Understating world market growth: A consequence of mismeasuring outputs of centrally planned transition economies in the
1990s.
Bill Jefferies
Submitted to: RIBM Doctoral Symposium 2011
30th-31st March
Advanced Track
Bill Jefferies
Research Institute for Business and Management
Manchester Metropolitan University Business School
Aytoun Street
Aytoun Building
Manchester
M1 3GH
Tel:0161 227 9100
E-mail: billjefferies@gmail.com
Bill Jefferies
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Abstract
This paper reviews how the centrally planned economies (CPE) were measured as
market capitalist ones for comparative purposes. It analyses the differences between
a centrally planned mode of production and a market capitalist one. It reviews the
Adjusted Factor Cost (AFC) created by Abram Bergson in the 1950s to establish an
artificial market price in them. It shows how Bergson's notional national income was
abstract, ideal and synthetic even in its own terms. It examines the collapse of the
central plan in the ex-USSR and Central and Eastern Europe after the 'big bang'
privatisation of the early 1990s and shows how this was measured as a collapse of
market capitalism not the collapse of the plan and how consequently, Western
statisticians measured a growth in the world market as a contraction of it. It produces
an estimate for the growth of the world market with capitalist restoration by strictly
differentiating between the social basis of the various economic systems, central
planning, capitalism and transitional states between them.
Key words: Central planning, SNA, NMP/MPS, market capitalist, Adjusted Factor
Cost
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Introduction
The method for measuring the output of the centrally planned economy (CPE)
introduced in the USSR after 1928 and extended after World War II into Central and
Eastern Europe (CEE), China and later Vietnam, Laos and Cambodia, posed a
conundrum for Western statisticians. Planned economies did not fulfill the model
associated with modern neo-classical economics, based on marginal utility theory,
factor incomes and market equilibrium. Consumers could not exercise choice in
markets, there were no capitalists or landlords and prices were determined
subjectively a priori by the bureaucratic apparatus, not objectively post-factum by the
market. Abram Bergson in conjunction with the Rand Institute and later the CIA,
developed an Adjusted Factor Cost (AFC) to measure the CPE as if it were a market
capitalist economy. This analysis shows how Bergson was explicit about the
limitations of his theory, that it was developed to measure a non-capitalist economy
as if it were capitalist. That it rested on arbitrary, abstract, ideal assumptions that had
little basis in reality. That its correction of the “distortion” of prices under the plan was
only possible by using a fictional, subjective, invented, indeed distorted set of prices
of his own creation, which mimicked a capitalist economy but did not create it.
Nonetheless, this measure was used by the IMF, World Bank and later Angus
Maddison to develop their estimates for the output of the CPEs. When market
capitalism was restored in the ex-USSR, CEE and China during the 1990s this was
the creation of real, not analytical, ideal, abstract fictional market capitalism. But
instead of measuring this real capitalism as a real enlargement of the world market
the Western statisticians measured the decline of the central plan, particularly in the
ex-USSR and CEE following the “big bang” privatization of the economy, as a
collapse of market capitalism rather than the creation of the market capitalist
economy out of the plan. Their statistics inverted the real process. They put a minus
where a plus should be. This analysis applies a theory of modes of production to
separate out the output of the CPEs from market capitalism to estimate the size of
the addition to the size of the world market with the transition of planned economies
into market capitalism and finds that it is a very significant enlargement indeed. As
such it is a critical adjustment to the data series for an accurate, or at least more
accurate, understanding of globalization today. The first section of the paper deals
with the difference between the CPE economies and capitalism and assesses how
this distinction was mirrored in alternative measurement systems of MPS/NMP and
SNA. The second part shows how Abram Bergson developed his idea of the AFC
during the 1950s. The third part shows how this was generalized across all of the
CPEs by other analysts and used by them to measure and therefore underestimate,
the transition to capitalism and additional size of real market capitalist GDP created
by this transformation. The fourth part develops some estimates for the actual size of
that addition to world capitalism. The fifth part draws an analogy between the
methods of Western statisticians and Ichyologists, fish scientists, may have
accounted for the existence of previously unknown dolphins, through the
“shark/dolphin” paradox. It concludes by briefly summarizing the key themes and
pointing to the significance of this debate
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Two different economies – two different measurement systems
The Centrally Planned Economy (CPE) was introduced in the USSR in 1928 after the
first five year plan (Carr, 1971) . The CPE was then extended into CEE and China
after World War II, creating regimes, which although they varied in details, managed
essentially the same type of economic system (Marer, 1985) .
The CPE abolished private property in means of production, it was illegal to employ
people to produce commodities for sale on the market (Preobrazhensky, 1980). The
apparatus which determined all major decisions on resource allocation decisions did
not own the means of production (Nove, 1977) . The planners gave highest priority to
investment in heavy industry and to military spending, although there was extensive
welfare provision and lower income inequality than in comparable market capitalist
economies (Mandel, 1962) . Consumption as a proportion of total output was typically
lower than in Western countries although basic living standards were assured by the
state. Basic items were sold below cost and full employment was guaranteed. Wages
could buy only a narrow range of selected consumer goods and not means of
production. The apparatus' monopoly control of means of production paralleled, but
did not equal, the monopoly control and ownership of the means of production or
fixed capital in market capitalist economies. There was no competitive pressure to
meet consumer demand for quality goods. Demand did not influence price and made
no difference to production decisions. Prices were units of account,they were passive
and not active, fixed for years and did not change according to supply and demand.
The flow of money and credit was adjusted by taxes, subsidies and credits to
implement the allocation of resources in essentially physical terms. The main
objective of monetary policy was to provide sufficient liquidity to enterprises to enable
them to fulfill the plan (Marer, 1985) . Enterprise “profits” were mark-ups on labour
and material inputs set by the planners in advance (Bergson, 1964) . There was a
high technical ratio of fixed investment relative to material quantities of other inputs
but no value relationship, “capital values” were in fact the units of account used to
measure physical quantities or qualities of means of production according to a set of
prices determined subjectively by planners (Kaplan, 1963) . The CPE used large
inputs of energy and materials relative to output. Managers had no incentive to
increase productivity and were not rewarded for improving efficiency, punishment for
failure to meet quantitiative output targets provided a positive incentive for waste and
inefficiency, stocks of labour and resources were hoarded. Management shunned
changes to production processes or output mixes as they undermined quantitative
plan fulfillment. The plan was inherently conservative, wasteful and opposed to the
revolutionizing of the productive resources. Targets were set using material measures
not value measures. International trade was concentrated on other centrally planned
economies, with barter exchange or transactions at subjective or planned not market
prices (Nove, 1977) . Surplus product was produced, surplus labour extracted from
the working class but no surplus value or profit (Dobb, 1966) . The factors of
production, capital and land did not “earn” their marginal factor income (Bergson,
1963) . Costs of production were not based on values, but were determined by the
material quantities of material inputs consumed in that production, surplus labour
consisted of the material quantities of output produced in excess of the material
quantities of consumed. Capital did not circulate or accumulate. The law of value, the
distribution of productive resources according to objectively given market prices, did
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not determine production decisions (Preobrazhensky, 1965) .
The nature of the MPS/NMP measurement system
The Centrally Planned Economies (CPE) were then a quite different mode of
production to that of market capitalist economies, subject to quite different economic
laws and with a quite different and distinct system of output measurement, the
Material Product System (MPS) or Net Material Product (NMP) to that the market
capitalist System of National Accounts (SNA). According to Abram Bergson, the
effective founder of Western measures of the Soviet Union, according to the
prevalent marginal utility theory of the Western statisticians this “socialist” system
represented a divergence from the principles of economic efficiency, as consumers
could not exercise choice in the market, it was a failure of market prices. Bergson
noted;
“But whether reference is to conventional optium conditions or operating rules, the
principles represent an application to socialist resource use of a particular value
theory. This is the marginal value theory accepted in the West....Where the law of
value is violated, we must also consider that resource use may be still further from
the optimum than where it is observed; for when the government is the master rather
than the servant of economic law, the alternative to the labor theory may not be
marginal analysis – it may only be no theory.
In sum, if we apply abstract theoretical principles to the U.S.S.R, we should not be
surprised if resource use often fails to conform to them. But this is still no argument
for an alternative approach often employed in respect to the U.S.S.R; to apply no
principles, or at least none to speak of. After all, one needs some principles even to
discover that none prevail.” (Bergson, 1964 p13)
Bergson applied neo-classical marginal utility theory to the USSR's centrally planned
economy in which it did not apply, along with a team of economists, including
Wassilly Lieontief and Simon Kuznets associated with the Rand Institute and latter
the CIA (Maddison, 1998) , Bergson developed a series of comparative tools to
measure the USSR's centrally planned economy as if it were subject to the economic
laws of a market capitalist economy. Essentially Bergson's method had to ensure that
the MPS/NMP and was comparable with the Western market capitalist SNA, so he
addressed three issues; first to ensure it had the same coverage of economic activity,
second, that there were a consistent system for netting out double counting and
most importantly third, that they had a comparable price measure.
Bergson's method for reconciling MPS/NMP with the SNA
Coverage
The aggregates of the MPS/NMP were similar to those used in the market capitalist
economies of the West, most major aggregates distinguished in one system had a
clear of counterparts in the other system, both systems have separate sections
dealing with production and disposition of goods and services, with incomes and
outlays, the accumulation of reproducible tangible assets and stocks of wealth
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(Ivanov, 1987) . But the MPS/NMP restricted economic production to industries that
produced material goods and material services. It excluded non-material production
essentially services, where output is consumed as it is produced, like passenger
transport, health, education, entertainment, banking, insurance, personal services,
government, party administration but it also excluded housing and the military. In the
MPS/NMP these were regarded as branches of the economy where the process of
redistribution and final consumption occur. The absence of these sectors had the
effect of underestimating the output of the MPS/NMP compared with the SNA of the
Western market capitalist economies (Saunders, 2009).
Gross output measures
Since the MPS/NMP counted material production it included not only newly added
value but transferred value, the value of output consumed in the process of
production, including all intermediate inputs, with some double counting in gross
output value (Wu, 1993). It measured gross output without deducting inter-sector
transfers of inputs (Maddison, 2005). If the exclusion of services from the MPS/NMP
had the effect of underestimating the output of the CPEs, its use of gross output
measures had the effect of increasing it (Saunders, 2009).
Prices
However, by far and away the most important difference between the SNA and
MPS/NMP was the price structure of the economies. The CPEs price structure was a
subjective construct of central planners; prices were passive, did not change, were
not subject to supply and demand and did not influence output decisions. In contrast,
the market capitalist price structure of the SNA is based on objectively given market
prices derived from a capitalist market economy in which everything is produced for
sale, one of generalised commodity production. The prices at which goods and
services are exchanged on markets provide the information needed for valuing,
directly or indirectly all the items in the SNA. All goods and services produced as
outputs must be such that they can be sold on markets or at least be capable of
being provided by one unit to another with or without charge. Market output is defined
as output that is sold at prices that are economically significant or otherwise disposed
of in the market. The decision as to whether units are market producers or nonmarket producers depends on the extent to which a unit produces for the market. A
market producer is defined as an autonomous economic unit capable of owning
assets in its own right, incurring liabilities, engaging in economic activities and
through transactions with other entities, it is an establishment or enterprise all or most
of whose output is marketed. As in the CPE all units were non-profit, nonautonomous state owned and non-market, they did not fulfill the SNAs definition of a
market producer and did not add value (Nations, 2009). As one commentator pithily
noted;
“Obviously, in a situation where units do not have a separate legal status, strictly
speaking the autonomy implied by the first criterion does not exist.” (Bloem, A, 1998
p3)
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Bergson faced a dilemma, unlike the issues of double counting or coverage this was
not simply a question of measurement consistency, in the CPE none of the criteria
“strictly speaking” necessary for the application of the SNA existed. So how to
measure market prices where no market prices existed?
Abram Bergson and the Adjusted Factor Cost (AFC)
Abram Bergson was well aware that the Soviet price system was a non-market one
albeit “distorted” by the central plan;
“Perhaps most importantly, in calculating general factor productivity, one ordinarily
aggregates inputs by using as weights “market determined” factor income shares.
Unfortunately, the Soviet price system fails to provide us with meaning full data of this
sort” (Bergson, 1963 p2).
Bergson's alternative, to the failure of the planned prices to enable what he
considered economic efficiency or optimum resource allocation, was to invent proxy
market prices to take their place. Brushing over the distinction between a planned
and a market economy Bergson asserted that the CPE could be measured in
“essentially the same way” as the national income calculations used by the U.S.
Department of Commerce for the US market capitalist economy (Bergson, 1961
p15)1. Bergson simply assumed away the distinctions between a centrally planned
and a market capitalist economy, in order to produce his calculations of the national
income of the Soviet economy;
“As with the Commerce Department concept, gross national product represents the
sum of the values at prevailing prices of currently produced goods and services. The
sum is calculated without any deduction for depreciation on durable capital, but is net
of “intermediate products” that are used up currently in the production of “final”
goods” (Bergson, 1961 p15).
Bergson developed an “adjusted factor cost” (AFC) to transform meaningless Soviet
prices into meaningful market capitalist ones. Rewards to factors of production other
than income to labour did not exist in the planned economy. There was no interest on
capital, no rents on land and no profits for entrepreneurs, so Bergson's AFC simply
assumed there was. He adjusted Soviet ruble prices by a hypothetical interest, profit
and rent to reinsert market capitalist value relations into the central plan to measure
the value added by primary inputs used indirectly in production (Liefert, 1991).
Bergson's adjusted Soviet ruble prices for the extent that they diverged from the AFC
(Bergson, 1961). He created an “imputed” rate of return or rate or profit suitable for a
Soviet economy. This was no straightforward matter, not least, as the price of
1 Tony Cliff's theory of “state capitalism”achieves a similar result albeit from a Marxist perspective
(Cliff, 1988). It asserts that military competition between the centrally planned economies and the
capitalist states changed the production mix of the plan towards the accumulation of means of
production and military materiel and so subjected the USSR to the “law of value” albeit externally.
But of course it did not. While military competition certainly changed what was produced in the
CPEs it did not change how it was produced - the mode of production of bureaucratic central
planning remained in tact. Such competition did not reintroduce commodity production, exchange
or market capitalism into the economy of the USSR. It did not create a state capitalist state.
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“capital”, of the stock of means of production was a subjective construct of the central
planners too and the depreciation charge on means of production included only wear
and tear and no moral component, to measure the reduction in value of capital stock
due to technological redundancy. How to estimate an average rate of return for fixed
capital in an economy in which there was no fixed capital with no market-determined
value? Bergson considered the impact of the scarcity of capital in the USSR, the
relatively low levels of means of production accumulated in it, the fact that Soviet
ruble prices did not include interest on the capital used in production, the investment
goods could be considered undervalued if interest rates were high, notwithstanding
the fact that it was generally believed that investment goods were priced too high in
the Soviet economy (Bergson, 1964 p344 ), he noted that;
“Our comparative data are especially inexact regarding capital, and the Soviet capital
stock is probably overstated relative to that of the U.S.A. For this reason further
computations where the Soviet capital stock is arbitrarily decreased by as much as
20 per cent may be of interest” (Bergson, 1964 p345).
Bergson developed a comparison of Soviet and US productivity. He estimated that
the USSR's net national product per unit of major inputs, with output in 1955 factor
costs and “ruble” weight for inputs was 54.5% of the USAs when he assumed a 20%
rate of interest or rate of return on capital. Nevertheless, this fell to 40% assuming an
8% rate of interest. Conversely, if he assumed a higher rate of interest then it would
have been higher still.
There was no satisfactory answer so Bergson fell back on the “concrete” experience
of the USA as opposed to the abstract theory of marginal utility, Bergson explained;
“All commodity prices correspond to average costs. Costs are computed in terms of
factor prices of a prescribed sort...” (Bergson, 1961 p105)
And continued;
“For capital, there is a charge, “interest” corresponding to the average internal return
on capital in the economy generally. The internal return is given by economies in
costs realized through capital investments in different branches. There is, of course,
no bar to a net charge for capital in the form of a residual income, “profits”, but in this
case, “profits” are included in average cost. In addition to “interest” (or “profits”), there
is a charge for “depreciation” determined in accord with conventional accounting
principles.” (Bergson, 1961 p105)
Bergson transformed Soviet subjective planned prices by his own subjective capitalist
prices. Soviet planners used straight-line depreciation based on an assets useful life,
without reference to technological redundancy. In contrast, in Western market
capitalist economies most depreciation results not from the physical redundancy of
an asset but due to its technological obsolesce. Soviet depreciation measures were
lower than their Western counter parts for a good reason; they were an illustration of
the wasteful, conservative nature of the bureaucratic central plan. Nonetheless,
Bergson sought to reconcile the alternative depreciation measures, to treat the
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USSR's as if they were subject to the same economic laws as in the West (Bergson,
1964). Elsewhere Bergson adjusted Soviet prices according to factor cost or
according to other subjective phenomena such as sales taxes and the predominance
of nominal profits in consumer goods, all with the intention of trying to replicate the
situation of the US market capitalist economy in the USSRs non-market non-capitalist
economy. This profoundly altered the structure of the Soviet economy and the total
nominal value of its output.
Gross National Product by Use USSR, 1950, at Prevailing Prices and Ruble
Factor Cost of 1950
Outlay category Value at Prevailing prices
Value at ruble factor cost
Billion rubles
Percent
Billion rubles
Percent
Household
purchases in
the retail
market
375
41.1
187.3
27
Household
consumption
outlays
500.5
54.9
316.1
45.5
Gross
Investment
156.5
17.2
155.1
22.3
Gross National 911.7
Product
100
694.1
100
(Bergson, 1961), p150)
Bergson estimated a hypothetical charge for agricultural rent based on a comparison
with US agriculture, a hypothetical charge of 10% on Soviet fixed capital, (Bergson,
1961 p140), multiplied outlays on residential rent by four or five fold (Bergson, 1961
p167) on housing by six fold (Bergson, 1961 p171) and so produced a measure of
Soviet GNP as if it were the capitalist United States.
Bergson's AFC eliminated the turnover tax, subsidies and enterprise “profit”, the
planned mark up of output over costs included in the various aggregate components
of the plan and then added notional amounts for returns to fixed and working capital
and land, that essentially considered the total non-labor income of the material sector
as a return to capital, redistributing that income among different sectors in
accordance with his estimates of the capital stock used in the sectors (Marer, 1985).
Bergson was well aware that his AFC was an abstraction from the actual CPE. It was
arbitrary, idealist, synthetic, did not describe things as “they actually are”, was
different in principle to the national income measure of an actual market capitalist
economy of actual economic outputs at objectively given market prices, total incomes
or total expenditures. Instead, Bergson's adjusted factor cost subjectively imputes
both costs and the value of outputs. Bergson rejects the subjective prices of Soviet
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planners and replaces them with alternatives, which are no less subjective. Bergon's
subjectivism was nonetheless in his view “meaningful” and therefore preferable to the
subjective but “meaningless” prices of the Soviet plan, he said;
“All three tabulations are highly arbitrary. Moreover, because of the nature of their
derivation the income shares indicated are somewhat different even in principle from
“market-determined” shares usually employed in calculations of this sort. There is a
corresponding change in the concept of factor productivity, although one hardly
entailing any loss of interest. Essentially, the usual “market determined” factor income
shares are supposed to correspond ideally to relative marginal productivities of
different factors. For the “synthetic” factor income shares considered, the
desideratum perhaps is best thought of as being instead that the shares correspond
ideally to relative marginal productivities not as they actually are but as they would be
if one abstracts from any special efficiencies or inefficiencies of the social system
considered.” (Bergson, A, Kuznets, S, 1963, p20)
Bergson's national income measure was applicable only after abstracting from the
actual social system. It measured the economy not as it actually was but as it actually
was not, according to an ideal subjective standard of his own invention.
The internationalisation of Bergson's AFC
Bergson's adjusted factor costs eliminated the “distortion” of the non-market prices of
the central plan (Ivanov, 1987) and were the preferred method employed by the
World Bank to derive their own estimates of Soviet national income (Marer, 1985
p15) , but had little to do with the reality of the Soviet economy (Rosefielde, 1991) .
Indeed, in the early 1980s the World Bank dropped estimates of the national income
of the CPEs for exactly this reason (Marer, 1985)
Nonetheless these AFC prices formed the basis for most subsequent Western
estimates of USSR national income and provide the methodological basis for
estimates of the other CPEs, notably for China and in Central and Eastern Europe
(CEE) (Wu, 1993) (Maddison, 2009) . However, a further layer of complexity was
added through the need to translate these notional national incomes into notional
international ones.
The exchange rates of the CPEs were not based on market prices but, as with all
other prices in their economy, were a subjective planning tool designed to assist the
fulfillment of the plan itself, mainly through earning a given quantity of foreign
exchange to meet limited purchases of international goods and interest payments.
But these exchange rates therefore had no relation to the actual market value of the
small amount of international trade these economies exchanged with the market
capitalist economies of the West, Maher of the World Bank noted in the mid 1980s;
“A comparative analysis of the price and exchange rate systems in place in the CPEs
during the early 1980s reveals that there was apparently no direct link between
foreign and domestic prices in the U.S.S.R, the German Democratic Republic and
Cuba; some linkage in Bulgaria, Czechoslovakia and Poland, and (since 1981)
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Romania; and substantial linkage since 1980 in Hungary.” (Marer, 1985 p9)
Instead, the International Comparison Project (ICP), organised in conjunction with the
World Bank, developed international prices that were quantity-weighted averages of
detailed Purchase Price Parity (PPP) s. In an international price system each
country's prices help, form international prices divided into the various categories of
GDP, weighted by the share in the world GDP of those countries for which the
sample country is considered to be representative. Geary Khamis (Khamis, 1984)
refined this system of PPP weighting. These international PPPs enabled Angus
Maddison to produce estimates for the national income of the CPEs, measuring them
as if they were market capitalist economies in the 1990s (Maddison, 1998) .
Measuring the CPE not as it was but as it was not
The ability of Western statisticians to abstract from the centrally planned economies
as they actually were and instead measure them as they actually were not, shaped
their response to restoration of capitalism, when capitalism was restored in the real
economy, they simply assumed that reality was catching up with the ideal type, a
good system of measurement had replaced an bad one. There was no conception
that the categories of the SNA depend on and are limited to a market capitalist
economy (Ivanov, Yuri, 1993 p280).
The transition from central planning to market capitalism
The transition from central planning to market capitalism took place through two quite
divergent routes. In China and Vietnam in a gradual market reform process from the
late 1970s on (Hart-Landsberg, Martin, Burkett, 2005). The process was relatively
smooth and growth continued throughout the period. Nonetheless, by the mid-1990s
a majority of exchanges in these economies took place on the basis of market
capitalist social relations (Johnson, 2005). In the ex-USSR and CEE by contrast, the
accession to power of pro-market reformers in the early 1990s meant that the central
plan was exploded in one 'big bang', a terrible economic crisis ensued with output
dropping very sharply.
Nevertheless, whatever the method employed for the transition from planning to
market capitalism by the late 1990s the circuit of capital accumulation, a market
capitalist economy, had been restored across the CPEs, real GDP, not unreal,
hypothetical, synthetic, abstract, ideal GDP, began to be produced in them.
But in a further twist, this real GDP became unreal in the hands of the Western
statisticians. The collapse of the planned economy in the USSR and CEE after 1990
was the collapse of non-capitalist, non-commodity, non-value, non-SNA output. It was
the collapse of material production not value production. Yet by “valuing” the nonvalue production of the Soviet plan as if it were value production before 1990, the
statisticians measured the collapse of the collapse of the plan as the collapse of the
market. The often-painful creation of real GDP was measured as its contraction by
Western statisticians, real GDP became unreal in their ideal system. The inaccuracy
of the AFC estimates of the size of the unreal Soviet economy demonstrated in real
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life by its violent contraction when market capitalism was actually established in it.
Even so, this was an absolute enlargement of the world market was measured as a
contraction of it. As one typical account of the effects of capitalist restoration
summarised it;
“Every one of the 18 countries in his sample experienced at least three consecutive
years of declining GDP; Moldova, Russia, and Ukraine each experienced seven or
more. In the Eastern European countries, GDP stood at 80 percent of its 1987 level
in 1996; in the republics of the former Soviet Union, GDP had by then recovered only
60 percent of its 1987 value.” (Dayton-Johnson, 1999 p118)
But of course, this is quite wrong. There certainly was a huge contraction of material
output in the USSR and CEE during the 1990s, but there was no decline in GDP for
the simple reason that before 1990 there was no real GDP, no real market, no real
capitalism. This 1990s decline in GDP was a decline in the notional, imaginary,
hypothetical, unreal GDP of Abram Bergson and the Western statisticians.
Even in China were the transition to capitalist social relations took place over two
decades, with the gradual growth of market prices and capitalist accumulation within
it, even while statisticians measured the increase in the proportion of that output
produced by the market capitalist sector, and explained that as a result of the market
capitalist reform process there, (Brandt, L, 2008), they simultaneously refused to
measure the growth of the market capitalist sector there. They explained how through
applying an appropriate price structure it was possible to ignore this transformation,
to remove the “distortion” of prices caused by the non-capitalist central plan. How it
was possible, to measure the central plan as market capitalist even while it was not;
“To obtain a long term measure of Chinese growth the avoids the biases inherent in
domestic prices during the plan era, we combine official time series for real value
added in the primary, secondary and tertiary sectors with nominal sectoral output for
2000 to form a new series of aggregate output valued in 2000 prices for the entire
period 1952-2005” (Rawski, 2009).
Simultaneously explaining and denying the real transformation of the Chinese
economy from central planning to capitalism. The removal of the “biases” inherent in
domestic prices during the plan was not simply an improvement in the statistical
series themselves, it reflected the transformation of economic production from
planning to the market. It was the creation of GDP of value production out of material
production. Something had replaced nothing. Some GDP is more than no GDP. Even
if the real GDP of the newly created capitalist economies of the ex-CPE was smaller
than the notional GDP of output of these economies whatever this increase
amounted to it was still an increase in value production.
So how much was it worth?
It is relatively straightforward to demonstrate the impact of this additional market
capitalist output on world capitalism as a whole using the existing statistical series
and available. Angus Maddison's Groningen Growth and Development Centre
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(GGDC) provide GDP figures for all of the world's economies for the period
concerned, including estimates of what the value of the centrally planned economies
would have been worth if it were produced on a market capitalist basis.
The transition to capitalism was completed across the CPEs by the turn of the
millennium. World GDP had increased by the total additional market capitalist
production underway in these states. The amount of this addition is the size of the
increase in the world market, of world GDP.
Total notional world output in 1991, attained by aggregating GDP and the MPS/NMP
of the now transition economies was worth $27bn. The production of market capitalist
states amounted to $22bn of that, the notional national income of centrally planned
states was $5bn or 18.3%. By 2000 the transition to market capitalism was complete,
the collapse or stagnation of the ex-USSR or CIS and CEE was offset by the growth
of China, before the recovery of these states and continued growth of China meant
that their combined output reached 2008 25% of world output. The addition to the
size of world value market capitalist production was therefore at least somewhere
between 18-25%.
However, of course even this understates the growth of the world market with the
transition of these economies to market capitalism. Before 1990, the world market
only consisted of capitalist states. As a proportion of these states the notional
national income of the CPEs added 1991 22.4%, by 2000 the real national income of
the ex-CPEs added 22.5% before rising to 2008 33.7%. Either way by failing to
measure the addition to the size of the world market by transforming central planned
economies to market capitalist ones the Western statisticians grossly underestimated
the real growth of world GDP in this period.
Table 1: The output of the centrally planned and capitalist economies
Year
1991
1995
2000
2005
2008
Gross world output 27,494,233 30,942,239 36,688,285 44,982,587 50,973,935
(GDP and
MPS/NMP)
Ex-CPEs output
5,030,884
5,555,893
6,738,462
10,487,991 12,840,660
Proportion
18.30%
18.00%
18.40%
23.30%
Western capitalist
(GDP only)
22,463,349 25,386,346 29,949,823 34,494,596 38,133,275
Ex-CPEs output
5,030,884
5,555,893
6,738,462
10,487,991 12,840,660
Proportion
22.40%
21.90%
22.50%
30.40%
25.20%
33.70%
Selected years GDP & NMP, NMP only and GDP only, in million 1990 International
Geary-Khamis dollars
(CPE = centrally planned economy)
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Source: Angus Maddison GGDC 2010 database
The shark-dolphin paradox
To illustrate the significance of this development it is perhaps easier to think outside
of the narrow world of economic categories, rather than a world of ideal prices, let us
construct an ideal a world in which only fish swim in the sea. Let us imagine that fish
scientists, ichthyologists, like the neo-classical economists before 1928 had
developed varied criteria for measuring fish according to their size, gill capacity, scale
density, swim speed and so on, but then had to explain the appearance around 1928,
of a dolphin mammal.
The dolphin has many fish like characteristics, it swims fast, is a successful predator,
reproduces underwater, indeed with eyes half closed it doesn’t half look like a shark,
but it has lungs, hair and breathes air, it is no fish. We might imagine that our ideal
Ichthyologists were panicked, to analyse a dolphin, as a dolphin would mean that
their previous fish theories did not apply. If would mean that they would have “no
theory”. As this was considered unacceptable, instead they chose to analyse a
dolphin as if it were a fish. A few years later around 1950, a load more dolphins
appeared. In response, the Ichthyologists developed a synthetic unreal fish
comparator that abstracted for the actual dolphin to cure it of it mammalian
“distortions”. The Adjusted Fish Ratio (AFC) drew up a composite that compared the
hypothetical, not as it actually was, highly arbitrary, abstract, ideal and synthetic,
gill/lung and hair/scale density of fishes and dolphins. By applying, the AFC
Ichthyologists found it was possible to “correct” the “distorted” features of the dolphin
like its lungs and hair and to measure them as if they were gills and scales. Debates
raged about whether a hair really equaled a scale or a lung could indeed be
compared with a gill. But there was general agreement that with the correct
mathematical formulae it is possible to implicitly measure dolphins as if they were
sharks. Then one day after a long illness, around 1990, an unanticipated but very
violent illness transformed the dolphin into a shark! So catastrophic was the
transformation that the ex-dolphin, now transitional shark, had shrunk to
approximately half its former size compared with the AFC dolphin/shark comparator.
The ichthyologists congratulated themselves that what appeared to be a dolphin was
in fact, implicitly, a shark all along. And failed to notice that there were now more fish
in the sea.
Conclusion
The attempts of Abram Bergson to measure the CPE through the Adjusted Factor
Cost, as if it were a capitalist economy was by his own admission arbitrary, ideal,
synthetic, hypothetical, an abstraction from the real economy. The price series he
created had no substantive relation to the actual prices used in the central plan or to
the structure of the economy itself. As a comparative exercise, this may have had
some worth in enabling economists and statisticians to establish a common standard
for assessing the output of the two different economic systems.
But only as long as they remembered that the figure measured a real material
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difference in the economic basis of society. Unfortunately, while they were on the one
hand well aware of this difference, hence the need to create the AFC in the first
place, on the other hand, they sought to erase it statistically through the use of the
very AFC necessary due to the qualitative difference between central planning and
the market/capitalism.
This lead them to treat the SNA as simply a superior measurement system to the
CPEs MPS/NMP, their efforts were to “correct” the MPS/NMP so that it could function
as if it were the Western SNA not to recognise that it measured a qualitatively
different form of planned economy based on material outputs, quite distinct from the
value production of the market/capitalism.
Hence, when capitalism was restored in the centrally planned economies in the
1990s their attempts to correct the “distorted prices” of the central plan blinded them
to the qualitative increase in total value market capitalist production worldwide. In
addition, the effect of this mis-measure of was to grossly understate the growth of the
world market, of world GDP, as a result of the transformation of the centrally planned
economies into ones based on value market capitalist production in the 1990s.
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