A study of pricing difficulties in the Soviet command economy

Secondly, I will discuss retail prices. These are also generally set by the central authorities and can be defined as the prices at which industrial goods are sold to the general public. Retail prices are partially derived from industry wholesale prices in that they include the latter plus a retail margin, however they also usually include what is known as a 'turnover tax'. The turnover tax constitutes an important source of revenue for the state, and also serves to increase the overall retail price to a level which supposedly clears the market.

It can be seen from this diagram that with the lower price P1, consumers would demand x amount of a particular good, but with the quantity supplied by the producer being fixed this would result in excess demand, shown by the line A – B. Hence, turnover tax is added to increase the price to the market-clearing or equilibrium level of P2. It should be emphasised that although the aim is to balance supply and demand, retail prices are not the same thing as market prices, due to the fact that it is not the market that sets them – 'Market prices are, in our view, alien to our economy and contradict the task of centralised planning.

The balance between demand and supply is the task of the planning organs'. 6 The frequent inability of the central authorities to anticipate consumer demand and thus achieve the above balance manifested itself in a number of ways, the first being the scarce supply of many consumer goods as a result of the excess demand mentioned above. For political and ideological reasons, it was often unacceptable to raise prices to the market clearing level, as evidenced by the riots which occurred in Poland in 1970 following an increase in the price of meat, something which had hitherto been sold far below cost.

Hence, the necessity of queuing to obtain even the most basic items was seen as preferable to restricting availability to those able to pay a higher price. Conversely, it can be seen that sometimes a particular retail price would be above the market clearing level, resulting in insufficient demand for the particular product in question and the accumulation of surplus stocks.

This could be partially circumvented by introducing a state subsidy to allow the retail price to be set at a level below the industrial wholesale price, although it should be noted that the state would still lose out in terms of not being able to collect turnover tax. To conclude, I would state that the Soviet-style system of pricing gives rise to a number of inherent problems. We have already seen how the use of 'cost-plus' prices often failed to reflect actual costs, and simultaneously negated the possibility of pricing based on value in use, or utility to the consumer.

In addition to this, it can be seen that the system in general does not allow prices to indicate scarcity, as opposed to a market economy where, for example, increasing retail prices could result in manufacturers satisfying a profit-motive by producing more in order to satisfy the evidently higher demand, and economizing on the use of relatively scarce inputs – '… if the price of coal was below cost, or above it, it made no difference to anyone concerned with mining, whose incomes were determined by wage and salary scales and whose bonuses related to norms and output plans, not at all to the profit and loss account'.

Changing consumer demand and preferences have at best only a minimal effect on prices resulting in indifference amongst producers, unlike in a market economy where the latter would pursue their own economic self-interests by acting upon such trends. Hence it is apparent there were many difficulties resulting from this system of pricing, most of which were attributable to the fact that prices did not perform the same functions as their market economy equivalents. As a result these functions had to be relinquished to the system of planning, a system which as we have seen was somewhat unequal to the task.