THE BERG PROPOSAL FOR IMPROVING THE STRUCTURE OF SOVIET PRICES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A001400060001-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: November 16, 2016
• Document Release Date: May 18, 2000
• Sequence Number: 1
• Publication Date: November 21, 1962
• Content Type: BRIEF

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Current Support Brief
CIA/RR CB 62-76 No. Pages 4
21 November 1962
THE BERG PROPOSAL
FOR IMPROVING THE STRUCTURE OF SOVIET PRICES
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
CONFIDENTIAL
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THE BERG PROPOSAL
FOR IMPROVING THE STRUCTURE OF SOVIET PRICES
A Soviet mathematician, Aksel I. Berg, who is chairman of the Council
on Cybernetics of the Academy of Sciences, recently has proposed that re-
search on devising a practical method for determining prices by means of
linear programming techniques be stepped up sharply to make possible the
early use of this method to improve the structure of Soviet wholesale
prices. 1/ Academician Berg contends that present Soviet wholesale prices
and the new prices being set under the general revision now in progress are
determined arbitrarily and do not measure true (social) costs of production
and thus make it impossible for Soviet planners to make efficiently planning
decisions that require comparisons of alternative costs. Reiterating an
argument made originally by Soviet mathematician L. V. Kantorovich, Berg
further contends that linear programming techniques can be used to measure
accurately social costs of production and that the general adoption of whole-
sale prices determined on the basis of these techniques could aid in improv-
ing radically the effectiveness of planning decisions. To speed research in
this field, Berg recommends that a group composed of leading mathematical
economists, mathematicians, and computer experts be established in one
of the leading governmental organizations such as the State Scientific-
Economic Council (Gosekonomsovet) and be given high priority to further
this work.
Soviet research on methods of determining prices by means of linear
programming techniques has evolved from input-output principles de-
veloped by Harvard economist Wassily Leontief in the US which in turn
were developed into optimizing techniques -- linear programming --
more or less independently by Kantorovich in the USSR and Dantzig in the
US. Linear programming essentially is a mode of deriving a numerical
solution to the problem of allocating scarce resources among competing
products. In solving problems of resource allocation such as maximizing
output, linear programming involves the calculation of the value of other
products given up to produce a given product. This value is the "shadow"
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or scarcity price of that product -- the price that is mathematically deter-
mined by the available supply of resources and the existing state of tech-
nology, given the demands of the society.
Berg's proposal could revive a recent public controversy between
Soviet mathematicians and mathematical economists who emphasize a
pragmatic approach to current economic problems and the more orthodox
economists. The latter reject those approaches (such as Kantorovich's)
that imply acceptance of Western economic theory, but they offer no prac--
tical alternatives. The use of prices determined by linear programming
techniques in planning originally was proposed by Kantorovich in 1959. 2/
At that time, Kantorovich's proposal was widely condemned as a complete
acceptance of Western economic doctrines, 3/ and it was shelved. Re-
search on practical methods for determining prices by means of linear
programming techniques has been continued on a limited scale, however,
in a few research institutions. These institutions include the Institute of
Electronic Controlling Machines of Gosekonomsovet, under Academician
I.S. Bruk, and the Laboratory for Economic-Mathematical Methods of the
Academy of Sciences, under Academician V.S. Nemchinov. 4/
Although orthodox economists as well as conservative bureaucrats
probably will oppose Berg's proposal, the climate of opinion in the USSR
at the present time is far more receptive to the use of linear programming
techniques to determine prices than it was at the time of the original pro-
posal by Kantorovich. The use of linear programming for other purposes
has gained widespread acceptance, and the ranks of economists openly
critical of the deficiencies both of present industrial wholesale prices and
of the new prices being set under the present revision have grown during
the intervening period. Moreover, the tolerant reception by the Khrushchev
regime of the recent Liberman proposal for tying bonus incentives in in-
dustry to profitability suggests that the regime now may be prepared to
adopt radical changes if it can be demonstrated that they would lead to
improvements in economic management and planning. Thus the Kantorovich
proposal stands a greater chance for adoption now than it did in 1959.
Because of the numerous theoretical and practical problems to be
solved as well as the vast amount of heretofore unavailable data needed to
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C-O-N-F -I-D-E -N-T -I-A-L
be collected, considerable time would be required before the determina-
tion of prices by means of linear programming techniques could be placed
on an operational basis. For example, the Institute of Electronic Con-
trolling Machines in 1961 determined prices experimentally from an inter-
branch balance table that divided the economy into only 70 industrial
classifications. 5/ Interbranch balance tables containing many times this
number of industrial classifications would be required to make operational
use of such prices in determining actual wholesale prices in the USSR. If
the Berg suggestion were to be adopted, therefore, it would come too late
to have an important influence on the present revision of wholesale prices
of industrial products that now is scheduled for completion during 1963. 6/
Berg proposes that shadow prices be used to set actual wholesale
prices in the Soviet economy. Although wholesale prices set in this man-
ner would not measure social costs as efficiently as the equilibrium prices
reached by a market economy under conditions of ideal competition, these
prices could be markedly superior to present Soviet prices in making plan-
ning decisions such as whether or not to construct a new factory or to adopt
a new technique. On the other hand, the use of shadow prices to set whole-
sale prices would in itself have relatively little effect on the behavior of
individual enterprises. Combined with the Liberman proposal or with more
far-reaching measures to decentralize decision-making, however, the
effect of the Berg proposals on individual enterprises would be increased.
21 November 1962 CIA/RR CB 62-76
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Analyst: 25X1A
Coord:
Sources:
1. Pravda, 24 Oct 62. U.
2. Kantorovich, L. V. Ekonomicheskiy raschet nailuchshego
ispol'zovaniya resursov (Economic Calculation of the
Optimum Utilization of Resources), Moscow, 1959. U.
3. Boyarskiy, A. "On the Application of Mathematics in
Economics," Problems of Economics, vol IX, no 9,
Jan 6 2. U.
4. Voprosy ekonomiki, no 4, 1962, p. 70-71. U.
5. Ibid., p. 71. U.
6. Ekonomicheskaya gazeta, 28 Jul 62. U.
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Date of Document 21 November 1962
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