This collection of essays in honor of Abram Bergson pays tribute to a distinguished teacher, scholar, and friend whose intellectual vision has vivified research in the fields of welfare economics and the economics of Soviet socialism. The enormous impact that his works have had on the development of these disciplines during the last four decades is attributable not only to the innovative spirit of his scholarship, but also to its unity. The common thread tying together the disparate strands of his life's work lies in his overriding concern with the phenomenon of human welfare. Soviet economic institutions and working arrangements are of interest not simply because they exist, but because they shed light on the possibility of organizing society in a better way, a way that improves the quality of life. This possibility, however, as Bergson never tires of stressing, should not be confused with its realization. The consequences of social action are often complex and contradictory. Their appraisal depends not only on scrupulous quantification but on a lucid understanding of the factors determining economic welfare. It was one of Bergson's greatest achievements to clearly recognize at the outset that the comparative economic merit of Soviet socialism could not be assessed without the aid of a rigorously elaborated, pure theory of economic welfare. His seminal research on social welfare functions should be seen in this light, attesting to his enduring commitment to advance our scientific understanding of the determinants of human welfare.

Introduction

The initial hypothesis that led to this chapter concerns the effects on aggregate growth of differences among production sectors in the potential rise in their productivity (per worker, or per unit of total input). Assume production sector I, which, for a variety of reasons (e.g., lesser role of recent technological innovations or greater institutional resistance to them), is assigned an expected lower rise in productivity over the next decade than production sector II. Then, if two economies differ in the proportions of sectors I and II in their product and inputs, economy 1, with a larger proportion of sector I and lower proportion of sector II, would tend to show a lower rise per worker (or per unit of total input) than economy 2; and this, under usual conditions, would also mean a lower rate of increase in per capita product (i.e., aggregate growth) in economy 1.

The general statement above can be made more meaningful by referring to identifiable major production sectors – A, agriculture and related activities, and the rest, (I + S), or the sum of industry and services. We can also use the familiar ratios for the less developed (LDC) and developed (DC) market economies. The simple example presented in Table 1, using labor force as the only productive factor (our data on others are still quite scarce), and thus dealing with changes in product per worker, illustrates the initial hypothesis.

Introduction

Western specialists hold sharply divergent views on whether Soviet international trade is economically rationa. This chapter attempts to advance the position developed in my previous studies that comparative advantage explains the pattern of Soviet foreign trade better than alternative hypotheses. Acknowledging all the bureaucratic impediments that constrain Soviet foreign trade planning, acknowledging that Soviet prices are not general equilibrium prices and that efficiency indices do not substantially remedy their deficiencies, it is nonetheless argued that Soviet foreign trade is determined by its “fundamental comparative advantage.” The term “fundamental comparative advantage” implies that comparative advantage holds in a delimited sense. It suggests that for a set of basic industries at a high level of aggregation, production costs are sufficiently differentiated to permit various sectors to be grouped into high and low domestic cost categories, which can be utilized to compute gains or losses from foreign trade.

Fundamental comparative advantage does not imply that individual commodities within any particular sector will be properly valued or exchanged according to the norms of general equilibrium. Similarly, fundamental comparative advantage does not imply that composite goods will be traded in optimal volumes and proportions. All that it stipulates is that low-cost goods for the basic aggregates will be exported and high-cost goods imported, and that when opportunity costs change, the pattern of tradeables will adjust appropriately.

This amounts to the assertion that the first-order partial derivatives of aggregate sectoral tradeables with respect to price are positive and the second-order partials are negative, as theory requires, without further presumption as to global properties or full general equilibrium optimality.

The basic framework

A. Introduction

Theoretical work on corruption has so far been grounded in the political–economic environment of Western capitalist societies (e.g., Becker and Stigler, 1974, and Rose-Ackerman, 1978) or underdeveloped countries (e.g., Johnson, 1975; Krueger, 1974; and Scott, 1972). Papers discussing corruption in the Soviet Union and Eastern Europe are mainly descriptive and lack both a well-developed theoretical structure and a comparison with Western experience (see Grossman, 1977; Katsenelinboigen, 1978; Kramer, 1977; and Simis, 1979). This chapter attempts to organize the material available on corruption in Soviet-type economies and to develop theoretical principles capable of explaining the behavior of corrupt agents in these systems.

We first identify a few of the most salient characteristics of Soviet-type economies. This exercise permits usto isolate corrupt incentives that may lead people to break the law or to violate the rules laid down by their organizational superiors. We speculate on the efficiency of corrupt transactions and consider how modifications in the rules might deter such behavior. The evidence we supply is anecdotal and is used merely to illustrate our points. The comparisons we make with corruption in market-oriented economies are meant only to set in relief the particular modes of behavior we think are more likely to be encountered in centrally administered Soviet-type economies.

In our stylized Soviet-type economy the bulk of economic activity is carried on by individuals, called agents, organized in a complete hierarchy (CH).

As I write, the new welfare economics is just over four decades old. This subject, in its essentials as we know it today, was born when the 24-year-old Abram Bergson – then still a Harvard graduate student – wrote his classic 1938 Quarterly Journal of Economics article. To one like myself, who before 1938 knew all the relevant literature on welfare economics and just could not make coherent sense of it, Bergson's work came like a flash of lightning, describable only in the words of the pontifical poet:

King Alphonse claimed that if he had been in on the Creation, he could have done a better job. By sheer good luck, as a fellow graduate student and comrade at arms, I was in on Bergson's creation: but time has shown that I have not been able to do a better job of it; nor, I believe, has anyone else – and this despite the quite confused rumors that Kenneth Arrow's Impossibility Theorem rendered Bergson's “social welfare function” somehow nonexistent or self-contradictory.

Here I hope to set the record straight as only a living witness and participant can. After a few introductory sections that sketch the historical setting of modern welfare economics, I provide under the heading “Existence and Property of a Bergsonian Social Welfare Function” an analytical exposition of some of the fundamentals of the Bergsonian welfare economics.

In the spirit of Abram Bergson's life's work, the essays contained in this volume are devoted to the theme of economic welfare, assessed both from the standpoint of pure theory and the behavior of the Soviet economic system. The book is divided into two parts. The first deals with the Soviet economy. The chapters in this section are arranged according to their generality, beginning with an overview of the development of Soviet economic studies and concluding with a detailed empirical analysis of the determinants of Soviet international trade. Part II focuses on welfare economics. Abram Bergson's contribution to welfare theory is appraised by Paul Samuelson in the opening essay. Special topics in the field of economic welfare are then explored by Kenneth Arrow, Simon Kuznets, and Jan Tinbergen. The section concludes with Martin Spechler's reappraisal of the economics of socialism, a subject that epitomizes Bergson's intellectual vision. A short biographical sketch and a complete list of Abram Bergson's publications are provided at the back of the volume for those wishing to delve systematically into his oeuvres.

Abram Bergson has devoted much of his life as a scholar to probing the efficiency of socialism. As he has taught us, such a complex matter must be analyzed at several levels – growth performance, “working arrangements” for allocating resources, and the theoretic consistency of idealized systems for operating an economy with social ownership of the means of production. Conclusions at one of these levels draw support from those on others. Moreover, Bergson has always insisted that systems be compared on like levels. Unlike other nonsocialists, he has never tendentiously held actual Soviet shortages and waste up to scorn against the purity of general equilibrium market models. Rather, the Lange, “computopia,” or other models are to be tried by the same procedures as the Walrasian or other parables of how capitalist economies work.

This chapter attempts to follow Bergson's lead by examining the question of product quality under socialism at the theoretic level. What should be the quality of goods under socialism? Can a mechanism be designed to secure those results efficiently?

The most trenchant critics of socialism have long asserted that only a free capitalist market can produce the right goods at the right time and place. Although one may concede Stalin's superiority in mobilizing resources and forcing through major structural changes, nearly all Western economists would agree that the delicate adjustment of product quality to the precise needs of producers and to changing demands of consumers constitutes a critical test of any developed socialist economy.

Czarist growth: Soviet growth in historical perspective

Western empirical research on the planned socialist economies was initiated, in large part, by the pioneering work of Abram Bergson and his associates. Bergson's own recalculations of Soviet national income have served as the model for other researchers, who have extended this line of inquiry to Eastern Europe and to China. This empirical work has allowed economists to deal with the issue of the relative efficiency of planned socialism and to define the characteristics of the socialist model of economic development.

To this point it has been difficult, if not impossible, to evaluate Soviet economic development in proper historical perspective, for relatively little is known of the economy that the Bolsheviks inherited from their czarist predecessors in 1917. The extant evaluations of Soviet economic growth and structural change are usually cast in terms of comparisons with the early (pre-Five-Year-Plan) Soviet period or with the historical or cross-sectional growth experiences of capitalist countries. Bergson's own calculations, for example, begin in 1928 on the eve of the First Five Year Plan; Kuznets's evaluation of Soviet growth rests upon comparisons with the industrialized West.

Lacking are comparisons of economic growth and structural change during the Soviet era with the late czarist era. Such comparisons are important for two reasons: The first is the need to determine the long-term growth rate during the late czarist era, in order to establish whether growth accelerated following the initiation of centralized planning.

Introduction

The level of world external indebtedness is rising and presently exceeds all previous historical levels. The external public debt of 84 developing nations amounted to approximately $174 billion in 1975 (IMF, 1977a, p. 177). As a result of the rise in raw materials prices, particularly of petroleum, many advanced Western industrial nations are rapidly liquidating external assets or are also going deeply into debt. At the end of 1975, Great Britain led the pack with a debt of about $45 billion, France was next with $20 billion – an amount exceeded by Mexico and Brazil (New York Times, 1976). According to the same source, net foreign currency liabilities of Euromarket banks exceeded $275 billion. Finally, in tune for once with the capitalist world, the communist nations (referring here primarily to the USSR and the rest of Eastern Europe) have also been borrowing from abroad – and from the West at that – at unprecedented rates with debts, at the end of 1976, probably aggregating in excess of $40 billion – and the end not in sight. This is surprising both because of the speed of the recent debt buildup and because until less than a decade ago, the Eastern nations followed policies largely designed to avoid any significant accumulation of external debt.

The issue with which we shall be concerned here is how to approach the question as to whether it is wise from an economic standpoint for the Western nations to continue to expand credits to the communist nations.

Introduction and summary

The concept of the social welfare function was introduced by Bergson in his classic paper (1938) to express preferences over resource allocations to all individuals in society. Just as the commodity bundles of an individual are supposed to be compared by his or her individual preference ordering, so the alternative allocations of commodity bundles to all individuals can be ordered by a social welfare ordering over this entire space. As with any ordering satisfying certain regularity properties, the social welfare ordering can be represented by a real-valued function, the social welfare function. Its significance is essentially ordinal, but under additional conditions of separability the function representing an ordering can be chosen to be additive in an appropriate choice of variables.

The optimization of a social welfare function should determine the entire allocation of resources among individuals and therefore includes the normative problems of income distribution. To concentrate on this topic, I will confine attention to the special case where there is only one commodity in the economic system. A resource allocation is then simply a vector with a (nonnegative) component for every individual in the economy.

To combine attention to the simplest normative aspects, I will further abstract from incentive questions. It will simply be assumed that the total available of the one commodity is given and is not diminished by any transfers.

Introduction: the problem of Soviet socialism

Few would deny that the Bolshevik Revolution was a “world historical event” in the Hegelian–Marxist sense. November 7, 1917, was “a day that shook the world.” Not only did it occasion the fall of the moribund Czarist autocracy, but it appeared to mark the ascendancy of a new social order in which the welfare of the “toiling masses” would supersede the minority interests of the nobility, or property-owning classes. Certainly, the Bolsheviks construed their own actions in these terms, proclaiming without reservation that their triumph would usher in a new era of (Marxist) socialism, followed ineluctably by full communism.

This ecstatic characterization, however, was vehemently contested not just by those who flourished under Czarism – the nobility and the bourgeoisie – but by a large spectrum of socialist dissent. Anarchists, populists, Socialist Revolutionaries, Mensheviks, suppressed, interned in concentration camps (by mid-1918), and not infrequently “exed” (executed by the Revolutionary Tribunal) rejected what seemed to them to be a perversion of the very social ideals that the Bolsheviks so fervidly professed. Leninist socialism, although it may have possessed some attributes of a legitimate socialist order (nationalization of the means of production, a working-class ideology, abolition of market relations, etc.), nonetheless from the dissenters' standpoint was inimical to other higher socialist ideals, the welfare of the masses, democracy, due process, civil liberties, and authentic socialist consciousness.

The basic structural features of the Soviet planned economy emerged in the period following the termination of the New Economic Policy (NEP) and the launching of the First Five Year Plan. With respect to the structure of prices, three principles were formulated as a guide to the formation of industrial wholesale prices. The first is the principle of average cost pricing; the price of a product is based on the average cost of its production in all the enterprises in that branch of industry, plus a normal profit markup of 4 to 5 percent over cost. The second is the principle of permanent prices; once the price is assigned to a product, it endures without limit of time, although from time to time prices are revised. The third is the principle of uniformity; the price of a given product is the same for all sellers and all purchasers. For decades these three principles have been presented in the general literature as the basis of price formation. In fact, certain departures were introduced in the very first years in which they were being formulated, but in the course of time the departures became increasingly massive, and the three principles have become less and less useful as a guide to the actual basis of price formation.

A variety of considerations have contributed to the evolution of price policy. There is, however, one common thread that unifies much of the history of that evolution.