Wassily  Leontief-Scientific Economic Planning

 
Hello Everyone,
 
The following article is by Wassily Leontief [not to be mistaken with an
author of an economics text book of Stalin's era with a similar name].  This
is a very interesting essay about scientific economic planning and the
problems of planning in the former Soviet Union.  The article was first
published in Foreign Affairs, Vol 38, No2, January 1960.  Wassily Leontief
was a Noble Laureate, well-known for his input-output model in the economic
theory.
 
This article was reprinted in Leontief's book "Essays in Economics" pages
223-236.
 
Enjoy,
- Sam Ghandchi
**********************************************
 
THE DECLINE AND RISE OF SOVIET ECONOMIC SCIENCE
 
I
 
One of the notable aspects of Soviet reality is the paradoxical co-existence
of the old and the new, of the modern side by side with the old-fashioned. A
visitor to Moscow cannot but be struck by the contrast between the
twenty-nine-story skyscraper of the Hotel Ukraina and the pre-revolutionary
log cabin with intricately carved window frames nestling practically within
its long shadow. Contemporary Russian literature and art present a striking
example of revolutionary, socialist content poured into Victorian forms.
One of the most notable paradoxes of this kind was--until recently--the
contract between the Soviet economy and Soviet economics.
 
The Soviet economy, directed with determined ruthless skill, has been
advancing for years at such a fast and steady pace that in total if not per
capita national income, Russia is now second only to the United States; the
output of certain of its key industries, such as machine tool building, for
example, has even exceeded that of ours. By contrast, Soviet economics, that
 is, Soviet economic science, has remained static and essentially sterile
over a period of more than thirty years--a huge, impassive, and immovable
monument to Marx--with scores of caretakers engaged in its upkeep, fresh
flowers placed in slightly different arrangements at its feet from time to
time, and lines of dutiful visitors guided past in never-ending streams.
 
The decline of economics in Soviet Russia dates back to the late 1920's, to
the time of the inauguration of the original five-year plan. The first
decade of the Communist regime--the years of civil war and famine and then
of economic rehabilitation and "primitive accumulation" assisted by the
partial restoration of private enterprise--was marked by lively economic
discussion. It ranged from immediate issues of economic policy to the most
general problems of economic theory. This was the time when the Communist
Basarov expounded his mathematical theory of economic growth and Professor
Kondratieff, director of the Moscow Business Cycle Institute, developed the
statistical analysis of long and short waves of economic growth which has
exerted considerable influence on Western theory of business cycles. ( A few
years later both of these men vanished without a trace. )
 
Looking back it is not difficult to explain the decline of economic science
in the first planned socialist economy. Marx was a prophet of socialism, but
he was a student of capitalism; to be more exact, he was a student of the
first hundred years--vital and incredibly creative, but also ruthless and
destructive of modern, mechanized large-scale industry. Marxism, as an
economic theory, is a theory of rampant private enterprise, not of the
centrally guided economy. Whatever references Marx made to the economy of
the socialist order were brief, quite general, and extremely vague. Some of
his most poisonous verbal darts were reserved for Lassalle, Proudhon, and
other contemporary social reformers who took delight in minute descriptions
of production, distribution, and consumption in ideal socialist or anarchist
commune. He considered these men naive and impractical, and dubbed them
"Utopists."
 
The Soviet economists of the Stalin era were no "Utopists" in any possible
sense of that word; for sound practical reasons they devoted their undivided
attention to paraphrasing and interpreting Marx and Lenin. The fact that
capitalism-- the subject of all these labors--had been by this time
abolished in Russia in a sense simplified their assignment job. Meanwhile,
the Communist leaders were engaged in the unprecedented task of transforming
literally at breakneck speed a  technologically backward,  pre-dominantly
peasant country into an industrialized military power dedicated to the
pursuit of further economic growth. They were their own economists.
 
Tie fundamental proposition which explains the high rate of Soviet economic
development is simple enough. Nearly two hundred years ago it had already
been clearly stated by Adam Smith and in more homely language by Ben
Franklin. To expand one's income fast, one must channel as large a part of
it as possible-and then more--into productive capital investment. This means
that consumption must be restricted; while thus holding down the living
standard of the masses, one must at the same time keep them working hard.
Marx, in his theory of capitalist accumulation, describes exactly such a
process, except that he refers to it in pejorative terms: the owners of the
means of production use their monopolistic position vis-a-vis the working
classes to keep wage rates down and profits up. Low wages mean a low level
of consumption. High profits--the high "rate of exploitation"--mean a high
rate of accumulation, since the capitalists forever strive to increase their
capital so as to be able to compete better with each other and also to
employ more workers to exploit.  This prescription was followed by
Communists in Russia steadily over a period of thirty years. However, the
unmistakable success of that ruthless experiment bears testimony not so much
to the economic sophistication of the Soviet rulers as to their political
perspicacity and determination.
 
So far as the Russian technique of economic planning is concerned, one can
apply to it in paraphrase what was said about a talking horse: the
remarkable thing about it is not what it says, but that it speaks at all.
Western economists have often tried to discover "the principle" of the
Soviet technique of planning. They never succeeded, since, up to now, there
has been no such thing.  The "Method of Balances," to which the Soviet
writers themselves invariably refer, hardly deserves its high-sounding name.
It simply requires that the over-all national economic plan be constructed
in such a way that the total output of each kind of goods be equal to the
quantity which all its users are supposed to receive. The method does not,
however, say what information and what computational procedure can be used
to achieve the simultaneous balancing of many thousands of different goods
and services covered by a comprehensive blueprint of a national economy.
 
The immense scope of the problem becomes clear if one considers the fact
that each item requires for its production several other items directly, and
many more--as a matter of fact, all others--indirectly. Thus whenever the
planner attempts to balance the supply and demand of any one particular
item, by expanding its output or by reducing its consumption, he is bound to
disturb the balance of many, and ultimately of all other, goods and
services.  Moreover, an efficient planner must compute more than a single
over-all balance. Land can be tilled with horses or with tractors; electric
energy can be generated by burning coal, oil, or natural gas as well as by
harnessing water power.  All such alternatives can be used in innumerable
combinations and each combination will require a different kind of over-all
economic balance. However, some of these will serve the national
objectives-whatever they may be--more effectively than others.
 
Soviet planning procedures, in practice, do not or at least did not up to
now--differ very much from those that were used during the war by our War
Production Board, by the English Supply Ministries, and by their counterpart
in Germany. The larger decisions are first made by balancing the
requirements for selected high-priority objectives with the available
amounts of the strategic resources, that is, the most important scarce ones.
Next, the details of the plan are worked out through application of standard
ratios based on past experience. Final adjustments are left to informal
trial-and-error procedures of the actual month-by-month and week-by-week
operations.
 
Soviet press reports over the years abound in examples of obvious
miscalculations. For instance, too much ore is mined and not enough coke is
made to produce the planned amount of steel; or insufficient quantities of
spare parts are turned out to keep in good repair machinery installed in new
plants. More difficult to detect, because it does not show up in glaring
imbalance between the supply and the demand of some specific item, but
probably not less deleterious in its effect on the overall efficiency of the
system, is the failure to make correct choices among several possible
alternatives. The failure to substitute gas for coal on the supply side of
the national fuel balance, or too hurried a substitution, might mean an even
larger potential loss of national income than that which is brought about by
the more obvious kinds of miscalculations mentioned above.
 
To solve all these problems in a systematic way, the planning technician
must be able to compute not only one balanced plan, but many, and then he
must be able to compare the efficiency of all these alternative plans in
attaining whatever the specific, over-all objective of the national economic
policy might be. This is an assignment easy enough to envisage, but most
difficult to accomplish; it is, moreover, a highly technical task which even
a very shrewd politician and powerful dictator cannot perform by himself,
any more than he can, by himself, build an atomic bomb or send a rocket to
the moon. He can, however, decide that the solution of this problem is worth
the cost involved in solving it; he can set the experts to work on it and
give them all possible support.  This is what actually happened in Russia
two or three years ago in respect to the important problems of economic
planning discussed above. The top leadership, with Khrushchev probably
taking a hand in it, apparently decided that with the rapid increase in the
size and complexity of the Soviet economy, rule-of-thumb planning procedures
would do no longer and must be replaced as soon as possible by more
efficient, scientific methods.
 
The high price the Russian rulers have shown themselves willing to pay is,
in this instance, not so much material as, one might say, moral: as in the
case of atomic power, the scientific basis of the new techniques is being
borrowed wholesale from the West--to be more specific, from the United
States. This time it is "bourgeois economics" rather than physics that is
about to be used to serve Soviet aims. For Communists and Marxists to
concede the superiority of Western science in this particular field must be
especially painful from both the ideological and the propaganda points of
view; out just because of this, the significance of the move must be
considered to be particularly great. To avoid any possible misunderstanding,
let it be emphasized that what the Soviets are about to adopt is Western
economic science, not Western economic institutions. There is good reason to
believe that this can actually be done. Those Western observers who say that
this cannot be done and who believe that the use of interest on capital in
planning calculations presages at least a partial restoration of the system
of private enterprise misunderstand, I think, the internal logic of Soviet
evolution.
 
II
 
The early mid-nineteenth century successors of Adam Smith--and Marx was one
of them--were concerned mainly with problems of economic growth, that is, of
increasing wealth and income and of the distribution of that increasing
income among labor, capital, and the landowning groups. Later, the focal
point of theoretical inquiry shifted to problems of economic efficiency and
has remained centered on these problems ever since. It is true that the
catastrophe of the Great Depression dramatically raised the question of full
employment, and the recurring smaller ups and downs in business conditions
continue to keep it on the map. However, looking back at the Keynesian
Revolution, with its paradoxical advocacy of spending for spending's sake
and the implied fear of a rapid rise in the productivity of labor, one must
recognize it for what it was: a long detour rather than a basic change in
the general orientation of Western economics. The question of efficiency and
of rational allocation of scarce resources dominates the field of advanced
scientific inquiry again. It was restored to that central position, however,
with a new and different emphasis.
 
The traditional approach to these problems was broad, abstract and purely
deductive; the new post-Keynesian, postwar inquiry is concise, specific,
factual, and eminently practical. The so-called "neoclassical" school, which
carried on the classical theoretical tradition between the two world wars,
mainly expounded and elaborated the liberal free-trade theme of the
"invisible hand." It demonstrated in great detail, occasionally even making
use of mathematical language, the automatic efficiency of competitive
pricing.  It classified and reclassified various theoretically possible
situations, particularly those in which free competition breaks down or in
any case does not bring about the most efficient allocation of economic
resources. The "neoclassical" economists made it very clear that efficiency
is a relative concept, that an allocation most efficient for the achievement
of one economic end might be quite inefficient from the point of view of
another. Incidentally, they have also shown that in a free competitive
economy the over-all economic goal is determined by a kind of universal
suffrage in which everyone has a multiple vote proportional to his dollar
income.
 
The postwar generation of American economists takes up where the
neoclassical analysts left off. Discussion of general principles is extended
into the solution of specific problems, hypothetical assumptions are
replaced by actual observation, and purely symbolic mathematics are carried
down to numerical computations.  The entire national economy is viewed by
the modern theorist as a gigantic, automatic computing machine, the price
system being interpreted as an ingenious computing aid.  To test and to
extend his understanding of the operation of this machine, the economist now
often identifies the specific problem it is supposed to solve, determines
through detailed, direct observation the basic numerical data which are
supposed to go into the solution, performs the necessary computation, and
then compares the final answer obtained from it with the answer to the same
question arrived at in real life by operation of the impersonal forces of
free competition.
 
To give a simple example: coal is produced in several parts of the United
States, the cost of production and the maximum possible annual output
varying from place to place mainly because of differing geological
conditions. It moves then by either rail, water, or truck to consuming
areas. The actual total output can be allocated in many different ways among
the producing regions and the proper amounts can be carried to the consuming
regions by many means along various routes. However, some of the possible
arrangements must obviously be more economical than others in terms of total
combined production and transportation costs. Traditional economic theory
explains why under certain simplifying assumptions the free competitive
pricing mechanism can be expected in this case, as in many others, to bring
about the establishment of the cheapest possible production and
transportation pattern. The modern analyst goes further. He collects
detailed information on the actual cost of production in all the different
coal mining regions and on the actual rail, water, and truck rates from
these regions to places of consumption; and then he determines by himself
using, if necessary, a modern high-speed computer the most efficient, that
is, the cheapest, of all the possible alternative production and
transportation patterns.
 
The computational procedure the economist uses might be designed in
imitation of the process of trial-and-error approximation that is supposed
to operate in a free-exchange economy. Or he might decide to use one of the
advanced textbook methods of numerical analysis. A comparison of this answer
with the observed production and the transportation pattern of coal might
show that the economist has, indeed, reached a satisfactory scientific
explanation of the actual  process.  On the other hand, he might turn up a
discrepancy which will indicate the direction of necessary improvement in
the theoretical formulation of the problem, the computational routine, or
the nature of the factual data used.  Since these elements are mutually
interdependent, the modification in any one of them will usually require a
corresponding adjustment in the other two. On the second or the third try,
the result usually turns out to be more satisfactory. If nothing helps, the
very assumption that costs are minimized in the economy might itself be
questioned.
 
Such relatively simple questions as that of minimizing the combined
production and transportation costs are ordinarily formulated as so-called
linear programming problems and are solved through application of a
computational procedure known as the Simplex method. Conceptually akin to
linear programming is the so-called input-output analysis which, for
example, has been effectively used in quantitative empirical analysis of the
balance or the imbalance, as the case may be, between several hundreds of
individual sectors of the United States economy.  The application of this
method requires a comprehensive statistical mapping of the structural
relationship determining the flows of goods and services between all the
sectors and a solution of large systems of mathematical equations based on
the hundreds or thousands of figures contained in a typical input-output
table. The Russians expect this method to be particularly helpful in the
solution of their larger planning problems.
 
Under such names as "operations research," "logistics analysis, "or
"management science," the new techniques are now being successfully used by
most large American corporations in the solution of production scheduling,
inventory control, investment planning, and many other of their internal
problems which hitherto were met by routine application of conventional and
mostly rather wasteful rules of thumb. But certain business circles in the
United States have viewed with unconcealed alarm the application of these
methods to the traditional problems of the economic system as a whole--the
very purpose for which some of the more powerful of the new analytical
devices were designed in the first place.  No doubt this attitude reflects
the fear that too close and too detailed an understanding of the structure
of the economic machine and its operation might encourage undesirable
attempts to regulate its course.
 
III
 
The first cursory references in Russia to new developments in the West
appeared some years ago in the typical polemical forays against "bourgeois
economics" published from time to time in Economic Problems and similar
Soviet journals. Gradually the polemical part of these surveys became less
virulent and shorter while the factual description of the new methods became
more systematic and longer. Oskar Lange, former professor at the University
of Chicago and now a prominent public figure and the leading economist in
Poland, has apparently been instrumental in arousing a positive interest in
linear programming and input-output economics among his high-placed Russian
colleagues. The last edition of the Textbook of Political Economy published
late in 1958 mentions a bourgeois science called Econometrics, some methods
of which it is significantly stated--might prove to be of interest to
socialist economists and planners. Early in 1959 the Studies on the
Structure of the American Economy, a rather technical volume published six
years ago in the United States by the author of this article and several
collaborators, appeared in a Russian translation (which incidentally was
edited by Professor A. A. Koniis, the last surviving mathematical economist
of the pre-revolutionary generation). Another straw in the wind was a
popular pamphlet on problems of economic planning written by a prominent
member of the research staff of the Gosplan- the central planning commission
and printed in several hundred thousand copies. It describes in great detail
the use of the mathematical input-output method for balancing planned
production and requirements. At the last two meetings of the International
Statistical Institute, the official Soviet delegation made input-output
analysis the subject of its principal scientific papers. Its leader used
this opportunity to declare this to be a topic singularly well suited for
scientific exchange between East and West.
 
As soon as the baby was adopted, the question of its intellectual parentage
was investigated with great diligence and it was found to be, after all, of
respectable Soviet Russian ancestry. A search through old economic journals
revealed that in 1925 a short article on the then newly compiled balance of
the Russian national economy was published in one of these periodicals over
my signature.( Actually, I wrote this paper when still a student at the
University of Berlin: it was first published in Germany and then translated
and published in Russia. ) Another Soviet priority claim seems to be more
substantial. In 1939 a young Leningrad mathematician, L. V. Kantorovich,
published two papers in which he presented a general mathematical
formulation of certain problems of production planning and transportation
scheduling, which in fact did anticipate the conceptual framework of the
linear programming theory developed a few years later by Koopmans and
Dantzig in the United States. Kantorovich did not, however, devise an
efficient computational solution of these problems; Dantzig did, thus
opening the door to the practical, large-scale application of the linear
programming approach. In any case, Kantorovich's original contribution found
no response and recognition till the time when information about new
developments in the West reached Moscow and the top decision was made to put
them into the service of socialist planning. Professor Kantorovich is now a
member of the Academy of Sciences and, according to recent newspaper
reports, he even can allow himself, at its public sessions, to make
disparaging remarks about "the meaningless discourse" of stalwart Marxist
theorists.
 
Once the crucial decision was made, scientific resources were rapidly
mobilized to conquer the field. The details of what actually goes on are
shrouded by a veil of secrecy, but it is known that many American articles
and books on the subject have been translated into Russian and circulated
"privately" among the specialists assigned the task of mastering the new
methods. For example, though the Russian edition of Studies on the Structure
of the American Economy was published in 1959, the translation of that book
was actually completed and widely circulated as early as1955 or 1956.
 
Among the scores of young economists and mathematicians whom I had an
opportunity to meet during a brief visit to Moscow and Leningrad early in
1959, many showed through questions they asked and remarks they made that
they had a good acquaintance, both theoretical and practical, with
input-output research. Some of these belonged to the selected group of
"aspirants" (corresponding to our young post-doctoral scholars) who at the
time were completing a course of intensive training in methods of modern
quantitative economics under the personal direction of Academicians
Kantorovich and Nernchinov. ( The latter, an economist and statistician,
headed until recently the Section of Social and Philosophical Sciences of
the Academy of Sciences and was also a member of the Academy's all-powerful
Executive Board; a few months ago lie was appointed chairman of the
Academy's Commission on the Study of the Productive Resources of the
U.S.S.R.) This fall, they are being transferred from Moscow and Leningrad to
the new Science City in Novosi-birsk, the seat of the rapidly expanding
Siberian branch of the Academy of Sciences. Equipped with large-scale
computational facilities, this will apparently become the new center of
advanced economic research.
 
It was interesting to note that young men with mathematical or engineering
backgrounds and some of the older practical planners and economic
administrators took easily to the new discipline, while those who as
students had concentrated on regular economic courses were still prone to be
beset by doubts. The use--in so-called dynamic allocation theory--of a
positive rate of interest on invested capital, for instance, is accepted by
the former as a logical necessity, while the latter ask questions which
indicate considerable resistance to such un-Marxist thought. As a result of
this, the manipulative aspects of the new methodology seem at the present
time more advanced in the Soviet Union than the understanding and the
exploration of its deeper fundamental levels. This aspect of the problem,
however, is also being taken care of: mathematics has been made an
obligatory subject in the economics departments of the Universities of
Moscow and Lenin-grad and, in both, new chairs of Econometrics were recently
established but not yet filled, apparently because of lack of suitable
candidates.
 
The massive support which the Soviet Government has given to the development
of the natural sciences is widely known. The fact that it is now prepared to
discard some of the central themes of traditional Communist lore in order to
gain command of the promising new intellectual tools of modern social
science indicates that it expects to receive an equally high return from
their use.  It will take some time before the Soviet planners will be able
to apply in practice the new techniques their economists are now acquiring
in theory. Not only must the vast training program, launched only a few
years ago, be advanced much further, but the activities of the huge and
clumsy Central Statistical Office will have to be reorganized from top to
bottom. The new methods of economic analysis can make effective use of a
much larger volume of much more detailed statistical and other factual
information than was considered practicable heretofore. But first the
information must be made available.  Lenin's slogan, "Socialism is
electricity plus statistics," will once again be often quoted in the Soviet
press.
 
There can be little doubt that in the years to come the introduction of
scientific planning techniques will increase the over-all productivity of
the Soviet economy, just as the adoption of new methods of scientific
management by our own large corporations has raised the efficiency of their
internal operations. A centrally planned economy depends on the
efficiency--or the inefficiency--of managerial decision to a much greater
extent than does the free-market economy, which benefits from the
economizing functions of competitive pricing. So, the advantage that the
Russians will derive from any improvement in such decision-making procedures
is bound to be particularly great. Whether the increased productivity will
be used to accelerate still further the high rate of their economic growth,
to step up military preparations or, as the free world should hope, to raise
their standard of living, one cannot predict.
 
IV
 
In the present world-wide contest between the United States and the Soviet
Union for the friendship of underdeveloped countries, the reorientation of
Soviet economics will probably have an even more immediate effect. For
better or worse, these have-not countries are not content to allow their
fervently desired economic growth to take care of itself. They regulate
their exports and imports, they encourage new industries, their governments
finance and build not only dams and roads, but also steel, chemical, and
other kinds of plants. In short, most undeveloped countries plan; they also
ask for help. Financial support and engineering advice they get both from
the Russians and from us. But so far as help on methods of economic planning
is concerned, neither side has thus far been able to offer them much. Our
advice is long on general wisdom, but short on teachable and learnable
techniques. It is the latter, however, that they want; wisdom is not easily
transmitted and furthermore no self-respecting politician has even been
known to admit the lack of it.  The Russians could have been expected to
teach how to plan, but for reasons explained above they were able only to
refer to the "method of balances," which raises an important question but
does not answer it. Until now, as technical advisers on development
economics, the Russians have not done any better than we have.
 
Having adopted modern analytical and programming techniques for large-scale
domestic application, the Russians are bound to offer them for export too,
and the demand is great. Since the new approach to economics originated in
the United States, one would think that in this line of intellectual
competition we could hold our own. But as things stand now, this is not the
case.  The scientific treatment of management and business problems is
expanding rapidly in the United States. But, for reasons noted before,
large-scale basic research aimed at the application of these newer methods
to the analysis of the structure and the operation of the economic system as
a whole has slowed down in recent years. As a matter of fact, in its crucial
empirical phase, this fundamental work has now come to a complete standstill
because of lack of financial and organizational support. Over twenty
countries--not counting the Soviet Union and its satellites--are ahead of us
in this field.