Price Scissors and the Structure of the Economy

Abstract

A basic problem faced by most economies at early stages of their development is how best to raise the investible surplus for rapid accumulation: to what extend should the burden be placed on those in the agricultural sector (by lowering the price of their output relative to the industrial products), and to what extent should the burden be borne by industrial workers. This question was central to the early Soviet state (where it was debated as the problem of price scissors) and it is central to many of today's LDCs, whether socialist or not. The answer depends in an important way on the salient features of the economy; among the features of the economy which we emphasize here are: the trade environment faced by the economy, the mechanisms which determine wages and earnings, and the effects of wages and prices on the productivity of workers. Under alternative representations of these features, we analyze the consequences of changing the terms of trade (on peasants, on industrial workers, and on the investible surplus) and identify several intuitive properties of the optimal terms of trade.

We examine two other issues which have remained controversial. The first issue concerns the effect of changes in the terms of trade on the intrasectoral distribution within agriculture (for example, on the welfare of landless workers versus that of landlords). We delineate simple conditions to determine who gains and who loses. The second issue concerns which agricultural inputs and outputs should be taxed, and which should be subsidized. We present powerful rules for reform in the prices of cash crops and production inputs. These rules are Pareto improving (that is, everyone in the society becomes better off): moreover, they are highly parsimonious with respect to the information required to implement them.

We also use the insights obtained in our analysis to interpret certain aspects of the Soviet industrialization debate (1924-28), and the subsequent collectivization of agriculture.