Communist Economics and Currency Convertibility

From the Foreword to the first issue: “Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to fact as a center for the collection and exchange of information on monetary and financial problems,’ and thereby to facilitate ‘the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.’ The publications of the Fund are one way in which this responsibility is discharged. “Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by professional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as necessarily indicating the position of the Executive Board or of the officials of the Fund.”

Abstract

From the Foreword to the first issue: “Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to fact as a center for the collection and exchange of information on monetary and financial problems,’ and thereby to facilitate ‘the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.’ The publications of the Fund are one way in which this responsibility is discharged. “Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by professional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as necessarily indicating the position of the Executive Board or of the officials of the Fund.”

During the past two years, there has been a renewal of speculation about the possibility of multilateralization of the foreign trade of the communist East European countries1 and about the convertibility of their currencies. This speculation has been occasioned by the economic reforms planned, experimented with, or introduced in these countries. The present paper examines the compatibility of the economic systems in these countries with the conditions necessary to achieve multilateralism and currency convertibility.

For purposes of analysis, this paper assumes multilateralism in foreign trade to exist where there is an absence of bilateral arrangements, i.e., arrangements under which each of two trading partner countries obligates itself (1) to buy from the other partner specific goods or any goods up to a defined total value, and (2) to pay for them through the accumulation of claims of the same or different defined total value by means of contra-deliveries of specific goods or any goods. Bilateralism is not confined to arrangements under which the mutual deliveries of goods are of equal value. It exists where two countries make an agreement to limit the choice of imports in any degree to those from the partner country, and where each pays for imports from the partner at least in part through exports to the partner country.

Convertibility of a currency exists where claims expressed in this currency may be used in payments to any third country, and thus transferred to any third country.

In the context of this paper, an “economic system” means an economic mechanism or set of rules by which any national economy functions or is operated. The term does not have here a socioeconomic meaning. This paper does not contrast communist with capitalist systems and does not limit the theoretical possibilities of practical multilateralism and currency convertibility to any specific socioeconomic system. That the capitalist system has a monopoly of multilateralism and convertibility, to the exclusion of any other imaginable system, has not been proved, and the present paper does not deal with such issues. It discusses only the ability of specific economic systems, in a specific place and time, to develop multilateralism and currency convertibility.

This paper does not consider whether the reforms introduced or planned by the East European countries represent a movement from the socioeconomic system of communism toward the socioeconomic system of capitalism. Thus, references in this paper to terms used in these countries such as the deviations of prices from “values,” interest on capital, consumer choices, and profits do not imply any judgment as to whether they do or do not represent purely capitalist notions, or whether they fit or do not fit communism. Prices in these countries have always deviated from value as defined by the labor theory of value, and this fact has been officially recognized there. Moreover, interest on short-term bank loans does exist in the East European countries; therefore, there is no conceptual, theoretical, or dogmatic reason why it should be doctrinally impossible to charge interest on another form of capital, viz., fixed capital. Consumers always have had some choices; the scope of choices has been increasing in accordance with the official policies, and there is no reason why it should not increase further, while still falling short of the private ownership of capital. The notion of profits was accepted by Lenin. In this paper, the discussion of these terms, of the economic systems in Eastern Europe, and of reforms in these systems is neither complete nor detailed; they are considered only to the extent necessary for the main subject—the feasibility of multilateralism and currency convertibility.

Until 1956 the economic systems of the East European countries were invariably modeled on that of the U.S.S.R. Although differences in the application of the Soviet economic system existed, they were immaterial for the present discussion, and it is safe to assume that, for all practical purposes, observations made in relation to the economic system in the Soviet Union would also be valid for other countries in Eastern Europe. It will therefore be sufficient to consider the possibility of multilateralism and currency convertibility under the system prevailing in the U.S.S.R. itself. This discussion is continued in the next section.

The year 1956 inaugurated an era of criticism of the Soviet economic model, both in the Soviet Union itself and in the other East European countries. Certain economic reforms followed in some of these countries. In subsequent sections, the developments after 1956 are discussed separately for each country or group of countries, so that account can be taken of dissimilarities that may be important for the main subject of this paper. Mention of changes after 1956 does not imply that the pre-1956 Soviet economic model is a thing of the past. On the contrary, it will be seen that the features which are most important in relation to multilateralism and currency convertibility remain in force.

I. Pre-1956 Economic System of the East European Countries

Price Formation

The method of price formation is essential to the issue of multilateralism and convertibility. It is necessary, therefore, to avoid any possible confusion which may arise from differences between the market and Soviet-type economies and from the identity of terms used in the analysis of price formation in different economic systems. In a market economy, the terms “rational price system” and “guidance function of prices” mean that the method of price formation tends to produce a structure of prices which guides consumers and producers in their efforts to select combinations of goods that ensure the greatest satisfaction or maximum profit, and allows prices to be molded by such efforts. From the utilitarian point of view, such equilibrium prices may be considered the best and most advantageous prices, ensuring maximum possible satisfaction; they are thus rational or efficient. Economic policy actions motivated by various social and other considerations lead to distortions of such prices.

Under the pre-1956 economic system of Eastern Europe, the range of supply and demand forces conditioning the price structure is limited by narrowing the scales of preferences of individuals and widening the scales of preferences of the government (be it a party, society, parliament, or a central planning office). The distribution of national income between investment and consumption is almost entirely absent from private preference scales and is determined by the government. To a larger extent than in market economies, the government also molds the composition of private consumption of goods and services. Nevertheless, there is a vast area of economic decisions of individuals, and even some narrower area of decisions of an entrepreneurial nature, which the government does not care to include in its own preference scales and which, theoretically, could give rise to a price structure that would be endowed with the function of economic guidance in allocating resources and would maximize the efficiency of the economy and still be in harmony with government preference scales. The communist parties of East European countries have never declared themselves against the production of consumer goods (which are absent from the government preference scales) being adapted to the tastes of individuals, or against an economic mechanism that would prevent factories from producing machinery with too much steel—something which has actually happened as a result of measuring the performance of factories in terms of tons of steel.

The following analysis and appraisal of the actual pre-1956 price formation method in the East European countries adopts the concept of rationality as permitted or required by the communist economic doctrine: the ability to produce price structures that would continuously reflect relative scarcities of goods and serve as an efficient guide in allocating resources to various uses within the politically or doctrinally determined division between private and government preference scales. The system of price formation which meets such requirements may be called rational or efficient.

The pre-1956 Soviet economic system had two main categories of prices: administratively established prices from which sellers and buyers could not legally deviate, and prices resulting from bargaining between the buyers and sellers. Prices of the first category are here called “list prices.” Prices of the second category appeared in the U.S.S.R. only on kolkhoz markets—markets where farmers sold mostly foodstuffs produced on their individual plots, or goods obtained as payments in kind for their work on kolkhozes (cooperative farms). Every communist country of Eastern Europe (and apparently also Mainland China and Albania) has a market corresponding to the kolkhoz markets. In most East European countries, the volume of goods sold on these markets represents only an insignificant part of the total turnover in consumer goods.2 For this reason, and also because the government influences prices on these markets in a very strong though indirect way, this category of prices is not here discussed.

List prices in the pre-1956 Soviet system were fixed centrally for all producer goods and for an overwhelming part of consumer goods. Centralization of price fixing did not by itself disqualify prices from performing the economic function of allocating resources. The theories of socialist allocation conceived by Professor Barone3 and socialist price formation presented by Professor Lange4 have never been tested in practice, but, for the purposes of this paper, these theories should not and need not be repudiated: they may well fulfill the function of guidance, even though they provide for administratively set prices. It is here argued that the Soviet price structure was disqualified as a guide for the allocation of resources, not because prices were administratively established, but because of the way in which they were established and maintained.

Under the pre-1956 system, prices (particularly for producer goods) were stabilized for a long time. In the Soviet Union, prices of producer goods were maintained without much change between 1948 and 1959.5 It would be unrealistic to expect that any price structure, even if originally appropriate, could continue for such a long time to express correctly the relative scarcities of goods and to serve as guidance for the allocation of resources.

It must be realized, however, that while the rigidity of prices disqualified the actual Soviet price structure from providing guidance, it did not necessarily disqualify the particular Soviet method of administrative price formation. If the stiffness of prices had been the only disqualifying characteristic, the situation could perhaps have been remedied by some organizational and technical improvements that would have enabled the authorities to change prices more frequently to match changing circumstances.

The pre-1956 Soviet method of price formation was disqualified from giving guidance because prices obtained by the particular Soviet method did not provide any guidance even at the moment they were established. Prices could never be established appropriately for a Soviet-type economy by the methods employed in the pre-1956 Soviet system.

The reasons for the main features of the pre-1956 method of price formation in the East European countries should be sought in the belief which prevailed in the Soviet Union that such a method alone conformed to communist doctrine, and specifically to the Marxist labor theory of value, which equates the value of each commodity to the socially necessary amount of labor embodied in it.

There was a strong tendency in the Soviet Union to believe that prices somehow should conform to this value. However, actual prices deviated significantly from it, and Marx himself recognized the inevitability of such deviations. In such circumstances the deviations of prices from values could have been such as to equip prices with the function of guidance.

However, under the pre-1956 Soviet method of price formation, there were no prices for the factors of production which may be summarized under the general term “nature.” Prices for capital were largely absent. Interest was charged only on short-term banking loans to enterprises. There was apparently a doctrinal objection to extending interest to fixed capital. The absence of a price on the use of fixed capital led to an unlimited demand for capital for various capital-intensive projects, and since the administrators had been deprived of any objective guiding mechanism, less rational investment was undertaken than would have been practicable had appropriate interest rates been established. This situation became particularly obvious to the Soviet economic authorities after the initial period of building basic investment.

Under the pre-1956 Soviet price system, inequalities in the average cost of production caused by differences in natural conditions or in management skills were not allowed to become a source of quasi-rent. Economic scarcity was not a working concept in the formation of prices, and in theoretical thinking the concept of marginality was an anathema. This concept had no practical significance in actual economic decisions—not even implicitly—as it has in market economies.

It is conceivable that the prices of goods may initially be obtained haphazardly, almost at random, and yet subsequently change under the influence of economic forces, either automatically or through the equivalent process of adjustments in list prices conceived by Lange, so as to represent an approximately consistent system of prices capable of giving guidance for the allocation of resources. In the pre-1956 Soviet economic model, such adjustments were not possible for two doctrinal reasons: first, the absence of a price for the use of nature and capital, and second, the inability of enterprises to choose freely among the available factors of production, and by doing so to influence the aggregate demand for various producer goods and their relative prices. Managements of enterprises, not empowered to choose among agents of production, performed only technical administrative functions, and had almost no power of making economic decisions.

Each enterprise (which might be composed of one or more plants) received a detailed plan from the planning authorities. This plan might be quite different from what the enterprise itself had proposed. The plan received from the planning authorities prescribed exactly the over-all volume of production, the volume of production for individual goods or categories of goods, the strength of the labor force of the enterprise according to categories of labor, wages and the wage bill, and the composition of input and output and their prices.

In the context of this paper, the fact that such planning was cumbersome and that it involved high social cost is of lesser importance than the effects of two inseparable aspects of the system on the prices of producer goods: first, they did not reflect the relative scarcities of goods and did not perform the function of guidance; and, second, the mechanism of price setting did not provide for corrective forces that would lead to adjustments in prices. Even if an enterprise’s own proposal were accepted, the method of the formation of prices and the performance of enterprises (in executing the plan) as ordered from above would prevent such a plan from being at all close to the equilibrium point of the individual firm.

Wages and salaries are paid in the East European countries predominantly in terms of money, and consumers have freedom of choice among the goods available to them. However, the adaptation of the supply of consumer goods to the consumers’ tastes—which could not be suppressed in a money economy—was achieved under the pre-1956 system not so much by regulating the volume of production of various consumer goods as by varying the “turnover” tax (a form of sales tax), which tended to bring the volume of demand for each consumer good into conformity with production.

Subsidies and price fixing in market economies may distort the economic magnitudes that would otherwise emerge from the purely free market forces, but they do not eliminate these market forces. On the contrary, they would not be able to exist in the absence of these forces. Under the pre-1956 Soviet system, the market or equivalent forces were absent for all practical purposes. Regulations related to prices and allocations introduced entirely new economic magnitudes independent of any market forces, and in complete disregard of them. These regulations could not use and distort market forces as do price subsidies and price fixing in market economies, because such forces were not allowed to emerge.

The above characterization of the pre-1956 economic system of the East European countries is not an invention of a Western economist. Professor Lange said that

… the first period of planning and management in a socialist economy, at least as far as our experience goes, has always been characterized by administrative management and administrative allocation of resources on the basis of priorities centrally established. Economic incentives during this period are replaced by moral and political appeals to the workers. … This is, so to speak, a highly politicalized economy. … I believe [it] can be described as a sui generis war economy.6

The Polish Deputy Premier, Piotr Jaroszewicz, described the situation in Poland as follows: “Our economic system is an abracadabra of prices, costs, and wages. No one is able to discern what is and what is not profitable.”7

Foreign trade organizations8

Under the pre-1956 economic system, the foreign trade operations of the East European countries were conducted by specialized foreign trade state organizations. Most transactions were made through separate exporting and importing organizations, trading in a limited assortment of goods.

Each foreign trade organization received a plan of the volume and types of exports and imports. This plan was coordinated, within the overall national plan, with the production and investment plans of producing enterprises and with the plan for consumer goods. Consonant with their plans, the individual foreign trade organizations entered into agreements with the domestic suppliers of exportable goods, with domestic investors, and with the domestic trading organizations.

Domestic producers, investors, and inland trade enterprises did not have any direct contact with foreign markets, with foreign exporters, or with importers. A lack of direct contact between the producers of one country and buyers of another country is not unusual; it must be considered normal for small producers, and particularly for producers of consumer goods and the individual users of such goods. Only large producers (or buyers) can afford to have direct contacts with foreign buyers or producers. Nevertheless, in the market economies the preferences of buyers do penetrate even to small producers; they are transmitted by trading, exporting, and importing enterprises. In the pre-1956 Soviet system, however, the foreign trade organizations represented a real barrier between the domestic producers, investors, and consumers, on the one hand, and the respective foreign suppliers and buyers, on the other. The responsibility for this barrier lay with the planning and price formation methods, fortified by the organization of foreign trade and by the foreign exchange system.

Because of this barrier, the foreign trade organizations of the East European countries could not respond to the comparative advantages of foreign trade.9 First of all, the domestic producing enterprises could not maximize profits by shifting sales toward the exporting organizations. They sold at list prices (in terms of domestic currency) to any approved buyer. There was no economic incentive for any enterprise to produce for foreign markets in preference to domestic markets, or vice versa. Producers sold to the foreign trade (exporting) organizations at domestic list prices, which applied also to domestic sales, and received payment in domestic currency, which was in no way related to foreign price quotations.

For the foreign trade organizations to secure the comparative advantages of foreign trade, the purchase of domestically produced goods for export and the importation of foreign goods for resale on the home market would have had to be governed by the relative scarcities of goods on the domestic market and abroad. In market economies, relative scarcities, broadly speaking, tend to be expressed by prices. Prices in the pre-1956 Soviet system, however, did not reflect relative scarcities. Under this system, purchases for export of domestic market goods which were comparatively the least expensive and which would secure highest prices abroad (at given exchange rates) would have tended, true enough, to maximize the profits of the trade organizations. But at the same time, such purchases could have disrupted domestic planning, and perhaps led to the exportation of goods which were domestically scarcer (as determined by the plan) than other goods or than some imported goods. This situation might have developed because goods which were relatively scarce did not necessarily command relatively higher prices. Similarly, there might have been imports of producer goods which were relatively less scarce than other producer goods, even though the latter were priced (on the domestic market) lower than the former. Only if unrationed consumer goods had been imported could domestic prices have been expected, by and large, to correspond to relative scarcities.

The Polish economist, M. Orlowski, has written of the Soviet foreign trade system as follows:

The Government enterprise participating in foreign transactions does not have a direct enough interest (the incentive created by the bonus system for employees of these enterprises usually has very little effect), nor does it influence the calculation of production costs, determine the choice of contractor, or determine the selling or buying price abroad.10

Foreign exchange system

The foregoing discussion of the pre-1956 foreign trade system of the East European countries assumes the existence of an exchange rate or of exchange rates, and the use of such rates in foreign trade transactions in the way they are used in market economies—as a price of foreign exchange, i.e., as one of the economic magnitudes guiding economic decisions. In fact, under this economic system, the exchange rate or rates did not guide foreign trade merchandise transactions for one reason at least: the exchange rates were not prices.

At first glance, this assertion may appear strange. After all, a resident of an East European country, once permitted to travel abroad, did buy foreign exchange at his bank and pay for it an amount of domestic currency at an official exchange rate, i.e., price. And he also sold foreign exchange to his bank at a certain price. If he was a tourist, his decision to spend his vacation in a foreign country might depend on the exchange rate. So the exchange rate was a price and an active element of his economic decisions. Also, exchange rates for various currencies were quoted by central banks of the East European countries. In order to clear up the matter, the following discussion deals separately with exchange rates appearing in certain international service transactions (export and import of services) and with exchange rates related to foreign trade merchandise transactions. In service transactions like tourism, where in order to purchase services it is necessary to transfer from one currency to another, exchange rates were involved, and they were prices of East European currencies. This was where the exchange rates were “relevant.11

In foreign trade merchandise transactions, on the other hand, exchange rates of the East European currencies were not prices; they did not enter into any calculations or perform the function of guidance. This situation was not a result of an independently conceived foreign exchange system, causally unrelated to other elements of the system but, as will be seen, was an integral part of the East European economic system, a logical consequence of its planning and pricing methods.

As mentioned above, the foreign trade organizations bought goods destined for export from domestic producers at domestic list prices and paid for these goods in domestic currency so that foreign exchange rates did not enter at all into these transactions. There is nothing unusual about this—it happens in other types of economies, too. The situation begins to seem unusual as soon as it is realized that the foreign trade organizations sold goods thus obtained at prices (expressed in terms of the foreign trade partner’s currency, a third currency, or a “clearing currency”) which had no causal or uniform relationship to the domestic list prices paid in the domestic currency to domestic producers. To enter into these export transactions, the foreign trade organizations did not need even to be aware of any specific relationship of this kind. Such a state of affairs was a direct consequence of the Soviet planning and pricing methods.

If the foreign trade organizations had offered to foreign importers an assortment of goods at foreign prices which reflected the domestic list prices of the goods and a uniform exchange rate, foreign importers would probably have wished to select from the assortment only those goods of which the prices were low, and would have refrained from buying other goods of which the prices were considered too high. This selection would have disrupted the Soviet export plan and made the whole planning of the country subject to price fluctuations on world markets. Even if this result had been acceptable, there would not have been enough responsiveness (in terms of time and the allocation of resources) to such price fluctuations in the Soviet planning practice.

In the pre-1956 system, a uniform foreign exchange rate would have allowed the exportation of the whole assortment of goods prescribed by the plan only if the rate were low enough to make the price of the most expensive (marginal) commodity still attractive to foreign importers. Such a procedure, resulting in a reduction, probably very severe, in the foreign exchange proceeds from exports, would have made economic sense only if the producers of exported goods could have been affected by such a uniform rate, and could have made changes in their inputs and outputs that would have led to changes in the assortment of goods produced in favor of the most profitable ones. These changes, however, would have implied that the domestic producers were not paid (by the foreign trade organizations) the list prices, but prices which were the outcome of foreign prices and of a uniform exchange rate. Payment of these prices, in turn, would have made economic sense only if the chain reaction started by domestic producers, striving to adjust themselves to the demand conditions abroad, had continued throughout the whole economy, influencing and being influenced by the prices of other goods, wages, etc. This reaction was not possible: a uniform exchange rate which would have assured the movement of all (or nearly all) planned exports would have led only to a reduction in the total export proceeds in terms of foreign exchange. In other words, there would have been no point in introducing a uniform exchange rate for merchandise export transactions unless planning and pricing methods had been adjusted so as to make prices in the whole economy reflect the relative scarcities of goods. Otherwise, with the planning and pricing methods remaining unchanged, a uniform exchange rate would have brought only losses and no advantages.

These conclusions were derived from an analysis of exports. An analysis of imports into East European countries leads to identical conclusions.

In actual practice, no uniform exchange rate was applied to foreign trade merchandise transactions in the pre-1956 system. Foreign trade organizations sold to foreign importers at prices quoted on foreign markets or at “negotiated” prices based on foreign quotations. No exchange rate entered into such transactions. Exchange rates could be obtained from a comparison of the domestic price paid for the item and the foreign price received for it, but they would be different for almost every exported commodity; in fact, any identity between two or more rates for two or more goods would be only coincidental. Moreover, the exchange rates thus derived did not represent any active economic magnitudes in the sense that they influenced economic decisions; they were simply passive results of arithmetical calculations without any characteristics of a price. They were implicit and multiple, as a logical consequence and an integral part of the pre-1956 system.

Bilateralism

In this system, foreign trade, both within Eastern Europe and with other countries, was governed by the principles of bilateralism. It may not appear so at first glance: the U.S.S.R. and other East European countries had trade agreements with the United Kingdom and some other Western countries under which there were no strictly agreed lists of goods to be exchanged, and no bilateral clearing accounts. It may appear that, since it takes two countries to arrange a bilateral trade and payments agreement, bilateralism in payments was not an inherent feature of the system. A more thorough analysis, however, leads to a conclusion that though the East European countries were able to conduct foreign trade with countries outside Eastern Europe on a formally nonbilateral basis, they were not able to rid themselves of those aspects of bilateralism which represented an antithesis of multilateralism of trade and of convertibility of currencies. Most Soviet imports under the pre-1956 system were producer goods needed to support detailed investment and production plans—plans which were not expectations or expressions of desirability, but commands. Imports of these goods had to be secured or else the plans would not have been fulfilled. Goods for export also had to be secured to pay for these imports, and the plan had accordingly to obligate both the producers of goods for export and the foreign trade organizations. This could only be done by constructing plans—actually commands—including export and import plans, i.e., lists of goods to be exported and imported.

In trade with countries outside Eastern Europe, particularly those with convertible currencies, these lists bound only the East European country. Collectively, the countries with essentially unrestricted foreign trade and convertible currencies represented a practically unlimited market for Soviet foreign trade. Any East European country could obtain on this market the goods it needed and could sell any goods for which there was a demand, without entering into trade agreements predetermining the composition of goods to be exchanged. The situation was quite different in trade between the East European countries themselves, where the need to fix lists of exports and imports existed, on both sides.

Another feature of bilateralism is the lack of convertibility of payments balances. Economic literature on bilateral payments agreements deals predominantly with bilateralism in countries outside Eastern Europe, where bilateralism is usually thought of as temporary, or at least not inherent in the economic system. It is considered that only an adverse balance of payments situation or some special market considerations can justify bilateralism, and that neither of these conditions can be permanent even though they may continue for a number of years. A second reason for bilateralism—price distortions (without which it may be difficult to find a sufficient balance of payments justification for bilateralism)—is gradually disappearing from market economies. But this was exactly the strongest reason for bilateral payments agreements in the pre-1956 Soviet system and the main reason why they could not be considered temporary. To have a convertible currency, one must first have assured convertibility of goods, i.e., convertibility of currency (foreign exchange) into any commodity.12 Such convertibility did not exist under the pre-1956 Soviet economic system, and it could not exist so long as the planning and pricing methods described above were in existence.

A resident of a country outside Eastern Europe could not buy export goods of his choice in an East European country and pay for them with that country’s currency (assuming that he was allowed to obtain it) or with any other currency. His inability to do so was caused, not merely by the existence of foreign trade monopolies, but by the fact that his action could easily have been contrary to the interests of the East European country: he would naturally have chosen the least expensive goods (compared with price quotations in other countries including his own), and in doing so, he might easily have chosen goods which were relatively scarce (from the point of view of planned investment and production) in the East European country.

It may be noted that currencies in Eastern Europe differed from most currencies outside Eastern Europe not only in their international relationships, but also in their domestic functions. In the East European countries, money represented a general claim on the available goods only for consumer goods, and even then only insofar as they were purchased directly by the consumers.13 In all other respects, money was not quite a universal claim: to obtain a commodity, one needed not only money but also an allocation decision of the planning authorities. Thus, for producers, money resembled a theater ticket or a ration card—it was valid only for a specific service or commodity.

It is sometimes suggested that although the method of price formation described above might have alienated the Soviet system economically from the Western markets, its uniqueness made the price structure of the member countries consistent within Eastern Europe—at least in the sense that multilateralization of payments, and something approaching convertibility of the ruble, were feasible within Eastern Europe. Such developments would have become possible, however, only if price patterns could have emerged in the East European countries that would simultaneously have corresponded to the relative scarcities of goods in each country. In fact, under the pre-1956 system, all these countries strove to introduce the same (Soviet) method of pricing; as long as this approach prevailed, not only did prices in each country diverge from relative scarcities, but the divergence was different in each country and no price pattern for these countries as a whole could emerge.14

Domestic price labels attached to commodities in each of the East European countries could not be used as guides for foreign trade transactions with Eastern Europe, even in the absence of foreign trade monopolies, for the same reason that they could not be used in any of these countries by an outsider who had accumulated either currency of one of these countries or convertible currency. In trade within Eastern Europe, these reasons applied on both sides. In economic relations with outside countries, any East European country could benefit from the existence of outside convertible currencies. In trade with one another, this was not possible and could not be achieved either by imputing a gold content to any or to all East European currencies or by minting gold coins.15

Inability of East European countries to use their own prices in trade with one another is evidenced by the fact that they all used world market prices for the valuation of exports and imports in such trade. This method led to bilateral balancing of exports and imports at values which did not conform (except by accident) to the price patterns in each country.

It may be concluded that the pre-1956 East European system of pricing and planning did not allow multilateralization of trade either between Eastern Europe and the outside world or within Eastern Europe itself and that it also excluded convertibility of any East European currency in terms of either outside or East European currencies.

II. Economic Discussions and Reforms Since 1956

Reasons and motives of reformist trends

The pre-1956 planning and price formation system began to incur criticism even before 1956. Newspapers in Eastern Europe were full of criticism, generally voiced in the belief that maladjustments arose from mistakes that could be alleviated by improved administration, without any need for a change in the basic system of planning and price formation.

The post-1956 liberalization, however, released intellectual inquiry which led to more profound criticism and to reform proposals. There is perhaps more reason for intellectual inquiry into economic problems being awakened by practical necessities under the East European economic system than in countries with market economies.

In some East European countries there was a tradition of economics; in others, economic analysis was a natural outcome of the practical complexities of industrialized countries. In the Soviet Union itself, “economist” meant rather an office grade than a profession. At the same time, the ranks of intellectuals swelled, and there was a stress on mathematics and strict sciences. It is mostly in those ranks that the liberalization and practical necessities of economic life found a response in the form of ingenious, inventive, and original economic thinking and economic reformism.

The development of the Soviet economy; the end of “war conditions,” under which investment decisions were relatively simple and the variety of goods, both producer and consumer, was rather limited; and an improvement in the standard of living—all helped bring to the fore a realization of the immense interdependence of magnitudes and decisions, as well as the need for improved planning and management of the national economy, industries, and individual enterprises. It was estimated in the U.S.S.R. that to accommodate the needs of the expanding economy, the number of people engaged in planning would have to increase by thirty-six-fold between 1962 and 1980.

Among the factors stimulating intellectual activity after 1956 was an improvement in the organization of money and banking. Before World War II, during the war, and for some time afterward, the East European economies were permeated with inflation, which from time to time was canceled by drastic monetary reforms. The current money incomes of the population greatly exceeded the value of available goods at list prices. This demand pressure induced black markets, not only for consumer goods but also for producer goods, and official double price levels for the same consumer goods. It led to queues in front of stores—comprised of people who wanted to buy the most desired goods at list prices—and to consumers spending the remaining money on almost anything that was available. Under such conditions, the supply of consumer goods did not have to correspond to consumers’ tastes, at least not to any significant extent. When inflationary tendencies were largely arrested, the lack of adaptation of the output of consumer goods to the tastes of the population became apparent. At the same time, the savings habits of the population developed, supported by a more stable value of money; and inventories of unsalable consumer goods increased. The daily press of the East European countries was replete with examples of such maladjustments.

Finally, economic reforms in Yugoslavia gave a tremendous impetus to economic discussions and to the advocacy of economic changes in these countries.

Economic discussions, criticism of the existing method of management of the socialist economy, and proposals for reforms have been encouraged, within bounds, in some East European countries by the governments and the communist parties, and they have been widely publicized. Economic writing has developed, particularly in Poland, the Soviet Union, Eastern Germany, and lately also Czechoslovakia. There has been “experimentation” in economic systems in all East European countries, and economic reforms in some. The meaning of these experiments and reforms is discussed in the following sections, always bearing in mind the question whether the reforms, or reforms assumed in principle, permit the fulfillment of conditions for the introduction of trade multilateralization and currency convertibility.

Economic discussions and reforms in the soviet union

In the Soviet Union, discussions of the theoretical foundations of economic reforms have been centered in a few universities. The participants are mostly of academic standing, although high government officials have participated in some exchanges of views. There has been almost no participation by practical economists. The discussions have received wide publicity, not only in university publications, but also in professional journals and in newspapers—a sign of the official approval and encouragement of discussions. However, discussions of a theoretical nature seem to have subsided after certain reforms were decreed late in September 1965.

The participants in the discussions have had access to libraries containing Western economic writings, a fact which makes the distinct originality of most relevant Soviet reformist writings particularly significant. They did not seek guidance from Barone or even Lange. The most important reason for the independent thinking of Soviet economists lies, no doubt, in the entirely different practical economic environment in which they live—conditions which gave rise to different intellectual models from those of their Western colleagues. In market economies, the economist discovers the scientific laws which express actual conditions; in the Soviet-type economy, the economist creates the laws in spite of, or contrary to, actual conditions, and proposes to adapt the system to the law thus created. The path of thinking is entirely different. In addition, perhaps the most important contribution to Soviet economic thought was made by a mathematician who became deeply interested in economics only after he had solved one of its basic problems. Subsequently, Soviet mathematicians and economists proficient in mathematics rediscovered almost the whole structure of Western economic theory.

Before World War II, a factory producing plywood turned to the Institute of Mathematics and Mechanics of the Leningrad State University for help in resolving a practical difficulty. The factory was turning logs into plywood, using different types of machine which had different technical productivities. The problem was how to assign various kinds of logs to the types of machinery so as to maximize output. The Institute of Mathematics assigned this problem to a professor of mathematics, Leonid V. Kantorovich. Professor Kantorovich, who found the problem fascinating, soon realized that an objective solution could not be found without some assumption as to the prices of logs and products. He made his answer dependent on the existence of objectively assigned “multipliers,” which were equivalent to prices.16

Kantorovich’s contribution to economic science in the Soviet Union, or strictly speaking, to the theory of production, though overlooked at the time it was made,17 was rediscovered later, and Kantorovich was recognized as the inventor of linear programing. His book, Economic Calculation of the Optimum Utilization of Resources, was published by the Academy of Sciences of the U.S.S.R. in 1959.18 In this book, Kantorovich in effect recognized the significance of his multipliers as prices, calling them “objectively determined valuations,” i.e., valuations determined as a result of the interplay of demand and supply. Thus, he integrated the theory of value and the theory of allocation.19

Kantorovich’s discoveries have been fortified by the work of Professor Victor Novozhilov, who rediscovered what amounts to the Western concept of opportunity costs.20 Kantorovich’s and Novozhilov’s writings and discussions undermined the existing pricing method, and pointed out that scarcity and the need for “valuation” applies not only to labor, but also to capital and “nature.”

The next step was to determine the process or mechanism for obtaining appropriate, objectively established prices. The most widely discussed but not the most revolutionary and controversial proposal, made as early as July 1956 by Professor E. Liberman of the Kharkov Engineering and Economics Institute, and in March 1957 by Mr. I. S. Malyshev, was to allow Soviet enterprises to strive to maximize their profits. The profit issue became widely known in 1962 after publication of an article by Professor Liberman21 proposing that enterprises should not be directed by numerous indicators imposed on them by planners, but should be motivated to a large extent by the incentive of profits.22

The article provoked vigorous discussions and voluminous writings. The proposal represents a compromise between the centralized system of allocation, with its detailed administrative management of the economy, and the freedom of individual enterprises to make their own decisions. Central planning authorities would continue to decide what should be the volume of production of each enterprise, and what broad assortment of goods it should produce. They would also continue to fix prices. The rest—the volume of capital and labor to be used, wages (partly paid in the form of participations in the enterprise’s profits), and the detailed composition of output—would be left to the free decision of enterprises, which, Liberman asserted, know better exactly what should be produced and how. For this purpose, enterprises would enter into more direct contact with buyers of the goods that they produce. The author did not dwell on speculations on the reform of the price formation. His proposal that prices would still be fixed centrally while deliveries of goods would be based on commercial considerations suggests that he might have had in mind list prices which would be changed according to demand and supply conditions, along the lines proposed by Professor Lange. He seems to have been satisfied conceptually, or from considerations of political realism, with a reform that would ensure an improvement in the quality and, in a strict sense, also in the composition of output of consumer goods on the basis of planned inputs and predetermined prices of both input and output.

Professor V. S. Nemchinov went further than Liberman and proposed that there be no planning of production or allocation of intermediate products, and that central planning of production should be limited to the broad lines of final products. Intermediate products, instead of being allocated in an administrative way, would be obtained by enterprises through commercial contracts at centrally fixed prices. Thus, a market in such products would emerge. Such an arrangement would reduce the powers of central planning authorities to determining the general volume of investment and major investment projects, relative rates of growth of various sectors of the economy, the general pattern of production in the country, and price fixing.23

In order to ensure that individual enterprises act in a mutually consistent way, Liberman proposed a revolutionary innovation in the state economy—an introduction of the profit motive. He proposed a “profitability rate” as the relationship, expressed as a percentage, between the amount of profit attained in a year and the value of the enterprise’s fixed and working capital. On the profitability rate would depend the amount of funds retained by the enterprise for various purposes, including the amounts for distribution as bonuses among the workers. The profitability rate would increase with a reduction of the volume of capital used and with a reduction of costs or an increase in revenues, and each of these actions would benefit not only the enterprise but the whole national economy. A slogan emerged: “What is good for the Soviet enterprises, is good for the Soviet Union.”

During the ensuing discussion of Liberman’s proposals, weaknesses were found in his reasoning and further progress was made in Soviet economic theory. Views were voiced that rational prices could not evolve from the competition of enterprises for intermediate products unless a “charge” on the use of capital was introduced. The concept of “charge” was identical with that of interest. Difficulties arose in reconciling Liberman’s and Nemchinov’s concepts of “commercial relations” between the enterprises with the fixing by the central planning authorities of list prices for all goods and of quantities of “final products” to be produced. Consideration of these difficulties led to much bolder proposals than those of Liberman.

A Soviet economist, Mr. A. Birman, proposed, as reported by one writer,

… to do away with all physical output targets except for two or three dozen key products such as steel, oil, and electric power. For all the other millions of products, the enterprise itself would decide what to produce, so as to maximize its profits on the basis of orders received from wholesale trade and from industrial consumers…. The enterprises’ compliance with the planners’ broad goals would be assured primarily by indirect regulation through prices, incentives, credit, and financial policies, rather than direct controls.24

What Mr. Birman in effect proposed was almost to copy the Yugoslav economic system.

While comprehensive theoretical models as conceived by Kantorovich, Novozhilov, and Nemchinov have not been widely accepted, the deficiencies of the present system have been almost universally recognized. Deficiencies are practical, tangible, and seemingly manageable. The theoretical models were not only hard to comprehend and often novel, but also, it has to be admitted, not so elaborated as to be ready to be put into operation. In these circumstances, the only practical way of removing at least some deficiencies in the existing economic system was to deal with specific practical problems. One such problem was the divergence between the plans for production of consumer goods and consumer preferences; another was inefficiency in Soviet enterprises. For years, thousands of examples of this divergence have been widely publicized in the Soviet newspapers. A recent one concerned sewing machines, which used to be scarce. Several factories were built to produce them, output rose, the market became saturated, and annual output surpassed annual demand. Nevertheless, factories continued to produce undiminished quantities of sewing machines. Inventories of sewing machines continued to increase, and still nothing was done. The difficulty was diagnosed as arising from the fact that once factories received their production plans, they could produce goods without regard to the utility of their output. They sold the produce to the trade network according to plan, and the administrative setup was such that the trade network could not reject goods it received, nor could it withhold payment for them. If the goods were not sold, inventories within the trade network and the volume of (formally short-term) credit granted to finance inventories both rose.

All these practical difficulties had increased in spite of improvements in the efficiency of the traditional system of economic planning and of management of enterprises. Thus, the political and economic leadership of the Soviet Union found itself facing, on the one side, growing practical difficulties demanding urgent solution and, on the other, a body of theoretical reformist thinking, the acceptance of which, in the view of many, could undermine the basic dogmas of Marxism and bring about an upheaval in the national economy.

Under such conditions, the only reform proposal which could be accepted was that presented by Liberman, which proposed to deal with the most immediate economic faults—inability of the administrative management of economic enterprises to adapt production of consumer goods to consumer preferences and to ensure increased production of needed goods. It did not propose to deprive central planning of its main tasks—allocation and price fixing; it did not propose to introduce interest on fixed capital or to reject the labor theory of value; it was on a low level of abstraction and easy to comprehend.

Liberman’s proposals to give enterprises more freedom of decision and to allow them to enter into a more direct contact with the consumer were accepted as suitable for experimentation. The aim was to find ways of removing the divergence between the production of consumer goods and consumer preferences, and improving the productivity of labor in enterprises producing consumer goods.

In 1964 a few enterprises producing consumer goods were allowed to experiment with Liberman’s ideas. They were allowed to produce an assortment of goods for which they found a real demand (on the basis of direct contacts with their commercial outlets). But the experimental enterprises could not influence the kinds of producer goods that they received from other enterprises. If they had been allowed to do so, a substantial part of the national economy would have been adversely affected, however temporarily; some goods (semimanufactures from the point of view of the “reformed” enterprises) which had been produced according to plan would have been rejected. The economy would have been disrupted. It was not without reason, therefore, that the enterprises selected for the experiment were some producing such consumer goods as garments and shoes—industries which can produce a great variety of finished goods from the same type of fabric or leather.

The experimental enterprises were allowed to retain a certain part of their profits to pay bonuses to the workers. But, consonant with Liberman’s proposals, they could not freely (by negotiations with the trade network) establish prices for their produce. Such an experiment could lead to a better adaptation of production to consumer choices than was ever achieved by the traditional system, and perhaps contribute to an increase in the rate of economic growth. But so long as the experimental enterprises could not influence the structure of their input, and so long as bargaining within the “commercial contacts” was not allowed to determine prices but only the assortment of goods produced (by the experimental enterprises) at list prices, the experiment could not directly create forces leading to the formation on a national scale of prices which would be equipped with the function of guidance as defined at the beginning of Section I above.

Apparently the need for a solution to the problem of maladjustment of production of consumer goods to consumer preferences—and perhaps more importantly the need for a more efficient allocation system in general—have been considered particularly pressing by the Soviet authorities, and the results of experimentation encouraging. At any rate, after considerable preparations and studies, it was decided to extend the experiment to 400 factories widely spread over the U.S.S.R., and representing 25 per cent of the total production of garments, 18 per cent of textiles, 28 per cent of shoes, and 30 per cent of leather. This decision was announced early in January 1965, and the transition of selected enterprises to Liberman’s principles of management was scheduled to take place gradually.

The decision meant more than just a confirmation of the success of the pilot experimental enterprises and an increase in the number of experimental enterprises. First of all, the selected enterprises did not belong only to the last stage of production. Shoe and garment factories produce ready-made consumer goods, but leather and textile factories produce intermediate goods used by the shoe and garment factories. Under the extended program, therefore, the output of some intermediate products was influenced by the “commercial contact,” i.e., in effect by consumer choices. The experimental enterprises were allowed to determine their wage bills and to pay bonuses from profits of up to 40-50 per cent of basic wages.

When Premier Kosygin delivered his speech in December 1964, in which he criticized the abstract theories of “mentors,” he also announced that reforms along the line of the experiments would be extended. He said that “we will proceed along the way of planning on the basis of customers’ orders, not only in the industry manufacturing consumer goods, but also in other branches of the economy.” Accordingly, a few enterprises in “heavy industry” and a coal mine have adopted principles of “planning and management” similar to those adopted by the selected enterprises in light industry. Subsequently, the Soviet authorities have announced that the principle of direct contact between the producers and users of goods would be extended to the machine-producing industry.25

Late in September 1965 the period of experimentation ended with the adoption by the Central Committee of the Communist Party of the Soviet Union of a resolution “On improving the management of industry, perfecting planning, and strengthening economic incentives in industrial production,”26 which provided for a gradual introduction of some changes in the national economy.

The main features of the reform are: (1) a vast reduction of the economic and technical indicators given as commands to producing enterprises by the central planning authorities, and a corresponding increase in the scope for economic decisions by enterprises and their associations; (2) the elevation of profit to the rank of one of the most important indicators of the performance of enterprises and a great increase in the importance of profits as a means of rewarding the success of enterprises and of their labor force; (3) the institution of direct commercial contacts between suppliers and buyers, not only between the trade organizations and consumers but between all levels of producers and users of goods; (4) the introduction of interest on all forms of capital, combined with an increase of financing of investment by bank credits and a corresponding decline in financing grants.

The changes did not go so far as some of the participants of the discussions in the U.S.S.R. on necessary reforms had suggested or wished. In particular, the volume of output of an enterprise will continue to be decided centrally. But the enterprise will not be entitled to sell automatically all it produces—and its success will to an appreciable and significant extent depend on its ability to place its produce on the “market.” This should lead to an improvement in quality.

The allocation of output in terms of broad categories will also continue to be determined centrally, but an enterprise will have more freedom to decide on the more detailed composition of output within each broad category, in conjunction with the buyers. This should lead to a somewhat better adaptation of output to the requirements of other producers and of consumers.

Similarly, the wage fund will be determined for each enterprise, but the enterprise will have freedom to determine total employment and the structure of employment; the practice of prescribing these magnitudes centrally has been abandoned.

The volume of profits and the rate of profitability of each enterprise will require confirmation from the center, but this does not necessarily deprive profits of their intended roles of indicator and incentive. The control of profits seems to be largely connected with the problem—a thorny one for the publicly owned enterprises—of the differences in natural advantages among enterprises producing the same or closely substitutable goods.

The most important limitation on the freedom of decision of individual enterprises is the continuation of the system of price fixing by the central planning authorities. The Soviet leaders recognized the importance of an appropriate price structure for the success of the reform. An agency in charge of analyzing prices and entrusted with the task of working out changes in the price structure has been upgraded and strengthened. But a reform of the price structure is not expected soon, and a reform of the method of price formation is apparently not under active consideration, at least for the time being. In the discussion of the price structure the importance of its stability is stressed, and there are suggestions (although these may not represent the official attitude of the authorities) that major changes in prices should be made at five-year intervals, only minor changes being made more frequently. Such minor changes, however frequent, would not eliminate the need for periodic major overhauls. Most of the time, therefore—perhaps, let us assume, with the exception of the time of a major reform—the structure of prices would not reflect the relative scarcities of goods.

The reform tends to improve the performance of the Soviet economy in accordance with the U.S.S.R.’s own aims. The fact that it fell short of more revolutionary proposals of some participants in the discussions in the U.S.S.R. may point to realism. The realization of the present reform requires sustained effort and outstanding skill, and a further-reaching reform could result in serious practical difficulties in the process of adjustment.

But while the reform is a move toward convertibility and multilateralization of trade, it constitutes only a preliminary step. Without a market, or an appropriate equivalent for it, for all goods in all stages of production, no price and allocation system that indicates relative scarcities can emerge in the Soviet Union. In the absence of such a system, the multilateralization of foreign trade and convertibility of the ruble cannot be obtained.

Economic reforms in poland

Poland’s advantage in bringing about economic reforms arises from the fact that it has quite a number of excellent economists, some of world reputation. There seems also to have been some continuity preserved in economic education, and a number of younger economists carry on the tradition of their masters.

After Mr. Gomulka assumed power, a State Economic Council was instituted, with renowned economists included in its membership. The task of the Council was to advise the authorities on all economic matters. In 1957 the Council presented to the Government its “theses.”27 These included proposals to introduce interest on capital, a profit motive, and a shift in the basis of determining bonuses for workers in enterprises from the volume of production to the volume of profits. The Council proposed also that the methods of cost calculation and price formation be changed so as to make the structure of prices (primarily of producer goods) correspond to relative scarcities. This change was to be made, first of all, by raising the list prices of goods being sold by producers below the cost of production, leading to the abolition of producer subsidies and to an allocation of such underpriced goods more in line with their relative scarcity. The Council also tried to have list prices fixed at what amounted to the cost of production of “marginal” enterprises, i.e., those whose cost of production was the highest among all the enterprises producing the same commodity.

Of all these proposals only those related to the price structure were implemented in 1960. A far-reaching and meticulously prepared price reform removed, at least temporarily, an extremely complicated system of subsidies. But the reform produced only a better structure of prices, not a better method of price formation. Interest on capital was not introduced; and since there was also no profit motive or any equivalent to it in the decision making of enterprises, the economic system still offered no guidance for the allocation of capital. The marginal principle was not accepted: each of the plants producing the same goods continued to deliver its products to the branch association of enterprises at its planned cost of production, plus a fixed markup for profits—not at the cost price of the enterprise with the highest cost of production. This represented a further impediment to a rational allocation of resources. Finally, the initiative of individual enterprises in regulating the structure of input and output remained about as limited as in the U.S.S.R. before the last reform there. Under such conditions, the formation of prices in such a way that they would represent relative scarcities and offer at the same time guidance to decisions on the allocation of resources could not be secured.

The new price structure introduced as a result of the “theses” has remained basically unchanged, and owing to extraneous circumstances, such as bad crops, balance of payments difficulties, and technological changes, it has become increasingly inappropriate as an indication of relative scarcities, though probably still superior to the former one.

The Council also proposed certain technical improvements in the evaluation of the performance of enterprises, such as a reduction in the number of indicators of enterprises’ performance and a better analysis of demand, and these proposals have been treated favorably by the political leaders. Numerous enterprises have been allowed to engage in carrying out various experiments. These enterprises have been given more autonomy in arranging their production according to market requirements, in assigning labor to various tasks, and in using the fund for paying premiums to workers for their efficiency. The production of these enterprises was estimated to have represented 35 per cent of the total value of industrial production in 1965. But the experiments did not go very far. Though accepted in principle,28 Liberman’s proposal for profit was not put into practice to any significant extent until late in 1965. To counteract the trend toward capital-intensive methods of production, the degree of “labor absorption” was accepted as a guide to decisions on the desired composition of output, instead of introducing interest on fixed capital.

In foreign trade, direct contacts have been permitted and encouraged between the industrial associations and foreign importers and exporters. More important proposals made by an interdepartmental Committee for the Inquiry into the Rentability of Foreign Trade, instituted in 1961 under the chairmanship of Professor M. Kalecki, have been implemented only to a limited extent. The recommendations of the Committee, accepted by the Central Planning Commission as guidance for further inquiries, included a proposal to introduce the principle of marginality into the formation of foreign exchange rates. These recommendations, and the problem of the “effectiveness” of foreign trade, have been widely discussed in Poland. The Committee’s proposals may be summarized as follows:

Enterprises and their associations would propose for the consideration of the planning authorities lists of goods which they could produce for export in the course of the ensuing year. The lists would include information on the cost of production per physical unit of each commodity offered for export. These lists, together with information on foreign prices of the commodities offered for export, would make it possible to calculate the cost of obtaining a unit of foreign exchange for each export commodity in terms of domestic currency.

All the goods which enterprises and their associations propose to export would be then put on a common list arranged in order of increasing cost of a unit of foreign exchange (in terms of Polish currency). In the annual economic plan the over-all minimum amount of export proceeds would be fixed. This minimum would also determine a cutoff point on the common list of exports. This point would correspond to the maximum permissible cost of a unit of foreign exchange (i.e., the marginal exchange rate of foreign currency). Only goods the export of which secures foreign exchange at or below this maximum cost should be exported. In other words, actual exports would take place at or below the marginal exchange rate of foreign currency (in terms of Polish currency).

The list of export goods could be then analyzed in conjunction with conditions on various foreign markets with a view to finding the most advantageous markets, and could be further differentiated according to the cost of imports from various countries.

A full acceptance of these proposals would provide Polish foreign trade with foundations much nearer those of a market economy than it seems to have now, but the marginal cost of the unit of foreign exchange would still not represent a uniform exchange rate for the zloty. It would represent only an abstract maximum exchange rate for the cost of obtaining foreign exchange (or of imports), or an indication that goods which would earn a lower exchange rate for Polish currency should not be exported. Exports and imports would continue to be made at multiple implicit rates as long as the latter were below the marginal cost of obtaining foreign exchange. The proposed method certainly offers a much more economic method of selecting exports than the Soviet system of designating goods for export by means of purely administrative decisions. Nevertheless, it does not change those aspects of the pre-1956 Soviet system which are responsible for the multiplicity of (implicit) exchange rates and for the bilateral payments method.

No doubt Professor Kalecki and his associates realized these limitations of their proposals. Possibly because of this realization, they inserted in their proposals a suggestion that would tend to make foreign trade and the principle of marginality a vehicle for making the price formation method and the price structure in Poland more nearly representative of relative scarcities. They suggested that production of goods which earned foreign exchange at lowest cost should expand, and those involving higher cost (a lower implicit exchange rate) contract. This process, assuming that domestic prices were formed as in a market economy, would tend to unify the now multiple exchange rates at the level of the marginal exchange rate.

It appears that the cost of foreign exchange is, in fact, calculated in Poland and that, in a considerable number of enterprises working for export markets, output is influenced by the effect on foreign exchange earnings. But the extent to which the results are used as guides for economic decisions seems to be limited. In the context of this paper, however, the extent to which the proposals related to foreign trade have been implemented is not of immediate practical importance. Even if fully implemented, multiple implicit exchange rates and a bilateral payments system would remain, as long as the reforms in foreign trade were not supplemented and supported by a reform of price formation methods—or, to be more exact, by the introduction of a market or equivalent price formation mechanism—and by a decentralization of planning and, specifically, of allocation of agents of production.

Reformist tendencies in Poland gathered strength in 1965, and in July of that year the Central Committee of the Polish United Workers Party adopted a resolution “On the direction of reforming the system of planning and management of the national economy during the period 1966-1970.”29 On January 28, 1966 the Economic Committee of the Council of Ministers adopted a resolution on the timing of various aspects of the reform.

The Polish decision maintains the experimental nature of the changes in the economic management of the economy to a much larger extent than does the reform in the U.S.S.R. Certain basic features of the changes have been decided on, but their implementation (apparently as in Czechoslovakia) has been left to a more elaborate formulation later.

The main features of the reform are (1) a gradual reduction of binding directives given to enterprises by the planning authorities and a corresponding increase in the scope for economic decisions by enterprises; (2) the elevation of profit to the role of one of the most important indicators of performance of enterprises, and an increase in the importance of profits as a means of rewarding the success of enterprises and of their labor force; and (3) the extension of interest to all forms of capital.

The similarity of these points to those of the Soviet Union’s reform does not prove that both reforms go to the same depth. Some of the features of the Soviet Union’s reform had been introduced in Poland much earlier (e.g., the price structure), and some of the earlier aspects of the economic reform introduced in Poland (notably the treatment of foreign trade) have not become a part of the reform in the U.S.S.R. The Polish reform seems to lay less stress on direct contacts between the suppliers and users of goods, but actual differences in this respect, if any, will become noticeable only as the reforms are implemented.

The Polish approach to prices seems to be basically the same as in the U.S.S.R.: central planning, plus some “flexibility” of prices achieved through more frequent changes in the list prices of some goods. Consequently, at this stage a method of price formation that would mold the price structure into an indicator of actual scarcities seems unobtainable. It may therefore be concluded that the Polish reform has not so far opened the road leading directly toward convertibility and multi-lateralization of foreign trade.

Economic reforms in eastern germany

Eastern Germany appears to be first among the East European countries in terms of the scope and implementation of economic reforms. Discussions started, with the approval and encouragement of official circles, soon after Liberman published in September 1962 his proposals to accept profit as the main incentive of economic activity in Soviet enterprises. A few associations of state enterprises started experimenting with Liberman’s ideas on profit and with the decentralized method of planning. In the middle of 1963, the Council of Ministers, and soon after that the State Council, approved blueprints of economic reforms as presented in “Guidelines on the New System of Economic Planning and Management.”30

Implementation of the reforms has been energetic, and the whole of state industry, representing an overwhelming part of total industry,31 now works on the new principles. The main features of the reform are the acceptance of profit as one of the main tests of the economic activity of enterprises, and the decentralization of planning of production and of the management of enterprises.

A great deal of hitherto centralized power in planning and management of enterprises has been progressively and speedily transferred from the central administrative organs to the associations of enterprises. As in other East European countries, these comprise factories specializing in identical or similar lines of production. The structure of output has been made, to a significant extent, dependent on “contracts” between the buyers and the suppliers, equivalent to the “commercial contacts” in the Soviet Union. These are not limited, as they originally were in the U.S.S.R., to contracts between the producers of consumer goods, on the one hand, and the trade outlets and the suppliers of intermediate products, on the other; they extend to all stages of production. The new system is not limited to the consumer goods industry (as, to a large extent, it is still limited in the U.S.S.R.) but extends to all industries. The dependence of the structure of inputs and outputs on contracts, and so on an analysis of demand, seems to be increasing only gradually, parallel with changes in the price structure.

The profit motive has the role of ensuring that enterprises will produce what is demanded most. Earnings of workers have been increasingly made dependent upon the profits of the enterprise; the share in total earnings of premiums paid out of profits is gradually increasing.

Among other features of the reform is the introduction of interest on fixed capital. Each enterprise pays a “production fund levy” calculated as a fixed percentage of the “fund of productive resources” (i.e., capital employed by the enterprise). Investments, though still centrally determined, will have to be financed as a rule from the resources of the associations of enterprises or borrowed from banks; only exceptionally will investment funds be provided from the government budget.

Decentralization, the scope of contracts between the suppliers and buyers, and the dependence of the work of enterprises on the volume of profits are enlarged only parallel with changes in the price structure. Price distortions, which are only gradually being eliminated, are considered to exist when prices fall below production costs and when, in consequence, subsidies have to be provided. In April 1964 and in January 1965, the prices of many basic materials were increased and the volume of subsidies greatly diminished. It is believed in Eastern Germany that unadjusted prices, being wrong prices, would lead to wrong decisions in enterprises and in their associations.

Prices remain centrally planned. The East German authorities have declared themselves against any “automatic” formation of prices. Instead, the authorities aim at making prices elastic, i.e., making frequent changes in list prices, apparently according to the results of official market analysis. In this way, it is hoped to make prices “an effective planning and guidance norm.”32 Price reform has not yet progressed, however, to the stage where such flexibility would be practicable. For the time being, prices of consumer goods are frozen to guard consumers and the cost of production (wages) from sharp changes in prices and real wages which could imperil the whole reform. It is believed in Eastern Germany that the price reform, and with it the introduction of the whole new system, will be completed in 1966 or 1967. For the time being, the allocation of agents of production is still largely centralized; and the price reform, as in Poland, has introduced a new price structure, not a new price mechanism that would enable prices to perform the function of guidance.

Reformist trends in other east european countries (excluding czechoslovakia)

In the remaining East European countries, other than Czechoslovakia, the reformist movements have been less advanced and the discussions of economic changes have not approached the refined levels reached in Poland and the Soviet Union. In all these countries, the need for reforms is recognized, and new forms of management of the economy are sought through experimentation in “Libermanism” and in decentralization of planning.

On January 1, 1964, Hungary introduced interest on fixed capital. There have been a considerable number of experiments in linking wages with profits and in the decentralization of planning, leaving enterprises a degree of freedom in deciding what to produce, on the basis of demand analysis, out of the centrally allocated agents of production. Both inputs and outputs remain at centrally established list prices.

For some time past, a number of Hungarian factories have enjoyed the right to make direct contacts with foreign buyers of their products. Some of these enterprises are also permitted to import direct without using the foreign trade organizations as intermediaries, and to pay for such imports out of a part of export receipts which they are allowed to retain.

In Bulgaria, experiments in the “new system of planning and management” are applied in factories representing about 40 per cent of total industrial production, and the scope of experimentation is being extended to the remaining enterprises. Profit is being gradually introduced as one of the main incentives and indicators of the performance of enterprises. But the main feature of the reform is the decentralization of planning: more freedom is left to enterprises to decide on how to produce out of allocated agents of production. Prices remain centrally fixed. Bulgaria is also experimenting with the decentralization of planning in agriculture. Both Hungary and Bulgaria have made advanced preparations for economic reforms.

In Rumania, experimentation in the new system seems to be on a small scale.

Economic reforms in czechoslovakia

For some time, Czechoslovak economists were largely isolated not only from Western, but also from Polish and Russian theoretical economic writings and reformist movements. In 1958-59, the country initiated an experiment by which a number of enterprises were freed from the tutelage of strict planning and given the right to decide what and how to produce, but the attempt ended in failure. As the economic reformists subsequently stated, the experiment was called off because it “was not carried out according to intentions” and because “it [produced] new difficulties.”33

Nevertheless, Czechoslovakia became in 1964 the only country in Eastern Europe with blueprints of an economic reform, which, if implemented, might eventually lead to a method of price formation that would tend to make the price structure reflect the relative scarcities of goods and to fulfill the basic conditions for multilateralism and currency convertibility.

The event which seems to have strengthened the movement for economic changes was a serious deterioration in the economic situation in Czechoslovakia: in 1962 and 1963, industrial production did not increase. The lack of economic progress was correctly attributed to the inefficiency of economic planning and of management of enterprises. The complexities of a developed economy, which in the Soviet Union became apparent only relatively recently, have been noticeable in Czechoslovakia for a long time.

The need for a reform of the system was recognized. Some economists criticized not only the present type of implementation of the socialist system, but even the principles of the system. And such criticism was published in newspapers and journals, which in the East European countries are invariably under strict government supervision.34

The leader of the reformists is Professor Ota Sik, member of the Academy of Science and, more importantly, a member of the Central Committee of the Communist Party. In a speech delivered at a session of the Central Committee (December 18-19, 1963), Professor Sik stated that the socialist economic system should work on the basis of market forces. Earlier, he had also made some remarks directed to the conservatives:

Unfortunately overcoming antiquated … views often entails not only a matter of difficulties in understanding but [also] unwillingness to accept new findings. This unwillingness has its roots in various vested interests, ambitions, prestige factors, etc.35

After two years of discussion, a proposal for reform was formulated and presented by Professor Sik to the Presidium of the Central Committee of the Communist Party. In September 1964, the Presidium approved the proposals, apparently after having introduced some significant changes,36 and subsequently approval was also granted by the Plenum of the Central Committee. The main features of this revolutionary reform are as follows:

(1) Central economic plans will not, as they do now, prescribe the detailed activity of enterprises, input and output, employment, wage bills, and other economic magnitudes. All these matters will be left, with some limitations, to the decisions of managements of enterprises and to their associations. The function of the annual national plan is to be mostly the prognostication of economic developments and a determination of over-all conditions of development. More detailed planning, but still without its present administrative and imperative nature, is to be the task of various associations of enterprises. Detailed plans will be worked out by the enterprises themselves on the basis of their analyses of markets.

(2) Decisions on investment of over-all national importance will be made by the central planning authorities. Investments in specific branches and all smaller investment projects will be the prerogative of individual enterprises and their associations. General principles governing decentralized investments will be worked out centrally.

(3) Decisions as to the structure of input and output, including employment and, to a large extent, wages (or, rather, the total earnings of workers), will be left to enterprises, which will be motivated in their decisions by the desire to maximize profits. Profits are defined as in Western economies, except that (as in Yugoslavia) the wage bill is not included in the costs of production.

(4) Minimum wages will be established centrally, but earnings of workers and employees will be strongly influenced by the size of profits made by enterprises.

(5) Interest on fixed capital will be introduced.

(6) Prices will be established in such a way as to eliminate the need for subsidies. There will be three categories of prices:

Fixed prices established by the central planning authorities. These prices will apply to basic raw materials and to basic consumer goods. In fixing prices for these goods, the authorities will take into account market conditions.

Ceiling prices established by the central planning authorities for “standard products” to eliminate “speculations” by enterprises.

Free prices emerging from market forces.

(According to more recent information37 only 7 per cent of the total volume of goods will be sold at free prices, at least initially, and 29 per cent at ceiling prices leaving 64 per cent to be sold at centrally fixed prices; surprisingly, only 11 per cent of the volume of consumer goods is to be sold at free prices.)

(7) It appears that there will be a shift in the source of government revenues from indirect to direct taxes. Profits will be taxed at rates that will, at first, be differentiated according to the performance of the enterprises, but eventually will become uniform for all enterprises.

(8) A “proper relationship” is to be established between domestic and foreign prices, to enable exporters to make appropriate decisions. (This implies a decision to fix an equilibrium exchange rate for the Czechoslovak currency, although it cannot be expected that such a uniform rate can be obtained soon after the implementation of other facets of the reform.)

Originally the Presidium of the Central Committee of the Communist Party decided that the new system should be introduced gradually during 1965, so that the 1966-70 plan could be based entirely on the new economic order. However, introduction of the main principles of the new system was postponed until January 1, 1966. Apparently this delay was caused by the need for more detailed blueprints. The Czechoslovak authorities may also be apprehensive about the cost of possible mistakes, and even of the mere cost of the transition from the old to the new system, particularly in view of the lack of external aid, such as Yugoslavia received while making a similar transition.

On the occasion of his New Year broadcast in 1965, President Antonín Novotný, who is also First Secretary of the Czechoslovak Communist Party, stated:

With the preparation for the 1966-70 plans are linked the beginnings of putting into operation improved forms of organization and management in our national economy, which are inseparable from the preparations of the fourth five year plan. We must realize that if we left [present] forms of management in operation they would become a brake on progress.

It appears that Czechoslovakia is on the threshold of revolutionary changes in its economic system.

III. “Multilateral” Settlements Within Eastern Europe

In October 1963, member countries of the Council of Mutual Economic Aid (COMECON)38 signed an agreement aiming at multilateral settlements, in “convertible gold rubles,” of claims arising out of the intra-COMECON commercial transactions. This agreement provided for the establishment of the International Bank for Economic Cooperation (IBEC), which was organized and put into operation at the beginning of 1964. According to reports in the East European countries, the first full year of operation of IBEC has been successful, and it is gradually extending the scope of its activities. Only in Poland was its operation given a mixed appraisal.

IBEC’s basic unit of account and of a store of value is the “convertible” ruble with a gold content of 0.987412 gram of pure gold. The capital of IBEC is to amount to 300 million of “convertible” rubles, subscribed (unequally) by the central banks of member countries and to be paid in five annual installments. The Bank Board comprises one representative from each member country, each with one vote. The same is true of the executive body—the Bank Administration. IBEC may accept various kinds of deposits in convertible rubles or in other convertible currencies (i.e., of Western countries), but it cannot sell convertible currencies for “convertible” rubles. It is allowed to lend convertible currencies on a short-term basis.

The establishment of IBEC is considered in the East European countries an important event permitting a transition from strict bilateralism to a system of multilateral settlements of claims arising out of foreign trade between the member countries. As explained by one Soviet writer:

In the early years when the world socialist system was still in its formative stage, bilateral payments agreements and bilateral clearing accounts represented the only practical form [of settlement]. However, under the conditions of [the] socialist division of labor and an increase in the volume of foreign trade, early forms of bilateral payments agreements and settlement of clearing accounts ceased to meet the new requirements. We know that under bilateral settlements the balance in favor of one country cannot be used to pay for imports from another country, and countries were compelled to reduce imports or exports. The subsequent stage of economic development required a new method [which is provided] by the new system of multilateral settlements.39

While the above description of bilateralism is clear and accurate, the suggestion that IBEC has introduced multilateralism and convertibility cannot be accepted. Behind such familiar terminology as “multilateralism,” “convertibility,” and “gold ruble,” there is an epistemology entirely different from the one of the Western world.

The important element in understanding the working of COMECON’s present payment system is its decision taken in June 1962 on the “Fundamental Principles of the International Socialist Division of Labor.” This agreement laid the basis for coordinating the economic development plans of member countries, and for the specialization by these countries in various lines of production.

Under the new system of payments, negotiations for the exchange of goods and for payments are conducted in two stages:

In the first stage, pairs of countries enter into bilateral understandings on the exchange of goods between them. In arriving at these understandings, the countries are guided, among other things, by the requirements of the specialization of production within member countries as a group. Such requirements are, of course, agreed on before any actual exchange of goods and payments takes place. At this stage of negotiations, the total values of goods to be exchanged between each pair of countries do not have to balance.

In the second stage, trade negotiations are conducted on a multilateral basis. Movements of goods between all the member countries are so arranged that payments by each country are balanced on a multilateral basis, although they may not be balanced for each pair of countries. Temporary imbalances, which may emerge for individual countries in the course of the “multilateral” trade plan are covered by “convertible” rubles, which the Bank has obtained from the subscriptions to its capital or from current inflows of temporary surpluses of other countries. The Bank may grant members short-term, seasonal, and medium-term advances.

Undoubtedly the establishment of IBEC may greatly benefit the member countries. Although formerly it was difficult to arrange even a triangular trade and payments agreement, it is now possible to enter into “multiangular” trade transactions. Also, in the past it was necessary to balance bilateral accounts by curtailing imports, whereas under the new system the country with an adverse balance has a breathing space because the creditor country can use its accumulations of “convertible” rubles to pay for deliveries of goods from other member countries. The right of IBEC to extend advances to member countries should also contribute to an increase in the volume of the intra-COMECON trade. If IBEC in addition becomes a holder of temporary surpluses of convertible currencies (of the outside countries), the reserves of such currencies needed by all the member countries may be reduced—IBEC will thus increase the over-all liquidity of member countries.

Nevertheless, the new system does not make the ruble convertible and does not result in any multilateralization of trade. The ruble used in “multilateral” settlements by IBEC is not the ruble circulating in the Soviet Union. As long as the valuation of goods exchanged between member countries is divorced from price quotations in any and all member countries, and instead is based on world market prices, the “gold” ruble is in reality as much foreign currency in the Soviet Union as is the U.S. dollar or pound sterling. All that IBEC does is to make the Soviet ruble a unit of account and permit multiangular trade. The U.S.S.R. ruble has not attained the status of a conditionally convertible currency, even on a purely regional basis, such as that of the pound sterling in the sterling area before it became convertible on a wider basis.

A necessary prerequisite for the attainment of the convertibility of the ruble is the creation of conditions for the “convertibility of goods” discussed above. This condition has not been fulfilled in any member country. Prices in these countries still do not reflect relative scarcities of goods and they do not perform any guidance function in the allocation decisions. Rubles accumulated at IBEC cannot be converted into any commodity in any country of the Soviet “multilateral” settlement scheme. They do not represent a general claim on goods in any member country. This is so, not because of the existence of monopolistic foreign trade organizations, but because a free use of accumulated “convertible” rubles on markets of member countries, including the Soviet Union itself, might very well mean—to repeat—the export of goods which are scarcer vis-à-vis domestic requirements than other goods, even though the latter may have relatively higher prices.

For these reasons, credit balances in rubles accumulated with the IBEC cannot be used for purchases of goods at domestic list prices. The prices used in intra-COMECON trade continue to be world market prices. As described by a Soviet writer:

… Foreign trade prices expressed in rubles are stable. They are determined [through COMECON negotiations] on the basis of average weighted price quotations on major world markets over a period of years, and they are not subject to fluctuations. Changes in these prices are made … through agreements among the participating countries, with due consideration accorded to the interests of these countries.40

Moreover, the use of the “gold ruble” in intra-COMECON settlements is strictly dependent not only on the valuation of goods exchanged at world market prices but also on agreements as to what goods can be exchanged. These agreements determine the quantities of each commodity exported or imported in accordance with each country’s plans of production, investment, and consumption. And the agreements themselves are influenced by the intra-COMECON agreement on the specialization of production and the division of labor in the member countries. In constructing plans for foreign trade and in negotiating agreements on the specific goods to be exchanged, the important elements are not domestic prices but administrative decisions which have no relationship to the comparative advantages of foreign trade.

The ruble accounts accumulated with the IBEC thus do not represent general purchasing power; their use is strictly limited. The only difference between the new and the former system of payments is that, at the second stage of trade negotiations, the lists of goods are agreed on multilaterally; “difficulties as to the volume and assortment of goods exchanged at the stage of bilateral negotiations (first stage) can be solved during multilateral negotiations (second stage), where mutually advantageous decisions are reached.”41

It appears, however, that the member countries have not availed themselves even of the opportunities offered by the Bank. Mr. Henryk Kotlicki, Director General of the Polish Ministry of Finance, in an interview given on the occasion of the first year of operation of IBEC, stated that the member countries tend to continue to balance their trade bilaterally, not multilaterally42 (or rather multiangularly). Another author said that there was no tendency to expand exports to other member countries since export surpluses could not be used because of a lack of supply of needed goods or of their poor quality.43 Mr. Kotlicki found also that interest rates on debit balances were too low to provide an incentive to eliminate such balances (apparently he meant canceling balances through an expansion of exports by the debtor country). He thought, however, that the main cause of deficiencies in the working of the Bank was the lack of convertibility of balances in “convertible” rubles into gold or convertible currencies (i.e., currencies of nonmember countries). He proposed that creditor balances maintained over a longer period of time should be converted up to a certain proportion (e.g., 10 per cent) into gold or into convertible currencies. The debtor would be required to pay a part of his negative balance, e.g., 10 per cent of it, in gold or convertible currencies. The proportion of payments into gold or convertible currencies would be increased in stages until a 100 per cent convertibility was attained. Such a reform, the author correctly asserted, would create incentives to expand intra-COMECON trade and to improve the quality of exported goods.

While some economists in the East European countries realize the limitations of the new system of intra-COMECON payments, they seem to consider them temporary and they have great hopes for the future role of IBEC. In the Soviet view,

… The system of multilateral settlements in convertible rubles may subsequently and in a gradual way bring the domestic prices in [member] countries into accord with each other, inasmuch as the use of the ruble as a measure of value makes it possible to compare the production costs and prices of commodities in [these] countries, to make a concrete evaluation of the economic benefits of exports and imports, and to take steps to bring about necessary reductions in the cost of production of specific commodities.44

This reference to the adjustment of domestic costs and prices sounds encouraging. However, the cost structures of East European countries can be influenced, through forces stemming from foreign trade, only if the methods of price formation in these countries are changed (including the introduction of interest on capital) so as to be able to transmit the forces from without. It should also be kept in mind that within the Soviet epistemology, the expression “the reduction of costs of production” should be understood as related to goods, of which the exchange (on an intra-COMECON scale) is determined by decisions related to the intra-COMECON specialization in production. It is neither comparative advantage nor relative costs which determines this specialization, but the other way round.

IV. Economic Reforms and the Conditions for Multilateralism and Convertibility

The common features characterizing the various reforms, experiments, and reform proposals in the East European countries are the decentralization of planning and management of the economy,45 the introduction of a profit motive as the main indicator of efficiency in the economic activity of enterprises, and a degree of freedom for enterprises in selecting the structure of output on the basis of market analysis.

All these features represent a sweeping change in the economies (or sections of the economies, depending on the scope of the reforms or experiments). None of the East European countries, however, has gone so far as to create conditions for the multilateralization of trade and convertibility of currencies. In this respect, the key issue is the system of “guidance”—i.e., of price formation and the allocation of agents of production; in none of these countries has it been solved, at least for the time being, in a way that would make their economies fully efficient in achieving their objectives.

Two approaches have been developed for solving the issue of guidance. One is the adoption of market forces. This method has to some extent been accepted in Czechoslovakia, but so far only in principle since the intended reform has not yet been fully implemented. Another approach is that of “equivalent forces,” i.e., forces equivalent to the free market. Under this method, prices are to remain centrally controlled, as are the present list prices, but the planning authorities are to keep prices “flexible” by changes made when necessary. It is not known how this method would work in practice; so far it has been attempted only in Eastern Germany. Even there, while the method of “equivalent forces” has been adopted in principle, the economic reforms have not yet been carried out to such an extent as to introduce and test the method to a sufficient degree. In Poland and in the Soviet Union, mathematical economists seem to have developed methods of price formation by “equivalent forces,” which are on a lower level of abstraction than, e.g., Pareto’s general equilibrium. But these methods are not ready to be translated into practical terms, nor does the leadership of the Soviet Union seem ready to consider them actively. There appears to be a search for something more concrete. The authorities of the other East European countries think, for all practical purposes, solely in terms of a price structure, not of a method of price formation which would provide prices leading to an ever new equilibrium.

For purposes of this paper, it is enough to conclude that neither the market method nor the “equivalent force” method has been implemented in any communist country of Eastern Europe, and that the necessary conditions for multilateralism and convertibility have not been met by any post-1956 East European economic system.

An important question, however, arises: have the up-to-date economic reforms released forces which will necessitate corrections in the functioning of the economy and will lead to further reforms directed toward a price formation system that would reflect relative scarcities and permit convertibility and multilateralism? A firm answer to this question is not possible at this stage. It may be presumed that, though prices remain parameters rather than variables, direct commercial contacts or contracts of the kind introduced in Eastern Germany and in the Soviet Union will not only lead to a more rational structure of input and output but will also tend to exert pressure to correct improperly fixed prices. This and further intensive studies of methods of price fixing may lead to frequent and appropriate price changes, whether on the basis of free market forces or by equivalent methods aided by electronic computers. However, it is certain that in planned economies like those of Eastern Europe, corrective actions in the form of price adjustments, and improved allocations of basic resources cannot come as an automatic or natural response to a force within a cybernetic system; they must come in the form of a conscious decision, and as such cannot be easily predicted.

The reforms will themselves create new problems which will call for solutions. One, produced by the partial decentralization of economic decisions, is the need for economic policies to replace the economic commands which before the reforms held an almost absolute monopoly. Perhaps it is on the ability and willingness to resort to economic policies rather than to commands in solving various difficulties that may arise from the reforms that will depend the most advantageous evolution of the economic systems of the East European countries.

Another problem is created by the greatly increased share of participation in profits in the remuneration of workers, together with a partial freedom of enterprises to regulate the employment they create. The tendency, which must emerge as a result of the reform, to maximize individual (average) incomes of the labor force will lead to the employment of fewer workers than in a capitalist enterprise with an equal volume of capital equipment. Under the capitalist system it pays the entrepreneur to increase employment to the point of zero profit brought by the last worker; in the East European system of the postreform type, the engagement of new workers will tend to stop earlier—at a point of equilibrium beyond which any further increase in the labor force will cause a decline in the average income of the workers. In practical terms the result of such a tendency will be to employ relatively more capital than labor in countries where scarcity of capital is more acute than that of labor. It appears that the introduction of interest on capital may make this tendency less apparent but that it cannot counteract it.

Economie communiste et convertibilité des monnaies

Résumé

Avant 1956, les régimes économiques des pays communistes de l’Europe orientale, sauf la Yougoslavie, étaient uniformément calqués sur celili de l’U.R.S.S. Les prix des marchandises, fixés par une autorité centrale, ne comprenaient pas le coût du capital ou de la terre, ne reflétaient pas les pénuries relatives des produits, et ne pouvaient pas être utilisés pour orienter les décisions économiques. Les autorités économiques ne désiraient du reste pas investir les prix de cette fonction d’orientation: les entreprises n’étaient pas libres de choisir leurs facteurs de production, et le plan fixait dans le détail la composition des entrées et des sorties. Les marchandises destinées à l’exportation étaient achetées, aux prix intérieurs imposés, par un organisme d’Etat exerçant le monopole du commerce extérieur pour être vendues aux cours mondiaux, la composition qualitative et quantitative de ces achats étant fixée par le plan; les importations se faisaient selon la même formule. Les taux de change, multiples et implicites, traduisaient les rapports entre les prix intérieurs et les prix étrangers. Le bilatéralisme dans les échanges et les paiements était la consequénce naturelle de cet état de choses, et, bien que le commerce avec certains pays occidentaux n’ait pas fait l’objet d’accords bilatéraux formels, les créances monétaires temporaires accumulées au titre des transactions commerciales avec un pays quelconque d’Europe orientale n’étaient pas transférables et ne représentaient pas une créance générate en marchandises, même sur le pays débiteur. Les monnaies ne pouvaient donc pas devenir convertibles.

Après 1956, les pays communistes de l’Europe orientale ont adopté des réformes économiques de portées très diverses. Ils ont évolué vers une décentralisation de la planification et ont commencé à tenir compte des préférences des consommateurs dans la production des marchandises. Dans une plus ou moins grande mesure, ils ont reconnu que le profit constitue un critère de la bonne marche des entreprises, et les salaires ont été fixés en fonction du rendement. Dans certains pays, les réformes ont en principe pour objectif de faire jouer aux prix un rôle d’orientation et de les faire correspondre aux pénuries relatives. Mais en général les prix continuent à être indépendants des pénuries. La Banque pour la Coopération Economique Internationale, récemment créée, ouvre des possibilités d’échanges et de paiements multiangulaires, mais non pas encore multilatéraux, intérieurs ou extérieurs au groupe de pays dont il est ici question. La convertibilité des monnaies ne peut être encore envisagée.

La economía política comunista y la convertibilidad monetaria

Resumen

Hasta 1956 los sistemas económicos de todos los países comunistas de la Europa Oriental, con exceptión de Yugoslavia, estaban inspirados en el de la U.R.S.S. Los precios de los articulos, fijados por el gobierno central, no incluían el costo del capital ni de la tierra, no se compadecían con las escaseces relativas de los artículos, y no podían servir de norte para las decisiones en lo económico. Ni tampoco pretendían las autori-dades planificadoras dotar a los precios de una función orientadora: las empresas no se encontraban en libertad para seleccionar los factores de productión, y la compositión tanto de los insumos como de la producción era determinada minuciosamente por el plan. Según la proporción que el plan señalara, el monopolio del comercio exterior adquiría a precios internos controlados los artículos para exportacíon y los vendía a razón de los precios externos; a las importaciones se las trataba de modo análogo. Los tipos de cambio eran múltiples e implícitos, y se los derivaba comparando los precios internos con los externos. El bilatera-lismo en el comercio y en los pagos sobrevino como consecuencia natural, y aunque el intercambio con algunos países de Occidente se realizaba sin acuerdos formales bilaterales, los activos monetarios que fueran acumulados con motivo del comercio con cualquier país de la Europa Oriental no podían ser transferidos y no representaban un crédito general contra mercancías ni siquiera en el país deudor. Así pues, las monedas no podían resultar convertibles.

A partir de 1956 los países comunistas de la Europa Oriental implan-taron reformas económicas cuyos alcances son muy diversos. Ha habido una tendencia hacia la descentralización de la planificación y hacia la productión de artículos en consonancia con las preferencias de parte de los compradores. En distintos grados, se ha reconocido a los beneficios como un indicador de la eficiencia de las empresas, y se ha hecho que los salarios dependan de los mismos. En algunos países las reformas procuran, en principio, dotar a los precios de una función orientadora y hacer que guarden relatión con las escaseces relativas. Pero, en términos generates, los precios siguen siendo ajenos a las escaseces. El recién creado Banco de Cooperatión Económica Internacional abre posibilidades para el comercio y los pagos multiangulares, mas no todavía para los multilaterales, tanto dentro como fuera del grupo de países a que nos referimos. Aún no se puede lograr la convertibilidad de las monedas.

*

Mr. Wyczalkowski, Advisor in the European Department, was educated at the Academy of Commerce, Warsaw, and the London School of Economics. He was formerly deputy professor and deputy rector of the Academy of Commerce, Warsaw, and Director of the Research Department of the National Bank of Poland. He is the author of Money in the Capitalist System and in A Planned Economy, Vol. I, and Economic Institutions of the United Nations, both in Polish.

1

Throughout this paper, which was completed in February 1966, “East European” and “Eastern Europe” refer to Bulgaria, Czechoslovakia, Eastern Germany, Hungary, Poland, Rumania, and the Soviet Union.

2

In Poland, “free market” prices corresponding to the Soviet kolkhoz market prices are much more extensively used. This, however, does not change the over-all picture of the price formation in the East European countries.

3

Enrico Barone, “The Ministry of Production in the Collective State,” in Collectivist Economic Planning, F. A. von Hayek, editor (London, 1935), pp. 245-90.

4

Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism (Minneapolis, Minnesota, 1938).

5

Morris Bornstein, “The Soviet Price System,” American Economic Review, Vol. LII (1962), pp. 64-103, and “The Soviet Price Reform Discussion,” The Quarterly Journal of Economics, Vol. LXXVIII (1964), pp. 14-48.

6

Oskar Lange, “Role of Planning in a Socialist Economy,” in Problems of the Political Economy of Socialism (a collection of articles by several authors), Oskar Lange, editor (Warsaw, 1962).

7

Trybuna Ludu (a Polish daily newspaper, Warsaw), November 18, 1956.

8

For detailed description and analysis of the East European foreign trade system, see Frederic L. Pryor, The Communist Foreign Trade System (Cambridge, Massachusetts, 1963), particularly Chapter II.

9

The following reasoning assumes, for the sake of convenience, the existence of an explicit exchange rate (or of explicit fixed multiple rates). See also Alfred Zauberman, Industrial Progress in Poland, Czechoslovakia, and East Germany, 1937-1962 (Royal Institute of International Affairs, London, 1964), p. 328.

10

M. Orlowski, “Das Problem der Volutakurse in der Sozialistischen Wirtschaft” [The Problem of Exchange Rates in the Socialist Economy], Zeitschrift für die Gesamte Staatswissenschaft, 116 Band, 1 Heft (Tübingen, 1960), p. 102.

11

Marcin R. Wyczalkowski, “The Soviet Price System and the Ruble Exchange Rate,” Staff Papers, Vol. I (1950-51), pp. 202-23.

12

The conditions for convertibility of the Soviet ruble and the role of convertibility into goods were discussed by Wyczalkowski, op. cit., and by Oscar L. Altman, “Russian Gold and the Ruble,” Staff Papers, Vol. VII (1959-60), pp. 430-35.

13

Ruble banknotes obtained on black markets outside the U.S.S.R. might be used by tourists visiting the U.S.S.R. for direct purchases of consumer goods but not for any other purchases.

14

Wyczalkowski, op. cit., p. 221.

15

Altman, op. cit., pp. 427-29.

16

Robert W. Campbell, “Marx, Kantorovich, and Novozhilov: Stoimost’ versus Reality,” Slavic Review, Vol. XX (Seattle, Washington, 1961), p. 405.

17

Ibid., p. 407.

18

English translation by P. F. Knightfield, The Best Use of Economic Resources (London and New York, 1965).

19

Campbell, op. cit., pp. 408-409.

20

See Novozhilov’s article, “Cost-Benefit Comparisons in a Socialist Economy,” in the English edition, A. Nove, editor, The Use of Mathematics in Economics (Cambridge, Massachusetts, 1964), pp. 33-189.

21

Pravda, September 9, 1962.

22

Alec Nove, “The Liberman Proposals,” Survey (London), No. 47 (1963), pp. 112-18.

23

lbid., pp. 114-15.

24

Leon Smolinski, “What Next in Soviet Planning?” Foreign Affairs, Vol. 24 (1964), p. 610.

25

Theodore Shabad, “Soviet May Relax Planning in Heavy Industry,” The New York Times, July 9, 1965.

26

Pravda, September 28, 1965.

27

“Theses of the Economic Council Concerning Changes in the Economic Model” and “Theses of the Economic Council Concerning the Formation of Prices.” See Severyn Kruszynski, “Problem cen w dyskusji nad polskim modelem gospodarczym” [The Problem of Prices as Presented in the Discussion on the Polish Economic Model], Ruch Prawniczy i Ekonomiczny, No. 3 (Warsaw, 1958), pp. 281-95.

28

Resolution of the Council of Ministers, July 29, 1964, “Concerning Economic Progress in the Socialized Economy and the Organization of Economic Services,” Zycie Gospodarcze (Warsaw), August 23, 1964.

29

Gospodarka Planowa [The Planned Economy], No. 10 (Warsaw, October 1965), pp. 10-20.

30

Neues Deutschland (East Berlin), July 17, 1963.

31

In addition to state industrial enterprises, there are in Eastern Germany local (Bezirk) enterprises and some mixed (state-private) enterprises.

32

Walter Kelbinalet, speech before the Berlin Economic Conference, June 24, 1963.

33

“Brain Trust on the Model for Us,” Mlady Svet [Youth World] (Prague), November 27 and December 12, 1964; and Marion Doenhoff, “The Thaw Continues,” East Europe (New York, December 1964), p. 21.

34

See Z. Haba, “Against Dogmatism for a Creative Development of Economic Science,” Hospodarske Noviny [Economic News] (Prague), November 8 and 15, 1963.

35

Kulturny Zivot [Cultural Life] (Prague), September 28, 1963.

36

The approved version was published in Rude Pravo [Red Law], October 17, 1964.

37

Rude Pravo, November 25, 1965.

38

Bulgaria, Czechoslovakia, Eastern Germany, Hungary, Outer Mongolia, Poland, Rumania, and the U.S.S.R.

39

P. Nosko, “A New System of Settlements,” Vneshniaia Torgovlia [Foreign Trade], No. 7 (Moscow, 1964), pp. 28-31.

40

Ibid.

41

Ibid.

42

Interview, Trybuna Ludu, April 27, 1965.

43

S. Albinowski, “The Transferable Ruble and Gold” (in Polish), Glos Pracy [Voice of Labor] (Warsaw), May 5, 1965.

44

P. Nosko, op. cit.

45

The recentralization of the economic administration in the U.S.S.R. seems to be compatible with the degree of decentralization of economic decisions attained in the reform.