10 SMB - System of Material Balances

SNA vs SMB

There was a very important difference between the System of National Accounts and the Sys
tem of Material Balances used in centrally-planned economies. The difference was due to w
hat was considered to be the goal of economic activity. SMB excludes all activities that
result in non-material output: government administration, education and health services.
Gross output in centrally-planned economies was thus systematically lower than when expre
ssed in the SNA. The difference was estimated at between 10 and 15 percent, and in some c
ases even 20 percent.

On the other hand, given that productivity growth is slower in education and health than
in the production of material goods, underestimation of gross output in socialist countri
es was combined with an overestimation of the rate of growth. We thus had, judged from th
e standpoint of SNA, two opposite biases in centrally-planned economies: lower level of o
utput, but its higher rate of growth.

The SMB claimed to have been based on Marx’s view of productive labor, but this is not
obvious because we do not know what exactly was seen by Marx to be the goal of economic a
ctivity in socialism. Marx believed that “productivity” (and thus the goal) is a historic
concept, defined from a systemic point of view. In a capitalist system, productive is th
e worker who produces surplus value for the capitalist. This is the origin of Marx’s famo
us example of the opera singer who is a productive worker if he is hired by a capitalist,
but not when he works for himself. Productivity of labor is not, according to Marx, dedu
cted from labor being embodied in goods as opposed to services (as held by the SMB) but f
rom labor’s contribution to what is the goal of economic activity in a given system. Unde
r capitalism, it is profit. So if the opera singer generates profit for the impresario wh
o hired him, he is a productive worker. Similarly, if the goal was to provide net income
for the elite as Physiocrats thought, and if the only source from which this can be extra
cted is agriculture, the correctly defined net product is indeed as they defined it.

What we call value added or useful output in one system is not necessary the same as what
we call useful output in the other. It depends on what the ruling ideology tells us is t
he reason why we engage in economic activity at all.

Milanovic (2023) Net economic output in history: Why we work? Ideology behind economic accounting