(The following letter is in response to “Soviet Management Reform,” by Ernest Germain, in the Summer 1965 International Socialist Review.) 

To the Editor: 

Mr. Germain might be well advised to make explicit the knowledge or interpretation of modern economic-planning theory that permits him to reject “supply and demand laws” as useful tools of analysis and rational economic determinants, even under socialism. Otherwise, his repudiation becomes cavalier, and his analysis of socialist economics becomes somewhat deficient in technical analysis. It is therefore one-sided. 

It is of course true that Soviet workers and peasants have been arbitrarily and often ruthlessly ruled by a State and party bureaucracy. That bureaucracy has aggrandized itself materialistically, though it has not re-created the legal basis for its own unlimited private accumulation of wealth. Nor has the drive to industrial and technical maturity been diverted to luxury goods. Moreover, fantastic wage differentials are being permitted to narrow, and the lowest brackets are especially benefiting from wage raises. The frenzied drive to expand steel, coal and other domestic heavy industry, at the expense of the vast “non-priority” consumer goods sectors, has been attenuated. The increasingly self-confident Soviet citizens have repudiated the forced marches imposed by an inner party clique, and the centralized command economy is beginning to yield to diffusive pressures. 

It could not be otherwise. An increasingly complex and interdependent industrial economy would falter at the obstacles imposed by inept “material balancing,” crude output targeting, and constrictively detailed resource allocation. 

One waits for Mr. Germain to advance beyond vague “motherhood slogans” (workers self-management, true proletarian democracy, etc.), and as an economist, actually grapple with the tremendous technical problems facing socialist economics. Obviously full democracy, and popular control facilitate inquiry and experimentation, just as they attack vested interests and accumulated bureaucratic privilege. Obviously, too, these benefits will not come to the Soviet people without an intense struggle against a bloated ruling party with enormous economic and political power. But are these obvious truisms sufficient tools for a thorough analysis of the Soviet economy? 

Specifically, does Mr. Germain not see that he could use much of modern “abstract” economic theory as a tool to rationally calculate social and private costs and benefits, and to which he could attach goals of egalitarianism and rapid growth. His contention that some vague “principle of planning” stands above all of this simply opens the floodgates to all kinds of quackery and ill-considered material and human sacrifice. 

Furthermore, Mr. Germain’s general denigration of citizens’ short and long run tastes as (at least) a powerful and fundamental determinant of resource and product allocation, leaves me wondering what party, what central committee or what political executive he envisages substituting for the people’s desires. 

Perhaps Mr. Germain only meant to say that a socialist central authority would try to integrate and harmonize as many firm, industry and sector activities into a binding comprehensive plan as modern computers and programming techniques permit. Here “workers’ control” would involve less local choice of productive techniques and output mix, and more group experimentation, personnel allocation, and search for non-wasteful techniques to feed the data processors and decision makers. 

Or perhaps Mr. Germain meant that co-existing with wider workers’ control, plus large freedom for the firm in product and resource markets, there should be general programming of sectoral and aggregate investments to avoid sharp imbalances and depression. 

But if he meant to say these things, Mr. Germain should have: (a) said them; (b) avoided implicit and careless equating of those useful “supply and demand” theorems of modern economists (predominantly Western) with the vicissitudes of the capitalist economies in which they often happen to live. 

May I once more apologize for the brevity (and obscurity) of this hurried comment. I have not bothered to praise the many competent points in Mr. Germain’s analysis, or the general revolutionary political conclusions. Instead I have briefly attacked those Marxist economic orthodoxies I think most harmful to a humane, efficient, and expanding international socialism. 

With very best wishes for your future work, Fraternally yours, John McCormack Toronto 

November 23, 1965

Reply: 

The operations of “market laws” allow “supply and demand” to balance - after the fact. This is obviously preferable to crude rule-of-the-thumb “balancing, ” or to extreme sacrifices imposed upon consumers by universal rationing dictated by the authorities. 

However, socialists have long known that this after-the-fact balancing of “supply and demand” has many deficiencies, and quite a few liberals agree with them. 

First of all, the “market laws” do not balance “supply” and human, physical and psychological demand; they only balance “supply” and effective demand, that is, disposable purchasing power. In a society still characterized by great inequality of income and by very low basic incomes for the millions of citizens, “market laws” simply substitute one type of rationing (“rationing through the purse”) for another. 

In the second place, after-the-fact balancing through “supply and demand” involves great waste, periodic destruction of goods and equipment (not to speak of periodic and permanent unemployment). 

In the third place, with the tremendous international inequalities of income between nations, laws of “supply and demand” are unable to induce any rapid process of industrialization in the underdeveloped world countries, without which these countries can overcome neither poverty nor huge under-employment, nor backwardness. It is precisely through an application of the “law of supply and demand” on the scale of the world market that the underdeveloped countries have been “specialized” in the production and export of primary products, and have thus been trapped in monoproduction and dismal poverty. 

In the fourth place, the richer a country becomes, the more basic physical needs can be satisfied by existing resources, and the more “market laws” become absurd, because by their very nature they are rational under conditions of scarcity. 

For all these reasons socialists prefer to have “supply and demand” balanced beforehand and not afterwards, through conscious prior allocation of resources and not through blind operation of “market laws. 

Here are three examples: 

1. Surely Mr. McCormack will agree that it would be nothing less than scandalous to have the distribution of medical services, pharmaceutical products and access to higher education “rationed” in a socialist country through the contents of the citizen’s purse! Even in capitalist countries socialists generally stand for free medicine and free education (and a few left socialist parties in Western Europe already call for a “national housing service,” in analogy to a national health service). 

But what else does this mean but the elimination of any “market law” determining the balance of supply and demand in these fields? The demands are established first, on a physical basis, in as scientific a way as possible; and the necessary resources are then detached from the national income to make possible the satisfaction of these needs (either immediately, or within a certain number of years). 

This is the substitution of the socialist principle of production according to needs for the capitalist principle of production according to profit. 

2. In Western Europe, we have witnessed for several years the so-called eggs cycle, which is quite similar to the famous “hog cycle” in North America, but much more wasteful. Every 18 months, hens are slaughtered by the hundreds of thousands because the prices of eggs have fallen too much. The slaughter of the hens causes a shortage in the eggs, prices start to rise (as much as two or three times as high as they were at the beginning of the cycle!). This rise in prices induces chicken farmers to increase the number of egg-laying hens they keep. Egg production is greatly increased, and eventually there comes a new glut, prices crash, and the cycle starts all over again. 

Now Mr. McCormack will probably also agree that in any advanced country the predictable consumption of eggs during a year could be easily established with great accuracy. The consumption of the previous year is known. Long-term series give near-exact income elasticity formulas. It is sufficient to combine these figures -- established on the predicted annual increase in per capita income in the various income groups -- with the increase in population to get a fairly accurate estimate of the annual rise in egg production necessary and sufficient to balance “sufficient and demand” -- before the fact. 

If one would object that the annual rise in per capita income cannot be foreseen exactly in a country like the Soviet Union, it can be replied that what would be involved here are possible mistakes of one or two per cent, which can easily be taken care of by allowing inventories to fluctuate. But the “balancing” by “market laws” the like of which we now suffer in Western Europe involves annual “mistakes” and “waste” on the order of 20 to 30 per cent, which cost the community and consumers in the long run in the millions of dollars. Surely the pre-planned balance would be largely preferable! 

3. When a new type of equipment is invented, which enables the community to economize thousands of working hours, it would be obviously irrational in a socialist economy to let “market laws” determine the price of equipment. As it is rare and its producers enjoy actual monopoly, prices would tend to go up to the point where the introduction of the new equipment would only be marginally economical, and only for the richest producing units (those which could pay the highest prices). 

Surely from the point of view of the economy taken as a whole, it would be much more rational to sell this new equipment as cheaply as possible (even to the point of subsidizing the plants which manufacture it), so as to enable the maximum number of producing units to introduce the maximum number of pieces of equipment of that type as quickly as possible. 

In other words: It is simply not true that “whatever is profitable for one plant is also profitable for the economy as a whole” (or that social profitability is but the sum total of the profits of all the units). The economy is an organic unit of its own, where higher overall profitability can very well result from deliberate losses imposed upon certain plants. 

All these examples are only given to show that a socialized economy cannot consider that regulation of the economy through these laws is an ideal objective to be reached. It must, on the contrary, assume that it should try to substitute as much planned balancing for after-the-fact balancing as is economically rational, given a certain level of development of the productive forces. This is what is meant by “the principle of planning”. This principle finds itself in a dialectical combination of struggle against, and coexistence with, the “market principle” during the whole period of transition from capitalism to socialism. 

Why can’t the principle of planned balancing of supply and demand become generalized? Obviously because of the still existing scarcity of resources. Withering away of commodity production and “market laws” cannot be “commanded” by authority; it depends upon relative abundance of resources, or physical saturation of needs which is only another way of stating the same idea. 

This is why consumer goods will generally remain commodities during the transition period (which does not imply at all, however, that their prices should necessarily be established by “market laws” and by “rationing of the purse”). But, the more productive forces grow, the more goods and services are characterized by inelastic demand, or even decline of demand, given a growing income, the more the principle of distribution according to needs can be extended to new categories of needs. However, as long as relative scarcity reigns in many fields, a certain amount of “market economy” must still be integrated with the “planning principle. 

Mr. McCormack is afraid that some “party,” or “central committee,” or “political executive” will dictate the “needs,” which the “principle of planning” balances beforehand with existing resources. This fear is a logical reaction to the experience of Stalinism -- and even to the political regime presently existing in the Soviet Union. 

But Mr. McCormack certainly cannot have missed the point of what he calls our “motherhood slogans”: workers self-management, true proletarian democracy, etc. What else do these mean but a determination by the majority of the people, freely expressing itself, of the priority of goals of economic development, of the needs which must have priority for being covered from the start by existing resources, of the goods and services which must be distributed according to needs? 

Even in bourgeois democracy, Britain and Saskatchewan have voted for a free health service without causing a collapse of the economy. Why couldn’t one visualize the mass of the toiling people in any socialized country based upon proletarian democracy, determining through free discussion, a free press, a free vote and free choice between various alternative plans, the exact amount of sacrifices it is ready to undergo as consumers, and the forms of sacrifices it refuses to accept here and now? 

And isn’t is obvious that this conscious selection of planning goals by the mass of the people, under conditions of socialist democracy, is much more democratic, much more rational, much less wasteful and much less oppressive than both the systems of resource allocations through the tyranny of market laws under monopoly capitalism (which implies “rationing through the purse,” huge waste and injustice), and resource allocation through an allegedly omniscient bureaucratic Planning Board, freed both from control by the workers and control by the market? 

This is why the present reforms of the Soviet economy, while they substitute some operations of the market for some operations of the Planning Boards, without going in the direction of workers self-management or proletarian democracy, do not solve the difficulties and contradictions of that economy, but only substitute one type of contradiction for another.

E. Germain