ket , par t i cul ar l y wi t h unempl oy-
ment , places on t hem here.
Sovi et al l ocat i on of mat er i al
product i ve fact ors among uses and
users i s handl ed bot h t hr ough t he
mat er i al s pl an and t he f act or mar -
ket . Mat er i al s are di vi ded i nt o t hr ee
classes whi c h reflect t hei r r el at i ve
scarci t i es. The more scarce t he
fact or, t he mor e i t s use i s cent r al l y
det ermi ned. But t he mor e anxi ous
also are producers to purchase these
mat er i al s i n excess of t he l egal
l i mi t s specified by t he pl an. Ma-
nager i al at t empt s t o procure these
scarce mat er i al s have resul t ed I n
t he b i r t h of "five-percenter t ype"
pur chasi ng agent s and a wi despread
i l l egal pr ocur ement syst em, or bl ack
mar ket , f or producer good' .
96
Januar y, 1959
Enterprise Demand
Related to Price
Ent er pr i se demand f or and use
of mat er i al s i s, of course, r el at ed
t o pri ce. The oppor t uni t y t o ad-
mi ni st er pri ces, t her ef or e, provi des
t he Sovi et cent r al aut hor i t i es wi t h
addi t i onal power t o det er mi ne f ac-
t or use. The Sovi ets have t r i ed t o
pri ce pr oducer goods so t hat t hey
refl ect si mul t aneousl y t hei r act ual
val ue at t he present t i me as wel l
as t hei r hoped f or val ue at a f ut ur e
t i me. That i s, t hey have at t empt ed
t o make f act or pri ces ref l ect cur-
r ent consumer desi res as wel l
as gover nment i nvest ment obj ec-
t i ves at t he same t i me. These ob-
j ect i ves are. of course, mor e of t en
t han not i n conf l i ct ; and pr i ci ng
of producer goods has, accor di ngl y,
gi ven t he Sovi et s no end of t r oubl e.
Si nce 1950 t he Sovi et s have i n-
cr easi ngl y compr omi sed t hei r ob-
j ect i ves by r eset t i ng f act or pri ces
so t hat t hey refl ect t he f act or s' r eal
val ues much mor e t han t hey used
t o, mor e near l y as Amer i can pri ces
do. Thi s change i n pr i ci ng pro-
cedure has meant gr adual abandon-
ment of t he subsi di es previ ousl y
gr ant ed t o cer t ai n i nf ant i ndust r i es.
Just as West er n economi es f ound i t
necessary t o gr ant cer t ai n i ndus-
t r i es t ar i f f and ot her pr ot ect i on t o
st i mul at e and per mi t t hei r gr owt h,
t he Sovi et s had pr ot ect ed t hei r
capi t al goods i ndust r i es by pri ce
subsi di es. As these i ndust r i es cease
t o be i nf ant s, t he economi c costs of
over- and under - pr i ci ng can no
l onger be j ust i f i ed, and t he sub-
si dl es are wi t hdr awn. Whi l e wi t h-
dr awal of subsi di es has rai sed pro-
t est among spokesmen of some of
t he i ndust r i es concerned, these
obj ect i ons appear t o have had less
i mpact i n t he Sovi et Uni on t han
t he same obj ect i ons have i n t he
Uni t ed St at es.
Economic Role of Profits Differ
The payment recei ved by produc-
t i ve f act or s, or f act or r ewar d, i s i n
bot h economi es det er mi ned l ar gel y
on t he f act or mar ket . By and l ar ge,
each uni t of f act or , such as an hour
of l abour or a t on of steel , i s pai d
f or by sale and purchase on t he
mar ket . We may di st i ngui sh re-
war d payment s f or l abour , t er med
wages and sal ari es, and payment s
f or mat er i al s, whi ch I shal l cal l
pr of i t s ( t hough t hey i ncl ude r ent ,
i nt er est , et c) . I n bot h economi es
wage payment s ma k e up t he bul k
of consumer s' money i ncome. The
maj or except i ons i n bot h count r i es
ar e t he i ncome of f ar mer s, and
i n t he U S, par t of t he i ncome
of smal l busi ness peopl e, most -
l y mer chant s and r eal est at e
owner s, whi ch cont ai n subst ant i al
pr of i t component s. Negl ect i ng t hi s
compl i cat i on, we may vi sual i ze
wage recei pts as t he source of most
consumer expendi t ures and non-
wage recei pt s as f l owi ng i nt o pro-
ducers' expendi t ures I n bot h econo-
mi es.
The economi c rol e of these non-
wage payment s, or pr of i t s, appears
t o di f f er i n t he t wo economi es, how-
ever. I n t he U S t he ext ent and
di st r i but i on of pr of i t s subst ant i al l y
det er mi nes who produces what cor .
sumer and producer goods; and, i n
t he absence of gover nment i nt er-
vent i on, t hey det er mi ne t he amount
of i nvest ment . I n t he Sovi et Uni on,
however, pr of i t s, pl ay onl y a mi nor
rol e i n di st r i but i ng i nvest ment and
producer goods among producers.
As we have seen t hi s t ask i s l ef t
pr i mar i l y t o t he mat er i al s pl an and
ot her cent r al l y and decent r al l y de-
t er mi ned f orces. Pr of i t s cer t ai nl y
do not det er mi ne t he amount of
Sovi et i nvest ment . I ndeed, we
mi ght say t hat i n t he Sovi et Uni on
pr of i t s mer el y ref l ect ot her deci si ons
and, l i ke t axes, are l ar gel y si phoned
of f by t he gover nment i n order t o
reduce i nf l at i onar y pur chasi ng
power. I n shor t , Amer i ca places re-
l at i vel y mor e rel i ance on a f ree
compet i t i ve mar k et t o al l ocat e
mat er i al s t han i t does t o al l ocat e
l abour . The Sovi et Uni on rel i es
r el at i vel y mor e on t he mar ket t o
al l ocat e l abour t han i t does t o
al l ocat e mat er i al s,
Economic Role of Profits
An y l ar ge economy whi ch rel i es
on speci al i zat i on of l abour t o pro-
duce a l ar ge var i et y of goods can-
not pr act i cal l y di st r i but e these
goods among consumers by cent r al
f l at . The onl y pr act i cal way t o
cope wi t h t he number of deci si ons
i nvol ved i n di st r i but i ng goods
among consumers i n t he U S and
t he Sovi et Uni on i s t hr ough de-
cent r al i zed mar k et deci si ons. Mor e-
over, we not ed t hat bot h economi es
al l ocat e l abour t hr ough mar k et i n-
cent i ves. I f these i ncent i ves and
t he r esul t i ng i nequal i t y of i ncome
di st r i but i on i s t o be meani ngf ul t o
wor ker s, t hey must , i n t hei r capa-
ci t y as consumers, be abl e t o exer-
cise a subst ant i al degree of choi ce
among consumer goods. I n bot h
economi es, each consumi ng uni t
commands a cer t ai n amount of i n-
come, each good bears a pr i ce; and
each consumer di vi des t he i ncome
avai l abl e t o h i m among t he goods
i n accordance wi t h hi s r el at i ve de-
si res f or goods and t hei r r el at i ve
pri ces. Consumer goods are t hus
di st r i but ed aut omat i cal l y and de'
cent r al l y. Al l avai l abl e goods ar e
t aken off t he mar ket i f t he pri ce
of each good i s such t hat t he mar -
ket demand cl ears t he mar ket sup-
pl y. I n t he Uni t ed States t he pri ce
i s by and l ar ge set t hr ough i mpl i ci t
bar gai ni ng bet ween consumers and
suppl i ers. I n t he Sovi et Uni on t he
gover nment sets most consumer
goods pri ces; but i t sets these pr i -
ces pr et t y much so t hat t hey wi l l
cl ear t he mar ket ; or else t he mar -
ket or gani zat i on woul d not wor k at
al l .
Three amendment s whi ch i nt r o-
duce some di fferences between t he
Sovi et and t he Amer i can si t uat i on
may be made t o t hi s descr i pt i on of
Sovi et consumer good di st r i but i on.
(1) Al t hough Amer i ca di st r i but es
some i mpor t ant goods, such as edu-
cat i on, communal l y, the Sovi et
Uni on di st r i but es a l ar ger share of
her out put communal l y. But i t may
be presumed t hat bot h soci eti es
f or ego consumer choi ce i n t he di s-
t r i but i on of "soci al servi ces" f or
ei t her of t wo reasons: ( a) ei t her
consumer wi shes and/ or pr oduct i on
condi t i ons ar e such t he gover nment
can effect the desi red di st r i but i on
mor e cheapl y t han t he mar ket (de-
fense) or ( b) t he soci ety wi shes t o
enf or ce a di st r i but i on of goods
whi ch di f f ers f r om t hat whi ch con.
sumers woul d choose I ndi vi dual l y
( educat i on, heal t h) .
(2) The second amendment i s
t hat f or some goods, not abl y f oods,
t he Sovi ets mai nt ai n t wo or t hr ee
mar ket s each wi t h a di f f er ent pri ce
f or t he same goods. I n t hat case
quant i t y suppl i ed I s i nadequat e t o
meet quant i t y demanded on t he l ow
pr i ce st at e mar ket s; but t he hi gh
pri ce f ree mar ket , where exi st ent ,
hel ps t o redress t he bal ance.
(3) The t hi r d qual i f i cat i on i s
t hat f or consumer, as f or producer
goods t he Sovi et economy mai n-
t ai ns mor e of a sellers mar ket and
t he U S mor e of a buyers ma r k e t
We shal l r et ur n t o t hi s di f f erence.
Aggregation
An y non- bar t er , exchange econo-
my faces a pr obl em of aggr egat i on:
equat i ng t ot al pur chasi ng power t o
97
J anuar y, 1959 THE ECONOMIC WEEKLY ANNUAL
T HE ECONOMI C WE E K L Y A N N U A L
t he val ue of goods avai l abl e. Bot h
t he Sovi et and Amer i can economi es
di ver t a l ar ge share of t hei r t ot al
pr oduct i on away f r o m t he consumer
goods mar ket . But wage earners
are r ewar ded f or t he pr oduct i on of
al l goods; producer, defense, and
soci al l y di st r i but ed goods whi ch do
not appear on t he consumer mar ket
as wel l as f or t he consumer goods
whi ch do. Ent er t he aggr egat i on
pr obl em: equat i ng pur chasi ng power
—der i ved f r om t he pr oduct i on of al l
goods—t o t he val ue of onl y t hose
goods t hat do appear on t he con-
sumer goods mar ket . An y mar ket
economy coul d have recourse t o
t he same t hree gener al sol ut i ons:
(1) keep pay r at es (wages) l ow
enough t o equate t ot al recei pts t o
t he val ue of goods; (2) keep pri ces
of consumer goods hi gh enough t o
absor b al l of t he pur chasi ng power
recei ved; (3) mat ch t he di ver si on of
producer and ot her goods out of t he
consumer goods mar k et by a si mi l ar
di ver si on of pur chasi ng power. The
Sovi et Uni on and t he Uni t ed St at es
bot h rej ect t he f i r st t wo al t er nat i ves
and pl ace t hei r pr i nci pal rel i ance
on t he t hi r d. Accept ance of ei t her
of t he f i r st t wo sol ut i ons t o the
aggr egat i on pr obl em woul d resul t
i n mar ket pri ces whi ch do not r e-
f l ect t he r eal val ues of f act or s.
Thus, i n usi ng pri ces as gui des, pro-
ducers woul d base t hei r pr oduct i on
deci si ons on mi si nf or mat i on; and
or gani zat i on on t he pr oduct mar ket
woul d be bought at t he cost of
di sor gani zat i on on t he f act or mar -
ket . We may presume t hat t hi s
cost expl ai ns t he r ej ect i on by bot h
economi es of t he f i r st t wo met hods.
Bot h t he U S and t he Sovi et eco-
nomi es, t hen, el ect t he t hi r d al t er -
nat i ve. They di ver t enough recei pts
f r o m t he consumer goods mar ket t o
achi eve at l east a r ough bal ance of
demand and suppl y. I n t he Uni t ed
St at es t hi s di ver si on t akes t he f o r m
of t axat i on and of pr i vat e and
busi ness savi ngs ( or undi st r i but ed
pr of i t s) . Si nce, compar ed t o t he
Amer i can economy, t he Sovi et
economy di st r i but es a l ar ger share
of t ot al out put out si de of t he con-
sumer goods mar ket , t he Sovi ets
al so di ver t a l ar ger por t i on of r e-
cei pts f r o m t hat mar ket . I n t he
Sovi et Uni on t he di ver si on used t o
absor b pur chasi ng power or t o
close t he i nf l at i onar y gap I s enter-
pri se pr of i t s whi ch are l ar gel y t u r n -
ed over t o t he gover nment f or re-
i nvest ment , t he t ur nover t ax,
var i ous " budget ar y adj ust ment s"
t o t hat t a x t he per sonal i ncome
t a x on ur ban peopl e, t he i ncome t ax
on peasant s, t he t ax on coopera-
t i ves, and t he sal e of gover nment
bonds. Of these, t he t ur nover t a x
I ncl udi ng i t s auxi l i ar y, t he budge-
t a r y di f f erence, i s by f a r t he most
i mpor t ant .
The essenti al s of pri ce and t a x
det er mi nat i on seem t o be t he f ol -
l owi ng: The pri ce t o t he f i nal con-
sumer i s set so as to equate quan-
t i t y demanded and quant i t y suppl i -
ed at t hat pri ce f or t he par t i cul ar
good and t o hel p equate t he quan-
t i t i es demanded and suppl i ed f or
al l goods. The t ot al pr oduct i on and
di st r i but i on cost of t he good i s cal -
cul at ed. The di f f erence i s a resi -
dual and i s desi gnat ed t o be absor-
bed by t he t ur nover t ax. But t u r n -
over t axes, whi ch are gener al l y
appl i cabl e t o t he whol e Sovi et
Uni on and i nf r equent l y changed,
can effect ver y r ough demand/ sup-
pl y adj ust ment onl y. Si nce cost
and demand condi t i ons di f f er f r om
pl ace t o pl ace and f r om t i me t o
t i me, f ur t her geogr aphi cal and
t empor al adj ust ment s are necessary
t o close t he i nf l at i onar y gap
t hr oughout . These adj ust ment s are
achi eved t hr ough t he so-cal l ed bud-
get ar y di f f erence whi ch mops up
pur chasi ng power not caught by t he
gener al t ur nover t ax.
Thi s i nt er pr et at i on of t he t ur n-
over t ax as a r esi dual desi gned t o
close t he i nf l at i onar y gap Is sup-
por t ed by t hree addi t i onal obser-
vat i ons: (1) About 75 per cent of t he
t ax revenue i s der i ved f r om con-
sumer expendi t ures on good and
appar el , whi ch renders t he t ax ver y
regressi ve. The mor e regressi ve t he
t ax, t he mor e i t f al l s on l ow i ncome
recei vers who t ypi cal l y spend r at her
t han save, and t he bet t er sui t ed i t
i s t o combat i nf l at i on. (2) The re-
gi ons i n whi ch per capi t a t ax pay-
ment s are hi gh are al so regi ons I n
whi ch a r el at i vel y Targe share of
i ncome i s recei ved f r o m pr oduct i on
of goods not ent er i ng t he consumer
goods mar ket . (3) The t ax yi el d
has been si mi l ar l y hi ghest i n t hose
year s I n whi ch t he gr eat er share of
out put t ook t he f o r m of producer
and defense goods. I n summar y,
t he dat a suggest t hat t he hi gher
i s t he i nf l at i onar y gap, r egi onal l y
or t empor al l y, the hi gher I s t he
t ur nover t ax yi el d.
Distribution of Income
The di st r i but i on of i ncome among
i ndi vi dual s i n t he Sovi et Uni on as
Wei l as i n t he Uni t ed St at es, I s
ver y much ef f ect ed at t he pl easure
of t he Cent r al gover nment . I n bot h
economi es, gi ven t he di st r i but i on of
weal t h and ski l l , i ncome i s di st r i -
but ed among i ndi vi dual s i n t he
f i rst i nst ance t hr ough mar k et re-
war d f or servi ces I ndi vi dual s ren-
der and i n t he second i nst ance
t hr ough gover nment amendment of
t he r esul t i ng Income di st r i but i on
by t axat i on and t r ansf er payment s.
The ext ent of mar ket r ewar d t o
each i ndi vi dual i s i n t ur n deter-
mi ned f i r st l y by t he amount of
resources he owns and secondl y by
t he pri ces hi s resources or t hei r
servi ces command i n t he mar ket .
Al t hough f act or resource pr i ce'
are set mor e cent r al l y i n t he Sovi et
Uni on t han i n t he U S, t he f i nal
di st r i but i on of i ncome i s cent r al l y
det er mi ned i n equal degree i n t he
t wo economi es. Each gover nment
af t er al l , has t he opt i on of al t er i ng
t he mar ket det er mi ned i ncome di s-
t r i but i on t hr ough t axat i on—and
bot h gover nment s exerci se t h a t
opt i on t hr ough a di f f er ent i al i ncome
t ax and each soci et y has t he opt i on
of al t er i ng t he exi st i ng di st r i but i on
of resources—and bot h soci eti es
exerci se t hat opt i on, pr i mar i l y
t hr ough f ree or subsi di zed publ i c
educat i on. The pri nci pl es under-
l yi ng t he di st r i but i on of i ncome
di f f er I n t he Sovi et Uni on and t he
U S however. I n t he Sovi et Uni on,
f or i nst ance, t he l ncome t ax i s
gr aduat ed wi t h respect t o source of
Income, such as l abour , pr of essi onal
pract i ce, handi cr af t , ar t , et c, r at her
t han by amount of i ncome as i t i s
i n t he U S. Bot h t he Sovi et and
the U S gover nment seem to be f ul l y
awar e of effects of I ncome di st r i -
but i on on personal i ncent i ves and
pr oduct and f act or mi x. Bot h t r y
consci ousl y t o use i ncome di st r i -
but i on as a means of pr omot i ng t he
desi red sel ecti on of goods and pr o-
duct i on met hods.
Market and Pricing
We have seen repeat edl y how
bot h economi es use mar ket s t o
handl e many i mpor t ant economi c
f unct i ons. But effi ci ent t hough t he
mar ket mechani sm i s, i t i s not per-
f ect . An y economy whose out put
changes t hr ough t i me i s l i kel y t o
experi ence di f f i cul t y i n r el yi ng on a
mar ket f or the si mul t aneous sol u-
t i on of bot h t he resource use and
t he aggr egat i on pr obl em. Gr owi ng
economi es, par t i cul ar l y, wi l l f i nd i t
di f f i cul t al ways t o equate demand
09
T HE ECONOMI C WE E KL Y A N N U A L
100
January, 1959
THE ECONOMI C WE E K L Y A N N U A L
Januar y, 1959
and suppl y f or each i ndi vi dual good
and f or al l goods put t oget her.
Bot h t he U S and t he Sovi et econo-
my do experience t hi s di f f i cul t y con-
t i nual l y ; t hey bot h operate wi t h a
di sequi l i br i um system, t o adopt t he
apt phrase whi ch Gal br ai t h appl i ed
t o the U S Wor l d Wa r I I economy.
I f one's mar ket cannot be i n equi l i -
br i um, and equi l i br i um i s di ffi cul t
for gr owi ng economies t o achieve,
t hen one must settle f or a buyers
mar ket or a sellers mar ket , or some
of each. The U S has t ypi cal l y elect-
ed t o r el y on a buyers ma r ke t and
t he Soviet Uni on on a sellers mar ket .
The buyers / sel l ers mar ket diffe-
rence between t he U S and t he
Soviet Uni on is most conspicuous in
t hei r respective l abour mar ket s, but
i t i s general l y apparent i n al l t hei r
mar ket s. The U S general l y mai n-
t ai ns r el at i vel y hi gh prices and l ow
pur chasi ng power so t hat supply
tends to exceed demand at present
prices, and the Soviet Uni on mai n-
t ai ns r el at i vel y l ow prices and hi gh
pur chasi ng power so t hat demand
tends to exceed supply at present
prices. As we have al r eady seen
t he r esul t i ng tendency is t hat in
the U S buyers enjoy more freedom
of choice t han do sellers, i ncl udi ng'
sellers of l abour ; whi l e in the Soviet
Uni on buyers of al l ki nds suffer at
the expense of sellers, i ncl udi ng
sellers of labour.
Some of the i ns t i t ut i onal results
of t hi s selection of sellers and buy-
ers mar ket s by the Soviet Uni on
and the Uni t ed States are purchas-
i ng agents ( t ol kachi ) and wa i t i ng
lists there and salesmen and ad-
ver t i si ng here. Bot h are costs or
results of r el yi ng on di sequi l i br i um
mar ket s. By usi ng t he appropri at e
monet ar y and fiscal i nst rument s,
each economy coul d, no doubt, r i d
i t sel f of t he par t i cul ar type of dis-
equi l i br i um wi t h whi ch i t i s beset;
but it mi ght wel l do so at t he cost
of get t i ng the ot her di sequi l i br i um.
We mi ght wel l regard the Amer i can
at t empt s t o guarant ee f ul l employ-
ment i n the face of downwar d i n-
fl exi bl e wages and the r esul t i ng
i nf l at i onar y pressure as a case In
poi nt : it appears as a step t owa r d
subst i t ut i ng the sellers mar ket
f ami l i ar f r om t he Soviet and t he
U S war t i me experience for the
buyers mar ket f a mi l i a r f r om our
own past experiences. So much for
the "how"; wha t about t he " wh y " ? '
Mor e extensive discussions of
how t he Soviet economy wor ks
may be f ound in H Schwart z,
Why the Similarity' and
Difference'?
Can we account f or t he s i mi l ar i -
ties and differences between Soviet
and Amer i can choices among or-
gani zat i onal met hods? Pr obabl y
not concl usi vel y. But , by focusi ng
on as few as t wo maj or objectives
among t he many t hat bot h the
Soviet and t he Amer i can people
have, we can find a pat t er n between
t hei r respective objectives and t hei r
observed selection of or gani zat i onal
met hods. Consider t he objectives,
(1) economic efficiency and (2) eco-
nomi c gr owt h a nd/ or defense. Bot h
st and hi gh i n t he l i st of each peo-
ple's maj or social objectives. Un-
f or t unat el y, however, the demands
these objectives make of any so-
ciety are frequent l y i n confl i ct .
Nei t her the Soviet Uni on nor t he
Uni t ed States appear yet t o have
found i t possible t o meet bot h ob-
jectives equally and si mul t aneousl y.
Accor di ngl y, occasions arise when
each count r y finds i t necessary t o
sacrifice some sat i sfact i on of one
obj ect i ve t o at t ai n more sat i sfac-
t i on of the ot her. We shoul d not
be surprised i f , upon exami ni ng the
r el at i on between objectives held and
met hods selected in t he Soviet
Uni on and the Uni t ed States, we
fi nd t hat t he met hods chosen and
sacrifices made correspond to the
rel at i ve i mpor t ance of the objectives.
Thus, we may observe: The more
emphasis each economy places on
efficiency in a gi ven si t uat i on, t he
more does it sacrifice gr owt h/ de-
fense and the more does it rel y on
decentralized decisions. The more
emphasis each economy places on
economic gr owt h or defense. the
more does it sacrifice efficiency and
t he more cent ral i zed are the rel evant
decisions. Consider the evidence.
I nsof ar as bot h economies em-
phasize al l ocat i on heavi l y, bot h
economies empl oy r el at i vel y decen-
t r al i zed or gani zat i on. Thus, we find
t hat bot h economies use mar ket s t o
' Russia' s Soviet Economy' ; F
Hol zman, ' Soviet Taxat i on' ; D
Gr ani ck, ' Management of the I n
dust r i a l F i r m in the U S S R' , J
Berl i ner. ' Fact or y and Manager
in t he U S S R' ; A Fr ank, "The
Or gani zat i on of Economi c Ac t i vi -
t y i n the Soviet Uni on, " i n ' Wel t -
wi rt schaffi ches Ar chi v' , vol 78,
No 1, 1957, pp 104-156, Addi t i onal
compar at i ve exami nat i on may be
found in A Oxenfel dt , ' Economi c
Systems i n Act i on'
di st r i but e goods among consumer ' '
and t o some ext ent det ermi ne bot h
t he produce and t he f act or mi x of
non-i nvest ment and non-defense
goods. I nsof ar as the Soviets em-
phasize gr owt h r el at i vel y mor e a n d
al l ocat i on r el at i vel y less t ha n we
do, t hey resort t o mor e cent ral i zed
decisions t han we do. Thus, t he
Soviet product and f act or mi x
i s mor e cent r al l y det er mi ned t ha n
ours. Wi t h i n t he Soviet Uni on I t -
self, t he mor e scarce or s t r at e'
gie a good or a f act or is, t he
more cent r al l y i s i t s di s t r i but i on
det ermi ned. For instance, cent ra-
lized decisions predomi nat e mor e f or
t he di s t r i but i on of steel and ski l l ed
l abour; decent ral i zed ones pr edomi -
nat e more for t he di s t r i but i on of
paper and or di nar y l abour. We
may s i mi l ar l y observe t hat t he sell-
ers ma r ke t predomi nat es i n t he
Soviet Uni on whi ch can i l l af f or d
the l arge stocks of mat er i al s and
goods necessary to operate a buyers
mar ket and whi ch wishes t o r e '
s t r ai n consumer soverei gnt y. The
buyers mar ket on the ot her hand
is more usual here where these ci r-
cumstances do not prevai l .
The more bot h societies emphasize
gr owt h or defense, t he mor e do
bot h det ermi ne the al l ocat i on of
resources by t hei r cent r al govern-
ment s. Thus, t he Soviets val ue a
hi gh rat e of gr owt h r el at i vel y mor e
hi ghl y t han we do. They also
place great er reliance on cent r al
det er mi nat i on of the i mpor t ant
consumpt i on/ i nvest ment r at i o t han
we do. However, when dur i ng t he
nineteen fort i es defense replaced
al l ocat i on as our pri me obj ect i ve we
i mmedi at el y adopted not onl y cen-
t r al i zed decisions of t he i nvest ment
defense t o consumpt i on r at i o, but
as wel l t he whol e gamut of Soviet
or gani zat i onal met hods i ncl udi ng
pl anni ng of f act or use, huma n as
wel l as mat er i al , admi ni st ered pr i -
ces, i nf l at i onar y i nst ead of defla-
t i onar y di sequi l i br i um, etc. I n ot her
periods of our hi s t or y also. when
we experienced the spurt s of eco-
nomi c gr owt h associated wi t h r a i l -
roads and aut omobi l es, t he Amer i -
can gover nment also helped to pave
the way wi t h r ai l r oad gr ant s and
r oad bui l di ng. An d i t i s conceivable
t hat t he Amer i can gover nment may
agai n t ake an act i ve role i n t he
fut ure of at omi c energy. At t he
same t i me, t he evidence ampl y i n -
dicates t hat as t he Russians eval u-
ate increased gr owt h r el at i vel y less
hi ghl y and present al l ocat i on rei a-
101
J anuar y, 1959 THE ECONOMIC WEEKLY ANNUAL
t i vel y mor e hi ghl y, so also do t hey
I ncr easi ngl y subst i t ut e mor e de-
cent ral i zed met hods of decision
ma k i n g a nd freer prices f or cen-
t r al i zat i on and admi ni st er ed prices.
I n short , i t does seem t ha t we can
associate cent r al i zat i on wi t h t he
sol ut i on of g r o wt h or defence pro-
bl ems and decent r al i zat i on wi t h
t he sol ut i on of al l ocat i on probl ems.
The Sovi et and Ame r i c a n eco-
nomies, i n concl usi on, exhi bi t sub-
s t ant i al or gani zat i onal si mi l ar i t i es.
The y exhi bi t some di ssi mi l ar i t i es as
we l l . I s i t acci dent al t ha t t he or-
gani zat i onal met hods selected by
t he Sovi et Uni on and t he Uni t ed
St at es correspond, at par t i cul ar
t i mes i n t hei r respective hi st ori es,
t o t he r el at i ve i mpor t ance t hey ac-
cor d t o t hei r common soci al objec-
t i ves of economi c efficiency and
growt h-defence? Or i s i t possible
t ha t anot her people' s choice of eco-
nomi c or gani zat i on, and ma y be
aspects of pol i t i cal and social orga-
n i z a t i o n as wel l , can be explicable,
and hopeful l y acceptable, i n t er ms
even of our own val ues and objec-
t i ves?
Foreign Exchange Revenues from
Oil Companies Down in Indonesia
NE XT to t he di ffi cul t i es as a result
of the i ncr easi ng demand but
dwi ndl i ng supply of oi l . t he oi l
quest i on wi l l ent ai l a f ur t her dec-
l i ne t oo of t he forei gn exchange
revenues of t he State. The oi l com-
panies are ent i t l ed t o use t hei r own
f or ei gn exchange f or t hei r i nvest -
ment i f these are cleared wi t h t hei r
f or ei gn exchange earned by t hei r
export s. On t he ot her hand, i f t hey
wa nt Rupi ah f or wages, taxes etc
t hey sell t hei r f or ei gn exchange t o
t he Gover nment i n order t o get
Rupi ah.
The pr oduct i on of the oi l com-
panies .shows a decline, except f or
Cal t ex, St anvac i s t hr eat ed wi t h
a decrease of her pr oduct i on as it
has not got new concessions. It i s
l earned t ha t t he pr oduct i on of Shel l
and St anvac wi l l go down f ur t her ,
whereas t he home need of oi l wi l l
s t i l l increase. The home consump-
t i on (has been i ncr easi ng as) can
be seen f r om t he fi gures of oi l sol d
i n t he home mar ket .
The Shel l export s of refi ned oi l
were i n 1956 39 mi l l i on bar r el s and
i n 1957 41 mi l l i on barrel s. The
mor e gasol i ne Shel l and St anvac
s el l at home, t he less Rupi ah t hey
wi l l wa n t a nd less f or ei gn exchange
t he gover nment wi l l get f r o m t hem.
Cal t ex f or ms an except i on as i t ex-
por t s t he oi l whol l y, s o t ha t i t wi l l
need mor e Rupi ah i f i t expanded
i t s business.
As a r esul t of t he dwi ndl i ng
amount of oi l f or t he refineries,
Shel l i s now i mpor t i ng mor e and
mor e crude oi l , vi z, i n 1956 21 mi l -
l i on and i n 1957 27 mi l l i on barrel s.
As t he Cal t ex pr oduct i on of crude
oi l i s r i s i ng i t woul d be bet t er i f
Shel l i s r ef i ni ng t hi s oi l , but i t seems
t ha t t he adagi um (si c) "business i s
business' ' i s s t i l l pr evai l i ng wi t h
Shel l , s o t ha t I t prefers t o i mpor t
crude oi l f r o m her o wn company
abr oad, t o keep t hei r refi nery-pl ant
r unni ng.
The oi l commi t t ee set up by t he
gover nment t o exami ne t he oi l ques-
t i on have met several t i mes t o dis-
cuss these probl ems. Wo u l d not i t
be bet t er t o have t he Cal t ex crude
oi l processed by t he Shel l refi nery
t han t o urge Cal t ex t o bui l d a re-
fi nery pl ant here, as t he exi st i ng
one i s not wo r k i n g at f u l l capaci t y?
— ' The Commer ci al Weekl y' , Dj a -
ka r t a , December 29, 1958.
102