Alexander Gerschenkron was part of the Project RAND team working alongside Abram Bergson. In a wide ranging debate about the validity of official Soviet statistics, Gerschenkron (1947) noted that there was “considerable evidence to suggest…Russian indices of the physical volume of industrial output – the main gauge for measuring the rate of economic development have ‘an upward bias’” (p217). Gerschenkron assumed that Russian statistical data was “free from deliberate distortions. Serious students of the Russian economy agree that the Russian practice is to withhold certain statistical information rather than to falsify it” (p217).
Gerschenkron considered that by far the most important reason for thinking that Soviet prices were inflated was the impact of the introduction of new
technology, particularly in the fast growing machinery and electrical sectors on the “so called constant prices of year 1926-27” (p219). The rapid transformation of the
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Soviet economy rendered the 1926/27 base period pattern obsolete. These “unchanged” prices were originally intended to provide a mechanism for the hierarchical regulation of self-interested enterprises under public ownership
(Harrison 1998). As the range of the commodities produced by industry widened, the selection of the appropriate price weights for new products presented a difficult statistical problem. New “commodities” were valued at the price current in the period when they were first produced on a large scale (p219/220). This was the so-called Gerschenkron effect;
“In a country in the first stages of industrialization the spread between prices of industrial goods of a low degree of fabrication and prices of highly
fabricated goods is relatively larger, than in a well-developed industrial country. This is often reflected in the structure of protective tariffs. As the country progressed on the road of industrialization, the spread tends to become narrower. At the same time, the share of relatively fabricated goods in total output increases. If prices of the first year of the period are used as weights, the increase in output over the whole period appears greater than it would if prices of the last year of the period are employed. It is quite likely, therefore, that if, e.g., prices of 1938 had been used in Russia, the index for the period 1928-38 would have shown a smaller rise than is the case on the basis of 1926-27 prices” (p221).
As the first year of production was relatively inefficient and therefore the cost of production relatively high, subsequent increases in output raised the index more than would be the case if prices of a later year of large scale production were used. Re-computing the index in prices of later years removed the specific inflationary bias caused by introduction of new commodities at prices higher than the general level of 1926-27. It eliminated the hybrid character of the index (p221). This re-computation formed a key part of both Jasny and Bergson’s later recalculation of the growth of Soviet national income. Gerschenkron suggested that a possible method for checking the “suspected error” in the indices of aggregate output was through comparison with figures on the output of basic industrial products and freights transportation, all expressed in physical units (p221), (Davies 1994, p32).
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This problem of index year relativity was expressed in the use of two alternative indexes, the Laspreyres and Paasche. The Laspeyres index number measures the change in output from the level and pattern of consumption of the base year. The Paasche index number measures the change in cost of living from the level and pattern of consumption of the given year (Chapman 1963, p29). Growth
transforms the relative prices or value added per unit of product. The faster the rate of growth, the greater the structural shifts in the economy, the sharper the change in value relationships and the more pronounced the difference between measures weighted at the beginning or the end of the period. As rising productivity causes unit prices to fall, weighting by “post-industrialisation” prices will yield lower rates of growth than weighting by “pre-industrialisation” prices (Grossman 1953, p3). Alec Nove (1957) pointed out that since no set of price relationships are more “true” in any absolute sense than another, no statistician can legitimately describe the Soviet series as “wrong” merely because of the peculiarities of the 1926/7 price structure. Nove argued that the pre-industrialization weights could be a more accurate basis on which to assess the sacrifices made during the first period of central planning, as the fall in the price of industrial goods relative to primary produce was a consequence of industrialization (p118). For Jasny (1951a), the use of base year weights by Soviet statisticians was ideological, keen to demonstrate the growth of the economy under planning they used this effect to exaggerate the growth of output;
“The more the pre-plan price pattern changed, the less favourable the new price pattern became for demonstrating achievement. Thus it happened that, although the economic pattern of the country had fundamentally changed and the 1926-27 price pattern had been outmoded for a long time, the Soviets stuck to the prices of that year for use in the most important economic indexes” (p5).
Alexander Gerschenkron’s (1951) own estimates of Soviet output were based on a dollar index of Soviet Machinery output, which compared physical quantities of Soviet machinery with American equivalents, between 1927/28 and 1937.
Gerschenkron acknowledged the essential choice in developing these comparisons was between the use of Soviet or non-Soviet data as weights in the index. Jasny and
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Donald Hodgman (1954), Gerschenkron’s doctoral student, had already
demonstrated how current rouble prices could be deflated to account for the change in industrial structure and inflation. The advantage of this method was that it possibly allowed a closer representation of the actual structure of Soviet output or their
“scarcity relations”.
Its disadvantage derived from “the difficulty in appraising correctly the degree of meaning and consistency inherent in any set of Soviet values”. This was after all non-market planned prices. Gerschenkron praised Hodgman (1954) for avoiding the use of weights pertaining to a non-Soviet economy in developing his national income estimates that of course, formed the very basis for Gerschenkron’s own work.
Gerschenkron (1951) followed Colin Clark and Julius Wyler and re-priced physical units of Soviet output at US dollar prices. This sidestepped the issue of the pricing of new Soviet machinery output that accounted for 72.8% of machinery output in 1933. Soviet data on quantities of machinery was gathered for as many items as possible, 128 were eventually found.
These were then compared with American equivalents. Soviet output multiplied by US prices yielded the dollar values. The gross value of these 128 Soviet machinery items increased from 1927/8 base year 100 to 525 by 1937, or from 1927/8 $203million to 1937 $1065 million (p26). Official Soviet indices were around three times higher by 1937. Gerschenkron’s index implied average growth from 1929/30 to 1937 of 13.9% compared to the official 32.4%.
Gerschenkron’s use of US prices for Soviet output established a clear point of comparison between the two economic systems. He did not try and create an ideal capitalist market within the USSR. He was relatively clear about the limits of his method, but this was more by intuition than any clear theoretical distinction about the nature of value in the two rival systems. In fact none of the participants in the debate pointed to the real distinction between the objective and subjective nature of value in
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a market and a centrally planned economy. This included the Marxists Paul Baran and Maurice Dobb (1948). While Dobb explained that the capitalist factors of
production did not exist in the USSR, he used a measure of national income based on the very same non-existent income flows (Dobb 1966). Dobb’s contribution
essentially consisted of an uncritical defence of whatever statistics were produced by the Soviet authorities (Dobb 1948), (Jasny 1950).