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ONE of the notable aspects of Soviet reality is the paradoxical coexistence of the old and the new, of the modern side by side with the old-fashioned. A visitor to Moscow cannot but be struck by the contrast between the 40-story skyscraper of the Hotel Ukraina and the pre-revolutionary log cabin with intricately carved window frames nestling practically within its long shadow. Contemporary Russian literature and art present a striking example of revolutionary, socialist content poured into Victorian forms. One of the most notable paradoxes of this kind was--until recently--the contrast between the Soviet economy and Soviet economics.

The Soviet economy, directed with determined ruthless skill, has been advancing for years at such a fast and steady pace that in total--if not per capita--national income, Russia is now second only to the United States; the output of certain of its key industries, such as machine tool building, for example, has even exceeded that of ours. By contrast, Soviet economics, that is, Soviet economic science, has remained static and essentially sterile over a period of more than 30 years--a huge, impassive and immovable monument to Marx--with scores of caretakers engaged in its upkeep, fresh flowers placed in slightly different arrangements at its feet from time to time, and lines of dutiful visitors guided past in never-ending streams.

The decline of economics in Soviet Russia dates back to the late 1920s, to the time of the inauguration of the original Five Year Plan. The first decade of the Communist régime--the years of civil war and famine and then of economic rehabilitation and "primitive accumulation" assisted by the partial restoration of private enterprise--was marked by lively economic discussion. It ranged from immediate issues of economic policy to the most general problems of economic theory. This was the time when the Communist, Basarov, expounded his mathematical theory of economic growth and Professor Kondratieff, director of the Moscow Business Cycle Institute, developed the statistical analysis of long and short waves of economic growth which has exerted considerable influence on Western theory of business cycles. (A few years later both of these men vanished without a trace.)

Looking back it is not difficult to explain the decline of economic science in the first planned socialist economy. Marx was a prophet of socialism, but he was a student of capitalism; to be more exact, he was a student of the first hundred years--vital and incredibly creative, but also ruthless and destructive--of modern, mechanized large-scale industry. Marxism, as an economic theory, is a theory of rampant private enterprise, not of the centrally guided economy. Whatever references Marx made to the economy of the socialist order were brief, quite general and extremely vague. Some of his most poisonous verbal darts were reserved for Lassalle, Proudhon and other contemporary social reformers who took delight in minute descriptions of production, distribution and consumption in ideal socialist or anarchist communes. He considered these men naïve and impractical and dubbed them "Utopists."

The Soviet economists of the Stalin era were no "Utopists" in any possible sense of that word; for sound practical reasons they devoted their undivided attention to paraphrasing and interpreting Marx and Lenin. The fact that capitalism--the subject of all these labors--had been by this time abolished in Russia in a sense simplified their assigned job. Meanwhile, the Communist leaders were engaged in the unprecedented task of transforming literally at breakneck speed a technologically backward, predominantly peasant country into an industrialized military power dedicated to the pursuit of further economic growth. They were their own economists.

The fundamental proposition which explains the high rate of Soviet economic development is simple enough. Nearly 200 years ago it had already been clearly stated by Adam Smith and in more homely language by Ben Franklin. To expand one's income fast, one must channel as large a part of it as possible--and then more--into productive capital investment. This means that consumption must be restricted; while thus holding down the living standard of the masses, one must at the same time keep them working hard. Marx, in his theory of capitalist accumulation, describes exactly such a process, except that he refers to it in pejorative terms: the owners of the means of production use their monopolistic position vis-à-vis the working classes to keep wage rates down and profits up. Low wages mean a low level of consumption. High profits--the high "rate of exploitation"--mean a high rate of accumulation, since the capitalists forever strive to increase their capital so as to be able to compete better with each other and also to employ more workers to exploit. This prescription was followed by Communists in Russia steadily over a period of 30 years. However, the unmistakable success of that ruthless experiment bears testimony not so much to the economic sophistication of the Soviet rulers as to their political perspicacity and determination.

So far as the Russian technique of economic planning is concerned, one can apply to it in paraphrase what was said about a talking horse: the remarkable thing about it is not what it says, but that it speaks at all. Western economists have often tried to discover "the principle" of the Soviet technique of planning. They never succeeded, since, up to now, there has been no such thing. The "Method of Balances," to which the Soviet writers themselves invariably refer, hardly deserves its high-sounding name. It simply requires that the over-all national economic plan be constructed in such a way that the total output of each kind of goods be equal to the quantity which all its users are supposed to receive. The method does not, however, say what information and what computational procedure can be used to achieve the simultaneous balancing of many thousands of different goods and services covered by a comprehensive blueprint of a national economy.

The immense scope of the problem becomes clear if one considers the fact that each item requires for its production several other items directly, and many more--as a matter of fact, all others--indirectly. Thus whenever the planner attempts to balance the supply and demand of any one particular item, by expanding its output or by reducing its consumption, he is bound to disturb the balance of many, and ultimately of all other, goods and services. Moreover, an efficient planner must compute more than a single over-all balance. Land can be tilled with horses or with tractors; electric energy can be generated by burning coal, oil or natural gas as well as by harnessing water power. All such alternatives can be used in innumerable combinations and each combination will require a different kind of over-all economic balance. However, some of these will serve the national objectives--whatever they may be--more effectively than others.

Soviet planning procedures, in practice, do not--or at least did not up to now--differ very much from those that were used during the war by our War Production Board, by the English Supply Ministries, and by their counterpart in Germany. The larger decisions are first made by balancing the requirements for selected high-priority objectives with the available amounts of the strategic resources, that is, the most important scarce ones. Next, the details of the plan are worked out through application of standard ratios based on past experience. Final adjustments are left to informal trial-and-error procedures of the actual month-by-month and week-by-week operations.

Soviet press reports over the years abound in examples of obvious miscalculations. For instance, too much ore is mined and not enough coke is made to produce the planned amount of steel; or insufficient quantities of spare parts are turned out to keep in good repair machinery installed in new plants. More difficult to detect, because it does not show up in a glaring imbalance between the supply and the demand of some specific item, but probably not less deleterious in its effect on the over-all efficiency of the system, is the failure to make correct choices among several possible alternatives. The failure to substitute gas for coal on the supply side of the national fuel balance, or too hurried a substitution, might mean an even larger potential loss of national income than that which is brought about by the more obvious kinds of miscalculations mentioned above.

To solve all these problems in a systematic way, the planning technician must be able to compute not only one balanced plan, but many, and then he must be able to compare the efficiency of all these alternative plans in attaining whatever the specific, over-all objective of the national economic policy might be. This is an assignment easy enough to envisage, but most difficult to accomplish; it is, moreover, a highly technical task which even a very shrewd politician and powerful dictator cannot perform by himself, any more than he can, by himself, build an atomic bomb or send a rocket to the moon. He can, however, decide that the solution of this problem is worth the cost involved in solving it; he can set the experts to work on it and give them all possible support. This is what actually happened in Russia two or three years ago in respect to the important problems of economic planning discussed above. The top leadership, with Khrushchev probably taking a hand in it, apparently decided that with the rapid increase in the size and complexity of the Soviet economy, rule-of-thumb planning procedures would do no longer and must be replaced as soon as possible by more efficient, scientific methods.

The high price the Russian rulers have shown themselves willing to pay is, in this instance, not so much material as, one might say, moral: as in the case of atomic power, the scientific basis of the new techniques is being borrowed wholesale from the West--to be more specific, from the United States. This time it is "bourgeois economics" rather than physics that is about to be used to serve Soviet aims. For Communists and Marxists to concede the superiority of Western science in this particular field must be especially painful from both the ideological and the propaganda points of view; but just because of this, the significance of the move must be considered to be particularly great. To avoid any possible misunderstanding, let it be emphasized that what the Soviets are about to adopt is Western economic science, not Western economic institutions. There is good reason to believe that this can actually be done. Those Western observers who say that this cannot be done and who believe that the use of interest on capital in planning calculations presages at least a partial restoration of the system of private enterprise misunderstand, I think, the internal logic of Soviet evolution.

II

The early mid-nineteenth century successors of Adam Smith--and Marx was one of them--were concerned mainly with problems of economic growth, that is, of increasing wealth and income and of the distribution of that increasing income among labor, capital and the landowning groups. Later, the focal point of theoretical inquiry shifted to problems of economic efficiency and has remained centered on these problems ever since. It is true that the catastrophe of the Great Depression dramatically raised the question of full employment, and the recurring smaller ups and downs in business conditions continue to keep it on the map. However, looking back at the Keynesian Revolution, with its paradoxical advocacy of spending for spending's sake and the implied fear of a rapid rise in the productivity of labor, one must recognize it for what it was: a long detour rather than a basic change in the general orientation of Western economics. The question of efficiency and of rational allocation of scarce resources dominates the field of advanced scientific inquiry again. It was restored to that central position, however, with a new and different emphasis.

The traditional approach to these problems was broad, abstract and purely deductive; the new post-Keynesian, postwar inquiry is concise, specific, factual and eminently practical. The so-called "neoclassical" school, which carried on the classical theoretical tradition between the two world wars, mainly expounded and elaborated the liberal free-trade theme of the "invisible hand." It demonstrated in great detail, occasionally even making use of mathematical language, the automatic efficiency of competitive pricing. It classified and reclassified various theoretically possible situations, particularly those in which free competition breaks down or in any case does not bring about the most efficient allocation of economic resources. The "neoclassical" economists made it very clear that efficiency is a relative concept, that an allocation most efficient for the achievement of one economic end might be quite inefficient from the point of view of another. Incidentally, they have also shown that in a free competitive economy the over-all economic goal is determined by a kind of universal suffrage in which everyone has a multiple vote proportional to his dollar income.

The postwar generation of American economists takes up where the neoclassical analysts left off. Discussion of general principles is extended into the solution of specific problems, hypothetical assumptions are replaced by actual observation and purely symbolic mathematics are carried down to numerical computations. The entire national economy is viewed by the modern theorist as a gigantic, automatic computing machine, the price system being interpreted as an ingenious computing aid. To test and to extend his understanding of the operation of this machine, the economist now often identifies the specific problem it is supposed to solve, determines through detailed, direct observation the basic numerical data which are supposed to go into the solution, performs the necessary computation and then compares the final answer obtained from it with the answer to the same question arrived at in real life by operation of the impersonal forces of free competition.

To give a simple example: coal is produced in several parts of the United States, the cost of production and the maximum possible annual output varying from place to place mainly because of differing geological conditions. It moves then by either rail, water or truck to consuming areas. The actual total output can be allocated in many different ways among the producing regions and the proper amounts can be carried to the consuming regions by many means along various routes. However, some of the possible arrangements must obviously be more economical than others in terms of total combined production and transportation costs. Traditional economic theory explains why--under certain simplifying assumptions--the free competitive pricing mechanism can be expected in this case, as in many others, to bring about the establishment of the cheapest possible production and transportation pattern. The modern analyst goes further. He collects detailed information on the actual cost of production in all the different coal mining regions and on the actual rail, water and truck rates from these regions to places of consumption; and then he determines by himself--using, if necessary, a modern high speed computer--the most efficient, i.e. the cheapest, of all the possible alternative production and transportation patterns.

The computational procedure the economist uses might be designed in imitation of the process of trial-and-error approximation that is supposed to operate in a free-exchange economy. Or he might decide to use one of the advanced textbook methods of numerical analysis. A comparison of this answer with the observed production and the transportation pattern of coal might show that the economist has, indeed, reached a satisfactory scientific explanation of the actual process. On the other hand, he might turn up a discrepancy which will indicate the direction of necessary improvement in the theoretical formulation of the problem, the computational routine or the nature of the factual data used. Since these elements are mutually interdependent, the modification in any one of them will usually require a corresponding adjustment in the other two. On the second or the third try, the result usually turns out to be more satisfactory. If nothing helps, the very assumption that costs are minimized in the economy might itself be questioned.

Such relatively simple questions as that of minimizing the combined production and transportation costs are ordinarily formulated as so-called linear programming problems and are solved through application of a computational procedure known as the Simplex method. Conceptually akin to linear programming is the so-called input-output analysis which, for example, has been effectively used in quantitative empirical analysis of the balance or the imbalance, as the case may be, between several hundreds of individual sectors of the United States economy. The application of this method requires a comprehensive statistical mapping of the structural relationship determining the flows of goods and services between all the sectors and a solution of large systems of mathematical equations based on the hundreds or thousands of figures contained in a typical input-output table. The Russians expect this method to be particularly helpful in the solution of their larger planning problems.

Under such names as "operations research," "logistics analysis" or "management science," the new techniques are now being successfully used by most large American corporations in the solution of production scheduling, inventory control, investment planning and many other of their internal problems which hitherto were met by routine application of conventional and mostly rather wasteful rules of thumb. But certain business circles in the United States have viewed with unconcealed alarm the application of these methods to the traditional problems of the economic system as a whole--the very purpose for which some of the more powerful of the new analytical devices were designed in the first place. No doubt this attitude reflects the fear that too close and too detailed an understanding of the structure of the economic machine and of its operation might encourage undesirable attempts to regulate its course.

III

The first cursory references in Russia to new developments in the West appeared some years ago in the typical polemical forays against "bourgeois economics" published from time to time in Economic Problems and similar Soviet journals. Gradually the polemical part of these surveys became less virulent and shorter while the factual description of the new methods became more systematic and longer. Oskar Lange, former Professor at the University of Chicago and now a prominent public figure and the leading economist in Poland, has apparently been instrumental in arousing a positive interest in linear programming and input-output economics among his high-placed Russian colleagues. The last edition of the "Textbook of Political Economy" published late in 1958 mentions a bourgeois science called Econometrics, some methods of which--it is significantly stated--might prove to be of interest to socialist economists and planners. Early in 1959 the "Studies on the Structure of the American Economy," a rather technical volume published six years ago in the United States by the author of this article and several collaborators, appeared in a Russian translation (which incidentally was edited by Professor A. A. Konus, the last surviving mathematical economist of the pre-revolutionary generation). Another straw in the wind was a popular pamphlet on problems of economic planning written by a prominent member of the research staff of the Gosplan--the central planning commission--and printed in several hundred thousand copies. It describes in great detail the use of the mathematical input-output method for balancing planned production and requirements. At the last two meetings of the International Statistical Institute, the official Soviet delegation made input-output analysis the subject of its principal scientific papers. Its leader used this opportunity to declare this to be a topic singularly well-suited for scientific exchange between East and West.

As soon as the baby was adopted, the question of its intellectual parentage was investigated with great diligence and it was found to be, after all, of respectable Soviet Russian ancestry. A search through old economic journals revealed that in 1925 a short article on the then newly compiled balance of the Russian national economy was published in one of these periodicals over my signature. (Actually, I wrote this paper when still a student at the University of Berlin; it was first published in Germany and then translated and published in Russia.) Another Soviet priority claim seems to be more substantial. In 1939 a young Leningrad mathematician, L. V. Kantorovich, published two papers in which he presented a general mathematical formulation of certain problems of production planning and transportation scheduling, which in fact did anticipate the conceptual framework of the linear programming theory developed a few years later by Koopmans and Dantzig in the United States. Kantorovich did not, however, devise an efficient computational solution of these problems; Dantzig did, thus opening the door to the practical, large-scale application of the linear programming approach. In any case, Kantorovich's original contribution found no response and recognition till the time when information about new developments in the West reached Moscow and the top decision was made to put them into the service of socialist planning. Professor Kantorovich is now a member of the Academy of Sciences and, according to recent newspaper reports, he even can allow himself, at its public sessions, to make disparaging remarks about "the meaningless discourse" of stalwart Marxist theorists.

Once the crucial decision was made, scientific resources were rapidly mobilized to conquer the field. The details of what actually goes on are shrouded by a veil of secrecy, but it is known that many American articles and books on the subject have been translated into Russian and circulated "privately" among the specialists assigned the task of mastering the new methods. For example, though the Russian edition of "Studies on the Structure of the American Economy" was published in 1959, the translation of that book was actually completed and widely circulated as early as 1955 or 1956.

Among the scores of young economists and mathematicians whom I had an opportunity to meet during a brief visit to Moscow and Leningrad early in 1959, many showed through questions they asked and remarks they made that they had a good acquaintance, both theoretical and practical, with input-output research. Some of these belonged to the selected group of "aspirants" (corresponding to our young post-doctoral scholars) who at the time were completing a course of intensive training in methods of modern quantitative economics under the personal direction of Academicians Kantorovich and Nemchinov. (The latter, an economist and statistician, headed until recently the Section of Social and Philosophical Sciences of the Academy of Sciences and was also a member of the Academy's all-powerful Executive Board; a few months ago he was appointed Chairman of the Academy's Commission on the Study of the Productive Resources of the U.S.S.R.) This fall, they are being transferred from Moscow and Leningrad to the new Science City in Novosibirsk, the seat of the rapidly expanding Siberian branch of the Academy of Sciences. Equipped with large-scale computational facilities, this will apparently become the new center of advanced economic research.

It was interesting to note that young men with mathematical or engineering backgrounds and some of the older practical planners and economic administrators took easily to the new discipline, while those who as students had concentrated on regular economic courses were still prone to be beset by doubts. The use--in so-called dynamic allocation theory--of a positive rate of interest on invested capital, for instance, is accepted by the former as a logical necessity, while the latter ask questions which indicate considerable resistance to such un-Marxist thought. As a result of this, the manipulative aspects of the new methodology seem at the present time more advanced in the Soviet Union than the understanding and the exploration of its deeper fundamental levels. This aspect of the problem, however, is also being taken care of: mathematics has been made an obligatory subject in the economics departments of the Universities of Moscow and Leningrad and, in both, new chairs of Econometrics were recently established--but not yet filled, apparently because of lack of suitable candidates.

The massive support which the Soviet Government has given to the development of the natural sciences is widely known. The fact that it is now prepared to discard some of the central themes of traditional Communist lore in order to gain command of the promising new intellectual tools of modern social science indicates that it expects to receive an equally high return from their use.

It will take some time before the Soviet planners will be able to apply in practice the new techniques their economists are now acquiring in theory. Not only must the vast training program, launched only a few years ago, be advanced much further, but the activities of the huge and clumsy Central Statistical Office will have to be reorganized from top to bottom. The new methods of economic analysis can make effective use of a much larger volume of much more detailed statistical and other factual information than was considered practicable heretofore. But first the information must be made available. Lenin's slogan, "Socialism is electrification plus statistics," will once again be often quoted in the Soviet press.

There can be little doubt that in the years to come the introduction of scientific planning techniques will increase the over-all productivity of the Soviet economy, just as the adoption of new methods of scientific management by our own large corporations has raised the efficiency of their internal operations. A centrally planned economy depends on the efficiency--or the inefficiency--of managerial decision to a much greater extent than does the free-market economy, which benefits from the economizing functions of competitive pricing. So, the advantage that the Russians will derive from any improvement in such decision-making procedures is bound to be particularly great. Whether the increased productivity will be used to accelerate still further the high rate of their economic growth, to step up military preparations or, as the free world should hope, to raise their standard of living, one cannot predict.

IV

In the present world-wide contest between the United States and the Soviet Union for the friendship of underdeveloped countries, the reorientation of Soviet economics will probably have an even more immediate effect. For better or worse, these have-not countries are not content to allow their fervently desired economic growth to take care of itself. They regulate their exports and imports, they encourage new industries, their governments finance and build not only dams and roads, but also steel, chemical and other kinds of plants. In short, most undeveloped countries plan; they also ask for help. Financial support and engineering advice they get both from the Russians and from us. But so far as help on methods of economic planning is concerned, neither side has thus far been able to offer them much. Our advice is long on general wisdom, but short on teachable and learnable techniques. It is the latter, however, that they want; wisdom is not easily transmitted and furthermore no self-respecting politician has even been known to admit the lack of it. The Russians could have been expected to teach how to plan, but for reasons explained above they were able only to refer to the "method of balances," which raises an important question but does not answer it. Until now, as technical advisors on development economics, the Russians have not done any better than we have.

Having adopted modern analytical and programming techniques for large-scale domestic application, the Russians are bound to offer them for export too, and the demand is great. Since the new approach to economics originated in the United States, one would think that in this line of intellectual competition we could hold our own. But as things stand now, this is not the case.

The scientific treatment of management and business problems is expanding rapidly in the United States. But, for reasons noted before, large-scale basic research aimed at the application of these newer methods to the analysis of the structure and the operation of the economic system as a whole has slowed down in recent years. As a matter of fact, in its crucial empirical phase, this fundamental work has now come to a complete standstill because of lack of financial and organizational support. Over 20 countries--not counting the Soviet Union and its satellites--are ahead of us in this field.

  • WASSILY LEONTIEF, Professor of Economics, Harvard University; author of "The Structure of American Economy" and other works
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