Quantity-Directed Socialism

Quantity-Directed Socialism, Socialist Economics

The institutional arrangements described in the preceding section made it unnecessary for the central pricing agency directly to order correct levels of output in each firm, because the guidelines for managers indi­cated the proper decisions, once prices were established. An alternative scheme for operating a socialist economy involves the direct determination of physical quantities to be produced in each industry, without major re­liance on prices as a planning tool. This is the method of input-output analysis that was developed by Professor Wassily Leontief of Harvard University.

Input-output economics establishes a framework for describing an entire economy and then draws further conclusions from the economic relationships observed. Table 1 shows a four-sector division (agriculture, mining, manufacturing, and services) of the United States economy in 1899; input-output tables with up to 500 sectors have been constructed. The table is a two-way classification of quantities of sales (reading across rows) or quantities of purchases (reading down columns) of each sector when measured in billion-dollar units. Value added is the sum of factor payments—wages, interest, profits—made by each sector; final demand consists of sales to ultimate consumers, who account for the national prod­uct of the economy.

Final demand may be thought of as what is "left over" out of total production after the raw materials needed to make goods and services have been set aside. A more interesting problem is created when the situation is viewed the other way around: If one desired the economy to produce a specified level of final-demand goods in each sector, how much total output would satisfy both the final-demand goals and the raw-material requirements for the production process to operate? An answer to this question can be obtained if we make the crucial assumption that the relationship between raw materials and total output observed in each column remains constant for other levels of output—that is, twice as much output requires exactly twice as much in purchases of raw mate­rials from each sector, and so forth. Using this assumption of constant returns to scale, a modern computer is easily programmed to find the re­quired level of total output in each sector to fulfill a desired pattern of final demand; the arithmetic is simply a bigger version of the two equa­tions, two unknowns type of problem solved by students in introductory algebra.

TABLE 1. U.S. INPUT-OUTPUT TABLE FOR 1899 (in billions of dollars)

The object of input-output economics is to derive a consistent plan, one in which no bottlenecks or superfluous raw materials appear. The materials-balancing planning process used in the Soviet Union has been shown to reach substantially the same results as would be calculated by an input-output model. Input-output planning is carried out in terms of physical quantities as measured by some set of fixed accounting prices. These are not scarcity prices such as operate in the models of purely competitive capitalism and Lange socialism to adjust production to con­sumer preferences and alter technology in reaction to changes in relative factor prices. Socialist planners assert that individual preferences do not adequately reflect social needs and that opportunities to substitute one factor for another are very limited in the real world. The fact remains that price-directed socialism produces optimal results in theory, while quan­tity-directed socialism does not.

The application of input-output analysis is not limited to centrally planned economies. Capitalist nations have found it a useful technique to study the possible economic impact of disarmament, trade liberaliza­tion, or future population growth. The American business community has come to rely increasingly on input-output projections to estimate market­ing opportunities for the products of individual sectors. Such projections have also proved helpful to underdeveloped nations in assuring an ade­quate supply of raw materials to achieve development targets.