The existence of real world Communist systems for many decades that were able to increase real output and effect real economic development was a rather embarrassing refutation of Mises’s argument that such systems were impossible.
One of Mises’s most feeble attempts to explain away this contradiction was the idea that socialist economies actually could only function because they used prices from the Western capitalist world:
“An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People do not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of the prices established abroad. Without the aid of these prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.” (Mises 2008: 698–699).Aside from the fact that Nazi Germany was never a fully planned economy and had many private sector prices, the idea that the Soviet Union could only function because it used prices taken from Western capitalist nations is an absurdity.
Note that the issue here is not whether Communist systems were efficient or successful in the long run, or whether they are subject to serious problems of production or planning (many no doubt were), but whether or not Mises’s argument about how their price systems worked is correct.
First of all, even on a theoretical level from Mises’s own theory, prices from the West were not appropriate for the supply and demand conditions of goods produced within Communist nations: Western prices could not have allowed Communist planners to make planning decisions on investment and production to calculate profit and loss, because they could not possibly reflect the costs of production of goods within the Communist nations, relative scarcities and supply and demand conditions.
Secondly, it seems to me that Mises’s statement is refuted by the empirical evidence. I cannot claim to have done an exhaustive literature review, but a sample of what seems to be good specialist literature on Soviet price setting (namely, Jasny 1950; Bornstein 1962; Bornstein 1978; Hutchings 1961) does not support Mises.
Instead, the literature shows that the former Soviet Union had a complex system of price setting that was accomplished by central government bureaus, the republics, local governments, ministries, associations, and even actual enterprises themselves (Bornstein 1978: 469).
There is no evidence I can see from a reading of the literature that prices were simply taken from the Western world.
As an example of how prices were actually set in the Soviet Union, we can take the most interesting case, as discussed by Bornstein (1978), of the method by which Soviet planners set prices for new products:
“… for … [sc. new products], the [sc. USSR State Price Committee] ministry itself is authorized to set ‘temporary’ prices (vremennye tseny). These are supposed to cover the planned cost of initial serial production plus the profit mark-up planned for the rest of the enterprise’s output (but not less than 10% or more than 20% above cost). The temporary price should not be used for more than two years. Before or by then, a permanent price should be established—by the USSR SPC—on the basis of planned cost in the second or third year of serial production, plus the standard profit mark-up.” (Bornstein 1978: 475).In other words, the Soviet planners were using mark-up prices based on costs of production plus a profit mark-up for their state-owned enterprises: this is an administered price of the same type familiar from the capitalist West as used in private firms.
But, contrary to Mises, the Soviets were not borrowing Western prices for such new products, but creating their own prices on the basis of domestic costs of production. Such labour and factor costs were themselves also set by planners.
Now Rothbard attempted to defend Mises by appealing to some empirical evidence adduced by Wiles (1957):
“But the decisive rebuttal [sc. to the view that socialism can work] has, once again, been levelled by Mises in Human Action: the Soviet Union and Eastern European economies were not fully socialist because they were, after all, islands in a world capitalist market. The communist planners were therefore able, albeit clumsily and imperfectly, to use prices set by world markets as indispensable guidelines for the pricing and allocation of capital resources. ...Rothbard has, however, grossly overstated the significance of the passage he quotes from Wiles.
Mises’s insight was confirmed as early as the mid-1950s, when the British economist Peter Wiles visited Poland, where Oskar Lange was helping to plan Polish socialism. Wiles asked the Polish economists how they planned the economic system. As Wiles reported:What actually happens is that ‘world prices’, i.e. capitalist world prices, are used in all intra-[Soviet] bloc trade. They are translated into rubles . . . entered into bilateral clearing accounts.Wiles then asked the Polish communist planners the crucial question. Since the Poles were, as good Marxist-Leninists, presumably committed to the triumph, as soon as possible, of world-wide socialism, Wiles asked: ‘What would you do if there were no capitalist world’ from which you could obtain all those crucial prices? The Polish planners’ rather cynical answer: ‘We'll cross that bridge when we come to it.’ Wiles added that ‘In the case of electricity the bridge is already under their feet: there has been great difficulty in pricing it since there is no world market.’ But fortunately for the world and for the Polish planners themselves, they were never truly forced to cross that bridge.” (Rothbard 2011: 854–855).
Here is the full passage from Wiles (1957), which is a discussion of international trade between Communist nations:
“At no point are home prices and the official rate of exchange taken into account in price-setting – indeed it would be very difficult as the zloty is overvalued 100 per cent vis-à-vis the ruble and 7 times vis-à-vis the pound. The official rate is only of interest to tourists and diplomats. It was fixed after the de-rationing and price increases of January 1953, at 1 zloty = 1 ruble = 21-4 pence. At that time the ruble was grossly overvalued vis-a-vis the pound and the zloty was fixed at one ruble because its purchasing power was equal on the retail market. Since then Soviet prices have fallen and Polish prices have risen. In answer to the question, will you devalue the zloty to reestablish purchasing power parity with the ruble, the Vice-Minister of Foreign Trade said this was entirely a matter for the Ministry of Finance. He had clearly never lost any sleep over it.So what this passage establishes is this:
What actually happens is that ‘world prices’, i.e. capitalist world prices, are used in all intra-bloc trade. They are translated into rubles (presumably at the official rate of exchange) and entered into bilateral clearing accounts. To the question, ‘What would you do if there were no capitalist world?’ came only the answer ‘We’ll cross that bridge when we come to it.’
In the case of electricity the bridge is already under their feet: there has been great difficulty in pricing it since there is no world market. This seems on reflection to bear only one interpretation. It is a major admission of the irrationality of Communist prices, and confirms that Stalin did not make a slip of the pen in the celebrated passage which has the same implications in the context of internal trade:Our economists and planners submitted a proposal which could not but surprise the members of the Central Committee, for by this proposal the price for a ton of grain was about the same as that for a ton of cotton; the price for a ton of grain was thereby made equal to that of a ton of baked bread. To the remarks of the Central Committee members that the price of a ton of baked bread must be higher than that for a ton of grain in view of the added price for milling and baking, that cotton is altogether much dearer than grain, as the prices of cotton and grain in the world market testify, the authors of the proposal found nothing sensible to say.How common then is it for Communists to plan their own relative prices on the basis of capitalist ones? Perhaps a subsequent visitor will discover. In the meantime let us note that prices on the capitalist world market are not at all likely to be those most rational in the specific conditions of relative scarcity in Communist countries.” (Wiles 1957: 202–203).
(1) the use of capitalist “world prices” was in the context of goods traded between communist nations within the communist bloc in intra-bloc trade, not the general price system.The passage, then, does not support Mises’s original argument in the way Rothbard invokes it. At best, it gives some limited support in the context of intra-bloc Communist trade, but Rothbard simply reads too much into it – or deliberately and dishonestly distorted its actual significance.
(2) Wiles did not even know to what extent communist planners used Western capitalist prices in their own internal price system.
(3) Wiles immediately and correctly pointed out that it is absurd to think that Western capitalist prices would be the rational ones for goods often scarce in Communist nations.
(4) Even the passage Wiles quotes from Stalin shows that Communist planners were perfectly capable of seeing that some goods should have higher prices than others on the basis of extra costs of production:“To the remarks of the Central Committee members that the price of a ton of baked bread must be higher than that for a ton of grain in view of the added price for milling and baking, ... .”
And, as we have seen, there is no empirical evidence I can see that Communist economies like the Soviet Union were simply deriving their prices from the West.
Bornstein, Morris. 1962. “The Soviet Price System,” The American Economic Review 52.1: 64–103.
Bornstein, Morris. 1978. “The Administration of the Soviet Price System,” Soviet Studies 30.4: 466–490.
Hutchings, R. F. D. 1961. “The Origins of the Soviet Industrial Price System,” Soviet Studies 13.1: 1–22.
Jasny, Naum. 1950. “The Soviet Price System,” The American Economic Review 40. 5: 845–863.
Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.
Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.
Wiles, P. J. D. 1957. “Changing Economic Thought in Poland,” Oxford Economic Papers n.s. 9.2: 190–208.