‘Measuring National Income in the Centrally Planned Economies: Why the West Underestimated the Transition to Capitalism’ reviewed by Brian Green

Reviewed by Brian Green

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Brian Green helped establish the union movement in South Africa in 1972. His website …

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Measuring the Centrally Planned Economy provides the first systematic, full length history and critique of the Western application of national income measurements to the output of the “Communist” states. Extracted from the author’s doctorate, the summary above conceals the significance of this book. It overthrows the fifty year attempt of Western intelligence agencies to apply neo-classical marginal utility theory to a non-market economy. It examines the outlandish assumptions that made this possible. The abstraction from the actual planned economy to a fantasy market one, which they acknowledged did not exist, even as they attempted to measure it. It proves that these agencies grossly underestimated the growth of the world market with the transition of the plan to market. It develops new, much higher, estimates of this transition, with profound implications for all theories of globalisation, based on the official national income series. This is one of those rare books that changes the way we view the world by challenging the previous propositions that until now were taken as authoritative.

The book shows that these authorities, namely the EU, IMF, World Bank, CIA, etc. misinterpreted the centrally planned economy. They failed to anticipate its abrupt collapse, and after its collapse failed to measure the growth of the market, leading them to conclude that national income was falling when it was in effect rapidly increasing. Jefferies therefore inflicts serious reputational damage on these institutions and in the process shows the relevance and superiority of the method and categories developed by Marx when reapplied to one of the defining moments of the 20th century.

The book reveals one of the big secrets of modern bourgeois economics, the origin of its System of National Accounts (SNA). These were first prepared in the early 1930s by two Soviet émigrés, Simon Kuznets and Wassily Leontief, based on the 1923/24 Soviet Balance. Leontief worked on and criticised the narrow scope and restricted coverage of the Balance, limited to material output only, in Russia at the time. Nonetheless, The Balance, based on an application of Marx’s schemes of reproduction from Capital II, was the first attempt to measure a national economy in history. This issue of coverage became an important part of Western critiques of Soviet national income. Kuznets and Leontief never revealed the source of the method that underlay it. It is ironic that the least read of Marx’s most famous trilogy is the one that has most influenced economics in the West.

Simultaneously in the 1930 Materialy the Soviet apparatus overthrew the previous classical Marxist orthodoxy and sought to measure “value” in the new planned economy, without commodity production and exchange. This physical “value” series aggregated concrete labour hours to estimate a subjective “national income”. It formed the basis for all subsequent Western estimates of Soviet output. Crucially the historically specific nature of value in commodity production and exchange was abandoned in both the East and West.

One of the central arguments of the book is to show value could not be dismissed. The USSR was not a capitalist country. There was no generalised commodity production and therefore, no exchange value. While the apparatus appropriated a surplus product, there was neither interest, profit nor rent. Enterprises did not own the means of production they employed, capital did not circulate, and the “wage market” determined neither the quantity of labour supplied nor its aggregate price, or the type and amount of goods consumed. If National Income measures output within the market boundary, the output of the centrally planned economies, was outside it by definition. Jefferies repeats Marx’s conclusion, the law of value is specific to an economy based on commodity production. It had no place in an economy where the labour of the individual was now directly part of the labour of society.

The centrally planned economies formed a distinct mode of production with its own unique laws, and capitalist accounting methods could not be superimposed on it no matter how modified. Prices in the USSR were at best functional and at worst, fictional, they varied between sector, producer and product. Wasted labour, stored labour as well as active labour was lumped together and priced together or rather under-priced so as to deprive workers of part of their product. This was no way to run an economy, deliberately so, for the indecipherable output concealed the self-aggrandisement of the apparatus. This is not a dry book. The tour that the author takes the reader on covers enormous intellectual ground, or more accurately a maze both within the USSR and outside it. It is exhaustively researched and referenced providing a valuable source document for those who wish to examine specific areas more closely.

Chapter 2 details the huge effort to understand the SMEs through the prism of capital. It begins with Leontief and Kutznets early work on preparing the System of National Accounts (SNA) in the USA, which later formed the template for estimating the size and growth of the centrally planned economies (CPEs). In 1939 Colin Clark, who had been instrumental in preparing British National Accounts, sought to measure the size of the USSR in a similar but modified way using a PPP to compensate for a fluctuating and inconsistent rouble. Thereafter the main effort moved to the USA where during the War, the efforts of “isolated individual economists was superseded by a systematic research programme” (28) paid for by the intelligence services keen to derive the military potential of the USSR from its economic capacity. Abram Bergson, a protégé of Kuznets and Leontief, was appointed head of the Russian Department at the Office of Strategic Services (OSS) – the forerunner to the CIA – during the Second World War, and the spooky sounding Project RAND developed The Adjusted Factor Cost (AFC) to apply the categories of the national accounts to the centrally planned economy of the USSR.

Bergson’s main rivals were Naum Jasny, a Menshevik exile, who sought to deflate Soviet prices by more realistic indices derived from 1926, the last year of the managed market economy. It was Alexander Gerschenkron who first pointed out the significance of index year relativity, pricing output in the base or given year, and who used a version of PPP based on machinery output, and G. Warren Nutter, a student of Milton Friedman, who paradoxically used a kind of labour theory of value, to estimate productivity. The efforts of each economist, building on or replacing the efforts of their predecessor is set out in great detail. Despite a long debate over the meaningfulness of Soviet statistics, none of them noticed that while Soviet statistics may have been more or less accurate as aggregates of physical output, they were not measures of market economy and never could be.

Jefferies does not make the mistake of confusing an inefficient CPE with an irrational one. The planning bodies did balance in a convoluted way inputs and outputs and they did reconcile this output to the number of hours worked to produce it in order to reimburse the wages fund. However while this was done at the level of the economy, there was no correspondence between the cost of producing any item and its price. For the first time in history, a complex economy had severed the relation between the actual cost of producing a thing and its price, unlike capitalism where this relation exists in an elastic form.

Accordingly seeking to transplant prices from an economy (capitalist) where the relation between prices and costs are elastic to an economy where they were non-existent was bound to fail. No amount of modifications and corrections could compensate and the book details the many attempts that were made. As these transplanted prices remained fictitious, Western institutions were not able to capture the falling efficiency of the planned economies, the squandering of their surpluses and therefore anticipate their collapse.

Reality, that is to say the emergence of real market prices in the 1990s, dealt with in Chapter 3, showed how irrelevant the efforts of all these economists had been. The staggering difference in previously imputed prices and functioning market prices showed that statistics and assumptions could not take into account the lack of productivity and contemporary use values which the introduction of global competition brought out. This chapter also draws the reader into the suffocating complexities thrown up by the movement from planned prices to actual market prices in the first half of the 90s and reviews the post restoration debate, principally between the arch neo-conservative Stephen Rosefielde and the former Stalinist Mark Harrison about the usefulness of the Western estimates. It finds that one side simply illustrated the weakness of the other. Rosefielde argued that as nothing was sold, there was no value as nothing had any use, whereas Harrison argued that as things had use, so things had value, even if they were never sold.

The scope of this book is not to look to the future, but to concentrate on the past, specifically the failure by western economists to understand what was really happening in the USSR and its implications for the world economy. This means that there is no substantive discussion as to whether an objective pricing system can replace the law of value following the abolition of commodity production. This could create the mistaken assumption that exchange value is the only source of real prices, meaning there is no alternative to the market.

The prior treatment of the CPEs as generating National Income in the capitalist sense, meant that the collapse of actual physical production in the former USSR and Central was treated as the collapse of actual National Income rather than a precondition for its increase. And here we arrive at the central thesis of the book. The author showed the opposite to be the case. When the output of the transition economies was integrated into the world capitalist economy, real capitalist National Income emerged for the first time, the extension of the “market boundary” in the words of the author now meant an expansion of global National Income. Official Western estimates of “national income” in the former USSR and CEE estimated their output contracted by 23% between 1989 and 1996, in fact real market production and therefore, national income, increased by 570% (122)

As a result, instead of the world economy contracting which it did physically at the time, the world capitalist economy actually expanded to the degree that the output and assets of these countries were now being added to it. Anticipating any criticism, in Chapter 4 the author provides numerous tables to show the contribution these economies, especially China, made to the world capitalist economy. So great was this contribution that it was sufficient to transform what had been presented as a stagnant decade (1990s), into one in which growth actually amounted to 52%.

The final part of the book deals with the contribution of these newly capitalised countries to the long boom. That it was an essential spur to the growth of globalisation and improvement in the rate of profit. This sober book sweeps away the illusions of the left that the events in the USSR, ending with the fall of the Berlin Wall, represented a revolutionary period which somehow benefitted the working class. Instead it reveals this tragedy for what it was; “perhaps the greatest single and exceptional one off increase in world capitalism in history.” (125) For the first time in 70 years the rule of capital was to be found everywhere. And the real farce was that it was done so cheaply. In the USSR privatisation receipts in what had been one of the world’s largest economies amounted to less than $7.5bn.

Jefferies’ Measuring National Income represents the application of the methodology developed by Marx to a contemporary phenomenon and like Marx, its sparkles with the richness of its research.

20 March 2015

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