Socialism and the Centrally Economy: Pricing and Resource Allocation

Pricing and Resource Allocation Prices in a command economy are not set by the forces of supply and demand. Instead planners determine the quantity of goods and services to be produced in accordance with their political goals. In the Soviet Union the State Committee for Prices (Goskomtsen) in the past has set prices annually for over 200,000 wholesale and retail items. Price in a command economy does not serve as a signal that influences profits and therefore incentives of private enterprise to produce, as is the sense that they have downward-sloping demand curves for cars and other consumer goods. Suppose the price of cars is set by planners to ensure that the annual quantity demanded just equals the fixed annual quantity supplied. The price is set at 15,000 rubles, corresponding to point A in the graph. Now suppose the demand for cars increases next year. The increase in demand would raise the price of cars if prices were determined in markets. However, here the planners determine the price. Assuming that Gosplan chooses not to revise the plan to increase the price or production of cars, the result will be a shortage of cars. At the price set by planners, the quantity demanded will be 3 million cars per year while the quantity supplied will be only 2 million. The 1 million-car shortage will be rationed by long waiting lists, which are typical in the Soviet Union and other planned economies. Planners in the Soviet Union often eliminate shortages in consumer markets by using the turnover tax, which is a sales tax used to raise revenue for the government. This tax is included in the prices of goods and services sold in the Soviet Union but is not separately itemized, as are sales taxes in the United States. The turnover tax is often set at an amount that increases the wholesale price of the scarce item to a level that clears the market. For example, to clear the market for cars, the price in Box 2 would have to increase to 18,000 rubles. A turnover tax of 3,000 rubles per car thus would reduce quantity demanded sufficiently to equal the fixed quantity supplied of 2 million cars per year. Labor Allocation and Occupational Choice in the Soviet Economy Planners in the Soviet Union actively influence the supply of labor through a variety of policies designed to develop the human capital necessary to fulfill the goals of Gosplan. The availability of education has been closely linked to the goals of the planners. Consequently, Soviet students often enjoy less freedom of choice in education than do American students. However, Soviet authorities are well aware of the benefits of education in terms of productivity gains. Education expenditures as a percentage of GNP are quite high and comparable to those in the United States. Workers with given skills are placed in jobs to achieve the goals of the plan. They are not required to accept the jobs they are offered, but their range of alternatives is usually much narrower than is the case in a nonsocialist economy. Graduates of specialized schools and universities are required to work for three years in jobs in which they are placed by authorities. Workers do change jobs regularly in the Soviet Union, where the annual turnover rate is about 20 percent. However, special bonuses and privileges associated with longevity on a job act as incentives to reduce worker turnover. One advantage of a planned economy is that planners directly control investment and influence most spending by consumers to avoid the fluctuations in aggregate demand that characterize market economies. The planners seek to coordinate the plan so that all those willing to work at the established wages can find jobs. The Soviet authorities don't publish unemployment data, so it's impossible to determine whether the Soviet economy is ever plagued by high unemployment. However, it's clear that planning is not an exact science, and occasional mistakes are likely to result in labor shortages and surpluses. There is also likely to be frictional and structural unemployment in the Soviet system as a result of job switching and changes in output structure caused by revisions in the plans. As a result of perestroika, unemployment is likely to rise considerably in the Soviet Union in years to come.