Shortage and Inflation: The Phenomena

Literature gives various labels to the group of phenomena discussed in the next two chapters: shortage, excess demand, disequilibrium, a sellers' market, suction, or repressed inflation, to list just the more common ones. The terms do not coincide exactly and need more explanation later, but the list suffices to define the subject.

The intention is to explain shortage basically in terms of the system's inherent characteristics. As in the previous chapters, therefore, the effect of external relations is ignored for the time being.

The examination concentrates on the system's constant, lasting features. Factors influencing short-term fluctuations in the intensity and distribution of shortage phenomena are covered at most in passing. Attention is trained on parts of the phenomena that distinguish classical socialism, lastingly from other systems, primarily capitalism.

The focus in the analysis of production is mainly on the sector in public ownership. However, the formal and informal private sector, and, in conjunction with it, the gray and black markets, are mentioned among the sources of supply for households.

The subject is covered in two chapters: chapter 11 describes the phenomena of shortage and inflation, and chapter 12 discusses the causes of the two related phenomena.

11.1 Shortage Phenomena and the Shortage Economy

Using a somewhat simplified, stylized form, one can examine the choices facing the buyer of a product for personal consumption, for instance, a woman setting out to buy food. Assume she has a well-defined purchasing intention that accounts for prevailing prices, which she knows, and that beef features on her shopping list. Unless lucky, her shopping is not a single action but a process, a sequence of decisions whose stages and branchings appear in figure 11.1.

।Figure 11.1 summary: A flow diagram of the shopping process starting from the initial decision to shop. The process branches based on item availability, leading to outcomes where the good is available immediately, available but requiring queuing, or not available. If not available, the flow leads to further decision paths including forced substitution, searching, postponing the purchase, or abandoning the purchase intent. This structure maps the various behavioral paths a consumer takes based on product availability.

Event 0 is the most desirable: the product required is available in the first shop the customer enters, and she immediately buys it. For her this part of the shopping process is over.

In event 1, beef is available, but customers must queue for it. This is a familiar occurrence; under classical socialism customers very often have to queue. For some goods there is an actual, “physical” queue at the counter or outside the store. For others the expression can be used only figuratively. Customers receive numbers in order of application, and when their turn comes they are summoned to pick up the good.

Returning to the customer, the good she seeks may not be available at all, either immediately or after queuing. In that case she must choose from a set of further alternatives.

Event 2 is forced substitution. The customer abandons her original purchasing intention and instead buys something else that is more or less a substitute for it. It may be a close substitute, for instance, another kind of meat instead of beef, or a remoter substitute, some kind of deep frozen or canned meat, or it may be drawn from an even remoter sphere of substitutes: any kind of foodstuff at all. Forced substitution may involve the customer in a qualitative concession, buying a good less to her liking than the one she was looking for. Alternatively, she may be prepared to pay a higher price for a better product than the one she wanted to buy, or she may suffer a combination of the two kinds of loss.

Forced substitution plays a major part in understanding the shortage syndrome. It should be distinguished from voluntary substitution. If a customer has hitherto chosen the first of two products, A and B, which are close substitutes for each other and both readily available on the supply side, and then changes to the other (substitutes B for A) because her tastes or the two products' relative prices have altered, the substitution can be considered voluntary.

But if she buys B because A is unavailable, the substitution is forced. Some deny these terms are appropriate, arguing that if product A becomes much dearer than B, the customer may be under an economic compulsion. There is no need to engage in a semantic argument on this; the main thing is for the distinguishing criterion to be clear. If both A and B remain available, there is a chance to choose between them, however expensive A becomes. (For instance, a customer who wants to stick to A at all costs may cut other expenses instead.) The position is quite different if A cannot be obtained. In that case the shortage unequivocally compels the customer to make another choice.

A case of forced substitution is illustrated in table 11.1. A representative sample of Hungarian automobile purchasers have been asked what model they would buy if all the imported Eastern European models familiar in Hungary were readily available without limits on supply or queuing. The main diagonal in the table represents those who would still buy the model for which they are queuing. They constitute only a small proportion of the buyers; the rest are making a forced substitution.

Table 11.1 summary: Forced substitution preferences in the Hungarian car market in 1977, where the Zhiguli is the most common preferred alternative for those who cannot get the make they ordered. Specifically, customers who ordered a Skoda, Dacia, or Wartburg showed a strong preference for the Zhiguli, with preference rates of 80 percent, 50 percent, and 53 percent respectively. In contrast, those who ordered a Trabant were most likely to prefer another Trabant at 47 percent, while those who ordered a Moskvich showed split preferences between the Trabant, Wartburg, and Zhiguli, each at 25 percent.

Returning yet again to the food customer, she may not be prepared to make a forced substitution. Instead, her choice may be event 3, embarking on a search at other stores. If she is lucky, she finds some beef in the second store and the shopping process ends. But it may take three, four, or even more attempts before she finds any beef, the maximum number depending on how determined she is in her search.

Frequently she hears, perhaps at the first store or perhaps at a later one she visits, that the good is not obtainable at present but a further delivery is expected. Based on such information or past shopping experience, she may decide to wait on the purchase. Event 4 is postponement. It ties in with the fact that the consumer does not spend the money for the future purchase during the waiting period. Consequently, accompanying postponement (or a long period of search) there is forced saving as well.

Finally, the customer can choose event 5: abandonment of purchasing intention.

Events 0, 1, 2, and 5 are alternative ends to the purchasing process. But with events 3 and 4, as the diagram shows, the process need not necessarily end at all. In the case of a search, the customer is faced constantly with all the alternatives, in store 2, 3, 4, and so on; the same situation arises when the shopping round is recommenced after a wait of a week, two weeks, and so on.

Events 1 to 5 are termed here collectively shortage phenomena. Although their specific contents and consequences differ, they are all brought about by a shortage of the good sought, and all cause unpleasantness, inconvenience, sacrifice, or some other loss to the customer.

The example above described the shortage phenomena arising when goods or services for personal consumption are purchased, so that the sufferer is a household. The item in short supply in the example was a material good, beef. Similar phenomena arise with so-called services of a nonmaterial nature: there can be a shortage of places in kindergartens, schools, or universities, in health or cultural facilities, and so on.

The same classification may be applied in full to the shortage phenomena that occur in the process of obtaining means of production, materials, semifinished products, machinery and equipment, and production services, when the sufferer is a firm. Event 1: the firm joins a queue at the input-supplying firm where orders have built up. Event 2: the firm is forced to alter the technology it originally planned, for instance, by using a poorer quality or more expensive input, because the input it initially intended to process is not available. Event 3: the firm begins a search for the required input among various firms that manufacture or stock it, or may borrow from another user-firm that happens to have stocks of it. Event 4: the firm postpones its purchase because it has stocks left or, if it has none, because it has no option, and for this reason production may even cease. Finally, there is event 5: the firm abandons its intention of buying the input and prefers to try to change its production and materials-management plans.

One group of shortage phenomena in the production sector deserves a special mention: shortages of machines, equipment, and construction capacity for investment schemes, that is, the phenomena of investment tension.

Largely similar shortage phenomena to those occurring during the acquisition of intermediate material products arise in the hiring and employment of labor.

Shortage phenomena may arise in foreign trade, and in this connection in external financial relations.

Let me introduce the concept shortage economy. An economic system is a shortage economy if the following conditions coincide: shortage phenomena are (1) general, that is, found in all spheres of the economy (in trade in goods and services for consumers, in means of production, including investment goods, in labor, in exported and imported products, and in international means of payment); (2) frequent, and not only exceptional or sporadic; (3) intensive, making their influence felt very strongly on the behavior and environment of participants in the economy and the traits and results of the economic processes; and (4) chronic, applying constantly, not just occurring temporarily.

The expressions “shortage phenomenon” and “shortage economy” can be used to make an economic statement: the shortage phenomena under the classical socialist system are general, frequent, intensive, and chronic; the system is a shortage economy.

This statement can be supported primarily by experience. Illustrative data are given in tables 11.2 to 11.4 and in many other tables in this chapter and the next. Moreover, a copious and varied body of literature exists that support the statement empirically. Statistical proof of the statement's truth is not needed, however, by those living in a socialist country. They experience the countless frustrations of thwarted purchasing intentions, queuing, forced substitution, searches for goods, and postponement of purchases in their daily lives as consumers and producers.

Note: Bulgaria: In larger cities, housing applicants were grouped in six categories: (1) families living under very poor housing conditions (for example, in a kitchen, cellar, or attic); (2) those living as cotenants of a single divided dwelling; (3) subtenants, or those living under very crowded conditions (with less than 5 sq. m. of living space per capita); (4) those living under crowded conditions (5 to 12 sq. m. per capita); (5) those under less crowded conditions (12 to 20 sq. m. per capita); (6) those under the least crowded conditions (over 20 sq. m. per capita). In practice, state housing could be obtained only by those in categories 1 to 4. The average waiting periods for the categories were (1) 5 to 6 years; (2) 7 to 8 years; (3) 9 to 10 years; (4) 15 to 20 years. Czechoslovakia: Figure for larger cities in 1987. East Germany: National average for 1982. Hungary: Figure for Budapest in 1986. Poland: 1987 figure for purchase of a subsidized cooperative dwelling. No state housing was built in Poland in the latter years. Soviet Union: In practice, state-rented accommodation was allocated only to those with less than 5 to 7 sq. m. of living space per capita.

Shortage phenomena occur also in capitalist countries, quite frequently, intensively, and lastingly in some areas (for example, the health or education sectors of numerous capitalist countries and the urban housing sector of many), and they may become quite general in exceptional circumstances such as a wartime economy. Nonetheless, if one considers the general, permanent state of the capitalist economy, one can say it is not a shortage economy.

Source: Z. Kapitány, J. Kornai, and J. Szabó (1984, p. 239), based on Hungarian Market Research Institute (1978), Központi Statisztikai Hivatal (Central Statistical Office, Budapest) (1980b), Merkur Car Trading Co. (1980).

Note: The survey questioned 4,120 persons, and 1,406 sent evaluable answers. The proportion of forced substitution is expressed by the total of elements not in the main diagonal. Yet many totals stay under 100 since some of those questioned listed other makes outside the ones included in the list.

Source: Compiled for this book by G. Such and I.J. Toth.

: Table 11.2 summary: Waiting times for housing in the 1980s varied significantly across different countries, with Poland experiencing the longest delays at 15 to 30 years. Other lengthy wait times occurred in Bulgaria, ranging from 5 to 20 years, and the Soviet Union, between 10 and 15 years. Shorter waiting periods were found in East Germany at 3 to 4 years, Hungary at 4 to 6 years, and Czechoslovakia at 6 to 8 years.

11.2 The Process of Demand Adjustment

This section returns to buyer behavior in a shortage economy, and for the time being specifically to households as buyers of goods and services for personal consumption. The purpose at this point is to trace buying intentions, not actual actions (purchase, forced substitution, postponement, etcetera). The shaping of these intentions is a dynamic process. To make the discussion clearer, practical problems of observation and measurement are ignored; it is assumed that one can discover a buying intention accurately at a particular time by questioning the buyer.

The first question to ask is what the buyer's buying intention would be, assuming prevailing prices, the buyer's prevailing income and wealth, and prevailing social and economic conditions, if there were not supply-side constraint on fulfilling one's buying intention. The buyer's answer to this question is the notional demand.

To simplify the explanation, the question concerns the buying intention in the existing state. Indeed, one might ask what the buying intention would be if the prices, income, wealth, and so forth were different from those that apply. In that case one would discover the notional demand function. The answer to the intentionally simplified question posed above merely reveals a single point on this function.

Waiting for Cars: International Comparison, 1989

The discussion is also simplified by examining a partial problem as an initial approach. A stricter and fuller discussion would entail analyzing all the buying and selling intentions for all goods and services together.

The second possible question is what the buyer intends to buy now that all supply constraints are known and the buying intention has been adjusted accordingly. This answer can be called the category of completely adjusted demand. The concept can be understood in terms of expectation theory.

This kind of buying intention is based on the expectation of the supply constraint at the time of purchase.

Notional demand and completely adjusted demand can be seen as the theoretical extremes of the demand-shaping process. There are numerous intermediate grades, which may be given the collective term partially adjusted demand. They differ from notional demand in that the buyer has noted the supply constraints to some extent in arriving at his buying intention, but he has no accurate knowledge of them and/or still refuses to go far in compromising with the supply.

For now he is unable or unwilling to divorce himself enough from his notional demand under the influence of supply constraint. In the following account, the term adjusted demand, without qualification, covers both completely and partially adjusted demand.

For the buyer, the road from notional demand via partially adjusted demand to completely adjusted demand is paved with a sequence of frustration, failures, dire rumors of impending shortages, and forced adjustment. Completely adjusted demand is the buying intention of a buyer resigned to chronic shortage.

Of course, the shaping of demand is described here as a series of consecutive instances of recognition and adjustment in a time order only to simplify the account. In fact, the succession is far less “regular”; the adjustment of demand to the realities and expectations of supply occurs in real life against a background of possibly conflicting communications, hopes, and failures, and successful and unsuccessful acts of purchase. Often the buyer herself is unsure of her own intentions. She improvises, and she might be unable to answer a market researcher reliably even if she honestly tried.

During the adjustment process, the buyer may abandon some buying intentions totally and irrevocably, so that they cease to feature later even as notional buying intentions. There is an analogy in this with the phenomenon described in Western literature on unemployment as “the discouraged worker.” Having sought a job vainly for a long time, many finally give up the struggle. Thereafter their names are not recorded at labor exchanges and so they are ignored in unemployment figures. Just as withdrawal by a seller of labor discouraged by lack of demand causes underrecording of the labor surplus, so withdrawal by a buyer discouraged by lack of supply reduces the observable shortage of goods.

Whereas a buyer's adjusted buying intentions for products in poor supply are lower than notional demand, his adjusted demand is higher than notional demand for goods that can be considered forced substitutes. It is possible (but not certain) that the two contrary changes in adjusted demand will cancel each other out.

The adjustment of demand to supply is not entirely unreciprocated. To a lesser extent, a producer-seller also does adjust somewhat to likely demand.

Ultimately, it is possible (but not certain) that a curious state of equilibrium will arise. This can be called the forced adjustment equilibrium. The aggregate demand of all households for all products, adjusted to supply, can be satisfied from the entire supply available to households. Emergence of this forced adjustment equilibrium is compatible with a persisting sense of frustration in the buyer, since she is unable to satisfy her notional demand and obliged to spend her money on forced substitutes.

What has been said so far is an aid to understanding what might be called the paradox of the shortage economy. On the one hand, consumers are highly dissatisfied and rightly complain about the items in short supply. On the other, “global equilibrium” (to use Eastern European professional jargon) can arise after all. The buyer's painful process of forced adjustment allows both sides of the paradox to apply.

I declared just now that it is possible but not certain that a forced adjustment equilibrium will arise. A buyer may find no acceptable substitute and prefer to spend less than his total notional spending intention. In other words, a shortage-induced forced saving takes place.

This may result from temporary postponement: the buyer sets aside the unspent money and makes his purchase when a supply to match his notional demand appears. In that case, the money accumulated through forced saving waits at the ready for the spending opportunity. But there is a chance of this not happening. Perhaps the forced saving was not earmarked at all; the buyer just simply failed to spend it sensibly and no attractive spending opportunity arose later either.

If this becomes a cumulative process in which more and more unspent and unspendable forced savings pile up in household hands, the household sphere moves further and further from a forced adjustment equilibrium, causing not only a notional but a genuine excess demand. A monetary overhang is generated, which expands over the sphere of consumer goods and services, creating tension in it.

Finally, yet another possibility needs to be considered. Households can spend part of their money in the formal and informal private sector, that is, on the legally permitted free market, or in the gray and black markets. Although some of the notional demand in relation to the sector of firms in public ownership remains unsatisfied and the buyer does not make a full forced adjustment in this direction, she is able to use all the money intended for spending after all. The parallel markets—the legal market at free prices, or the gray and black markets—may be able (wholly or partly) to prevent forced saving. The consequent situation is considered likewise a kind of forced adjustment equilibrium; here the forced substitution in connection with the products of state-owned firms is complemented by purchases on the gray and black markets.

So far trade in articles and services for consumer consumption has been considered. In other spheres of the economy, a forced adjustment equilibrium in the specific sense taken above may not arise at all, and a real, lasting excess demand prevails. One such sphere is certainly the transactions of investment goods.

The question of which spheres typically have a forced adjustment equilibrium and which suffer from chronic excess demand will be left open for the time being. But I must add that even in the spheres where a forced adjustment equilibrium is finally attained, the unsatisfied notional buying intentions (and similarly, the partially adjusted buying intentions) are no mere notional quantities. They have a real momentum and a great influence on the behavior of both buyers and sellers.

As mentioned before, buyers are embittered by the frustration of their original intentions. This bitterness is what “resigns” them and forces them to adjust. At the same time, the existence of the same notional excess demand fills sellers with confidence. They can bank on selling their products without much trouble.

Last of all, an observation on terminology is required. Some writers use the expressions “excess demand” and “shortage” as synonyms. This book and my earlier works follow the common parlance of the socialist countries in using “shortage phenomena” or simply “shortage” in a broader sense, as a collective term with a wide meaning. It covers not only excess demand, namely, unfulfilled buying intentions, but all forced adjustment forms, both forced change of intentions and actual adjustment actions (that is, forced substitution, search, postponement, and forced saving).

Source: Column 1: Union Internationale des Télécommunications (1980, pp. 42, 52, 130, 154, 260) and (1982, p. 254); Columns 2 and 3: Union Internationale des Télécommunications (1986, pp. 56, 66, 150, 180, 280, 288, 348).

$ ^{a} $Calculated on the basis of total demand for main lines. This includes new applications and applications for resetting. Resetting is a nominal demand for a main line in which a subscriber wishes to move a phone from one site to another.

$ ^{b} $Calculated on the basis of the waiting list for main lines. This covers demand whose satisfaction has to be postponed because of a shortage of technical capacity (equipment, lines, and so on).

c1972-75.

$ ^{d} $In many capitalist countries all telephone requirements can be satisfied practically straight away.

Source: Compiled by Z. Kapitány for this book, partly based on Z. Kapitány and L. Kállay (1989). Note: All cars are products of socialist countries.

$ ^{b} $For cars other than Dacia there are no data available or the makes were not available.

: Waiting lists for telephone subscriptions were significantly longer and generally increased more in Socialist countries than in Capitalist countries between 1971 and 1985. In Socialist countries, Hungary and Poland saw substantial increases, with waiting lists reaching 55.5 and 57.1 percent of subscribers respectively by 1981 to 1985. In contrast, Capitalist countries maintained much lower proportions that generally declined over time. For example, France dropped from 13.1 percent in 1971 to 75 to 0.9 percent in 1981 to 85, and Austria decreased from 14.1 percent to 2.9 percent over the same broad period.

: Table 11.4 summary: Waiting periods in years for various car makes across several Eastern Bloc countries. East Germany had the longest wait times overall, reaching up to 17 years for a Lada and 14 to 16 years for a Wartburg. In contrast, some countries had very short wait times for specific models, such as Hungary where a Trabant had a zero year wait and a Wartburg took one year. Other examples include Bulgaria, where Lada wait times were 10 to 12 years while Trabants and Dacias took only one year, and Romania, which lists a 4 to 6 year wait specifically for Dacia.

11.3 Horizontal and Vertical Shortage

The phenomena surveyed in sections 11.1 and 11.2 occur in the relationship between the seller and the buyer. In a legal sense, at least, they are horizontal relations. The seller is not the buyer's superior in an administrative sense, even though the seller has a power advantage. So this group of shortage phenomena will be termed horizontal shortage.

This is distinguishable from vertical shortage, which appears in the vertical relation between a superior and a subordinate . Take, for example, the setting of a firm's annual materials quota. The firm submits its requirements to its superior institution, the directorate, which fulfills the function of allocator in the relationship. The allocator has already received a quota from its own superior, the ministry, and that is the maximum it can distribute among its firms.

As mentioned earlier, the firm has an interest in receiving as slack a plan as possible, in other words, minimum output commitments coupled with maximum input quotas. Under the circumstances, the sum of the requirements submitted exceeds the quota the allocator can distribute; this discrepancy is referred to here as vertical shortage.

The vertical shortage that arises during directorate-firm bargaining over rations of materials is a single example of a phenomenon common to all levels of the bureaucratic hierarchy (that is, between directorate and ministry or ministry and planning office as well) and to allocation of all resources and products, whether semifinished products, components, machines, manpower, wage funds, investment quotas, or import allowances.

The situation certainly differs from the one in which the buyers' demand exceeds the sellers' supply. It amounts only to the antecedents within the bureaucracy of a real transaction that takes place later; a future buyer is obtaining a permit from its superior to make a later purchase with its own money. But the kinship between the two kinds of phenomenon, horizontal and vertical shortage, is apparent. It is the likely horizontal shortage that makes it so important to the firm to receive enough rations of materials to ensure a favorable position in the competition from buyers.

The two types of shortage are not independent of each other. During the bargaining process, the subordinate unit, expecting a horizontal shortage, submits an oversized application so exacerbating the vertical shortage.

A specific combination of horizontal and vertical shortage appears in the case of products and services distributed by the authorities to consumers through a bureaucratic rationing system. In many countries coupon schemes are applied for a long period to staple foodstuffs, and in some cases to mass-produced consumer durables. A few examples are shown in table 11.5. In most socialist countries the following are rationed to the population throughout the classical period: state-owned housing tenancies, telephone lines, health services, places in educational institutions, and vacations in publicly owned vacation centers. Some of the rationing is done by state authorities, some by the monopoly firm or institution providing the relevant good or service, or perhaps by a mass organization (for example, the trade unions), and some by workplaces. The proportions each undertake differ from country to country and period to period, but each is appreciable in every classical socialist economy.

Table 11.5 summary: Rationing systems in socialist countries varied in scope and specific quantities. Cuba had the most extensive list of rationed goods, including staples like 2.3 kilograms of rice and 1.8 kilograms of sugar, as well as hygiene products like soap and washing powder. Poland rationed items such as butter at 0.75 kilograms and meat between 2.5 and 8.0 kilograms, along with 24 to 36 liters of gasoline. Romania's system included daily bread at 0.3 kilograms, 10 eggs, and 1 kilogram of pork or beef, as well as energy quotas for natural gas and 43 kilowatt hours of electric power. Vietnam rationed rice at 9 kilograms and pasta at 4 kilograms. The Soviet Union and Yugoslavia both rationed a mix of staples like sugar and meat, with Yugoslavia specifically including 40 liters of gasoline.

^{b} In Romania there were severe restrictions on energy consumption after 1984. In the towns, those exceeding the prescribed limits had to pay a fine, and their supply would be cut off until the end of the month.

^{c} A variety of different coupon systems was introduced in several republics and cities in the Soviet Union. The table lists foodstuffs rationed in this way in many places.

The coupon system in Yugoslavia was differentiated district by district. In Serbia in 1983, for instance, there was a coupon system in 80 out of 114 settlements.

There is a shortage in all spheres where a system of coupons or other form of rationing is employed. The allocating authority or institution feels the pressure of the vertical shortage; wherever applications can be made in advance (for instance, with housing or vacations) the sum of the requirements exceeds the quantity available for distribution. Intensive horizontal shortage appears at the same time. In all these spheres, the product or service concerned is made available to the user free or at a very low price. The question of whether it is shortage that makes bureaucratic coordination inevitable, or the reverse, is addressed later in the causal analysis.

Source: Compiled by G. Such and I. J. Toth for this book on the basis of a large number of newspapers and journals.

Note: The table describes rationing in the 1980s. For brevity's sake, it does not include the exact dates on which rationing was introduced and abolished for each product in the various countries and regions of countries.

$ ^{a} $The Polish gas ration varied according to the capacity of the engine, within the limits given.

11.4 Shortage and Surplus

The previous three sections dealt solely with the phenomena of shortage. It is now time to examine the opposite phenomenon, surplus.

In the case of a single sale/purchase event, shortage and surplus are mutually exclusive. A buyer enters a store at a particular moment with a particular demand. The store, at that same moment, has a particular stock.

If the buyer receives the good she is looking for and it is the last of that good in the store, there is neither a shortage nor a surplus after the transaction. But two other cases, strictly exclusive of each other, are possible: the buyer may not have received the good she was looking for (shortage), or stock of the good may remain in the store (surplus). So at that submicro level, there cannot be shortage and surplus at once.

The position is different if the situation is described in any kind of aggregate form, for instance, if several products, several buyers, several sellers, or a longer period of time are considered. In the case of a summation, there can be a coexistence of shortage (some demand from buyers remaining unsatisfied) and surplus (some sellers being left with unsold products).

The fact that the classical socialist system is a shortage economy does not preclude the appearance of surpluses, indeed, there are several features of the system that directly encourage them to form.

The less certain the prospect of obtaining goods, the more intensively buyers have to hoard. This hoarding tendency is apparent in firms, nonfirm institutions, and households. Buyers get used to shopping when goods are available (if their pockets allow), not when the time comes to use something. Large input inventories build up, and producers also try to create reserves of labor, which is in the shortest supply of all, and all kinds of capacity where a bottleneck may form.

Another inducement to a subordinate unit to build up reserves and then conceal them from its allocating superior is the phenomenon of plan bargaining.

The producer-cum-seller is bad at adapting to demand (for several reasons considered in the next chapter). The frictions in the adaptation of production give rise to residual, unsalable stocks that cannot even be foisted on the buyers most embittered by shortage.

It is useful to observe and measure the two kinds of phenomena separately. Those suffering from a shortage of a particular product, service, or resource are not compensated by the knowledge that surpluses, unutilized capacities, and frozen stocks exist somewhere else in the economy. The inertia of the system, its many inflexibilities, and the strong frictions within it rule out any guarantee that one kind of surplus will be used in time to offset another kind of shortage.

The frequency and intensity of the occurrences of shortage can be shown to bear a great many relations to the scale and consistency of the surplus. Some of these can be easily discerned in the figure resembling a Beveridge curve [ to figure 10.2]. Consider the following problem as an example. A buyer is looking for a specific good. The more varied the stock in each store, the fewer stores the buyer has to visit. Or take another example: the greater the variety of size, quality, and environment among the dwellings lying empty, the greater the chance someone seeking accommodation has of finding something suitable quickly. There is a negative relation between the mobilizable surplus available to the buyer (or input-user) and the frequency and intensity of the shortage phenomena. suffered. It is common under all economic systems for greater or lesser phenomena of shortage to coincide with larger or smaller surpluses. These result from inevitable frictions in the adjustment between production and consumption and supply and demand. Only a perfectly adapted system could operate absolutely without friction, in other words, with no shortage or surplus of any kind. The system-specific feature of the socialist economy is that the friction is on a large scale; while the shortage is frequent and intense, the surplus is great as well, because a sizable proportion of it cannot be mobilized to supply the buyer or user better, and so lies unused.

11.5 Market Regimes: The Buyers' and the Sellers' Market

Those living in a shortage economy experience day by day that the buyer is at the mercy of the seller. The next topic is this unequal, asymmetrical relationship between the buyer and the seller.

A distinction can be made between two kinds of market regime: a buyers' market and a sellers' market. The word regime implies that the intention is to describe constant features of the buyer-seller relationship, not a momentary state. The main attributes of the two regimes can be seen in table 11.6. The purpose of the table and the comments appended to it is mainly to explain the two concepts. But one can add straight away an economic statement in accordance with the one made earlier. The classical socialist system is marked by a sellers' market, while the capitalist system, or, more precisely, the sphere of it operating in a framework of imperfect competition, is marked by a buyers' market.

Table 11.6 summary: Market power shifts based on whether it is a Buyers' Market or a Sellers' Market. In a Buyers' Market, the buyer holds the ascendency, while the seller is primarily responsible for information activity, adjusting to the other side, making efforts to win over the buyer, and bearing the consequences of uncertainty. Conversely, in a Sellers' Market, the seller holds the ascendency, and the burden of information activity, adjusting to the other side, making efforts to win over the seller, and bearing the consequences of uncertainty shifts primarily to the buyer.

Accordingly, the sellers' market can be examined through examples from the classical socialist system, and the buyers' market through examples from the capitalist system and its sphere of imperfect competition. That entails repetition in some places of sections 11.1 to 11.4, to make as full a comparison of the two regimes as possible.

Table 11.6

Main Features of the Buyers' and the Sellers' Market The lines of table 11.6 each consider separately spheres of phenomena that partly overlap. The divisions are a help, however, in picking out the individual conjunctions of problems.

1. Information. Information is required so that the seller and the buyer can meet up with one another. In a buyers' market this is mainly the concern of the seller, who advertises or sends a salesman around to the buyer. Of course, there are things for the buyer to do as well. It is not easy to find one's way around a wide range of choice; even in a buyers' market, price differences between close mutual substitutes are an incentive for search and discovery of the price-quality combination most favorable to the buyer.

In a sellers' market, information is mainly the concern of the buyer, who must obtain it. There is practically no advertising in a classical socialist economy. If not a household, a firm as a buyer sends a representative to the seller. The buyer often has to invest great effort in discovering where a desired product can be found.

2. Adjustment. In a buyers' market, the seller tries to identify as accurately as possible what the buyer needs, and adjust to it as much as he can. The goods he stocks are those for which he expects a demand. If he works to order, he tries to fulfill the orders as punctiliously as he can.

In a sellers' market, on the other hand, the buyer adapts to the seller. Forced substitution, search, postponement, accommodation of buying intentions to supply constraints, or complete abandonment of them are the various forms of forced adjustment caused by shortage. Of course, that does not mean the seller dictates totally to the buyer. The seller is obliged to some extent to consider the likely demand.

3. The buyers' and sellers' efforts to win the other side over. In a buyers' market, sellers compete with each other for the buyers' favor and confidence, and ultimately for their willingness to buy. So with justification it is also termed sellers' competition.

Under conditions of perfect competition, a generally applicable price level develops out of impersonal processes, and both sellers and buyers are pricetakers, that is, obliged to accept the market price. In practice, this kind of market operates only in the exchange of standard products, all of whose quality specifications are clearly known (as in the example of grain mentioned earlier). Since the price and quality are set, only one more decision remains for both seller and buyer: the quantity they wish respectively to sell and buy. (Naturally, one possible decision is to sell or buy none.)

The situation differs entirely under the conditions of imperfect competition that necessarily arise in the case of nonstandard, differentiated products. The seller of all differentiated products and services is a “monopolist” to some extent, whether it is the quality of the product or service or the place or particular time of sale that distinguish one seller from other sellers. The price is not set externally; the seller is the price-maker.

Sellers can win buyers from competitors with similar but not absolutely identical goods if they ask a lower price. In addition, they have a chance to engage in nonprice competition. They may win the buyers' custom (to repeat what was said under points 1 and 2) by advertising more convincingly, employing cleverer salesmen, and guessing better what the buyer needs.

Other efforts can be added. Sellers will try to be as friendly and polite as they can to the buyers. They will perform many special services, if possible better than their competitors, offering a wide range, packing the good more attractively and carefully, perhaps providing delivery to the buyer, accepting a shorter deadline, or offering more favorable payment or credit facilities. Most important of all, they will woo the buyers with new products of better quality.

The most important weapons of all in the competition for buyers are quality improvement and product innovation.

All these efforts are mingled with harmful ones: attempts to manipulate buyers through misleading advertisements, cosmetic changes to the product, and pretense innovation. Corruption exists in all societies. In a buyer's market, the seller tries to corrupt the buyer.

The situation is the other way around in a sellers' market. Here there is buyers' competition for the seller's favor, or more precisely, willingness to sell. The buyer's efforts to obtain information and his or her forced adjustment have been mentioned. One can add to them the opposites of all the occurrences in the previous list.

The seller is unfriendly and impolite with the buyer, while the buyer tries to flatter the seller and win his or her favor. The corruption points in the opposite direction: in retail trading, the buyer gives the “sweetener,” an extra, under-the-counter payment to the sales clerk in order to obtain a good in the store at all. Firms employ “expediters” (tolkach in Russian), who obtain the inputs their firms require through personal connections, by doing favors, and perhaps with bribes. The selection is narrow, the packing is ugly and flimsy, and the buyer has to transport his or her purchases as best he or she can.

A producer or seller working to order quotes a long deadline and often fails to meet it. As a rule, there are no credit sales. The gravest side-effect is that there is no competition spurring the producer or seller to improve product quality or to innovate.

4. Uncertainty. The economic processes take place amid uncertainty: no seller knows accurately the intentions and capabilities of the other sellers or the buyers, and conversely, no buyer knows accurately the intentions and capabilities of the other buyers or the sellers. The problem ties in with the acquiring of information, discussed under point 1, but other aspects need mentioning as well.

In an uncertain situation it is useful to have reserves. A buyers' and a sellers' market differ again according to who has to build up the reserves. In a buyers' market it is mainly the seller.

The producer or seller in a trade whose technical nature dictates that sale from stock should be customary holds appreciable output stocks. In a trade whose technical nature dictates that production or delivery to order should be the custom, the seller holds appreciable reserve capacity. But even branches producing for stock normally keep some reserve capacity.

The stocks of output and reserve capacity are needed so that the seller can adapt quickly to buyer requirements; if possible, no buyer should leave disappointed or unsatisfied, lest he or she become a competitor's customer instead.

But in a sellers' market, no appreciable output stocks can accumulate, as the buyers soon snatch up output, unless it is a frozen stock of some useless good. There is no real reserve capacity. The superior organizations try to tighten production to the limit of capacity. Even if the producer succeeds in concealing part of its capacity during plan bargaining it will not use that surplus for the buyer's sake, and so it does not count as mobilizable reserve capacity.

The shortage phenomena and the uncertainty of obtaining supplies induce the buyer to hoarding, that is, to build up large input stocks. Buyers make up for the absence of mobilizable producer reserve capacity by themselves producing the inputs they lack, if need be. This occurs even in the household in the form of handyman, do-it-yourself activity, and is thoroughly typical of the producer firms in classical socialism, whose high degree of vertical integration is largely explained by the shortage syndrome. Wherever possible an engineering works makes its own components and has its own foundry, and even its own building department, because it does not believe any outside firm will deliver a part or a casting, or provide a construction service on time or in an orderly way.

This line of thought provides a basis for assessing table 11.7, which gives an international comparison of the composition of stocks. The figures show clearly that input stocks are relatively low in countries with a buyer's market, in line with the present hypothesis, and that the proportion of output stocks is relatively high. In countries where a sellers' market is assumed to operate, the proportions are reversed. This index number is quite stable; it varies little with the changes in the momentary state of the economy, which makes it highly suitable for distinguishing statistically the two kinds of regime, in other words, the lasting differences between a sellers' market and a buyer's market.

Table 11.7 summary: Socialist countries maintained significantly higher ratios of average input stock to average output stock in manufacturing from 1981 to 1985 compared to capitalist countries. For socialist countries, the ratios ranged from 3.07 in Czechoslovakia to a high of 6.10 in Hungary, with the Soviet Union at 3.16. In contrast, capitalist countries all remained below 2.0, with West Germany at the lowest ratio of 0.71 and Finland at the highest for that group at 1.92.

Some parties in the economy inevitably suffer losses from the uncertainty, even if they conduct extensive information activity and keep appreciable inventories. These losses are incurred mainly by the seller on a buyers' market. Some of the competing sellers have less skill or luck in assessing the likely situation, and so make smaller profits or even become insolvent. The buyer is less affected by the uncertainty.

By contrast, in a sellers' market almost all the consequences of uncertainty are borne by the buyers. If they weigh up the situation badly or have no luck (or connections), they do not receive the goods or have to make more forced adjustment. Sellers have nothing to worry about. They can assume that almost all output is salable, and if there should be any difficulties, paternalism and the concomitant soft budget constraint will see them through.

5. Relative power. The time has come to sum up the main attributes of the two regimes. Who is stronger? Who has power over the other? Who can force the other to do things he or she would not do of his or her own accord?

The seller has ascendancy in a sellers' market and the buyer in a buyers' market. Nor is this just a question of two possible discrete states. There is a scale of relative power. Even if one cannot calibrate the scale accurately at this point, it is worth noting that it is possible for the seller to have, say, a small, medium, or very strong power advantage over the buyer, and vice versa. Remaining with the narrower subject of shortage, it depends on the frequency, prevalence, and intensity of the shortage phenomena whether the seller is stronger or weaker in relation to the buyer, and whether the buyer is at the seller's mercy to a greater or lesser extent.

In a particular country, the relative power can vary in time and between sectors of the economy. It may be that the seller's advantage over the buyer decreased in Czechoslovakia between 1978 and 1980 and increased in Hungary, and that in both countries the ascendancy was more pronounced in the state housing sector than in the clothing market. The present discussion, however, is not intended to deal with these short-term temporal changes and sectoral variations. What table 11.6 compares is the two regimes' lasting attributes, their natures.

The relationship between seller and buyer is among the most important social relationships. Marx turned to Greek drama for the metaphor of the masks worn by characters. There are tragic and comic, or heroic and villainous masks. The personal expression of the person concealed behind the mask is immaterial; the role that the actor plays in the drama is expressed by the mask.

Social relationships develop character masks of this kind. No one can say that the sellers are benevolent in a buyer's market or malevolent in a seller's market. It is the situation, one's own interest, and the role one plays under the prevailing conditions that induce the seller to be attentive and friendly to the buyer in the first case and inattentive and unfriendly in the second.

The same person who is rude to the buyer when playing the part of seller is incensed by the indifference when she finds herself in the buyer's position. Ultimately, this is a social relationship in which power is divided between the seller and the buyer, to the advantage of one party and the detriment of the other.

Here a short terminological detour is needed. Though the detailed causal analysis comes later, it is already clear that there is a close relationship between the mass, chronic phenomena of shortage, on the one hand, and the dominant role of bureaucratic coordination mechanism, on the other. This assumption is supported indirectly by the well-known fact that mass, lasting shortage does not arise in economies (or in certain spheres of those economies) where bureaucratic influences limit operation of the market mechanism of coordination to a small degree only. So, in fact, it is not a happy choice of words to describe as a “sellers' market” a form of coordination that hardly possesses or entirely lacks a market character. Nonetheless, I have been obliged to use the expression in this book, since it is the most prevalent one in other writings on the subject.

Source: Compiled by A. Chikán for this book.

11.6 Normal Shortage and Normal Surplus

Whatever system one sets out to describe, one of the most important characteristics is what market regime operates in it. One of the regularities of the classical socialist system is that a sellers' market prevails, in other words, that the system is a shortage economy.

Although all classical socialist systems without exception share this feature, countries, and within each country, spheres and periods in history, still vary in the intensity of the shortage and the scale of the seller's advantage over the buyer. In this respect appreciable variance can be observed.

Analysis becomes easier if the concepts of normal shortage and normal surplus are introduced. These categories cannot be employed universally; they are applicable only when a degree of temporal stability can be observed in the shortage and surplus in a particular country over a fairly long period. One can say of country A, in terms of an intertemporal mean over quite a long period, that consumers typically wait an average of eight years for rented public housing and six years for a car. Though the quarterly observations vary around the averages of eight and six years, they do not depart from them greatly: there is always a waiting list, and the queue never lengthens much beyond the averages stated. Meanwhile, in country B, taking the average of a fairly long period, people typically wait only three years for housing and two for a car. Both countries in the example have shortage economies, and a sellers' market regime applies in the housing and automobile sectors of both. Yet the fact that the normal shortage is more intense in A than in B is an important distinction between them.

Of course, the two queuing periods given are merely examples. One could conduct a similar analysis of the normal values of many other indices, ranging from ratios of forced substitution to the number of stores visited before a purchase is made, or to the ratio of rejected and accepted orders.

The numerical characteristics of normal shortage and normal surplus, comprehensively the normal state (or, in a dynamic setting, the normal path), are not valid in perpetuity. Even within the classical system, there can be changes in the external and internal political situation or the system of political and economic institutions in society, bringing about a new normal state. Such changes may result, for instance, from transitions from a peacetime to a wartime economy or the reverse, from replacement of a policy of fairly high growth with one of more moderate growth, and so on.

Classical socialism never changes from a sellers' market regime to a buyers' market regime; it never ceases to be a shortage economy. Even so, it is important to establish the scale of the normal shortage and normal surplus under various historical circumstances. Also worth following is the way the various indices of shortage and surplus fluctuate year by year and quarter by quarter around their normal values in a particular country over a certain historical period.

For specific mechanisms are at work in the system, and although these allow short-term fluctuations, the shortage and surplus are drawn constantly back to values near the normal shortage and normal surplus. These mechanisms are discussed in more detail in the following chapter during the causal analysis.

There is no way of demonstrating what has been said with a comprehensive international comparison. It would have been most instructive to have regularly observed the phenomena of shortage and surplus, measure them, and publish the results, but unfortunately no socialist country did so. The situation is rather as if the capitalist countries would never publish figures for their system-specific problem, unemployment. The official statistical institutions cannot be excused by the admission that it would have been a highly difficult measurement task.

These days there are plenty of known, usable indices for analyzing comprehensively the phenomena of shortage and surplus, the process of forced adjustment, and the behavior and mutual relations of the seller and buyer. Some sporadic data on shortages are presented in this chapter and the next. Even these few examples confirm that it was feasible to observe and measure the phenomena of shortage.

Shortage and surplus cause losses, which are discussed in section 12.11. But they belong to the accustomed, normal order of life under this system, which is what justifies referring to normal shortage and normal surplus. No one is surprised that commodities are in short supply or that one has to queue; housewives, buyers of inputs for firms, foremen, and workers have adapted their way of life and norms of behavior to the normal conditions of a shortage economy.

Normal state is a concept related to equilibrium. The latter has several meanings, and so some conceptual clarification is required. In a wider sense equilibrium denotes the steady state of a dynamic system. That is how the concept is understood in the mathematical theory of dynamic systems and the natural sciences that make use of its apparatus. It is a value-free concept: no one argues that the state of equilibrium in a chemical system is “good.” Many economists have taken over this meaning. Where that is the case, a system is in disequilibrium when it departs from its own state of equilibrium, the steady state typical of it. This is the sense in which Keynesian macroeconomics uses “unemployment equilibrium”: there is a customary, steady rate of unemployment under the system, in which mechanisms operate to restore the customary unemployment if it is upset. In the same sense, one can talk of a shortage equilibrium as a synonym for normal shortage.

Other economists use the concept of equilibrium in the narrower sense of a desirable state of equality between demand and supply. Theoretical writings use an adjective to distinguish this special type of equilibrium: Walrasian equilibrium. Of course, a shortage economy is not in equilibrium in that narrower sense. More precisely, there emerges in certain periods and certain spheres of the economy a specific kind of aggregate equilibrium, which was termed the forced adjustment equilibrium in section 11.2. It is accompanied, however, by a variety of discrepancies between demand and supply and numerous loss-inducing shortage phenomena covered in sections 11.1 to 11.5.

11.7 Open, Declared, and Hidden Inflation

Study of the relationship between shortage and inflation is kept for the next chapter. The task here is to clarify a few concepts, and then arrive at some statements. still to do with the phenomenon of inflation.

Inflation is not system-specific; it can arise under any system. It always ties in with upward pressure on the prices of a great many (not just a few) products, and on the price level as a whole. This upward pressure can be traced directly from the pull of excess demand, the push of rising costs of products and services, or a combination of the two. The effects of demand and costs are usually closely connected.

A case where the market equilibrium adjusts once and for all to a single wave of price rises cannot be termed inflation, which is always a dynamic process: the original upward pressure on prices must constantly reproduce to cause an inflationary process.

If the price level steadily rises without administrative resistance, one speaks of open inflation. If the rise in price level (and the normally accompanying rise in nominal level of wages) is slowed or even halted by administrative price control (and usually administrative wage control), there is repressed inflation.

Tables 11.8 and 11.9 contain official price statistics for a few countries, whose reliability will be examined in a moment. It emerges even from the column of official Soviet figures, however, that there was very strong open inflation for a long period. In spite of its strict central control of prices and wages, the classical socialist system fails to ensure a complete stability of prices.

Table 11.8 summary: Official retail prices in the Soviet Union saw the most significant average annual increases during the periods of 1928 to 1937 at 20.5 percent and 1941 to 1947 at 18.1 percent. Following these peaks, price changes fluctuated, reaching a low of negative 8.2 percent between 1948 and 1957. From 1958 through 1989, annual changes remained relatively low and stable, ranging from a slight decrease of negative 0.1 percent in the early seventies to a peak of 2.1 percent from 1986 to 1989.

: Table 11.9 summary: Capitalist countries generally experienced higher average annual changes of consumption than socialist countries. Among capitalist nations, Spain had the highest rate at 10.05, followed by Italy at 9.08 and Ireland at 9.24, while West Germany was the lowest in this group at 3.95. Among socialist countries, Poland saw the highest increase at 4.97, while East Germany experienced the lowest at 1.21.

Table 11.8

Source: For the period 1928 to 75: D. M.. From 1976: United.

Nonetheless, after the first wave of inflation following the Second World War, many socialist countries managed to stabilize the price level quite firmly, at least according to the official statistics. This is one of the achievements frequently cited in the official ideology, and it is eagerly contrasted with the far higher rate of inflation in many capitalist countries.

But how reliable are these official statistics? There are many methodological problems involved in measuring the price level in any country. Where there is political and scientific liberty, however, any bias in the state's figures can be challenged by independent experts, or by professional representatives of particular social strata, such as researchers working for the trade unions.

This contrasts with the situation under the classical socialist system, where the central statistical offices have a total monopoly over the compilation of price statistics, and there is no opportunity for subjecting the calculations to open criticism. What is more, those running the economy have an interest in denying the scale of any inflation as far as possible. If price stability has been blazoned as a propaganda victory, an admission that the price level is rising will undermine the system's own arguments. Moreover, the high rate of growth is paraded as an achievement. The rate of output growth measured at prevailing prices would look far lower if a bigger deflator were used to calculate production volume at constant prices; in other words, conceding there was a rise in price level would weaken that argument for self-legitimation too.

The official statistics are distorted methodically in various ways; there is a measure of hidden inflation that the price statistics cover up.

Hidden and repressed inflation should not be confused. Repression of inflation means prices do not rise despite the upward pressure, whereas prices do rise if there is hidden inflation, although the official statistics deny that the rise has occurred. In that sense, total open inflation consists of two components: the inflation declared in the official statistics, and the hidden inflation.

Looking behind the scenes, one might find cases of conscious distortion of aggregate figures and the overall price index. But although the possibility cannot be excluded, there is no conclusive evidence either. The price index may become distorted, however, without any recourse to crude, central falsification. Four ways need mentioning.

1. The central price index relies on reports from below, from production and trading companies. As each report passes up through several levels in the hierarchy, those forwarding it realize that a price rise reflects badly on them; it is in their interest to gloss over any flagrant price increases. So the center aggregates reports that have been distorted in advance.

2. Firms often impose disguised price increases. Although profit is no matter of life and death to firms, as mentioned before, so that they are not in despair if they incur a loss, it remains more comfortable to avoid one by raising prices, rather than having to ask the superior organizations for help.

If a cost rises, in many cases it is not worth seeking official acknowledgment of it in a rise in the current administrative price. It is far easier to make some fairly simple modifications to the product, so that it becomes a “new manufacture” for which a new price can be calculated. The calculation then incorporates the increased cost in advance, which is acknowledged when the decision on the new administrative price is taken. In such cases the price authorities know what is happening too, but their motivation (a desire to demonstrate “price stability”) coincides with the interest of the firm, and so they quietly acknowledge the procedure taken.

Let me add here that the firm is also interested in a disguised price increase because it can make the output plan, calculated at prevailing prices, easier to fulfill.

3. The statistical principle of comparability must be observed in the compilation of price indices. Note must be taken exclusively of products and services made in exactly the same quality last year as this when the price levels of the two years are compared. Generally speaking, that strict criterion is met by standardized products, whereas differentiated products do not usually satisfy the criteria of comparability because there are constant changes in their quality.

If there is no administrative control of prices and the market mechanism operates fully, a close correlation develops between the price movements of standardized and differentiated products. The prices of both groups settle freely, and there is no chance of the price level for standardized products lagging behind the level for differentiated products, because then it would not be worth making the former. So the calculation is not distorted by the components of the price index, on the long-term average, even if the whole of production is represented by the standardized products.

The situation differs under a system in which production and prices are coordinated bureaucratically. In the main, the price authority is able to set real administrative prices for standardized products, where price fixing can be enforced over a long period. For many differentiated products only pseudo-administrative prices can be set in real life.

The price authority cannot control them fully, and disguised price increases are common. So there is a looser correlation between the price movements of standardized and differentiated products; in fact, the latter's price level may rise much faster than the former's.

If the standardized products are taken in this situation to represent the movement of the whole price level (pleading comparability), the price index is methodically biased downward.

Technical advance and consumption growth necessarily raise the proportion of differentiated products in total production. The greater this ratio and the wider the sphere of pseudo-administrative pricing, the greater the bias in the price index.

4. There is an informal private sector even under classical socialism. The price changes within it are not covered by the official price index, whereas the big rise in gray-and black-market prices is the clearest reflection of the shortage of the state and cooperative sectors' goods and services. A truly comprehensive price index must be an average of the price levels in the formal and informal sectors weighted according to the sectors' real volumes. The bias can be sizable, depending on the informal sector's share of total output and the discrepancy in the two price levels.

Many Western economists have expended great effort on experiments in eliminating one or another of the distorting factors just mentioned and elaborating alternative estimates. Table 11.10 gives two examples of this. The table shows that the distortion concealed in the official statistics is substantial. Of course, such experiments cannot provide a substitute for a conscientious internal audit of the statistics, since one could only obtain all of the figures required inside the country.

Table 11.10 summary: Average annual rate of change of prices across several Eastern Bloc countries shows that independent estimates from Alton and Culbertson-Amacher are consistently higher than Official figures. For instance, in Poland from 1976 to 1978, the Official rate was 5.9 percent while the Alton estimate was 8.0 percent. Similarly, for the period 1963 to 1970, Culbertson-Amacher estimates far exceed Official rates, such as 8.6 percent in the Soviet Union compared to the Official 0.1 percent, and 6.3 percent in Romania compared to the Official 0.4 percent. While Official figures often remain near zero, such as in East Germany, where they ranged from minus 0.3 to 0.0 percent between 1971 and 1978, the Alton estimates for the same period were higher at 0.7 and 1.3 percent.

Table 11.10

Price Indices of Socialist Countries: Alternative Estimates were taken used differing official statistical sources.

Without wholly reassuring figures to go on, it is hard to arrive at general statements, but the following can be put forward as a working hypothesis. The control mechanisms of the classical socialist system make it possible for the prices to resist the inflationary pressure. At least several countries over longer periods of time, if not every country all the time, managed to ensure price stability to quite a substantial degree.

Source: F. L. Pryor (1985, p. 123).

Source: D. M. Nuti (1986a, pp. 50, 52), who uses the following sources: 1963–70, columns 1 and 3: W. P. Culbertson and R. C. Amacher (1972); 1971–75 and 1976–78, columns 1 and 2: T. P. Alton et al. (1979).

Note: Although the periodizations of tables 11.9 and 11.10 differ, so that they cannot be compared directly, it is clear that the official indices given for several countries in table 11.10 are lower than those in table 11.0. The Western researchers from whom the figures

$ ^{1} $A substantial proportion of the ideas put forward in chapters 11 and 12 are based on my earlier works. Already my first book, Over centralization in Economic Administration [1957] (1959), discussed the issue of shortage. Later that was one of the central themes in Anti-Equilibrium (1971) and Economics of Shortage (1980). A considerable part of the conceptual system and the analysis that follows has been taken over from those works of mine.

My ideas on the subject have altered several times during several decades of research, influenced partly by the works of other authors and partly by debates around what I wrote. In this book I have tried to include everything I can accept of the ideas of other authors. I aim to integrate all I am able to subscribe to into the account as a whole. I do not offer a more detailed breakdown of the remaining differences of opinion, apart from making comments of a dissociative kind in one or two places. In line with the general plan of this book, with only a few exceptions, I do not use its pages as a forum for debate. I would not wish to burden readers with a detailed account of how the position expressed in this book coincides with and differs from my earlier views.

The two sources of intellectual inspiration on the subject of shortage are Marx, who was an outstanding pioneer in analysis of lasting deviation from market equilibrium, primarily in his analysis of labor surplus (see chapters 23 and 24 in volume 1 and chapters 14 and 15 in volume 3 of Capital [1867-1894] 1978), and the work of Keynes (1936) on relations among unemployment, macro demand, and investment.

Recent literature on non-Walrasian equilibrium and disequilibrium has played an outstanding role in investigating the problem area. The pioneers of this school are R. W. Glower (1965) and A. Leijonhufvud (1968). See, furthermore, J.-P. Benassy (his comprehensive work of 1982), E. Malinvaud (1977), J. Muellbauer and R. Portes (1978), R. Portes and D. Winter (1980), and R. Portes et al. (1987). This group is called in many works the Disequilibrium School.

On the subject of chronic shortage under the socialist system, the following pioneer works must be mentioned: L. N. Kritsman (1926), V. V. Novozhilov (1926), M. Kalecki (1970, 1972), F. D. Holzman (1960), and H. S. Levine (1966).

Attention is drawn particularly to the works that take issue with the ideas I expressed on the theme of shortage. The highly influential works of R. Portes and other members of the Disequilibrium School need underlining above all. Other important polemical works are K. A. Soos (1984) and S. Gomulka (1985).

Other references to major researches in the field of shortage can be found in the later footnotes to chapters 11 and 12. The volume edited by C. Davis and W. W. Charemza (1989) and the excellent summarizing article by J. M. van Brabant (1990) give a broad survey of the debate.

$ ^{2} $The formal and informal private sector plays only a small part under the classical socialist system, gaining weight appreciably in the reform period. So analysis of the relations manifested between private production, on the one hand, and shortage and inflation, on the other, is postponed until later [ $ \rightarrow $19.1, 19.5, 23.5].