Product Categorisation and Costing in a Participatory Economy

April 13, 2022

Participatory Planning and Accounting

Coordination of economic relations among producers and consumers in a participatory economy is primarily done via a unique democratic planning procedure called participatory planning, whereby self-managed worker and consumer councils and federations propose and revise their own production and consumption plans, over several iterations which gradually leads to a viable, efficient, and equitable plan. The annual planning procedure takes place in light of previously approved long term development plans with regard to human resource or educational planning, environmental planning and strategic international economic planning, and a five-year investment plan. This means that the supply of various categories of productive capital and labour that is available for use, and the amount of capital goods that will be produced in a particular year are known, or “given,” when the annual planning process begins. These long-term decisions are handled in separate investment planning and development planning procedures.

The main participants in the planning procedures are the worker councils and their federations, the consumer councils and their federations, and an iteration facilitation board. The workers in the worker councils formulate and adjust their production proposals for the coming year in much the same way as today’s companies prepare budgets. They also elect representatives to industry federations. Members of the neighbourhood consumer councils prepare and adjust their household consumption proposals and submit these to neighbourhood council, where they also participate in discussions about what local public goods they want to ask for and elect recallable representatives to higher level consumer federations. 

The Iteration Facilitation Board (IFB) consists of workers whose only job it is to facilitate the flow of information during the planning process. The IFB’s main task is to adjust indicative prices – estimates of opportunity costs of using different kinds of productive capital, natural resources and labour, and the social costs of producing intermediate and final goods and services – to reduce excess supplies and demands before every new planning iteration until a coherent, or “feasible” plan is reached.

The main objectives for accounting in a participatory economy is to enable:

  1. Planning of future economic activity in three separate planning procedures with different time horizons – long term development planning, investment planning and annual planning. 
  2. Recording of economic transactions during the current year.
  3. Continuous monitoring and evaluation of outcomes in relation to plan for various activities, and possible adjustments of the current annual plan and other future plans.

To achieve these goals, the design of an accounting system must permit economic actors to correctly estimate, record and evaluate: (i) the opportunity costs of using various categories of labour, natural resources such as agricultural land and forests, and produced capital assets such as factory buildings and equipment, (ii) the social costs of producing and consuming various categories of goods and services, (iii) the damage, or social cost of emissions of different pollutants, and (iv) as best possible the social rate of return on investment in expanding different aspects of the productive capacity operative over many years.

There are several issues of a technical and practical nature to consider in this context. One crucial issue is how all the different varieties of goods, services, capital assets, resources and emissions of polluting substances should be defined, categorised and quantified so that; a) consumers and workers can relate to them in an efficient way, b) their prices will, as best possible, reflect the opportunity costs of productive resources and the social costs of goods and services, c) a viable, fair and efficient annual plan will emerge in the annual planning procedure and d) an efficient monitoring of the annual plan is facilitated. 

With these goals in mind, the question becomes: How should the catalogue of goods and services, which consumers and producers relate to when they prepare their plans during the annual planning, best be compiled and expressed?

Product categorisation and costing

One important aspect of the compilation of a catalogue of an economy’s goods and services and the categorisation of its products is the way in which it will affect cost accounting and product costing. The purpose of product costing is to accumulate the costs of produced products and services for the purpose of facilitating decision making and analyses. In today’s economy managers and accountants use product costing to guide the setting of prices and inventory valuation and for income determination. Producers in a participatory economy will also need to value their inventories and plan and record their income, or their SB/SC ratio, in a similar way as companies do today, and they will need to decide which products and services are most socially valuable to produce. And even though producers in a participatory economy only respond to prices set by an external facilitation board, and don’t set prices themselves, product costing sometimes plays a role when prices for subcategories are derived as we will see below. 

There are essentially three broad areas of activities that will affect how the catalogue of goods and services in a participatory economy will be compiled:

  1. Product development and the principles of categorisation of products
  2. The final design of products and services
  3. The production process and technology

An economy produces, distributes, and consumes a huge variety of products, services, resources and activities and the control and influence over product development and categorisation, design, and production are of crucial importance and go directly to the question of self-management. The goal of a participatory economy is to maximise self-management meaning that influence over decisions should be allocated based on the degree one is affected. 

A first step in the task of defining a catalogue of goods and services for annual planning could be to identify different types of products and services, based on how these three activities will be performed and controlled. For instance, there are differences regarding how product development, design, and production are done for individually consumed goods, individually consumed services, collectively consumed goods, collectively consumed services, intermediate goods, capital goods, etc. 

Coarse categories and subcategories

Another important issue is to understand how prices of coarse categories of goods and services, which are set in the annual planning iterations, relates to the individual prices of the huge amounts of different, more detailed versions or subcategories of goods and services that will be produced and consumed during the year.

Every coarse category of goods and services that is priced in the annual planning procedure will contain several more detailed subcategories. The prices that the IFB announces in the planning procedure, and that consumers and worker councils base their proposals on, are the average unit price for all goods or services in each coarse category. The producers, i.e., the worker councils, propose what they want to produce and how, based on the prices announced by IFB before each iteration. However, when preparing their proposals, worker councils will want to work with and plan for more detailed subcategories of goods and services, which will help them to efficiently plan their use of various resources and inputs in their production. Thus, there must be a way for producers to derive prices for subcategories from the announced prices for coarse categories of final goods. 

Derived prices of subcategories

Every subcategory belongs to a coarse main category and is primarily defined and categorised based on consumers’ preferences and differences in potential use of resources in production. This means that every product will belong to both a coarse main category and a more detailed subcategory. 

Main CategorySubcategory
Coarse main product A
(priced in the annual planning)
Detailed subcategory – product Aa
Detailed subcategory – product Ab
Detailed subcategory – product Ac
Coarse main product B
(priced in the annual planning)
Detailed subcategory – product Ba
Detailed subcategory – product Bb
Detailed subcategory – product Bc

In their production proposals worker councils specify, for every subcategory of good they plan to produce, both the number of units and production cost. In other words, a worker council’s total production cost must be allocated to the individual subcategories of goods, which they propose to produce. Most companies do such cost accounting already today to put a price tag on their different products and to value their inventory. Normally, a company allocates all their costs to their different products and knows how much it cost to produce each and every one of them. Product costing is a prominent part of every manufacturing company’s accounting system and discussions about how to best allocate overhead and indirect costs to products, and other cost objectives, is at the very core of modern management accounting theory. 

When all consumption and production proposals in an iteration are submitted, there is information about excess demand or excess supply for each coarse main category, which is the information that the IFB uses when adjusting prices for the next round of proposals. But there is also information about the worker councils’ total average production cost for every coarse category good and for each detailed subcategory good. Based on this information, a unit price for each subcategory can be derived, even though the IFB formally only announces prices for coarse main categories. 

The ratio between the current Price (P) and the Total Average Production Cost (TAPC) for a unit of a main category product (P/TAPC) indicates a relation which, for our purposes, can be assumed to apply generally to all relevant subcategories. This means that the derived unit price for a product in a subcategory (p) can be calculated by multiplying the ratio P/TAPC for the main category with any subcategory’s average production cost (apc).

P/TAPC apc p
Price/Total Average PC per main category unit xAverage pc per subcategory unit=Derived unit price per subcategory
PC=Production cost

So, for example, if the aggregated submitted production proposals regarding main product A, at a current price of 5,00, show: 

100 units of category A, a total production cost of 460; an average of 4,6 and a proposed distribution between subcategories:

  • 50 units of subcategory Aa, a total production cost of 150; an average cost of 3,0
  • 20 units of subcategory Ab, a total production cost of 100; an average cost of 5,0
  • 30 units of subcategory Ac, a total production cost of 210; an average cost of 7,0

Then, P/TAPC is = 5,00/4,60 =1,087 and, thus

  • The derived price of subcategory Aa = 1,087 * 3,0 = 3,26
  • The derived price of subcategory Ab = 1,087 * 5,0 = 5,45
  • The derived price of subcategory Ac = 1,087 * 7,0 = 7,61 

This way of deriving prices for subcategory goods and services makes it possible for worker councils to plan, assess and evaluate production proposals, and real output during a year, in a more detailed, efficient, and fair way since the derived prices take into account that the production of different subcategory products require different quantities and categories of raw materials, inputs and other resources, and, thus, costs society different amounts to produce. But note that consumers don’t have to specify what subcategories that they plan to consume during the annual planning. 

When worker councils plan their production for the next year they are, first and foremost, guided by prices and demand for main category goods. They then need to decide how to allocate their production among different subcategories of goods. To guide and facilitate such detailed production decisions, the National Federation of Consumer Councils may, through their special support units, provide historical statistics and forecasts of the distribution of demand between subcategories of goods and services in the main categories. 

The task of categorising goods and services into coarse and detailed categories may be performed by a subunit of the IFB or some other economy-wide support unit, or categorisation committees made up of representatives from consumer council federations or worker council federations, or both, with different compositions depending on type of good and service.

Notable Replies

  1. I do hope anyone who is interested in how we can do all three of these things will read Anders’ posting. I get more questions about THIS than anything else from people after they read about our proposal for a participatory economy.

    1. For how many different goods do you expect WCs and CCs to do annual planning? Surely the categories during annual planning must be “coarse” enough, i.e. the number of goods must be small enough, so there are not too many different goods during the participatory annual planning process.

    2. How do you expect these coarse categories from the annual plan to be translated into a much more refined and therefore numerous number of categories which is what WCs will actually end up producing and consumers will end up consuming?

    3. Surely things which were not anticipated when the annual plan was created and agreed on will happen during the year when it is being carried out. How do you propose to respond to these unforeseen circumstances during the year?

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