Paul Cockshott has posted a critique of my article ‘The Need for Planning: The Restoration of Capitalism in the Soviet Union in the 1950s and the Decline of the Soviet Economy (http://clogic.eserver.org/2010/Ball.pdf) on the Revolutionary Left Forum.
Paul Cockshott is a Reader in Computing Science at the University of Glasgow. He is also the author of ‘Towards a New Socialism’ and many other works on economic planning and the labour theory of value. I reproduce his critique below and then I reply to it.
‘Joseph Ball has an interesting article on planned economy here: clogic.eserver.org/2010/Ball.pdf I was generally sympathetic to his aims in writing it: to defend socialist planning. I think that it makes a very interesting point in focussing attention on innovation and the comparative role of subsidies versus temporary prices. I had not heard this argument before.
I am not sure that I find it entirely convincing as a long term explanation of the slowdown in the diffusion of technology. If there was gaming over the temporary prices, would there not have been similar gaming over subsidies in the long run with enterprises applying for subsidies for products that they claimed were new, but which were actually just slight mods of old ones.
Similarly if the planners forgot to downgrade the temporary prices in the 60s might they not have forgotten to remove subsidies in the 60s had these been retained.’
I think the main point is that, in practice, the Soviet subsidy system did not seem to lead to the same problems as the temporary pricing system, whatever the problems we might imagine could have occurred.
Subsidies for innovation existed throughout most of the Stalin-era. Stalin died in 1953 and the new rulers of the Soviet Union ended the subsidy system and brought in the temporary pricing system to replace it.
The subsidy system subsidised the costs associated with introducing an innovation. The subsidy for a product was withdrawn as these costs reduced due to economies of scale, learning by doing and so on. The temporary pricing system was meant to give enterprises a high price for any innovation they introduced on a temporary basis only. The high price was meant to be reduced as costs went down. However, this did not happen on an adequate basis as revisions in Soviet prices tended to be infrequent. Thus an enterprise could often choose to produce an old product which had just as high a price as an innovation but without the higher costs associated with innovation. This obviously reduced the incentive for technological progress, making the production of old products more profitable. (In the capitalist system no subsidy is necessary as companies producing new products tend to charge a high initial price for the product and then bring the price down as the cost of production reduces over time.)
Berliner’s work (which is generally quoted as the leading authority on matters to do with Soviet innovation) shows that the abolition of the subsidy system did remove an important incentive to innovate. Berliner writes of the subsidy system:
'As cost declined, the size of the subsidy diminished, so that the older product did not yield a significantly higher return to the producer than the new product. The variable subsidy served as an instrument for offsetting the effect of the declining cost.' (1)
'With the elimination of subsidies, the high start-up costs of new products strained the finances of product innovators and militated against the decision to innovate.' (2)
Cockshott argues that the subsidy system could have led to simulated innovation too. On p. 33 of my article I deal with this issue. I point out that Berliner believes this problem existed in the Stalin-era but I quote Berliner stating: It does appear, however, that the extent of the practice expanded greatly following the introduction of temporary pricing in 1955. . . . (3)
I could add that Mark Harrison, who studied the Soviet archive concerning this matter, found no direct evidence of simulated innovation in the period he studied, 1928-50 (4). He points to Moorsten's evidence of 'conservatism' in innovation in this period but I deal with this objection in my article (p28). The reason why simulated innovation was more common in the post-Stalin era was because of the lack of the subsidy system. Once there was no subsidy to cover the higher cost of producing a new product compared to an old product, there obviously was an added incentive to pretend to innovate, so as to not spend the extra money. It is true there was some incentive to simulate innovation in the Stalin-era but the point is that the withdrawal of subsidies increased this incentive. I make this point on page 33 of my article.
Cockshott’s objection is that in principle it would have been just as time-consuming to reduce subsidies as to reduce prices so he has difficulty seeing why there should have been any difference in practice. One possible reason for this difference is that it is probably more likely a continuing subsidy will be noticed than a price that has been left at the wrong level. Paying a subsidy is an active thing. Even where there is a soft budget constraint, the fact remains that the subsidy is still coming out of someone’s budget. Someone senior has to authorise it every year when they sign off their accounts. Therefore there is some likelihood that the problem will be noticed. When a price needs adjusting it just 'sits there' until someone remembers to change it. Consumers of the highly priced machine or component might complain but on the other hand they might just find it easier to pass on the cost to their own consumers.
I indicated in my article that the subsidy system seemed to be a better ‘fit’ for the planned economy than a system of temporary prices. Most important though is probably the difference in political line between the Stalin-era and what came after. After the death of Stalin, the use of planning very much went out of favour. Although plan targets were still set, including for innovation, the enthusiasm for this type of approach was gone. The new leaders of the Soviet system focused their efforts on attempts at market reforms. Central planning mechanisms were intended to remain as a sort of ad hoc temporary measure, while this new architecture was put in place. However, there were all sorts of problems with converting the system to a market economy as the policy-induced collapse of the Soviet Union in 1991 would reveal. This is probably why progress in ‘reform’ proved elusive for so long and the Soviet economy remained in limbo. Planning only remained between 1953 and 1991 due to inertia so it is not surprising that its results were lacklustre.