Measuring National Income in the Centrally Planned Economies

William Jefferies

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317594925
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In 1991 "Communism" collapsed. The cold war was over and the West had won. Whole cities, Moscow, St Petersburg, Warsaw, Beijing, Budapest and Bucharest, whole countries indeed, were privatised for nothing or next to nothing. This was probably the greatest expansion of the world market in history. And yet, according to national income measurements of the CIA, OECD, World Bank and IMF, this gigantic expansion of market production, led to a decline in market production in the very countries where it was introduced. How to explain this paradox?

This book traces the origin of the West's national income measurements, from their origin in the 1923/4 Balance developed in the USSR, to the USA in the early 1930s via two Soviet exiles, Simon Kuznets and Wassily Leontief, and then back to the USSR again, after a vigorous debate, through a protégé of Kuznets, Abram Bergson. The AFC imputed national incomes to a centrally planned economy, based on physical not income measurements. This book provides a detailed assessment of the failure of the AFC method to measure the real growth of actual market production during the transition period.

This book provides a detailed account of the application of national income measurements to the centrally planned economies. It assesses all of the major contributors to this debate, including Colin Clark, Naum Jasny, Alexander Gerschenkron, G.Warren Nutter and Abram Bergson. It provides a new much higher, estimate of the expansion of market production during the transition period, based on an estimate of the actual growth of real market production. It discusses the very significant implications of this re-estimate for contemporary theories of globalisation.

1
Introduction

In 1991 “communism” collapsed with the triumph of the capitalist market. The cold war was over and the West had won. The entire accumulated output of formerly centrally planned economies including entire cities such as Warsaw, Moscow, Beijing, Prague, Leningrad, Sofia, Shanghai, Kiev, Bucharest and Budapest, along with all of the associated infrastructure of a modern society, from hydro schemes to railways, electrical transmission systems, roads, ports and airports were passed to the world’s capitalists for nothing or next to nothing. An area encompassing a third of the world’s surface and half its population was subject to the rule of capital. For the first time in at least seven decades, a truly global market embraced the entire world.

The old capitalists of the West or the new capitalist classes fashioned from the old state apparatus or trained at the behest of the Central Intelligence Agency (CIA) created a capitalist system that, in the words of the International Monetary Fund (IMF), “destroyed” the old economy (Koen & Marrese 1995, p.1). It was as Yegor Gaidar, the prime minister of Russia and architect of shock therapy, dryly noted “repulsive, thievish and socially unjust” (Spulber 2003, p.314). In the former USSR output collapsed. In Central and Eastern Europe (CEE) the largest falls in production everywhere coincided with the introduction of market prices. The life expectancy of Russian males fell by 10 years (Murrell 1996). East German industries were sold off for a dollar, while the entire privatisation receipts for the total Soviet economy amounted to a meagre US$7.5 billion (Dornbusch & Wolf 1994). The Chinese social security system or “iron rice bowl” was dismantled (Maddison 2006). The old world was destroyed, even if the new world had yet to be built.

The impact of this one-off shock stretched far beyond the transitional economies themselves. The dissolution of the bipolar world meant that the balance of power, however relative, between the old Warsaw bloc and the North Atlantic Treaty Organization (NATO) was replaced by the hegemonic rule of the United States. The neo-liberal counter-reform programme, begun by Thatcher and Reagan, was consolidated across the West, as entire heavy industries were closed and shipped to the so-called emerging markets in this newly created global market. The nationalised industries of dependent, formerly third-world nations were privatised. Trade barriers were dismantled, tariffs fell and foreign direct investment soared. This was arguably the greatest expansion of the world market in history.

If national income is a measure of the value of economic production within the market area, it must have increased as the real market grew. Yet the official statistics turned the world on its head. All of the official agencies responsible for the measurement of the world economy, the IMF, the World Bank, the Organisation for Economic Co-operation and Development (OECD), the Commonwealth of Independent States (CIS) Statistical Commission, the European Bank for Reconstruction and Development (EBRD) and so on measured the expansion of this new market production, this new national income, as its contraction.

This base-level error was the result of the authorities’ method of estimating “national income” in the centrally planned economies. This method called the Adjusted Factor Cost (AFC) was developed in the aftermath of the Second World War. It meant that the categories of the US System of National Accounts (SNA) were superimposed on, what was acknowledged to be, a non-capitalist economy. This method imputed national incomes where these incomes did not exist, and so, as the centrally planned economies collapsed, the creation of national income – production within a real market boundary – was measured as the collapse of it. In hock to an ideological method of the AFC, according to these agencies, the expansion of capitalism across a third of the world actually led to its contraction, and their figures defied the truth.

Measuring National Income refutes this idea. By disaggregating the collapse of the central plan from the growth of real market production it develops, for the first time, estimates of the growth of real national income with the growth of real market production in the transition economies.

Far from the 1990s being a decade of capitalist stagnation, world capitalist aluminium production increased 60.3%; hydraulic cement, 96%; steel, 56%; electricity, 61%; automobiles, 27%; and gross domestic product (GDP Geary Khamis [GK] PPP), 52%. By the 2001, when the process of capitalist restoration was complete, the transition economies accounted for 37% of world capitalist employment, 31% of its aluminium, 44% of its hydraulic cement, 24% of steel, 16% of electricity, 8.5% of cars and passenger vehicles and 17% of GDP (GK PPP). The official agencies underestimated the growth of the Chinese economy during the transition from central planning to capitalism by 20%. They underestimated the growth of the united German economy, through the incorporation of East Germany into it, by 16%. They underestimated the growth of the market economies in CEE and the CIS by more than $2.1 trillion (GDP GK PPP). They underestimated world growth in the 1990s by half.

So how could the official measurements be so wrong? What was the root of this monumental blunder? How to explain this total failure of official economic theory in its application to the centrally planned economies?

Measuring National Income shows how all modern systems of national income measurement were derived from the original Balance developed by Soviet theoreticians in 1923 and 1924. The Balance was an application of Marx’s schemas of reproduction, published by Engels in 1885, in Capital Volume II. The Balance measured the value of the material product sector in the commodity economy during the 1921–28 New Economic Policy (NEP). This limitation was criticised at the time, for the exclusion of services and the government sector meant it was unnecessarily narrow. However, the basic application of the method, despite these limitations, formed the template for all subsequent SNAs.

This explains why in every SNA value is created in production and then realised in exchange. A distinction is drawn between property income (the total of rents, interest and profits) or surplus value, in Marx’s original schema, and wages or variable capital. It explains why the different sides of national income, whether viewed from the production, demand or income side balance. To this day, even though the SNAs mention the labour theory of value nowhere, the growth of national income measures the change in labour hours, plus or minus the change in productivity (an aggregate of changes in the intensity and quality of labour and the organic composition of capital). Leaving aside the essential identity between the Balance and the modern SNA, there is an even more compelling reason for appreciating the origin of capitalist national accounts in Marx’s Capital.

The US SNA was developed by Simon Kuznets, a former member of the Jewish Marxist Bund group and a follower of Georgi Plekhanov, the founder of Russian Marxism and Wassily Leontief, the creator (or rather imitator) of input–output accounting, who had participated in the original Soviet Balance debate. Kuznets and Leontief explained that as physical things are incommensurate as use values, or in other words, because there is no fixed correlation between what one physical quantity and another exchanges for on a market, then the physical qualities of things cannot explain their exchange value or price. Consequently there must be some other value that determines price. But what was this value? Neither Kuznets nor Leontief ever defined it. They preferred to conceal Marx’s definition, the socially necessary labour time required for the production of a commodity, even if they never abandoned its use. This is understandable. They were after all working in the United States, at the behest of the “intelligence community”. The choice between Stalin’s gulag and America’s Ivy League was no choice at all. While in Britain J.M. Keynes, who oversaw the development of the UK national accounts in the late 1930s, referred to Marx’s schemes of circulation in his notes to prepare the General Theory, but excluded any reference to them in the published edition. As a result there is no definition of value in the national accounts, other than the assertion that value is the total sum of different values, which is rather like defining banana as the sum of bananas.¹

Measuring National Income shows how the determination of Kuznets and Leontief to have value without value theory, to separate value from its location in exchange value, and more specifically the socially necessary labour time required for the production of a commodity and measured in exchange, was mirrored in the Soviet Union during the plan period. From 1930, Stalinist theoreticians abandoned the historical nature of Marx’s categories, rooted in the actual social relations of production. Instead, they asserted that although there was no exchange at market prices in the centrally planned economy of the USSR, commodities, that is the things produced for sale on a market existed, even though nothing was produced for sale on a market or indeed sold at market prices. The “sale” of labour was no real sale at all. The quantity of labour and the quantity and quality of consumer goods were established in physical terms by planners in advance. A conscious disproportion between the physical quantity of consumer goods supplied and the amount that could be theoretically purchased was established. This shortage affected neither the quantity supplied nor the “price” of supply. Rather, it ensured that all consumer goods were consumed, hence the queues.

Stalin resolved this irresolvable contradiction by insisting that that the law of value, the law that regulates production in a capitalist economy, existed in the centrally planned economy, only not as a regulator of production. The retention of the notion of value in the planned economy assisted the Stalinist apparatus in concealing its exploitation of the working class. This meant the accurate accounting of real socially necessary labour times was impossible, given that criticism of such inaccuracy, and therefore wastefulness, was likely to be met with a bullet to the back of the head or an ice pick in Trotsky’s case.

This logic chopping was reflected in the Materialy, a planning document drawn up for the first years of the plan period in 1930. It created a new measure of “national income” in the centrally planned economy, based on aggregates of concrete but not on social labour hours. There was no mechanism to transform individual labour into social labour in the USSR, as there was neither exchange though a market nor any workers’ democracy or control whatsoever. This was no communist society as understood by Marx and Engels but a “communist” society in which a parasitical apparatus extracted surplus labour from the workers and farmers. The direct producers could not compare the fruits of their labours because the dictatorship denied any democracy in society. Wages were driven down to provide resources for investment, with the terror of state execution or of the gulag inflicted on the population to ensure producers’ compliance. There was exploitation, but the mechanism of surplus extraction was not a market one. This was no capitalist society.

The use of concrete labour hours to create some notion of value – where none actually existed – was reflected in an unresolved debate around the validity of Soviet statistics in the Western intelligence and academic community. It was eventually concluded that the statistics of the plan apparatus measured quantities of real things, whether in tons of steel, pairs of shoes, square metres of housing or labour hours expended, but although these figures were “true” – more or less as rough measures of inputs and outputs in the central plan – they were untrue as measures of value, of socially necessary labour time. There could be no value without exchange value and no national income without a wage market that responded to supply and demand, without profits to capitalists, interest to bankers or rent to landlords.

Measuring National Income shows how it was nonetheless, a modified form of these official statistics that provided the basis for all the subsequent Western estimates of Soviet “national income”. Abram Bergson, a student of Kuznets and Leontief and from the war on the head of first, the Office of Strategic Services (OSS) Russian division and, then, the US Air Force’s Project Research and Development (Project RAND), developed an AFC to measure the central plan according to the categories of the Western SNA. The AFC eliminated the turnover tax, subsidies and profits that were used by the apparatus as components of various aggregates when valued at prevailing prices and then added notional amounts for returns to fixed and working capital and land. The AFC ultimately provided the foundation for all official Western estimates of Soviet “national income”, and although Bergson acknowledged the limits of his method, he used quotation marks whenever referring to the “national income” of the Soviet centrally planned economy. As the years went by, these limits were forgotten and the quotation marks disappeared.

The attempts of Western theorists to measure Soviet “national income” saw much innovation in comparative techniques. In 1939 Colin Clark, a colleague of Keynes and one of the first statisticians to apply gross national product (GNP) measurements to the British economy, developed the first-ever application of purchasing power parity (PPP). Unconvinced about the reality of Soviet apparatus prices, Clark priced estimates of twelve key Soviet physical outputs in UK pounds to develop estimates of the “value” of Soviet output. Clark also extended the coverage of his national income estimates to include the services sector and pointed out how the different calculation of depreciation in the central plan, based on a nominal installation or “historic” cost, meant that Soviet depreciation was underestimated and the output of its economy, therefore, overestimated. The issues of coverage and depreciation became two of the defining features of alternative Western measurements over the years.

Alexander Gerschenkron followed Clark in using a type of PPP estimate, although in his version based on the output of machinery. Gerschenkron’s major innovation was to point to the importance of index year relativity in influencing the estimate of the growth of national income. All national income estimates aim to measure the change in real output, the actual value added in a given period, through the aggregation of the actual price that commodities exchange for on a market. But they need to differentiate between the real growth in value production from inflation, a change in price without any change in value. This is particularly difficult in a period when the economy is going through an industrial revolution, such as the USSR experienced in the 1930s. Manufactured goods were “priced”, not sold, based on an administrative estimate of the average installation cost during the first three years of production. As productivity increased the amount of physical outputs relative to the amount of physical inputs, the amount of concrete labour hours required to produce a given output, was reduced and so the administrative “price” fell. As a result, estimates of national income based on the base year – the Paasche index – would be higher than those based on the later given year – the Laspreyes index – as the installation “price” of machinery was higher in the base year than in the given year. There is no reason in principle for preferring either the base or the given year. They show different rates of growth, illustrating both the physical increase in output and the change in the structure of production. The Soviet apparatus preferred the base year, to provide the best possible measurement of the growth in output, whereas the West preferred the given year, to provide the worst.

Naum Jasny, another Menshevik exile now working the United States, developed the final major contribution to the debate on measuring Soviet output. Jasny accepted Clark’s general estimates, but rather than measuring the output of the Soviet centrally planned economy by comparing it to the prices of output in a capitalist market economy, Jasny used detailed Soviet price manuals to “correct” national income estimates for the subjectivity of the apparatus. This method was much criticised by supporters of Bergson as being subjective itself. This issue was essentially irresolvable as the absence of market prices meant that there was no objective standard against which to judge the subjective estimates. There could be no definitive answer by definition.

Measuring National Income shows how Bergson’s building-block method was generalised across the new centrally planned economies of central and eastern Europe and then into China. Objections from economists as varied as Alec Nove, the noted historian of Soviet history; G. Warren Nutter, Milton Friedman’s first graduate student, who was commissioned by the National Bureau of Economic Research (NBER) to produce alternative estimates for the Eisenhower administration; and P.J.D. Wiles, a neoclassical economist ...