The Socialist Blueprint

3. To facilitate matters we will assume that means of production are present in given and, for the moment, unalterable quantities.

Now let the central board resolve itself into a committee on a particular industry or, still better, let us set up an authority for each industry that is to manage it and to cooperate with the central board which controls and coordinates all these industrial managers or managing boards. This the central board does by allocating productive resources—all of which are under its control—to these industrial managements according to certain rules.

Suppose the board rules that industrial managements can have any quantities of producers’ goods and services they choose to call for subject to three conditions. First, they must produce as economically as possible. Second, they are required to transfer to the central board, for every unit of each producer’s good and service called for, a stated number of those consumers’ dollars which they have acquired by previous deliveries of consumers’ goods—we might just as well say that the central board declares itself ready to “sell” to any industrial management unlimited quantities of producers’ goods and services at stated “prices.”

Third, the managements are required to call for and to use such quantities as (and not less than), producing in the most economical manner, they can use without having to “sell” any part of their products for less “dollars” than they have to transfer to the central board for the corresponding amounts of means of production. In more technical language, this condition means that production in all lines should be such as to make “prices” equal (not merely proportional) to marginal costs. 5

The concept of marginal cost, meaning the increment of total cost that must be incurred if production is to be increased by a small amount, is indeterminate as long as we do not relate it to a definite period of time. Thus, if the question is whether or not to transport an additional passenger by a train that would run in any case, marginal cost to be considered might be zero and at all events is very small. This may be expressed by saying that, from the standpoint of a very short period—an hour or a day, or even a week—practically everything is overhead, even lubricants and coal, and that overhead does not enter into marginal cost. But the longer the period envisaged the more cost elements enter marginal cost, first all that are usually comprised in the concept of prime cost and after them more and more of what the businessman calls overhead, until, for the very long run or from the standpoint of planning an as yet non-existent industrial unit, nothing (or practically nothing) is left in the category of overhead and everything including depreciation has to be taken into account in figuring out marginal cost, so far as this principle is not modified, in the case of some factors such as a railroad track, by the technological fact that they are available or usable only in very big units (“indivisibility”). Marginal costs should hence always be distinguished from (marginal) prime costs.

Now we often associate the condition under discussion with the rule that the socialist— just like the capitalist—managements should, at any point of time, let bygones be bygones if they are to act rationally; that is to say that in their decisions they are not to take account of the book values of existing investments. But this is only a rule for short-run behavior in a given situation. It does not mean that they are to neglect ex ante those elements that will crystallize into fixed costs or overhead. To neglect these would spell irrational behavior with respect to the labor hours and units of natural resources that go into the production of the overhead, whenever there is an alternative use for them. But to take account of them will in general imply equating prices to total cost per unit of product as long as things develop according to plans, and since exceptions are mainly due to the technological obstacle to rationality represented by indivisibility or to deviations of the actual course of events from the plans, the logic of these plans is after all not badly expressed by the latter principle. Though in a short-run situation it may be the most rational thing to do, it is yet never part of that logic to operate an industry at a deficit. This is important to note for two reasons.

First, it has been denied. It has even been suggested that welfare would (i.e., in the long run) be increased if prices were always equated to short-run marginal costs excluding depreciation and that overhead (say, the cost of a bridge) should be financed

The task of each industrial board is then uniquely determined. Exactly as today every firm in a perfectly competitive industry knows what and how much to produce and how to produce it as soon as technical possibilities, reactions of consumers (their tastes and incomes) and prices of means of production are given, so the industrial managements in our socialist commonwealth would know what to produce, how to produce and what factor quantities to “buy” from the central board as soon as the latter’s “prices” are published and as soon as the consumers have revealed their “demands.”

In a sense these “prices,” unlike the “prices” of consumers’ goods, are unilaterally set by the central board. We may also say however that industrial managers display a uniquely determined “demand” for the producers’ goods much as consumers do for consumers’ goods. All we still need to complete our proof is a rule, conforming to the maximum criterion, for that price- fixing activity of the central board. But this rule is obvious. The board has simply to set a single price on every kind and quality of producers’ goods— if the board dis criminates, i.e., charges different prices for the same kind and quality to different managements, this would in general 6 have to be justified on non-economic grounds—and to see to it that that price exactly “clears the market,” i.e., that no unused quantities of producers’ goods remain on its hands and that no additional quantities are called at those “prices.” This rule will normally suffice to insure rational cost accounting, hence economically rational allocation of productive resources—for the former is nothing but a method of insuring and verifying the latter—hence rationality of the plan of production in socialist societies. Proof follows from the consideration that as long as this rule is being observed no element of productive resources can be diverted to any other line of production without causing the destruction of as much (or more) consumers’ values, expressed by taxation. Our rule, as given in the text, does not mean this, and it would not be a rational thing to do.

Second, in a decree of March 1936 the Russian central authority, abolishing for a number of industries the system of subsidies till then in force, prescribed that prices should be regulated so as to equate average total cost per unit plus an addition for accumulation. For the first part of the rule it may be said that, though not strictly correct, it differs less from the correct one than incorrect formulations of the latter might lead one to suppose; for the latter, that the obvious objection to it is much weakened as soon as we take into account the conditions or necessities of rapid development—the reader will recall the argument submitted in Part II for the capitalist case—and that it is quite conceivable that the Soviet government was right both in embarking upon its policy of subsidies, which amounted to financing investment at a loss, and in partly abolishing the practice in 1936.

in terms of consumers’ dollars, as that element would add in its new employment. This amounts to saying that production is being carried, in all directions open in the general conditions of the society’s environment, as far as and no farther than it rationally can be and completes our case for the rationality of socialist planning in a stationary process of economic life in which everything is correctly foreseen and repeats itself and in which nothing happens to upset the plan.