L. Shanin

QUESTIONS OF THE ECONOMIC COURSE

... The fundamental criterion determining the volume of admissible expansion of fixed capital and indicating the maximum limit of investment is the existence of commodity reserves created by prior economic activity (or imported on the basis of credit). If normal productive operations require as working commodity capital, let us say, a month’s reserve of commodities (inventory) and if actual reserves do not exceed this one-month norm, then expansion of fixed capital cannot take place. Only to the extent that, let us say, a six-weeks’ or two-months’ reserve is formed, can investment in fixed capital attain a volume corresponding to the excess of commodity reserves over the above indicated one-month norm of working reserves.

Hence a precondition for crisis-free expansion of fixed capital is a certain prior saturation of the market with both agricultural and industrial goods. That is the only basis on which appropriations made for industry, transport, and agriculture, the intensified extension of bank credit, and the arrangement of an economic reconstruction loan will be able to create not only effective demand but also real (commodity) possibilities for investment in fixed capital. That is the only basis on which investment can actually be effected, without a crisis. For only under these circumstances will the reserves be available that will make possible painless immobilization of commodity masses in fixed capital.

Initially, investment in fixed capital curtails the supply of goods put on the market. However, not every curtailment of the supply of goods creates a goods famine. It will not occur if the commodity reserves on hand are greater than the reduction of these reserves that will result from the expansion of fixed capital.

In due course capital put into industry begins to function and to yield growing industrial output. The difficulty is to be able to wait for that moment to arrive, and wait in such a way that the curtailment of the commodity supply does not create a goods famine.^1. This is possible only when commodity reserves are so considerable that when they are temporarily reduced somewhat, this cannot at once create a goods famine. The course being proposed should establish these conditions by saturating the market with agricultural and manufactured goods.

The essential difference between us and the West on this point becomes clear. Intensive investment in fixed capital in the West usually creates a crisis of industrial overproduction; in our case it has created an acute goods famine. What is the reason for this striking difference? It is that the wealthier Western states do their investing on the basis of commodity reserves accumulated in considerable quantities beforehand. These reserves enable them to effect investment in such a way that the diminution of the commodity mass does not create a goods famine and remains un-noticeable throughout the period of immobilization. It makes it possible, consequently, to wait calmly, without a commodity shortage crisis, for the development of industry to yield results. But when industry begins yielding its increased output, the countries which were able (thanks to the considerable volume of their commodity reserves) to survive the period of curtailment without crisis, plunge for the very same reason into a crisis of overproduction. When there is a deficiency of commodity reserves, however, investment in fixed capital initially becomes, on the contrary, the source of an acute commodity shortage crisis, and only later can it bring some relief. This explains the aforementioned difference between us and the West.

If, therefore, by holding off on investment and intensifying foreign trade we form some commodity reserves, conditions will thereby have been created for expanding fixed capital under less crisis-ridden circumstances, and more energetically, later on. The ultimate result of the economic program envisaged will be precisely that.

THE OUTLINES OF OUR DEVELOPMENT FROM THE STANDPOINT OF PURE ECONOMICS

This settles the problem of the over-all magnitude of investment. But there is another problem which must be resolved at the same time: in what branches, to what extent, and in what sequence should this expansion of fixed capital proceed?

Let us first examine this problem on the basis of narrow economic considerations, in isolation from the political aspects asso -ciated with the fact that we are carrying on our construction in capitalist encirclement.

The criteria for the solution of this problem can be laid down only in the most schematic form.

Since under our conditions agriculture, as a rule, requires less capital than industry, preference should be given to agriculture. The development of agriculture to the full extent of what the world market can absorb ought to have been the basic directive. The possibility of achieving an upsurge in the national economy through agricultural exports, i.e., of achieving it in the cheapest possible way, is our economy’s biggest asset. This asset ought therefore to have been exploited to the hilt.

But even from the standpoint of narrowly economic considerations, this line can be taken only to the extent that our agricultural output is assured a world market. This market may not be considered to exist on an unlimited scale for all branches of our agriculture. Therefore, as soon as we approach the limit of the world market’s capacity, further investment of capital in agriculture (all other things being equal) becomes irrational. For all that the magnitude of capital investments is relatively smaller in agriculture than in industry, this advantage of agriculture’s is losing its significance at this point, since there is no market for the increased output of peasant agriculture.

In the case of a number of branches of agriculture, furthermore, exports are possible only on the basis of preliminary industrial processing. This holds for sugar beets (sugar industry), potatoes (alcohol industry), in part for fruit-growing and truck farming (canning industry), for animal husbandry (bacon factories and refrigeration plants), etc. Where there is a limit to how much agricultural foodstuffs or raw materials can be exported in pure form, although they can be exported in processed form, the development of the respective branches of industry becomes an immediate precondition for agricultural export.

But the development of agriculture may still be balked by the limited capacity of the world market. Agriculture will be unable to continue developing without the simultaneous development of those industries which, though they do not export, expand the domestic market for agriculture by using agricultural raw materials in their operations and consequently provide an opportunity for the further investment of capital in agriculture. The development of the said industries is a necessary and decisive prerequisite for the further development of agriculture and hence of the economy as a whole.

The same significance may later attach also to those industries which, even though they do not use agricultural raw materials in their operations, create a domestic market for agricultural foodstuffs (grains and animal products).

With the transition to these later stages, the cost of our economic progress will rise considerably. Even at that point agriculture per se will require relatively less investment of capital, but since at that stage the advancement of agriculture will no longer be possible without the simultaneous advancement of industry (the latter requiring considerably larger investments of capital), in the aggregate the cost of developing the national economy will become much greater than before. That cost will then presuppose considerably greater preliminary accumulation of capital than at preceding stages.

Under present circumstances, as long as the capacity of the world market to absorb agricultural products has not been exhausted, we can advance the economy (specifically agriculture) without advancing industry to the same extent, whereas at the new stage the only way development can proceed will be in this more costly fashion. Whereas now we have a choice, by that time the choice will no longer exist and the forced-draft development of industry will become a necessity from the purely economic point of view.

The following pattern thus emerges. To the extent that the world market for agricultural products in their original form becomes exhausted, a world market must be opened up by way of the industrial processing of agricultural raw materials. After grain and animal husbandry have had their turn, sugar, alcohol, textiles, leather products, etc., must have theirs. To the extent that these possibilities, too, exhaust themselves, development must proceed thanks mainly to the industry which, though operating for the domestic market, uses agricultural raw materials or just agricultural foodstuffs. But at the same time we should also develop those industries which, though they do not operate on agricultural raw materials, are nevertheless highly important in the export field (petroleum, manganese, platinum, etc., and the rubber, match, and lumber industries). With respect to the development of the other industries (which neither operate on agricultural raw materials nor produce for export), decisive significance attaches to prices of domestic output as compared with world prices.^2. The extent and the sequence of the development of these branches are determined, furthermore, by the amount of capital investments which they require.^3.

The course proposed involves a reduction of the aggregate fixed capital to be invested. In addition, it means an allocation of the invested capital among the individual branches of the economy and in particular of industry different from the pre sent allocation. Is it to be expected, in this connection, that still greater difficulties will be created with respect to the supply of industrial commodities? Such apprehensions are unfounded. As a matter of fact, what will occur is not a diminution but an increase in the supply. A certain inhibition of the rate of industrial development is precisely what should give rise to more abundant industrial supply. This may appear to be paradoxical, but it is nevertheless so.

Curtailed investment in industry means curtailment of domestic consumption by industry and released resources for export. On the basis of expanded exports imports will develop on a considerably broader scale than at present. These same resources will be advanced (for export) that were to have been invested in domestic production, and on that basis imports will yield a considerably larger supply of goods. This result is due to the fact that one and the same unit of export goods buys considerably less within the country than abroad. In addition, the proceeds from exports, amplified by foreign credits (both export and import crldits), yield an additional increase in the mass of commodities forthcoming, thus heightening supply. To these factors should be added the lessened Immobflization of goods in fixed capital, greatly depressing the demand for manufactured goods. One can plainly see, therefore, the degree to which forgoing the forced-draft expansion of industry’s fixed capital should initially increase, and not diminish, the supply offered by industry.

But what does this type of development bode, not in the way of over-all growth in the supply of manufactures (albeit accounted for by imports) but in the way of our own industry’s development? Does it imply forgoing the extensive development of our industry?

Such an interpretation would be the greatest mistake. For only this type of development opens up the maximum industrial prospects. Only this (leaving aside an influx of foreign capital) can ensure the maximum industrial development within our capability.

But why is this so? What prompts this assertion? How explain so paradoxical a result of the policy of not developing industry under forced draft?

Our industry’s growth in the period immediately ahead will have two sources: (1) its own accumulation and (2) the diversion of resources from other spheres of the economy (from agriculture).^4. But inasmuch as development will proceed in these two ways, we shall encounter a complex interweaving of influences. Let us analyze this process.

The development of industry-this year, let us say-proceeds on the strength of last year’s accumulation within industry and of resources diverted to it from other spheres. But after this diversion process has been completed and these resources have been absorbed by industry, they-equally with other resources-enter into industry’s productive operations and become a source of what is then intra-industrial accumulation (in ensuing years). Whereas prior to the diversion phase resources drawn in from the outside are external resources, once they have been invested in industry, they figure as a source of ulterior intra-industrial accumulation.

Curtailment of the diversion of resources from agriculture must therefore initially result in a two-fold deceleration of industrial development: in the first instance directly and immediately, owing to the diminished influx of resources from the outside, and in the second instance indirectly, owing to the diminution of subsequent intra-industrial accumulation (as a result of the diminished diversion of resources). For the retardation of industrial development (based on the slowed diversion of resources from other spheres) constricts the base of operations in industry and thereby also the proportions of intra-industrial accumulation in it. The more slowly industry absorbs resources from the outside, the narrower will be the base for its internal accumulation in each subsequent year and the more slowly will its development proceed, owing to that accumulation.

Clearly revealed here, consequently, is the adverse effect of the slowed diversion of resources. How, in that case, can that diversion become a factor in the expanded development of industry? This seems to be a perfectly legitimate question.

The effect is possible by virtue of the fact that concurrently with the above process another process of opposite significance will be under way in the national economy, the latter process outweighing the former. What is this process?

In our circumstances, investment of capital in agriculture is more profitable than investment in industry. The organic structure of capital is considerably smaller in agriculture, and labor requirements are considerably greater. One and the same unit of capital brings into play masses of labor eight times as great in agriculture as in industry; and with the same rate of labor utilization the same unit of capital yields a much larger accumulation in agriculture than in industry. Moreover, the level of consumption in agriculture is lower than in industry and this further enhances the accumulative effect of capital invested in agriculture.

If in industry average accumulation is estimated at, say, 6 per cent per annum, in agriculture it can be reckoned at a considerably larger figure, say, 15 per cent. What conclusion follows from this? Clearly, if some 100 units of resources were diverted this year from agriculture to industry, the following year they would total 106 additional units in industry, the third year 112.3, and the fourth year 119.1. But if the original 100 units were left in agriculture, the following year they would there yield 115.0 units of additional resources, the third year 132.2, and the fourth year 152.0. If the diversion of these means from agriculture to industry were carried out in the first year, the resources of industry would increase by the beginning of the fifth year to 119.1 units. But if this diversion were to take place not in the first year but towards the beginning of the fifth year, the resources of industry, on those same 100 units, would grow to 152.0 units. It is clear that by taking the resources intended for diversion to industry and passing them first through agriculture, we enable them to advance industrial development more tellingly than if we pour them immediately and directly into industry.

What conclusion may be drawn from this? It is clear that by cutting the relative share of the surplus product of agriculture to be diverted at this time from agriculture to industry, in the early years we also reduce the absolute magnitude of what we pour into industry. But later, thanks to the considerably greater fruitfulness of investment in agriculture, the reduction of the relative share of the transfusions can yield in absolute figures a greater mass for injection into industry. Thanks to the greater productivity of capital investments in agriculture, the ability of these resources to bear fruit is greater in agriculture than in industry. As a result, the relatively reduced share of the surplus product of agriculture being diverted to industry will begin to amount in absolute terms to greater masses of commodities as the years go by.

Thus, holding back somewhat in the diversion of resources to industry will as time goes on not only make up for the original slowdown (both in the diversion of resources and in intra-industrial accumulation) but will result in the positive effects considerably outweighing the negative. What we lose in the rate of industrial development in the initial years will be made up with interest in the succeeding ones. For ultimately the absolute growth of industry will be greater than with the type of development that is based on immediate diversion of resources under maximum forced draft.

True, with the alternative we suggest, the relative growth of industry (as compared with the growth of agriculture) will be smaller. This will not be, however, because industry will develop more slowly than with the other pattern (on the contrary, it will develop faster), but because with our alternative agriculture will develop faster still.

The disproportion between industry and agriculture will be more noticeable with this pattern of development than with the other one. For though both (industry and agriculture) will be growing more rapidly than with the first pattern, agriculture will in this case be growing faster than industry.

Both stand to gain with this scheme of development. The general level of the economy will rise markedly. This includes industry, which will be growing faster than with the other pattern. It will grow faster because with our alternative the reservoir of agricultural resources will expand more rapidly and industry will be able to dip into this reservoir for greater masses of resources.

This is why it can be maintained that not only will the economy develop more fully and agriculture experience more luxuriant growth with the scheme that we have outlined, but that this is the only pattern of development that gives fullest expression to the policy of industrialization proclaimed by the Fourteenth Congress of the Party....

“Voprosy economicheskogo kursa,” Bol’shevik, No. 2, January 30, 1926, pp. 65-87.

1. The problem is more complicated if a country’s agriculture grows faster than its industry over an extended period and if an attempt is made to eliminate this disparity in rates of growth by expanding the fixed capital of industry. In that case industry later pays back what was invested and, it is true, somewhat more, but since at this later date agriculture is still growing faster, leveling is not achieved even then. But the point is that, generally speaking, this leveling is not at all imperative.

2. The high cost of a product of domestic origin as compared with the cost of the imported product does not always indicate that that branch of industry is impractical in our circumstances. There may be cases where this high cost is determined not by the uneconomical set-up in the given industry, but by the high cost of the raw materials and semifinished goods that it uses. Under such circumstances, rather than forgo developing the particular industry, it would be more advisable to switch to importing those of its production components (raw materials and semifinished goods) that determine the abnormally high cost of the end product. But even in those cases where the fundamental causes of the high cost lie in the industry itself, one still may not unconditionally forgo its development. Frequently the high cost is merely a resultant of the initial period of production: there is every reason, to expect an appreciable drop in costs as time goes on. In that case a certain tutelary protectionism is unquestionably rational. But protectionism is in nowise warranted when the industry or enterprise, owing to its technological conditions, has no prospect of being able to meet the world price. Putting fixed capital into industries which under no circumstances give promise of being able to effect the necessary price reductions is inadmissible. Only in the interests of defense is some modification possible in this case.

3. The author has been reproached with completely losing sight of industry. In this connection I consider it helpful to point out that the portion of this chapter which has been cited reproduces almost verbatim one of the theses in that same report to the Central Committee of the All-Union Communist Party (Bolsheviks), part of which was once published in Ekonomicheskaya zhizn [Economic life] and Finansovaya gazeta [Financial gazette].

4. Some of my critics have maintained that I deny the need to divert resources from other spheres of the economy to industry. This is a patent error. What I was saying, merely, was that in the third phase of our development, when the relative weight of our industry will be greater than that of agriculture and when our industry will be growing more rapidly than agriculture, industry will develop on the strength of its own accumulation and not of what is diverted to it. This all referred specifically to the third phase of our development, when “agriculture’s rate of development will gradually decline as compared with industry’s, while the prospects for industrial development will be improving all the time;” it did not refer to the present phase.