Appendix A

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

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

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

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

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

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

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

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

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

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

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

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