T H E ECONOMIC W E E K L Y A N N U A L

Soviet and American Economic Organization

A Comparison
Andrew Guilder Frank

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 basis of (5) H o w s h a l l t h e t o t a l p u r - important ways. I t i s also i n de-

comparison. T h e basis to be c h a s i n g power i n the hands of ciding the c o n s u m p t i o n / i n v e s t m e n t
used here, a convenient y e t i m p o r - buyers be equated to the t o t a l r a t i o t h a t t h e Soviet U n i o n a n d t h e
t a n t one, i s the question: "How a m o u n t o f goods available for U S probably exhibit the most
does the society provide f o r the purchase? T h i s is the p r o b l e m apparent and actual differences;
f u n d a m e n t a l decisions necessary to of aggregation. t h o u g h , I suggest, t h e a c t u a l diffe-
run a complex economy?" The rences are n o t n e a r l y as g r e a t as
(6) W h o shall receive what
f u n d a m e n t a l decisions, or questions t h e a p p a r e n t ones. T h e Soviets de-
slice of the t o t a l income pie, or
to be answered, or problems to be f i n i t e l y determine the c o n s u m p t i o n /
w h a t shall the d i s t r i b u t i o n of
solved, m a y be d i s t i n g u i s h e d as investment ratio centrally; and it is
income be?
follows: difficult t o a s c e r t a i n j u s t w h a t , o t h e r
(1) W h a t p o r t i o n o f t o t a l o u t - ( N o t e t h a t t a s k s ( 4 ) a n d (6) d i f f e r ; t h a n the s t r o n g desire f o r g r o w t h ,
p u t s h a l l b e consumed a n d w h a t t a s k (6) involves o n l y t h e d i v i s i o n guides t h e i r selection. The con'
portion saved and reinvested? a m o n g the society's members of sumption/investment ratio is not
T h i s question w i l l b e r e f e r r e d t o total purchasing power; task (4) t h e outcome o f i n t e r a c t i o n among
as the consumption/investment r e f e r s t o the a d d i t i o n a l decisions r e - p r e v i o u s l y d e t e r m i n e d prices, pro-
decision. q u i r e d t o d e t e r m i n e w h o gets w h a t duct mix, factor mix, profitability,
p a r t i c u l a r goods). A l l these prob- or inflation. On the contrary, it
(2) Given the consumption/
lems are, of course, i n t e r r e l a t e d ; appears that the consumption
investment ratio, just what con-
a n d each economy solves them investment ratio is the mainspring
sumer a n d investment or pro-
simultaneously. B u t w e c a n under- decision w h i c h i t s e l f gives rise t o
ducer-goods shall be produced?
s t a n d t h e e n t i r e process b e t t e r if them. H o w the decision i s imple-
In other w o r d s , precisely what
we visualize the economy as t h o u g h m e n t e d w i l l t h e n appear in our
s h a l l t h e p r o d u c t - m i x be?
i t solved t h e m separately a n d i f w e e x a m i n a t i o n o f these o t h e r m a t t e r s .
(3) G i v e n the p r o d u c t - m i x , h o w
t a k e t h e m u p i n the o r d e r j u s t pre- Does A m e r i c a n d e t e r m i n a t i o n o f
s h a l l t h e selected products be
sented. O u r answers to the ques- the total consumption/investment
produced? H o w shall the a v a i l -
t i o n s w i l l t h e n p e r m i t u s t o explore ratio differ substantially f r o m the
able resources o r f a c t o r s o f pro-
w h e t h e r the s i m i l a r i t i e s a n d d i f f e r - Soviet one? Apparently, yes. At
d u c t i o n be c o m b i n e d to produce
ences in methods of economic o r g a - f i r s t g l a n c e i t appears as though
t h e selected goods? T h i s question
n i z a t i o n m a y not b e explained by total American investment is the
m a y b e labeled the " f a c t o r - m i x "
s i m i l a r i t i e s a n d differences i n ob- result of m a n y relatively decent-
(4) Once t h e products a r e p r o -
jectives between t h e Soviet U n i o n r a l i z e d decisions which producers
duced, w h i c h consumers s h a l l r e -
a n d t h e U n i t e d States. m a k e i n response t o m a r k e t con-
ceive w h a t products; or what
ditions. These i n v e s t m e n t decisions
shall the distribution of consu-
How Does the Economic are related to m a r k e t profits and
m e r goods be?
t o conditions o n the f i n a n c i a l m a r -
Organization Compare?
See, f o r instance, W a r r e n N u t t e r ket. B u t these decisions primari-
w r i t i n g i n t h e ' A m e r i c a n Econo- We m a y conveniently begin t h e ly determine the allocation of t o t a l
m i c R e v i e w ' , M a y 1957 a n d 1958; a n a l y s i s by a s k i n g h o w the Soviet i n v e s t m e n t a m o n g p a r t i c u l a r goods
Joint Economic Committee of the U n i o n a n d t h e U n i t e d States decide a n d p a r t i c u l a r firms. T h e level of
Congress, 'Soviet Economic h o w t o d i v i d e t o t a l o u t p u t between i n v e s t m e n t , o n the o t h e r h a n d , i s
Growth, A Comparison w i t h The consumption a n d investment. The v e r y m u c h influenced b y the g o v e r n -
U n i t e d S t a t e s ' ; a n d such p u b l i c a - Soviet s o l u t i o n t o t h a t question de- ment. W h e n e v e r the g o v e r n m e n t
tions as 'U S News a n d W o r l d termines the remainder of the r e g a r d s the p r i v a t e l y determined
Report'. Soviet economic organization in level of i n v e s t m e n t as u n s a t i s f a c -

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t o r y ( w h e t h e r too h i g h o r too l o w ) m i x m u s t i n some w a y s reflect con- choice. Nonetheless, a c t u a l alloca-

i t uses Its various m o n e t a r y , t a x i n g sumer preferences as expressed tion of labour both w i t h i n industry
a n d spending (fiscal), powers to t h r o u g h the m a r k e t and political a n d between i n d u s t r y a n d a g r i c u l -
change the a m o u n t of investment. processes, f o r surely neither the ture, has t h r o u g h o u t the Soviet
E c o n o m i c a l l y speaking, it is mere planner n o r the enterprise could period been organized p r i m a r i l y
happen-chance t h a t the p r i v a t e l y l o n g a f f o r d to produce goods w h i c h t h r o u g h a free labour m a r k e t . T h e
determined level of i n v e s t m e n t in the consumers do n o t choose to Soviets have relied m o s t l y on m a r -
the U S is usually more n e a r l y buy. I n other words, the Soviet k e t incentives b o t h to r e c r u i t labour
s a t i s f a c t o r y to the people a n d t h e i r consumer exercises some degree of into i n d u s t r y a n d t o allocate it
g o v e r n m e n t t h a n has been the case consumer sovereignty i n determin- w i t h i n i n d u s t r y . They r e l y h e a v i l y
in the Soviet U n i o n d u r i n g the last i n g the product m i x j u s t as does on piecework wages to provide
generation. Thus, the U S govern- the American consumer. The w o r k e r incentive o n the j o b . A l -
m e n t m a y be said to determine Soviet consumer exercises this t h o u g h labour a l l o c a t i o n directives
total i n v e s t m e n t sometimes by per- sovereignty over a smaller p o r t i o n a n d administered wages have gene-
m i t t i n g p r i v a t e producers' decisions of t o t a l n a t i o n a l product because a r a l l y been included in the p l a n ,
to stand sometimes, such as in smaller share of Soviet output enterprises have m u c h more often
m o s t post-war years, by a m e n d i n g t h a n A m e r i c a n output i s channeled t h a n n o t honoured t h e m i n the
private decisions through mud i n t o consumer goods, a n d because breach. Only t r a i n e d personnel,
m o n e t a r y a n d f i s c a l measures; a n d Soviet producer goods are t y p i c a l l y w h i c h is more scarce t h a n o r d i n a r y
sometimes, notably during the used to m a k e s t i l l more producer labour, is l a r g e l y allocated central-
t h i r t i e s a n d early forties, by employ- r a t h e r t h a n consumer goods. Ad- l y . Managers, engineers, a n d peo-
i n g more direct measurers analo- m i n i s t r a t i v e p r i c i n g a n d the sellers' ple j u s t out of professional school
gous to the Soviet m a t e r i a l s p l a n . market l i m i t Russian consumer are praced in their jobs.
A s f o r a n o t i n g n a t i o n a l income t o sovereignty s t i l l f u r t h e r . B u t these
defense, w h i c h requires r e s t r a i n t s matters are better dealt w i t h i n our Materials Plan and Factor Market
on consumption similar to those comparison of the Soviet a n d A m e - The f o l l o w i n g a d d i t i o n a l obser-
posed by investment, the Soviet rican market. vations m a y be made: In the Soviet
Union a n d the United States equally U n i o n , since m a n y w o r k e r s live i n
permit the g o v e r n m e n t to have f i r s t Factor Mix and Factor Reward company housing, w o r k e r s ' freedom
c l a i m o n the n a t i o n a l output. I n discussing h o w factors o f pro- of m o v e m e n t is p r o b a b l y limited
duction or resources are allocated more in t h e i r capacity as buyers
Product Mix to uses a n d users, it is convenient on the sellers m a r k e t f o r housing,
Disposal of the c o n s u m p t i o n / to d i s t i n g u i s h between materials t h a n in t h e i r capacity as producers
i n v e s t m e n t decision introduces the a n d labour. I n the U n i t e d States in w h i c h they are themselves sellers
p r o b l e m of selecting the p a r t i c u l a r both kinds of productive factors on a sellers m a r k e t . In the U S, on
types a n d quantities of consumer are g e n e r a l l y allocated a m o n g users the other hand, w o r k e r s movement
a n d producer goods to be produced. t h r o u g h m a r k e t b a r g a i n i n g between is more l i k e l y to be restricted bo-
In large complex economies such as owners a n d p o t e n t i a l users of these cause they are sellers of labour in
those of the Soviet U n i o n a n d the factors. The more competitive the a buyers m a r k e t , in w h i c h supply
United States, the n u m b e r of deci- m a r k e t , the better do prices reflect exceeds d e m a n d a n d the result of
sions i n v o l v e d in this selection pro- the public's w a n t s a n d thus the quitting a j o b m a y be unemploy-
cess is m u c h too large f o r a central more l i k e l y is it t h a t the resultant ment. It m a y be possible to explain
a u t h o r i t y to handle. In the U S f a c t o r a l l o c a t i o n i s i n the p u b l i c s m a n y of the 1940 Soviet laws w h i c h
the product m i x for the h u l k o f the interest. Competitive conditions do attempt to circumscribe labour
goods a n d the large m a j o r i t y of not, however, prevail universally. m o b i l i t y a n d to enforce labour dis-
the decisions i n v o l v e d are r e l a t i v e l y The American labour market, cipline by observing t h a t they were
decentrally made. The American p a r t i c u l a r l y , seems to be beset by designed to place the pressure on
product m i x occurs i n the context either monopoly, monopsony, or w o r k e r s there t h a t the buyers mar-
of a m a r k e t . The Soviets resort to b o t h at the same time. Thus, the ket, p a r t i c u l a r l y w i t h unemploy-
a p l a n n i n g agency to " p l a n " a l a r g - most desirable use of resources is ment, places on t h e m here.
e r share o f the product m i x . T h e n o t u n i v e r s a l l y achieved. A d d i t i o n - Soviet allocation of material
p l a n n e d product m i x is c o m m u n i - a l l y , f a c t o r prices frequently differ productive factors a m o n g uses a n d
cated to the various enterprises; f r o m those w h i c h w o u l d be esta- users is handled b o t h t h r o u g h the
nonetheless, each i n d i v i d u a l enter- blished by b a r g a i n i n g alone, either m a t e r i a l s p l a n a n d the f a c t o r m a r -
prise m u s t purchase its inputs, a n d competitive or monopolistic. We ket. M a t e r i a l s are d i v i d e d i n t o three
dispose of its o u t p u t on a m a r k e t . m i g h t c a l l these prices "administer- classes w h i c h reflect t h e i r relative
I n d i v i d u a l enterprises t y p i c a l l y de- ed", t h o u g h t h e y m a y n o t be ad- scarcities. The more scarce the
viate considerably f r o m planned ministered c e n t r a l l y . factor, the more its use is c e n t r a l l y
o u t p u t i n response t o m a r k e t and T u r n i n g to factor allocation in determined. B u t the m o r e anxious
other pressures. Moreover, in set- the Soviet U n i o n , it is i m m e d i a t e l y also are producers to purchase these
t i n g u p t h e m a t e r i a l s plans, c e n t r a l obvious t h a t factors are allocated materials in excess of the legal
planners are dependent for their both t h r o u g h the c e n t r a l l y appoint- l i m i t s specified by the p l a n . Ma-
i n f o r m a t i o n on enterprise decisions ed m a t e r i a l s a n d financial plans n a g e r i a l a t t e m p t s to procure these
as to w h a t i n f o r m a t i o n about out- and through a factor market. scarce m a t e r i a l s have resulted In
p u t possibilities a n d needs to com- The year 1940 saw the i n t r o d u c t i o n , the b i r t h o f "five-percenter t y p e "
m u n i c a t e t o the center. a n d 1956 the repeal, of several mea- purchasing agents a n d a widespread
B o t h c e n t r a l g o v e r n m e n t a n d pro- sures i m p o s i n g severe l e g a l restric- i l l e g a l procurement system, or black
ducer decisions about the product tions on worker occupational m a r k e t , f o r producer g o o d ' .

96
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Enterprise Demand m a j o r exceptions i n b o t h countries economies, each consuming unit

Related to Price a r e t h e income o f f a r m e r s , a n d commands a certain a m o u n t of in-
Enterprise demand f o r and use in t h e U S, p a r t of t h e i n c o m e come, each g o o d bears a p r i c e ; a n d
of m a t e r i a l s is, of course, r e l a t e d of small business people, m o s t - each consumer divides the income
t o price. The opportunity to ad- ly merchants and real estate a v a i l a b l e t o h i m a m o n g t h e goods
m i n i s t e r prices, t h e r e f o r e , provides owners, which contain substantial i n accordance w i t h his r e l a t i v e de-
the Soviet c e n t r a l a u t h o r i t i e s w i t h p r o f i t components. Neglecting this sires f o r goods a n d t h e i r r e l a t i v e
a d d i t i o n a l power t o d e t e r m i n e fac- complication, we may visualize prices. Consumer goods are thus
t o r use. T h e Soviets h a v e t r i e d t o w a g e receipts as the source of m o s t distributed automatically and de'
price p r o d u c e r goods so t h a t t h e y consumer expenditures and non- centrally. A l l a v a i l a b l e goods a r e
reflect simultaneously their actual w a g e receipts as flowing i n t o pro- t a k e n off the m a r k e t i f the price
value a t the present t i m e a s w e l l ducers' expenditures In b o t h econo- of each g o o d is such t h a t the m a r -
as t h e i r hoped f o r v a l u e at a f u t u r e mies. k e t d e m a n d clears t h e m a r k e t sup-
t i m e . T h a t is, t h e y h a v e a t t e m p t e d p l y . In the U n i t e d States t h e price
T h e economic role of these non-
to m a k e f a c t o r prices reflect cur- is by a n d l a r g e set t h r o u g h i m p l i c i t
w a g e p a y m e n t s , o r p r o f i t s , appears
rent consumer desires as well b a r g a i n i n g between consumers and
to d i f f e r in the t w o economies, h o w -
as g o v e r n m e n t investment objec- suppliers. I n the Soviet U n i o n the
ever. In t h e U S t h e e x t e n t a n d
t i v e s at t h e same t i m e . These ob- government sets m o s t consumer
distribution of profits substantially
jectives are. o f course, m o r e o f t e n goods prices; b u t it sets these p r i -
d e t e r m i n e s w h o produces w h a t c o r .
t h a n not in conflict; a n d pricing ces p r e t t y m u c h s o t h a t t h e y w i l l
sumer a n d producer goods; a n d , i n
o f producer goods has, a c c o r d i n g l y , clear the m a r k e t ; o r else t h e m a r -
t h e absence of g o v e r n m e n t inter-
g i v e n the Soviets no e n d of t r o u b l e . ket organization would not w o r k at
v e n t i o n , t h e y d e t e r m i n e the a m o u n t
all.
Since 1950 the Soviets have i n - o f i n v e s t m e n t . I n the Soviet U n i o n ,
creasingly compromised their ob- however, p r o f i t s , p l a y o n l y a m i n o r Three a m e n d m e n t s w h i c h intro-
jectives b y r e s e t t i n g f a c t o r prices role i n d i s t r i b u t i n g i n v e s t m e n t a n d duce some differences between t h e
s o t h a t t h e y reflect t h e f a c t o r s ' r e a l producer goods a m o n g producers. Soviet a n d the A m e r i c a n situation
values m u c h m o r e t h a n t h e y used As we h a v e seen t h i s t a s k is l e f t m a y be made to this description of
to, m o r e n e a r l y as A m e r i c a n prices p r i m a r i l y t o the m a t e r i a l s p l a n a n d Soviet consumer good d i s t r i b u t i o n .
do. T h i s change i n p r i c i n g pro- o t h e r c e n t r a l l y a n d d e c e n t r a l l y de- (1) A l t h o u g h A m e r i c a d i s t r i b u t e s
cedure has m e a n t g r a d u a l a b a n d o n - t e r m i n e d forces. Profits certainly some i m p o r t a n t goods, such as edu-
m e n t o f the subsidies previously do not determine the a m o u n t of cation, communally, the Soviet
g r a n t e d t o c e r t a i n i n f a n t industries. Soviet investment. Indeed, we U n i o n d i s t r i b u t e s a l a r g e r share of
J u s t a s W e s t e r n economies f o u n d i t m i g h t say t h a t i n t h e Soviet U n i o n her o u t p u t c o m m u n a l l y . B u t i t m a y
necessary t o g r a n t certain indus- p r o f i t s m e r e l y reflect o t h e r decisions be presumed that both societies
tries t a r i f f a n d o t h e r p r o t e c t i o n t o a n d , l i k e taxes, are l a r g e l y siphoned f o r e g o consumer choice in the dis-
stimulate and permit their growth, off b y the g o v e r n m e n t i n order t o tribution o f " s o c i a l services" for
the Soviets h a d protected their reduce inflationary purchasing either o f t w o reasons: (a) either
c a p i t a l goods industries b y price power. I n s h o r t , A m e r i c a places re- consumer wishes a n d / o r p r o d u c t i o n
subsidies. As these i n d u s t r i e s cease l a t i v e l y m o r e reliance on a free conditions a r e such the g o v e r n m e n t
to be i n f a n t s , t h e economic costs of competitive market to allocate c a n effect the desired d i s t r i b u t i o n
over- a n d u n d e r - p r i c i n g can no m a t e r i a l s t h a n i t does t o a l l o c a t e m o r e cheaply t h a n the m a r k e t (de-
longer be j u s t i f i e d , a n d the sub- labour. T h e Soviet Union relies fense) or ( b ) the society wishes to
sidles are w i t h d r a w n . While with- r e l a t i v e l y m o r e o n the m a r k e t to enforce a distribution of goods
d r a w a l of subsidies has raised pro- allocate l a b o u r t h a n i t does to w h i c h differs f r o m t h a t w h i c h c o n .
test a m o n g spokesmen o f some of allocate materials, sumers w o u l d choose I n d i v i d u a l l y
the industries concerned, these (education, h e a l t h ) .
Economic Role of Profits
objections appear to h a v e h a d less (2) T h e second amendment is
i m p a c t i n t h e Soviet U n i o n than A n y large economy w h i c h relies t h a t f o r some goods, n o t a b l y foods,
t h e same objections have in the o n s p e c i a l i z a t i o n o f l a b o u r t o pro- the Soviets m a i n t a i n t w o o r t h r e e
U n i t e d States. duce a l a r g e v a r i e t y of goods c a n - m a r k e t s each w i t h a d i f f e r e n t price
not practically distribute these f o r the same goods. I n t h a t case
Economic Role of Profits Differ goods a m o n g consumers b y c e n t r a l q u a n t i t y supplied Is inadequate to
T h e p a y m e n t received b y produc- flat. The only practical w a y to meet q u a n t i t y demanded o n t h e l o w
tive factors, or factor reward, is in cope w i t h t h e n u m b e r o f decisions price state m a r k e t s ; b u t the h i g h
b o t h economies d e t e r m i n e d l a r g e l y involved in distributing goods price free m a r k e t , where existent,
on the factor m a r k e t . By and large, a m o n g consumers in the U S a n d helps to redress the balance.
each u n i t o f f a c t o r , such a s a n h o u r t h e Soviet U n i o n is t h r o u g h de-
(3) The t h i r d qualification is
of l a b o u r or a t o n of steel, is p a i d c e n t r a l i z e d m a r k e t decisions. M o r e -
t h a t f o r consumer, a s f o r producer
f o r b y sale a n d purchase o n the over, w e n o t e d t h a t b o t h economies
goods the Soviet economy main-
market. We may distinguish re- allocate labour t h r o u g h m a r k e t i n -
t a i n s m o r e of a sellers m a r k e t a n d
w a r d payments f o r labour, termed centives. I f these incentives and
the U S m o r e of a buyers m a r k e t
wages a n d salaries, and payments the resulting i n e q u a l i t y o f income
W e s h a l l r e t u r n t o t h i s difference.
f o r materials, which I shall call distribution is to be meaningful to
w o r k e r s , t h e y m u s t , i n t h e i r capa- Aggregation
p r o f i t s ( t h o u g h t h e y include rent,
c i t y as consumers, be able to exer- A n y non-barter, exchange econo-
interest, etc). In both economies
cise a s u b s t a n t i a l degree of choice m y faces a p r o b l e m o f a g g r e g a t i o n :
wage payments m a k e up the bulk
o f c o n s u m e r s ' m o n e y income. The among c o n s u m e r goods. In both equating total purchasing power to

97
J a n u a r y , 1959 THE ECONOMIC WEEKLY ANNUAL
 T H E ECONOMIC WEEKLY ANNUAL

t h e v a l u e o f goods a v a i l a b l e . B o t h to that t a x the personal income Weil as in t h e U n i t e d States, Is

t h e Soviet a n d A m e r i c a n economies t a x o n u r b a n people, t h e i n c o m e t a x v e r y m u c h effected a t t h e pleasure
d i v e r t a l a r g e share o f t h e i r t o t a l o n peasants, t h e t a x o n coopera- of the Central government. In both
production a w a y f r o m the consumer t i v e s , a n d t h e sale o f g o v e r n m e n t economies, g i v e n t h e d i s t r i b u t i o n o f
goods m a r k e t . B u t w a g e earners bonds. O f these, the t u r n o v e r t a x w e a l t h a n d s k i l l , income i s d i s t r i -
are r e w a r d e d f o r t h e p r o d u c t i o n o f Including its auxiliary, the budge- buted among individuals i n the
a l l goods; producer, defense, and t a r y difference, i s b y f a r t h e m o s t first instance t h r o u g h m a r k e t re-
socially d i s t r i b u t e d goods w h i c h d o important. w a r d f o r services I n d i v i d u a l s ren-
n o t appear o n t h e consumer m a r k e t der a n d i n the second instance
T h e essentials o f price a n d t a x
as w e l l as f o r the consumer goods through government amendment of
d e t e r m i n a t i o n seem to be t h e fol-
which do. Enter the aggregation the r e s u l t i n g Income distribution
l o w i n g : T h e price to the final con-
p r o b l e m : e q u a t i n g p u r c h a s i n g power by taxation a n d transfer payments.
sumer is set so as to equate q u a n -
— d e r i v e d f r o m the p r o d u c t i o n o f a l l The extent of m a r k e t reward to
t i t y d e m a n d e d a n d q u a n t i t y suppli-
g o o d s — t o t h e value o f o n l y those each i n d i v i d u a l is in t u r n deter-
e d a t t h a t price f o r the p a r t i c u l a r
goods t h a t d o appear o n the con- mined firstly by the amount of
g o o d a n d t o help equate the q u a n -
sumer goods m a r k e t . Any market resources he owns a n d secondly by
t i t i e s demanded a n d supplied for
economy could have recourse to t h e prices his resources or t h e i r
a l l goods. T h e t o t a l p r o d u c t i o n a n d
the same three g e n e r a l s o l u t i o n s : services c o m m a n d i n the m a r k e t .
d i s t r i b u t i o n cost of t h e good is c a l -
(1) keep p a y rates (wages) low
culated. T h e difference is a resi- A l t h o u g h f a c t o r resource p r i c e '
enough t o equate t o t a l receipts t o
d u a l a n d is designated to be absor- are set m o r e c e n t r a l l y i n t h e Soviet
t h e v a l u e of g o o d s ; (2) keep prices
bed b y the t u r n o v e r t a x . B u t t u r n - Union than in t h e U S, t h e final
o f consumer goods h i g h enough t o
over taxes, w h i c h are generally d i s t r i b u t i o n o f income i s c e n t r a l l y
a b s o r b a l l o f the p u r c h a s i n g power
applicable to the whole Soviet d e t e r m i n e d i n equal degree in the
received; (3) m a t c h the d i v e r s i o n o f
Union and infrequently changed, t w o economies. Each government
producer a n d o t h e r goods o u t o f the
c a n effect v e r y r o u g h d e m a n d / s u p - a f t e r a l l , has the o p t i o n o f a l t e r i n g
consumer goods m a r k e t by a s i m i l a r
ply adjustment only. Since cost the m a r k e t d e t e r m i n e d income dis-
d i v e r s i o n o f p u r c h a s i n g power. T h e
a n d d e m a n d conditions d i f f e r f r o m tribution through taxation—and
Soviet U n i o n a n d the U n i t e d States
place t o place a n d f r o m t i m e to both governments exercise that
b o t h reject the f i r s t t w o a l t e r n a t i v e s
time, further geographical and option through a differential income
a n d place t h e i r p r i n c i p a l reliance
t e m p o r a l a d j u s t m e n t s are necessary t a x a n d each society has the o p t i o n
o n the t h i r d . Acceptance o f either
to close the inflationary gap o f a l t e r i n g the e x i s t i n g d i s t r i b u t i o n
o f the f i r s t t w o solutions t o the
throughout. These a d j u s t m e n t s are of resources—and both societies
aggregation problem would result
achieved t h r o u g h t h e so-called b u d - exercise that option, primarily
i n m a r k e t prices w h i c h d o not r e -
g e t a r y difference w h i c h mops up t h r o u g h free o r subsidized public
flect the r e a l values of f a c t o r s .
p u r c h a s i n g power n o t c a u g h t b y t h e education. The principles under-
T h u s , in u s i n g prices as guides, pro-
general turnover tax. lying the d i s t r i b u t i o n o f income
ducers w o u l d base t h e i r p r o d u c t i o n
decisions on misinformation; and T h i s i n t e r p r e t a t i o n o f the turn- d i f f e r I n the Soviet U n i o n a n d the
o r g a n i z a t i o n o n the p r o d u c t m a r k e t over t a x as a r e s i d u a l designed to U S however. In t h e Soviet U n i o n ,
w o u l d be b o u g h t at the cost of close the i n f l a t i o n a r y g a p Is sup- f o r instance, the lncome t a x is
disorganization on the factor m a r - p o r t e d by three a d d i t i o n a l obser- g r a d u a t e d w i t h respect t o source o f
ket. W e m a y presume t h a t this v a t i o n s : (1) A b o u t 75 per cent of the Income, such as l a b o u r , professional
cost e x p l a i n s the r e j e c t i o n b y b o t h t a x revenue i s d e r i v e d f r o m con- practice, h a n d i c r a f t , a r t , etc, r a t h e r
economies o f the f i r s t t w o methods. s u m e r expenditures o n good and t h a n b y a m o u n t o f income a s i t i s
a p p a r e l , w h i c h renders the t a x v e r y in the U S. B o t h the Soviet and
B o t h t h e U S a n d the Soviet eco- the U S g o v e r n m e n t seem to be f u l l y
regressive. T h e m o r e regressive t h e
nomies, t h e n , elect the t h i r d a l t e r - a w a r e o f effects o f Income d i s t r i -
t a x , t h e m o r e i t f a l l s o n l o w income
n a t i v e . T h e y d i v e r t enough receipts b u t i o n o n personal incentives a n d
receivers w h o t y p i c a l l y spend r a t h e r
f r o m t h e consumer goods m a r k e t t o product a n d factor m i x . Both try
t h a n save, a n d t h e b e t t e r suited i t
achieve at least a r o u g h balance of consciously to use income distri-
is to c o m b a t i n f l a t i o n . (2) T h e re-
d e m a n d a n d supply. I n the U n i t e d b u t i o n as a means of p r o m o t i n g t h e
gions i n w h i c h per c a p i t a t a x pay-
States t h i s d i v e r s i o n t a k e s the f o r m desired selection o f goods a n d p r o -
m e n t s are h i g h are also regions I n
of taxation and of private and d u c t i o n methods.
w h i c h a r e l a t i v e l y Targe share of
business s a v i n g s (or undistributed
income i s received f r o m p r o d u c t i o n
profits). Since, c o m p a r e d to the Market and Pricing
o f goods n o t e n t e r i n g t h e consumer
American economy, the Soviet We h a v e seen repeatedly h o w
goods m a r k e t . (3) T h e t a x yield
economy d i s t r i b u t e s a l a r g e r share b o t h economies use m a r k e t s to
has been s i m i l a r l y h i g h e s t i n those
of t o t a l o u t p u t outside of the con- handle m a n y i m p o r t a n t economic
y e a r s I n w h i c h t h e g r e a t e r share o f
sumer goods market, t h e Soviets functions. B u t efficient t h o u g h t h e
o u t p u t t o o k t h e f o r m o f producer
also d i v e r t a l a r g e r p o r t i o n of r e - m a r k e t m e c h a n i s m is, i t i s n o t per-
a n d defense goods. In summary,
ceipts f r o m t h a t m a r k e t . In the fect. A n y economy whose o u t p u t
t h e d a t a suggest t h a t the h i g h e r
Soviet U n i o n t h e d i v e r s i o n used to changes t h r o u g h t i m e i s l i k e l y to
i s t h e i n f l a t i o n a r y gap, r e g i o n a l l y
absorb purchasing power o r to experience d i f f i c u l t y in r e l y i n g on a
or t e m p o r a l l y , the h i g h e r Is the
close t h e i n f l a t i o n a r y g a p Is enter- m a r k e t f o r the simultaneous solu-
turnover t a x yield.
prise p r o f i t s w h i c h are l a r g e l y t u r n - t i o n of b o t h the resource use a n d
e d o v e r t o t h e g o v e r n m e n t f o r re- Distribution of Income the aggregation problem. Growing
investment, the turnover tax, T h e d i s t r i b u t i o n o f income a m o n g economies, p a r t i c u l a r l y , w i l l f i n d i t
various "budgetary adjustments" i n d i v i d u a l s i n t h e Soviet Union as difficult always to equate d e m a n d
09
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100
 THE ECONOMIC W E E K L Y A N N U A L
a n d supply for each i n d i v i d u a l good
and f o r a l l goods put together.
B o t h the U S a n d the Soviet econo-
my do experience this difficulty con-
t i n u a l l y ; they b o t h operate w i t h a
disequilibrium system, to adopt the
apt phrase w h i c h G a l b r a i t h applied
t o the U S W o r l d W a r I I economy.
I f one's m a r k e t cannot b e i n equili-
b r i u m , and equilibrium is difficult
for g r o w i n g economies to achieve,
then one must settle f o r a buyers
m a r k e t or a sellers m a r k e t , or some
of each. The U S has t y p i c a l l y elect-
ed to r e l y on a buyers m a r k e t a n d
the Soviet U n i o n on a sellers m a r k e t .
The buyers /sellers m a r k e t diffe-
rence between the U S a n d the
Soviet U n i o n is most conspicuous in
t h e i r respective labour markets, but
it is generally apparent in a l l t h e i r
m a r k e t s . The U S generally m a i n -
tains r e l a t i v e l y h i g h prices and low
purchasing power so that supply
tends to exceed demand at present
prices, and the Soviet U n i o n m a i n -
tains relatively low prices and h i g h
purchasing power so that demand
tends to exceed supply at present
prices. As we have already seen
the resulting tendency is t h a t in
the U S buyers enjoy more freedom
of choice t h a n do sellers, including'
sellers of labour; while in the Soviet
U n i o n buyers of a l l kinds suffer at
the expense of sellers, including
sellers of labour.
Some of the i n s t i t u t i o n a l results
of this selection of sellers and buy-
ers m a r k e t s by the Soviet Union
and the U n i t e d States are purchas-
ing agents ( t o l k a c h i ) a n d w a i t i n g
lists there and salesmen a n d
v e r t i s i n g here. B o t h are costs
results of r e l y i n g on d i s e q u i l i b r i u m
m a r k e t s . B y using the appropriate
m o n e t a r y and fiscal instruments,
each economy could, no doubt, r i d
itself of the p a r t i c u l a r type of dis-
e q u i l i b r i u m w i t h w h i c h it is beset;
but it m i g h t well do so at the cost
of g e t t i n g the other d i s e q u i l i b r i u m .
We m i g h t well regard the A m e r i c a n
attempts to guarantee f u l l employ-
m e n t in the face of d o w n w a r d in-
flexible wages a n d the r e s u l t i n g
i n f l a t i o n a r y pressure as a case In
point: it appears as a step t o w a r d
substituting the sellers market
f a m i l i a r f r o m the Soviet a n d the
U S w a r t i m e experience for
buyers m a r k e t f a m i l i a r f r o m
o w n past experiences. So m u c h for
the " h o w " ; w h a t about the " w h y " ? '
M o r e extensive discussions of
h o w the Soviet economy w o r k s
may be f o u n d in H Schwartz,
Why the Similarity' and
Difference'?
C a n we account f o r the s i m i l a r i -
ties a n d differences between Soviet
and A m e r i c a n choices a m o n g or-
ganizational methods? Probably
not conclusively. But, by focusing
on as few as t w o m a j o r objectives
a m o n g the many that both the
Soviet a n d the A m e r i c a n people
have, we can find a p a t t e r n between
t h e i r respective objectives a n d t h e i r
observed selection of o r g a n i z a t i o n a l
methods. Consider the objectives,
(1) economic efficiency and (2) eco-
nomic g r o w t h a n d / o r defense. B o t h
stand h i g h in the list of each peo-
ple's m a j o r social objectives. U n -
f o r t u n a t e l y , however, the demands
these objectives m a k e of a n y so-
ciety are frequently in conflict.
N e i t h e r the Soviet U n i o n nor the
U n i t e d States appear yet to have
found it possible to meet b o t h ob-
jectives equally and simultaneously.
A c c o r d i n g l y , occasions arise when
each c o u n t r y finds it necessary to
sacrifice some satisfaction of one
objective to a t t a i n more satisfac-
t i o n of the other. We should not
be surprised if, upon e x a m i n i n g the
relation between objectives held a n d
methods selected in the Soviet
U n i o n and the U n i t e d States, we
find t h a t the methods chosen and
sacrifices made correspond to the
relative importance of the objectives.
Thus, we may observe: The more
emphasis each economy places on
efficiency in a given situation, the
more does it sacrifice g r o w t h / d e -
fense and the more does it rely on
ad-
decentralized decisions. The more
or
emphasis each economy places on
economic g r o w t h or defense. the
more does it sacrifice efficiency and
the more centralized are the relevant
decisions. Consider the evidence.
I n s o f a r as both economies em-
phasize allocation heavily, both
economies employ r e l a t i v e l y decen-
t r a l i z e d o r g a n i z a t i o n . Thus, we find
t h a t b o t h economies use m a r k e t s to
'Russia's Soviet Economy'; F we experienced the spurts of
H o l z m a n , 'Soviet T a x a t i o n ' ; D nomic g r o w t h associated w i t h r a i l -
G r a n i c k , 'Management o f the I n
dust r i a l F i r m in the U S S R', J
Berliner. ' F a c t o r y a n d Manager
in the U S S R'; A F r a n k , "The
the
O r g a n i z a t i o n o f Economic A c t i v i -
our
ty in the Soviet U n i o n , " in 'Welt-
wirtschaffiches A r c h i v ' , v o l 78,
No 1, 1957, pp 104-156, A d d i t i o n a l
c o m p a r a t i v e e x a m i n a t i o n m a y be
found in A Oxenfeldt, 'Economic
Systems in A c t i o n '
101
January, 1959
d i s t r i b u t e goods a m o n g consumer''
a n d to some extent determine both
the produce a n d the f a c t o r m i x o f
non-investment and non-defense
goods. I n s o f a r as the Soviets em-
phasize g r o w t h r e l a t i v e l y more a n d
a l l o c a t i o n r e l a t i v e l y less t h a n we
do, they resort to more centralized
decisions t h a n we do. Thus, t h e
Soviet product and f a c t o r m i x
is more c e n t r a l l y determined t h a n
ours. W i t h i n the Soviet U n i o n I t -
self, the more scarce or strate'
gie a good or a factor is, the
more c e n t r a l l y is i t s d i s t r i b u t i o n
determined. F o r instance, centra-
lized decisions predominate more f o r
the d i s t r i b u t i o n of steel and s k i l l e d
labour; decentralized ones p r e d o m i -
nate more for the d i s t r i b u t i o n of
paper a n d o r d i n a r y labour. We
m a y s i m i l a r l y observe t h a t the sell-
ers m a r k e t predominates in the
Soviet U n i o n w h i c h can i l l a f f o r d
the large stocks of m a t e r i a l s and
goods necessary to operate a buyers
m a r k e t a n d w h i c h wishes t o r e '
s t r a i n consumer sovereignty. T h e
buyers m a r k e t on the other hand
is more usual here where these cir-
cumstances do not prevail.
The more both societies emphasize
growth or defense, the m o r e do
b o t h determine the a l l o c a t i o n of
resources by t h e i r central govern-
ments. Thus, the Soviets value a
high rate o f g r o w t h r e l a t i v e l y more
highly t h a n we do. They also
place greater reliance on central
determination of the i m p o r t a n t
consumption/investment ratio than
we do. However, when d u r i n g the
nineteen forties defense replaced
allocation as our prime objective we
immediately adopted not o n l y cen-
tralized decisions of the investment
defense to consumption r a t i o , b u t
as w e l l the whole g a m u t of Soviet
organizational methods including
p l a n n i n g of factor use, h u m a n as
well as m a t e r i a l , administered p r i -
ces, i n f l a t i o n a r y instead of defla-
t i o n a r y disequilibrium, etc. I n other
periods of our h i s t o r y also. when
eco-
roads and automobiles, the A m e r i -
can g o v e r n m e n t also helped to pave
the w a y w i t h r a i l r o a d g r a n t s and
r o a d b u i l d i n g . A n d it is conceivable
t h a t the A m e r i c a n government m a y
again t a k e an active role in t h e
future o f atomic energy. A t the
same time, the evidence a m p l y i n -
dicates t h a t as the Russians evalu-
ate increased g r o w t h r e l a t i v e l y less
h i g h l y and present a l l o c a t i o n reia-
 J a n u a r y , 1959 THE ECONOMIC WEEKLY ANNUAL

t i v e l y m o r e h i g h l y , so also do t h e y w i l l w a n t a n d less f o r e i g n exchange Shell, s o t h a t I t prefers t o i m p o r t

Increasingly substitute m o r e de- the government w i l l get f r o m t h e m . crude o i l f r o m her o w n company
centralized methods of decision Caltex f o r m s an exception as it ex- abroad, to keep t h e i r refinery-plant
m a k i n g a n d freer prices f o r cen- ports the o i l w h o l l y , s o t h a t i t w i l l running.
t r a l i z a t i o n and a d m i n i s t e r e d prices. need more R u p i a h i f i t expanded The o i l committee set up by the
In short, it does seem t h a t we c a n its business. g o v e r n m e n t to examine the o i l ques-
associate centralization w i t h the As a result of the d w i n d l i n g t i o n have m e t several times to dis-
solution o f g r o w t h o r defence pro- amount o f o i l f o r the refineries,
cuss these problems. W o u l d n o t it
blems a n d decentralization with Shell i s n o w i m p o r t i n g m o r e a n d
be better to have the C a l t e x crude
t h e solution o f a l l o c a t i o n problems. more crude o i l , viz, i n 1956 2 1 m i l -
l i o n a n d in 1957 27 m i l l i o n barrels. o i l processed by the Shell refinery
The Soviet a n d A m e r i c a n eco-
As the Caltex production of crude t h a n to urge Caltex to b u i l d a re-
nomies, in conclusion, e x h i b i t sub-
o i l i s r i s i n g i t w o u l d b e better i f finery p l a n t here, as the existing
stantial organizational similarities.
T h e y e x h i b i t some d i s s i m i l a r i t i e s as Shell is r e f i n i n g t h i s o i l , but it seems one is not w o r k i n g at f u l l capacity?
w e l l . I s i t accidental t h a t t h e or- t h a t the a d a g i u m (sic) "business is — 'The C o m m e r c i a l W e e k l y ' , D j a -
g a n i z a t i o n a l methods selected by business'' is s t i l l p r e v a i l i n g with k a r t a , December 29, 1958.
t h e Soviet U n i o n a n d t h e United
States correspond, at particular
t i m e s i n t h e i r respective histories,
to the r e l a t i v e i m p o r t a n c e t h e y ac-
c o r d to t h e i r c o m m o n social objec-
tives of economic efficiency a n d
growth-defence? Or is it possible
t h a t a n o t h e r people's choice of eco-
nomic organization, and m a y be
aspects of p o l i t i c a l a n d social orga-
n i z a t i o n as w e l l , can be explicable,
a n d hopefully acceptable, i n terms
even of our o w n values a n d objec-
tives?

Foreign Exchange Revenues from

Oil Companies Down in Indonesia
N E X T to the difficulties as a result
of the increasing d e m a n d but
d w i n d l i n g supply of o i l . the o i l
question w i l l e n t a i l a f u r t h e r dec-
line too of the foreign exchange
revenues of the State. The o i l com-
panies are e n t i t l e d to use t h e i r o w n
foreign exchange f o r t h e i r invest-
ment i f these are cleared w i t h their
f o r e i g n exchange earned by t h e i r
exports. O n the other h a n d , i f they
w a n t R u p i a h f o r wages, taxes etc
they sell t h e i r foreign exchange to
the Government in order to get
Rupiah.
T h e production of the oil com-
panies .shows a decline, except f o r
Caltex, Stanvac is threated with
a decrease of her p r o d u c t i o n as it
has not g o t new concessions. It is
learned t h a t the production of Shell
a n d Stanvac w i l l go d o w n further,
whereas the home need of o i l w i l l
s t i l l increase. The home consump-
t i o n (has been increasing as) can
be seen f r o m the figures of o i l sold
i n the home m a r k e t .
T h e S h e l l exports o f refined o i l
were in 1956 39 m i l l i o n barrels a n d
i n 1957 4 1 m i l l i o n barrels. T h e
m o r e gasoline Shell a n d Stanvac
s e l l at home, the less R u p i a h t h e y
102