PERESTROIKA, OSCAR LANGE, AND POINT-OF-SALE TECHNOLOGY 1 Foreword This piece was originally drafted at the time Chairman Gorbachev first announced his goal of perestroika (restructuring) of the Soviet economy. By hurrying the piece along, I had hopes of influencing the new policies in the direction of Socialist Economist Oscar Lange's notions regarding the promise of market-directed socialism. The paper was written while I was living in Mexico and teaching at Monterrey Institute of Technology. It was presented at the annual meeting of the Southwestern Economic Association in San Antonio for review and comment (where it received considerable attention), before sending a copy to Mr. Gorbachev's chief economic advisor of the moment, Abel Abegglayan, who was at the time visiting London. I received a nice note from Mr. Abegglan acknowledging receipt and saying he'd read the paper with interest. But the rapidity with which political perestroika overtook economic perestroika, eventuating in the catastrophic collapse of the entire Soviet Empire, meant that whatever consideration these thoughts may have been given in Soviet economic circles, events overtook any possibility of their implementation. With current attention being focussed on political independence and the negotiation of the new Commonwealth relationship, the introduction of crude price decontrol on January 1, 1992, preoccupation over who will control atomic weaponry, and who will succeed to the erstwhile Soviet seat in the UN Security Council, there appears little likelihood that any of the constituent republics of the new Commonwealth of Independent States will attempt experimentation with Point-of-Sale Technology as a solution to Langeian market-directed planning, if, indeed, there is any interest in preserving any aspect of Marxism in Eastern Europe today. It is in a way sad that Lange's methodologically interesting approach to resolving the problems of socialism will die without ever having been tried. On the other hand, the prediction in the last paragraphs of the paper that Capitalism, by reason of its dynamicism and innovativeness would probably beat Socialism to market-directed planning -- albeit on a totally private enterprise, non-government coordinated level -- appears even closer to reality today than when the paper was written. Oscar Lange Oscar Lange was a world-renowned Polish born Economist who taught for many years at the University of Chicago. It is ironic that Lange, a Socialist, formulated his major contribution to economic thought at a university known as the headquarters of Free Market economic thinking. Recognizing that Central Planning, even more than state ownership, is the essence of Socialism; but also understanding, because of the depth of his knowledge of economic theory that planning boards would need to manipulate thousands of data bits in setting planning goals if the needs of a modern economy were to be met (which he considered beyond the limited possibilities of the mathematics and technology of his day), Lange argued that it would be not only desirable, but essential, for any socialist economy wishing effectively to meet the needs of its people, to rely on market signals if setting realistic planning goals were to be possible. Thus his Theory of Market Directed Socialism, Lange's major contribution to economic thinking. At the end of World War II, Lange was invited by the new Socialist Government of Poland 1. Printed in Abstracts , Southwest Economic Association, 1989 to return as Minster of Economics. This he did, but resigned shortly thereafter as it became clear that crude Stalinist-type planning would be imposed by the Soviet masters on all of the East-bloc satellites, including Poland. Later economists concluded that even Langeian market-directed planning would in any event probably be impossible to implement because he had seriously underestimated the vast diversity of products generated by a modern economy. Not only thousands, but tens of thousands (and perhaps hundreds of thousands) of market-generated data bits respecting different products would need to be manipulated if an economy were not to be impoverished by unimaginative planning controls imposed from above by planners having no direct contact with innovation and no hard-won personal experience in managing or directing businesses and industry. That this has indeed proved to be the case is evidenced by the collapse of the Soviet economy; by the long queues for basic foodstuffs both preceding and following the collapse, which characterized buying and selling in the USSR; by the production bottlenecks encountered by plant managers who found it impossible to obtain essential inputs; by the wasteful overproduction of shoddy, unwanted goods for which it has been impossible to find markets; by the inefficiencies of state directed barter-trade with other socialist states; and by the enormous over-valuation of the ruble, which discouraged both trade with Free Markets as well as tourism. In-put/Out-put Analysis and Point-of Sale Technology In the meantime, Free Market ingenuity has come up with devices which may provide solutions to the technical shortcomings of Langeian market-directed Central Planning. First of all, high powered computers -- first developed in support of the Defense effort -- are now capable of manipulating almost any number of simultaneous equations, meaning that Central Planners would no longer be inhibited by limitations on the number of product lines they could deal with. Secondly, a Harvard economist, Nobel Prize winner Wassily Leontieff, developed the concept of In-put/Out-put analysis, which enabled the United States to avoid major bottlenecks when the US economy came under essential government controls during the Second World War, as most facilities were devoted to producing war materiel. In-put/Out-put analysis enabled the United States, more than any other combatant nation, to see that the civilian population underwent no overly severe deprivation. Since the war, Western economists have applied these planning principles to Free Market economies, essentially as a theoretical exercise. And the matrix of factor inputs and product outputs with which economists currently are playing, now exceeds 300 x 300, providing ample discretion for broad-scope planning -- and with no theoretical limit in sight. The final element in the solution to the Langeian problem, is the development of bar-code price scanners. Neither shop-keepers, warehousemen, nor plant managers, need resort to old-fashioned, time-consuming item by item periodic inventories, nor, in the case of shop-keepers, of individually price-marking every item in stock, painstakingly revising them item by item with every inflationary price change. Each product item is now bar-coded on the packaging material by the producer with the producer's identifying data and product description (with almost infinite variation regarding size, quality, color, etc.). When a shipment leaves the factory, shipment is recorded, including all necessary product and price detail, and the invoice is automatically printed for mailing. When the shipment arrives at the regional warehouse it is inventoried in (by box or case or trainload) by electronic scanner together with product detail. At this point, price information may be entered in the computer to reflect wholesale markup, minimizing effort and error. At retail level, prices are adjusted to reflect retail markup, eliminating the need to put stickers on every item in the store, obviating the possibility of fraudulent price-tag switching, and providing the customer with a confidence-enhancing list of purchases, matching product name, item price, and total cost of purchase on the sales slip. So far, most readers will be familiar with what we are talking about. It is increasingly rare to see stockboys moving up and down the aisles affixing new price stickers over old ones. What may be less well understood, is the most significant contribution of the new technology. Point-of Sale Cash Registers in both wholesale and retail outlets are directly connected to the inventory control mechanism of the computer system. At the end of each business day (or week, or month, depending on the turnover and policies of management), a button can be pushed printing out the exact quantities of each item sold, how many remain in stock, and the contribution this product line is making to the overall profitability of the enterprise. This information can then be used to reorder low-inventory items in timely fashion, and to consider reordering policy for the sizes, colors, and specific features most in demand, reducing the possibility of running out of popular products (and losing profits) or holding costly inventories of less-demanded goods because of inefficient inventory practices. Applicability to Central Planning Many enterprises have already connected their regional warehouses to the Home Office, and Home Office to production facility, so that as soon as a shipment is made to a retailer, this product information is immediately fed into the production plan of the relevant factory. The efficiency of this high-tech approach to Free Market, private sector planning, has already been demonstrated during the last two recessions in the United States where production was cut back substantially and with minimum time lag as soon as computers registered a slacking in demand. This minimized unwanted inventory build-up during the recession, hastening the recovery when demand began to pick up. At this point, perhaps something should be said about planning. Free Market enthusiasts often insist that planning is anathema. Yet no one needs to plan more carefully and accurately than the Free Market entrepreneur. It is his capital and his unsubsidized business which are at risk. If he plans poorly and over (or under) purchases, it is his profits which suffer and his enterprise which may face bankruptcy. So, when one digs a bit more, one finds that the Free Market entreprenuer, with his monthly, semi-annual, annual, three year, and long-term plans, is not opposed to his own planning practices. His underlying opposition to "planning" is generally based on a realization that planning at national level, by people not directly involved in and not knowledgable about the economics of his business, can lead to major catastrophe when planning mistakes are made. Better, he feels, for small mistakes in judgment to be made at firm level, being somewhat canceled out by the law of large numbers. And in this, entreprenuers may be pleased to learn that most professional economists are in agreement. Still, there is undeniably a lot of waste in competition. Viz. the multi-billion dollar bailout of dozens of failed Savings and Loan establishments, mounting airline backruptcies following unrestrained deregulation, and the current failures of major banks, newspapers, and large enterprises. It can of course be argued, and has been, most notably by Joseph Schumpeter a noted Harvard economist of a generation ago, that these failures constitute a necessary, periodic, cleaning out of the arteries of business -- what Schumpeter called "a creative destruction". And that the costs of such failures are miniscule compared to the chronic waste of the protection and subsidies of centrally planned socialist economies. And, one supposes, that the collapse of the Soviet economy and forced market-oriented restructuring of the Chinese economy are evidence in support of the Shumpetrian thesis. Which brings us back to Oscar Lange and his untried theory of market-directed central planning. The present author certainly does not intend to present a brief in favor of central government planning. It is simply that, as a matter of theoretical interest, Point-of-Sale Technology presents the possibility for an interesting effort to match socialist planning ideals to modern technology. It almost seems a pity that we'll be seeing the end of socialism before the contribution of its most throughtful theorist, Oscar Lange, have ever been tried. There is no technical reason why, in a socialist economy, the cash registers in every wholesale and retail outlet in a given country could not be directly connected with the computers of the Planning Ministry. This would give the Ministry almost-instantaneous information regarding the market demands for virtually every product category. This information, fed into the nation's In-put/Out-put matrix would provide information regarding potential shortages at current production levels of raw material and other factor inputs, permitting reallocation to product lines in apparent higher demand (or, alternatively, considered of higher national priority). As can be seen, this would not totally eliminate the possibility of political interference with the planning process. But planners would at least know what the public wanted. And it must be acknowledged that in Westerm economies there is also significant political distortion of the private sector utility function: but through the fiscal system. Parliaments decide how much of the national product to devote to social needs, defense, and foreign affairs, and simply appropriate the necessary amounts (or, in the United States, significantly less than the necessary amount) to pay for these needs. The author considers this a superior method of taking care of the social dimension of life, but for theoretical purposes is prepared to concede that the alternative of having the political leadership pass instructions directly to Planning Authorities, is a potentially viable alternative. For this alternative to work, the socialist political authorities should be democratically elected to reflect the social preference function (which theorists will insist is impossible of construction -- though like the bumblebee, which theoretically can't fly, life must go on and social decisions must be made). Convergence Theory and Langeian Economics For a number of years it has been popular for certain political theorists to believe that as a result of the constraints and demands of the Cold War, the West would continue reducing the historic freedoms of its citizenry, while, at least since Krushchev and Deng Xiao-ping, the major communist nations would be easing the rigors of life for their citizens. Of course no one could have anticipated the dramatic events of Tianenmen; or the fall of the Berlin Wall and newly installed independent democratic governments of Poland, Hungary, and Czechoslovakia; or the independence of the Baltic Republics and dissolution of the Soviet Union, or its reformulation into the Commonwealth of Independent States. But there is no technical reason why, in a socialist economy, the cash registers in every wholesale and retail outlet in a given country could not have been directly connected with the computers of the Planning Ministry. This would have given the Ministry almost-instantaneous information regarding the market demands for virtually every product category. This information, fed into the nation's In-put/Out-put matrix would provide information regarding potential shortages at current production levels of raw material and other factor inputs, permitting reallocation to product lines in apparent higher demand (or, alternatively, considered of higher national priority). One might have anticipated (this paper, when first written in 1988 did) that there might thus occur some economic convergence as western industries and businesses refined their internal planning techniques, increasingly interfacing with the planning procedures of suppliers and customers, both upstream and downstream; and as the communist world took advantage of the same techniques to enhance the efficiency and responsiveness of their planning techniques to better satisfy the wants and needs of their citizenry, reducing pressures for revolutionary change. Doubting that this would occur, however, the original version of this paper, presented at a Southwestern Economic Association Meeting in San Antonio put forward the view that because of inefficiencies in the Soviet system, and the dynamicism, innovativeness, and flexibility of western economies, the West would likely beat the Soviets to the punch and we'd end up with a totally unforeseen type of convergence: Free Market planning, loosely integrated from production floor to regional warehouse, to retail outlet, to final consumer, doing more or less what socialist Oscar Lange had envisioned as the task of central government planners -- the most efficient and timely production of both private and public wants and needs with minimal production, inventory, and out-of-style/ out-of-demand products. But by keeping government out of the circuit, it would be more efficient than the Langeian model since it would reduce layering and avoid public sector recognition and policy implementation lags. While it is possibly too soon to assert that the Free Market has won on this score, it is surely evident that Communism has lost an opportunity to have reformed its system from within and given up major ground politically, militarily, and economically. It remains to be seen whether any of the independent constituent republics of the Commonwealth of Independent States will attempt (or wish) to salvage anything of their heritage of the past seventy years by reexamining the thinking of Oscar Lange. The author's judgment is that they will be too preoccupied with questions of survival and making their new political and trade relationships work to give much thought to trying to salvage socialism, of whatever unorthodox variety.