In the mid-1970s, a system-wide noncyclical economic crisis of the planned economies of the USSR and the European socialist countries began to appear. This crisis was unlike the cyclical crises of capitalist economies. It expressed itself through shortages of consumer goods and deliveries of supplies to industrial enterprises, and failure to meet goals of five-year plans for volume of production and increases in living standards.

Among factors contributing to this crisis were the U.S. escalation of the arms race to strain the economies of the socialist countries, a U.S.-led embargo of technology transfer, and violations of democratic centralism in the ruling Communist parties.

More important was the lack of an adequate material and theoretical base for the management of a planned economy. Sorely needed, for example, was a theory of commodity relations to determine prices paid by one enterprise to another in the absence of a competitive market.

A growing gap in productivity emerged between the socialist and capitalist economies. Consequently, the gap between the standard of living in the socialist countries (in spite of their initial gains) and the developed capitalist countries began to widen.

Why was the theory of price formation important? Marx showed that in a market economy the workers’ labor is the sole source of capitalist profit. The workers receive as wages only a portion of the value they add in production. But the labor time embodied in a commodity is due not only to the live labor of the workers, but also the “dead,” or previous, labor embodied in the production of the raw materials, prefabricated inputs, depreciated tools, and factory plant. Marx showed that capitalist profit is the difference between the value added in production by the workers and their wages.

Although the capitalist’s source of profit is only the live labor employed, the price is not just determined by the sum of labor time of the live and dead labor embodied in the product. If that were the case, the profits in more labor-intensive industries would be higher than in the other branches of industry and capital would flow into them, resulting in a commodity glut and a decline in prices. Due to the outflow of capital from the less labor-intensive branches to seek the higher profit, the demand for goods produced by those branches of industry would exceed the supply and the price would rise.

Marx attributed to market forces the adjustment of prices so that approximately the same rate of profit occurs across all branches of the economy, thereby stabilizing the distribution of capital investments. Technological innovations occur on the background of the interplay of such market forces, and are largely the product of the associated market-driven allocation of funds for research and development.

Without comparable market forces, a socialist planned economy competing with a capitalist economy on the world market must have a theoretical basis for consciously relating prices to labor input in a similar manner and providing a comparable stimulus for technological advance.

The political leadership of the socialist countries did not recognize the seriousness of such problems. And even had such a theory been developed, the material base for the accumulation of the data needed to apply it did not yet exist. Thus the provisions for technological development in the five-year plans through the adoption of targets for economic efficiency of individual enterprises or branches of industry amounted merely to desire, owing to the inability to coordinate such targets with developments in the world market and the lack of serious economic consequences to an enterprise for failure to reach its productivity targets. In a market economy, on the other hand, technological advance is a matter of life and death for the enterprise.

The introduction of the socialist planned economy to utilize a nation’s resources in what appeared to be the most rational way was, in reality, premature and, despite its many powerfully positive accomplishments, must be viewed as a variant of utopian socialism. The decision in Vietnam, China, and, to a lesser extent, Cuba to move to a socialist market economy should therefore not be considered a retreat but a historical-materialist recognition of the necessity of not skipping stages of social evolution.

A socialist market economy will certainly have its problems, as I will show in next week’s article with the example of Vietnam. The standard of living of the people there has nonetheless risen severalfold, a positive result that outweighs the social cost.

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