What does directive pricing mean?

There are two methods for setting prices. Everything depends on the type of economic system within which the state operates. Directive pricing is typical for countries with planned economy. In this case, the market has virtually no effect on the market. Prices can be determined even before the direct production. A different situation is observed in the market mode. In this case, prices are determined not by the enterprise, but under the influence of demand and supply when selling products on the market. More details about this we will talk in today's article.

We will find out what is meant by directive pricing

The state can directly or indirectly influence the market situation. Various economic theories see the role of the state in managing the national economy in different ways. Free pricing is the basis of the market system of management. He justified all the classical economic theories. It is believed that the need for government intervention in economic processes was first argued by John Maynard Keynes. Completely directive pricing is the prerogative of a planned economy. In this case, the cost of products is determined at the stage of production or even earlier. The limits of prices, rates of profitability, coefficients of possible changes can be established. To date, many countries with market economies use one or another way of interfering in the economic situation.

In classical theories

The attitude toward the role of the state has changed dramatically several times over the course of history known to us. At the turn of the 17th and 18th centuries, in the period of the emergence of modern market relations, the dominant doctrine was mercantilism. It was believed that the national economy can not function effectively without state intervention. However, two hundred years later, this doctrine was replaced by the ideas of so-called economic liberalism. His apologists were Adam Smith and David Ricardo. They said that the market is a self-regulating system, directive pricing for it without need. It is based on an "invisible hand" - personal interests in enrichment.

However, the First World War and the Great Depression that followed it led the scientists to reconsider their views on pricing. Already in the 1930s, special laws were adopted that expanded the sphere of state intervention in the national economy. Directive pricing for certain categories of products has become commonplace.

Features of the Keynesian economy

After the Great Depression many developed countries abandoned the idea of market self-regulation and began to interfere in economic processes. Keynes argued for the need to increase fiscal spending and lower interest rates during recessions. Demand creates a proposal, and not vice versa, as claimed by the classics. Neo-Keynesians favor market and directive pricing in symbiosis. They adapted some of the ideas of the classics and believe that government intervention is only necessary in the short term. This is due to the fact that the conjuncture can not quickly rearrange itself in order to "heal" the economy from the negative consequences of a decline in business activity. However, neo-Keynesians believe that in the long term the market is a self-regulating system.

Methods of influence

There are two methods of state regulation of prices: direct (directive) and indirect (economic). The first include:

• Fixing prices. For example, the state can set tariffs for transportation or ritual services at its own discretion.
• Restriction of prices. The state can enter a maximum or minimum limit.
• Establishment of marginal price change factors. For example, such a system is often used when calculating telephone tariffs by consumer categories.
• Establishment of maximum trade allowances. So prices for essential goods, medicines and some food products are regulated.
• Setting the level of profitability. This means that a certain rate of profit is immediately put in the price. For example, the payment for the use of containers is often established immediately taking into account the 25 percent profitability of this type of transportation.
• Establishment of guaranteed prices. This system often operates in the field of agriculture. Prices are set by special state bodies. They are used in procurement even when the real market value of goods is lower.

The declaration of prices is a process of reviewing state-regulated prices. To do this, you need to apply to special government agencies with an economic justification for the request.

Economic methods of regulation include subsidizing, compensating producers' costs, lending at preferential rates, granting tax holidays. All these measures allow to reduce the market value of the products.

In developed countries

We have already figured out what is directive pricing. The market economy openly does not recognize its necessity. However, no one is in a hurry to completely abandon its use. The state can fix the rules for setting prices in the form of normative acts. They describe the principles, methodology and standards. It is believed that prices for 10-30% of products are set by directive. But the state most often does not stop there. In developed countries, indirect intervention in pricing is common. All this is argued by the need to achieve social results, that is, benefits for the whole society.

The modern approach

Many believe that directive pricing is a command economy. However, in fact today, many states are actively interfering in economic processes. It is believed that in the long term the market has the ability to self-regulate, and in the short term - the additional influence of the Central Bank and the government is necessary. It is recognized that the establishment of maximum or minimum prices for products can lead to the fact that this indicator will cease to be objective. However, no one argues with the fact that sometimes a market mechanism needs to be adjusted.

Domestic realities

The process of pricing in Russia has often changed over time. Important stages in its history include:

• The appearance of money surrogates in 1916-1921.
• The period of military communism.
• New economic policy.
• Directive pricing for almost all types of products in 1929-1933.
• The emergence of supply and marketing of products by agreement with the buyer.
• The liberalization of prices, which began after the collapse of the USSR since 1992.