APPENDIX A

THE PRICE-MECHANISM IN A PRIVATE CAPITALIST SOCIETY

IN

PRIVATE

capitalist societies it is the tnore or less free fortnation of

prices that provides the data necessary for calculation. Many objections are made against their price-mechanism, inter alia that it is unjust,
because it is influenced by the distribution of income, which is itself
said to be inequitable. This. is an ethical, sociological question that
we shall not discuss here. What interests us in this connection is the
potential and actual efficiency of the mechanism which exists irrespective of the form of-society and of the given, but continually changing,
distribution of income. It may be stated at once (we shall revert to the
question later) that the functioning and technical efficiency of the pricemechanism is in our day being undermined.
In spite of this, in the capitalist societies it is still prices, or rather,
price-alterations, that act as the anonymous conductor of the economic
orchestra. They play. the same part as the central authority in socialist
societies. It is price-alterations that keep production and business in
capitalist societies from being conduc~ed "blindly" and "without plan".
It is price-alterations that provide the necessary indications that determine to what alternative uses "scarce resources" shall be allocated in
order to satisfy consumers'. effective demand. It is price-alterations
that indicate what goods, what qualities and what quantities shall be
produced and distributed.
A fall in prices may becaused by severalfactors: on the supply side,
lower costs of production, new inventions, rationalization, greater
competition, and expectation of a development in these direction~~ On
the demand side, lower purchasing power or reduced interest in the
commodity in question, or expectations of lower prices. The causal
relationship is complicated, but the result is easily analysed: falling
prices mean that there is being offered, or expected to be offered, more
of the goods or services in question than the market can or will absofb
at previous prices. Rising prices indicate the opposite.
If prices rise more than costs the result is greater profit. If prices
fall more than costs the result is falling profit. The incentive to expand
or reduce production, activity and demand will thus be increased or
lessened. On the demand side the most important result of rising
prices is a restriction in the number of those who can or want to buy.
(This is not altered by the fact that rising prices and expectation of
higher prices may temporarily stimulate demand and production.)
19 1

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ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY

Thus an automatic rationing is taking place without the use of rationcards or official directives. This rationing, and the efficacy of pricealterations to restrict and expand consumption, however, vary greatly
with the elasticity of demand of different goods.
Prices, or price-alterations, set in motion forces that tend to bring
about equilibrium and harmony between supply and demand, between
production and consumption. This point of equilibrium is not a constant level. The level itself is constantly shifting, but as long as free
competition1 and free price-formation are not entirely abolished, the
tendency will be this: buyers will outbid each other and sellers will
undersell each other, and both will be stimulated to make the deal, as
otherwise they will risk someone else stepping in (see p. 193). The
gap between actual market price and the "ideal" normal price, where
consumption and production per time-unit are equalized, is likewise
continually changing. The quicker the tendency towards the new
point of equilibrium, the more effectively does the price-mechanism
function. Provided the price-mechanism is allowed to work, even
insignificant and finely graded alterations are registered, which makes
the price-mechanism also a wonderful instrument for making quantitative comparisons.
The ability of price-formation to regulate is not confined to consumption goods, but extends to raw materials, semi-manufactured
goods and means of production at every stage of production. That is
to say, not only.do there exist calculation-data for the factors of production and for consumption goods at every stage of production, but
these data-with the reservations already taken and to be made---simultaneously register (1) the goods for which there is a demand (and
in what quantities and of what qualities) and (2) the scarcity of the
means of production in relation to the uses necessary for the production of the goods demanded. The dry price-datum is really the result
of innumerable computations, measurements and valuations. It
represents the final expression of a conflict between factors so different
in nature as (on the supply side) costs in the form of scarcity of
resources and man-hours used and (on the demand side) subjective
valuation of needs. Professor Louis Baudin has written the following,
almost poetical, description of prices' synthesizing ability:
"It (the price) synthesizes a number of factors, so that there is
difficulty in identifying them and even more in foreseeing them:

IJ. E. Mead has given the following simple definition of perfect competition:
"competition is perfect when two conditions are fulfilled; (1) when there is no
artificial restriction upon the movement of factors of production from occupation
to occupation in search of the highest reward, and (2) when no single unit of control
-i.e. no single individual or company which is deciding to buy or sell somethingcan by its own action appreciably ,affect the price of the things bought or sold".
Economic Analysis and Policy, London, 195 6, p. 96.

THE PRICE-MECHANISM

quantities, qualities, possibilities, calculations of interest,

memories, fears, hopes. A price is not only the result of statistical
figures. It includes all the vibrations of man's thoughts and soul,
since ever they have exercised an influence on the market."!
Before continuing, let us just repeat that there is to-day in capitalist
societiesa tendency to do away with the price-mechanism, or at. any
rate to reduce its significance. This tendency takes various forms. That
sector of the society's life in which activities are undertaken without
regard to prices and markets, the so-called social sector, is continually
growing. Fear of war, together with the policy of isolation adopted by
the socialist communities, have forced other countries to put obstacles
in the way of the international exchange of goods and services, which
similarly hampers the free formation of prices (to say nothing of
international division of labour). In addition business men have
usually a tendency to interfere with the functioninK of the pricemechanism, partly to assure themselves a fixed income, partly to
protect "vested interests", and partly to eliminate competition and
thereby the insecurity inherent in it. The natural tendency to take
advantage of monopoly elements and to make cartels and price agreements has lately been strengthened because the authorities in some
countries show a tendency to order the formation of cartels, or, at any
rate, to punish those who sell cheaply or in other ways follow the rules
of the price game. (U.S.A. under New Deal and 'Norway to-day.)
This means in fact that we have entered a new phase of economic
development. For there is a great difference between a private
monopoly or cartel. and a .legal-official one. Where an agreement
regulating competition is voluntary, it is as a rule abolished, broken
or modified, when conditions alter. 2 Competition, whose imperfection
has so often been described, has in reality a quite astounding vitality
despite all onslaughts. Competition may be camouflaged and go
underground, but it is difficult to kill. If it is forbidden to compete in
price, there will be competition in terms of credit and conditions of
payment. Secret discounts and concessions may be given and even
quite objectionable methods used. 3
Therefore, the actual effect of private agreements to control competition is not so great as is usually assumed. The situation, however,
becomes quite different when groups of manufacturers and traders
turn to the State to have a price-reduction forbidden by law. Laws
lLa Monnaie et fa Formation des Prix, L Paris, 1936, p. 591.
2S ee 1. W. F. Rowe: Market and Men, A Study of Artificial Control Schemes in some
primary Industries, London, 1936.
3There was a drastic example of this when Norges Handelsstands Forbund had to
decide how many units go to the dozen, and pronounce a practice introduced by
certain German firms as improper competition, namely to invoice thirteen units as
a dozen. (See Handclsstands Mdncdsskrift, NO.9, 1937, p. 182.)

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ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY

which make alterations in price a crime or offence punishable with

large fines are a much more effective and lasting method of hampering
the functions of the price-mechanism, than any private attempts.
The propensity to control and regulate inherent in every government similarly tends to disturb the function of the price-mechanism.
The last few decades have been characterized by an obvious tendency
to switch from a price- and market-economy to interventionism and
publicly fixed prices, also called "valuation-economy". The intervention of the authorities in the domestic production of goods by means
of controlled prices, and in the international production of goods by
means of agreements for quotas and clearing, marks the first stage in
the abolition of the right of free disposal of the means of production
and of the actual right of ownership to them. According to the
definition of sodalism given, this "valuation-economy" is an obvious
step towards socialism.

The fact that price-formation and competition are in practice

becoming more and more imperfect does not, .of course, detract from
their proverbial efficacy to regulate supply and demand. We shall not
embark on a discussion of the theoretical possibilities of perfect competition, partly because this would involve a discussion of definitions
and terms! which would take us too far away from our subject, and
partly because any reference to ideal conditions would be irrelevant,
since we are discussing the possibility of economic calculation in a
socialist community in the world of reality.
On the other hand, it may be mentioned in passing that it is illogical
to demand the substitution of a socialist central authority for the pricemechanism on the grounds that the price-mechanism is becoming
more and more imperfect, considering that this growing imperfection
is mainly due to the development towards socialism.
For all its alleged imperfections the price-formation is still acknowledged as one of the chief factors in the economic activities of the
capitalist sodety, and the terms "price-society" and "price-economics"
are still used as synonyms for "capitalist society".
The importance of the price- and market-mechanism has even been
affirmed by socialist economists. 2 Dr. Heimann writing (see also
Chapter IV) of the price-system has said that:
"It records the least deviation in valuation with the accuracy
lSee, inter alia, Joan Robinson: Economics of Imperfect Competition, and the subsequent discussion in the Economic Journal.
2The expression "socialist economist" occasionally employed in this book, is in
no way used to draw a distinction between "socialist economics" and a "bourgeois
economics". As Sombart has rightly said, there are correct and incorrect economic

THE PRICE-MECHANISM

195

of a seismograph, and directly by means of this occasions the

adaptation of the processes of production to the new situation."!
"The decisive task of the economic system is to allocate labour
and capital to the individual branches of production in proportion to the strength of the existing need for their products. In
capitalist economic systems this task is fulfilled by the market,
and no concentration in cartels and trusts can alter it. . . ."
"The market is what is really economic about the modern
economic system. To do away with it would be a leap into the
dark. . . ."
"The market, of course, is to-day capitalist in action. But is
that alone reason enough to abandon it? Is Socialist Thought
going to be so unhistorical and undialectic as to take over from
Capitalism only its technological elements and its business
organization, and to do away with its method of conducting its
economy?" 2
Dr. Heimann considers that price-formation is the real heart and
soul of the science of economics. He writes:
"that order has been established and maintained in the seeming
confusion of atomic industries, and how this effect has been
achieved, this is the real object and kernel of economic science.
. . ."3
In Lamentfor Economics Barbara Wootton says that economic theory
has been too much occupied with markets and equilibria, but in her
Plan or No Plan she has given an admirably clear description of the
potential efficacy of the price-mechanism. For all her later reservations about the fairness of the market-economy, the price-mechanism
seems to enjoy her entire respect, especially when she says:
"Here- it may be said right away that no society which has
attempted to dispense altogether with all use of the price
mechanism has had any success sufficient to commend it to
detailed study."4
theories, and it is here that the dividing line must be drawn. Nevertheless it is
useful to use the term "socialist economist" of those who thus describe themselves,
and "Marxist economists" of those who base themselves on the Marxist
theory of value. The characterization has partly the advantage that it leads to
economy in words, and partly prevents the views of such economists being dismissed as coming from "liberal economists", "Manchester economists", "orthodox"
or "reactionary" economists. This may be important in a period, when these
appelations have been invested with so much odium that the use of them sometimes
seems to be regarded as a sufficient counter-argument in itself.
lMehrwert und Gemeinwirtschaft,p. 169.
2"Sozialisierung" in Neue Blatter fur den Sozialismus, Tiibingen, 1930, Vol. I,
PP25- 26 .
30p. cit., p. 174, footnote.
40p. cit., p. 55.

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ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY

And to quote Professor A. P. Lerner:

"But even if all decisions about what people should consume
are made by a. single dictator or by a very small oligarchy which
can reach all decisions by agreement in the council chamber, an
elaborate pricing mechanism will still be necessary to make
possible the comparison of the marginal productivities of all
original means of production and intermediate products in all
stages of the manufacture of all commodities in order to achieve
the purely technical maximization of the output of commodities
in the proportions decided upon."!
and
"The proposition that I wish to establish is that when the State
has decided what it is going to do as to fulfilment or non-fulfilment
of individuals' choice, setting up its own system of priorities, it
will not be able to achieve its ends with any reasonable degree
of efficiency without the use of a price system." 2
(Dr. Lerner on the price-mechanism is also quoted on p. 147.)
Dr. Felix Weil is of the opinion that fictitious, arbitrary prices are "a
worthless gamble" (see. p. 18 I), while Leon Trotsky succinctly puts
it that "economic accounting is unthinkable without market
relations". 3
When the demands of producers and middle-men for raw materials,
intermediate goods and means of production are met in the capitalist
society, the former owners of the goods and means of production
receive their share of the product. This does not mean that demand
for consumer goods unilaterally determines the value of means of
production and goods at earlier stages of production. There exists an
interrelationship which is not confined to prices and incomes. The
price of the product sold is only one of the factors with which producers and middlemen must calculate. There are, in addition, various
costs. (See Chapter II.)
Besides taking into consideration those data which are already given,
a business man will, to a greater or lesser extent, also have regard to
the future. The longer the period of production and turn-over, the
greater attention he will have to pay to the possibility of future changes
and thus of increased risk. In a progressive dynamic society with
democratic rights the possibilities of such changes are both numerous
and heterogeneous. Populations change both in size and composition;
l"Economic Theory and Socialist Economy" in Review of Economic Studies,
1934-35, p. 60.
2S ee "A Rejoinder" in "Economic Theory and Socialist Economy" in Review of
Economic Studies, 1934-35, p. 15 2
3See Soviet Economy in Danger, New York, 1933, p. 33.

THE PRICE-MECHANISM

197

tastes alter; savings vary both in extent and rate of growth; the
amount of investment varies and so does the pace of technical development.
There are other elements of uncertainty such as political developments, the possibility of alterations in the value of money itself, as
well as developments in the trade cycle (which is partly a result of
these changes and of expectations of their effect). There exists a

reciprocal relationship between several of these factors, which are

themselves dependent on expectations about the future.
The anticipated attitude of competitors will also play its part; so that
estimation of others' expectations also becomes a market-determining
factor. To what extent such expectations will have any influence, the
extent to which they will behased on irrelevant factors such as season
of the year, state of the weather, glandular secretions. or emotions like
fright and hope, cannot be stated with any certainty, since the expectations vary in kind and strength from one individual to the other, and
even with the same individual from period to period.
We shall not discuss here the interesting question of whether or
not the economist should concern himself with motives of reason and
emotion, and with the ethical or unethical motives that lie behind
price-reactions and .market phenomena, or whether he should he
content to stick to the final price-data.!
The fact that price-determining motives and factors are varying and
of many kinds, the fact that in all societies, irrespective of structure,
estimates of the future contain elements of uncertainty, and the fact
that the price-mechanism in our time is being more and more restricted
in scope, should not obscure the fact that it is the price-mechanism
which plays the part of the great conductor in the capitalist economy.
Further, it must he stressed that in capitalist societies there do exist
markets where, despite more or less imperfect competition, prices
are quoted that form a basis for economic calculation. Prices not only
for consumer goods, but also for natural assets, raw materials, intermediate goods and means of production of all kinds, and not only
"spot", but also "forward" prices. Forward prices make it possible
not only to measure uncertainty in regard to the future, but also to
eliminate it.
Price-formation also makes itself felt in respect of man-power. Here,
its ability to regulate is, however, smaller. This is not only due to
monopoly tendencies through labour unions, but because man-power
differs in certain important respects from other objects dealt in. It is
enough to mention its slow rate of reproduction. (It takes from
lSee, inter alia Ludwig von Mises: Grundprobleme der Nationalok.onomie, Jena,
pp. 168-169.

~933,

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ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY

fifteen to sixteen years before a new-born child becomes old enough to

work, and in addition it is doubtful whether changes in wage-rates
influence the birth-rate.) Another factor is the low mobility of manpower, partly due to emotional and psychological factors (dislike of
breaking up a home and of leaving home and country), and partly to a
political tendency towards self-sufficiency and isolation expressed in
the growing number of obstacles put in the way of both emigration
and immigration.
The importance of price-formation is also limited where it comes to
credit, loans and the right to dispose of capital. Special factors enter
into play when it comes to the formation of price for capital. A
detailed discussion of this problem would result in a full-scale discussion of the theory of distribution and the trade cycle, upon which we
cannot embark here, but the question of interest has been touched
upon in Chapter VII. Here it must suffice to state that competition is
less perfect, or, rather, still more imperfect, when it concerns credit,
than when it concerns goods, but that interest rates exist in the
capitalist societies as given data.
Many objections have been raised against private capitalism and the
price-mechanism. They will be dealt with in Appendix B; but there is
one that directly concerns the price-mechanism and should be discussed here.
We refer to the objection that in capitalist societies prices are used
as indicators of profitability. People produce for profit, it is said.
This statement is correct. If the commodity to be produced, or resold,
is not demanded at a price that covers costs, it will not be produced
or bought at that price. On the other hand, to imply that production
for profit does not mean production to satisfy needs, is entirely false.
The contrary is the case. The producers' and traders' every effort is
directed towards anticipating and satisfying the needs of the buyers,
in the last resort the needs of the public, such as they are expressed in
effective demand. The success of producers and traders will depend
on their ability to do this. Their ability to anticipate correctly will
decide whether the result will be profit or loss, which in the long run
will decide whether they can stay in business or not. l
IProfessor Boris Brutzkus goes so far as to say that the producer and trader in a
capitalist country, strictly speaking, does not need to keep books or to calculate, as
prices will give him all necessary indications. If he does not take heed of prices,
he risks losing his fortune and his position. In socialist countries where the state is
the only owner of the means of production and the only distributirig agency, this
automatic purging process does not exist, so that, as Brutzkus says, "economic
calculation is of far greater significance in the socialist, than in the capitalist society".
(Economic Planning in Soviet Russia, p. II.)

THE PRICE-MECHANISM

In the discussion of the merits and de-merits of the price-mechanism

it has been maintained that market economy is "democratic", inasmuch
as every penny used for voluntary purchases represents a vote cast in
the great election of what the public wants. This is a graphic, but
misleading metaphor.. The voting is not democratic; nor is it based on
the principle of equality. The voting is not by heads, but according to
the number of voting-papers, .or banknotes. It is the amount of purchasing power at his disposal which determines the degree to which the
individual consumer can influence the type and size of production. It
may be said that this is unjust, but that is a moral judgment that we
cannot go into here and which does not affect the price-mechanism's .
efficacy for regulating production and sales according to effective
demand at any given time and at any given distribution of income.
(See p.. 94, footnote 2.)

An additional word or two are still required about the view that
there is an antithesis between production for profit and production to
satisfy needs. If there is any point in this assertion (apart from its
propagandistic value) it must mean that there is presumed to exist
another scale of values than that of the buying public expressed by its
demand. If we try to analyse that scale of values we generally find that
it is a so-called "social scale of values" with the necessities of life at
the top and expensive 'luxury articles at the bottom.
Such an order of preference would, perhaps, be right in a society
where everybody was short of nearly everything. Once the demand
for the necessities of life has been covered, people will, however, be
found to have wishes and needs that vary from individual to individual
and which no "social" scale can cover. In reality these special, individual desires make themselves felt long before the requirements of
the primary physiological needs of life are satisfied. Even the physiological needs vary from individual to individual, and from season to
season. A young man may be prepared to give up his lunch so that he
can take his girl to the cinema; she may be prepared to sacrifice one or
two meals in order to have a permanent wave; while a third may be
ready to do without both girl and lunch in order to hear a symphony
concert.
To use a given piece of ground for grain production is not necessarily a more "social" employment than to use it for a cosmetics factory
or a farm for silver foxes. If there were overproduction of grain the
first use would be quite irrational. Barbara Wootton, who has made
use of an analogous example, says that this belief in an "intrinsic
value" makes every university-trained economist see red, and that this
relativity of all values is "extremely repellent" to non-economists, who

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ECONOMIC CALCULATION IN THE SOCIALIST S'OCIETY

find it incredible (to take the text-book example) that bread is not in
some absolute sense more valuable than diamonds. Nor are they
satisfied with the concession that existing monetary. values may be
compatible with moral principles or social needs, a concession which,
as she says, "merely leads into the misty spheres of moral philosophy". 1
This tendency to look at prices from a moral aspect is a contributory factor in the present-day trend of so many countries more or
less consciously to prevent the price-mechanism from functioning.
Market-economy is being replaced by valuation by price-regulators,
which leads to values being determined not by the many, but by the
few. The logical and psychological consequences of certain people
having the power to determine values in the economic field is that
they will also arbitrarily determine what is to be regarded as artistically
and scientifically valuable. This retrogression to mediaeval jttsfttmpretium views is, in my opinion, one of the reasons why during the last
decades the world has relapsed so rapidly into conditions of the
Middle Ages in non-economic fields as \vell.
lOp. cit., p. 39.