Socialist calculation debate

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The socialist calculation debate, sometimes known as the economic calculation debate, was a discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money, financial prices for capital goods and private ownership of the means of production. More specifically, the debate was centered on the application of economic planning for the allocation of the means of production as a substitute for capital markets and whether or not such an arrangement would be superior to capitalism in terms of efficiency and productivity. [1] [2]

Contents

The historical debate was cast between the Austrian School represented by Ludwig von Mises and Friedrich Hayek, who argued against the feasibility of socialism; and between neoclassical and Marxian economists, most notably Cläre Tisch (as a forerunner), Oskar R. Lange, Abba P. Lerner, Fred M. Taylor, Henry Douglas Dickinson and Maurice Dobb, who took the position that socialism was both feasible and superior to capitalism. A central aspect of the debate concerned the role and scope of the law of value in a socialist economy. Although contributions to the question of economic coordination and calculation under socialism existed within the socialist movement prior to the 20th century, the phrase socialist calculation debate emerged in the 1920s beginning with Mises' critique of socialism. [3]

While the debate was popularly viewed as a debate between proponents of capitalism and proponents of socialism, in reality a significant portion of the debate was between socialists who held differing views regarding the utilization of markets and money in a socialist system and to what degree the law of value would continue to operate in a hypothetical socialist economy. [4] Socialists generally held one of three major positions regarding the unit of calculation, including the view that money would continue to be the unit of calculation under socialism; that labor time would be a unit of calculation; or that socialism would be based on calculation in natura or calculation performed in-kind. [5]

Debate among socialists has existed since the emergence of the broader socialist movement between those advocating market socialism, centrally planned economies and decentralized planning. Recent contributions to the debate in the late 20th century and early 21st century involve proposals for market socialism and the use of information technology and distributed networking as a basis for decentralized economic planning. [6]

Foundations and early contributions

Karl Marx and Friedrich Engels held a broad characterization of socialism, characterized by some form of public or common ownership of the means of production and workers' self-management within economic enterprises and where production of economic value for profit would be replaced by an ex ante production directly for use which implied some form of economic planning and planned growth in place of the dynamic of capital accumulation and therefore the substitution of commodity-based production and market-based allocation of the factors of production with conscious planning. [7]

Although Marx and Engels never elaborated on the specific institutions that would exist in socialism or on processes for conducting planning in a socialist system, their broad characterizations laid the foundation for the general conception of socialism as an economic system devoid of the law of value and law of accumulation and principally where the category of value was replaced by calculation in terms of natural or physical units so that resource allocation, production and distribution would be considered technical affairs to be undertaken by engineers and technical specialists. [8]

An alternative view of socialism prefiguring the neoclassical models of market socialism consisted of conceptions of market socialism based on classical economic theory and Ricardian socialism, where markets were utilized to allocate capital goods among worker-owned cooperatives in a free-market economy. The key characteristics of this system involved direct worker ownership of the means of production through producer and consumer cooperatives and the achievement of genuinely free markets by removing the distorting effects of private property, inequality arising from private appropriation of profits and interest to a rentier class, regulatory capture, and economic exploitation. This view was expounded by mutualism and was severely criticized by Marxists for failing to address the fundamental issues of capitalism involving instability arising from the operation of the law of value, crises caused by overaccumulation of capital and lack of conscious control over the surplus product. This perspective played little to no role during the socialist calculation debate in the early 20th century. [9]

Early arguments against the utilization of central economic planning for a socialist economy were brought up by proponents of decentralized economic planning or market socialism, including Pierre-Joseph Proudhon, Peter Kropotkin and Leon Trotsky.[ citation needed ] In general, it was argued that centralized forms of economic planning that excluded participation by the workers involved in the industries would not be sufficient at capturing adequate amounts of information to coordinate an economy effectively while also undermining socialism and the concept of workers' self-management and democratic decision-making central to socialism. However, no detailed outlines for decentralized economic planning were proposed by these thinkers at this time. Socialist market abolitionists in favour of decentralized planning also argue that whilst advocates of capitalism and the Austrian School in particular recognize equilibrium prices do not exist, they nonetheless claim that these prices can be used as a rational basis when this is not the case, hence markets are not efficient. [10] [11] Other market abolitionist socialists such as Robin Cox of the Socialist Party of Great Britain argue that decentralized planning allows for a spontaneously self-regulating system of stock control (relying solely on calculation in kind) to come about and that in turn decisively overcomes the objections raised by the economic calculation argument that any large scale economy must necessarily resort to a system of market prices. [12]

Early neoclassical contributions

In the early 20th century, Enrico Barone provided a comprehensive theoretical framework for a planned socialist economy. In his model, assuming perfect computation techniques, simultaneous equations relating inputs and outputs to ratios of equivalence would provide appropriate valuations in order to balance supply and demand. [13]

Proposed units for accounting and calculation

Calculation in kind

Calculation in kind, or calculation in-natura, was often assumed to be the standard form of accounting that would take place in a socialist system where the economy was mobilized in terms of physical or natural units instead of money and financial calculation.

Otto Neurath was adamant that a socialist economy must be moneyless because measures of money failed to capture adequate information regarding material well-being of consumers or failed to factor in all costs and benefits from performing a particular action. He argued that relying on any single unit, whether they be labor-hours or kilowatt-hours, would be inadequate and that demand and calculations be performed by the relevant disaggregated natural units, i.e. kilowatts, tons, meters and so on. [14]

In the 1930s, Soviet mathematician Leonid Kantorovich demonstrated how an economy in purely physical terms could use determinate mathematical procedure to determine which combination of techniques could be used to achieve certain output or plan targets.

Debate on the use of money

In contrast to Neurath, Karl Kautsky argued that money would have to be utilized in a socialist economy. Kautsky states the fundamental difference between socialism and capitalism is not the absence of money in the former; rather, the important difference is in the ability for money to become capital under capitalism. In a socialist economy, there would be no incentive to use money as financial capital, therefore money would have a slightly different role in socialism. [15]

Labor-time calculation

Jan Appel drafted a contribution to the socialist calculation debate which then went through a discussion process before being published as Foundations of Communist Production and Distribution by the General Workers' Union of Germany in 1930. An English translation by Mike Baker was published in 1990. [16]

Interwar debate

Economic calculation problem

Ludwig von Mises believed that private ownership of the means of production was essential for a functional economy, arguing:

Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.

His argument against socialism was in response to Otto Neurath arguing for the feasibility of central planning. [18] Mises argued that money and market-determined prices for the means of production were essential in order to make rational decisions regarding their allocation and use. [19]

Criticism of the calculation problem

Bryan Caplan, a libertarian economist, has criticized the version of the calculation problem advanced by Mises arguing that the lack of economic calculation makes socialism impossible and not merely inefficient. Caplan argues that socialism makes economic calculation impossible, yet that problem may not be severe enough to make socialism impossible "beyond the realm of possibility". Caplan points out that the fall of the Soviet Union does not prove that calculation was the main issue there. He suggests that more likely the problems resulted from bad incentives arising out of the one-party political system and degree of power granted to the party elite. [20]

Knowledge problem

Proponents of decentralized economic planning have also criticized central economic planning. Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and so they would be unable to respond to local conditions quickly enough to effectively coordinate all economic activity. [21] Trotsky argued:

If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy. But, in reality, the bureaucracy errs frightfully in its estimate of its spiritual resources. [...] The innumerable living participants in the economy, state and private, collective and individual, must serve notice of their needs and of their relative strength not only through the statistical determinations of plan commissions but by the direct pressure of supply and demand.

Leon Trotsky, The Soviet Economy in Danger [22]

Lange model

Oskar Lange responded to Mises' assertion that socialism and social ownership of the means of production implied that rational calculation was impossible by outlining a model of socialism based on neoclassical economics. Lange conceded that calculations would have to be done in value terms rather than using purely natural or engineering criteria, but he asserted that these values could be attained without capital markets and private ownership of the means of production. In Lange's view, this model qualified as socialist because the means of production would be publicly owned with returns to the public enterprises accruing to society as a whole in a social dividend while workers' self-management could be introduced in the public enterprises. [23]

This model came to be referred to as the Lange model. In this model, a Central Planning Board (CPB) would be responsible for setting prices through a trial-and-error approach to establish equilibrium prices, effectively running a Walrasian auction. Managers of the state-owned firms would be instructed to set prices to equal marginal cost (P=MC) so that economic equilibrium and Pareto efficiency would be achieved. The Lange model was expanded upon by Abba Lerner and became known as the Lange–Lerner theorem.

Paul Auerbach and Dimitris Sotiropoulos have criticized the Lange model for degrading the definition of socialism to a form of "capitalism without capital markets" attempting to replicate capitalism's efficiency achievements through economic planning. Auerbach and Sotiropoulos argue that Friedrich Hayek provided an analysis of the dynamics of capitalism that is more consistent with Marxian economics' analysis because Hayek viewed finance as a fundamental aspect of capitalism and any move through collective ownership or policy reform to undermine the role of capital markets would threaten the integrity of the capitalist system. According to Auerbach and Sotiropoulos, Hayek gave an unexpected endorsement to socialism that is more sophisticated than Lange's superficial defense of socialism. [24]

Contemporary contributions

Networked digital feedback

Peter Joseph argues for a transition from fragmented economic data relay to fully integrated, sensor-based digital systems, or an Internet of things. [25] Using an internet of sensory instruments to measure, track and feed back information, this can unify numerous disparate elements and systems, greatly advancing awareness and efficiency potentials. [26]

In an economic context, this approach could relay and connect data regarding how best to manage resources, production processes, distribution, consumption, recycling, waste disposal behavior, consumer demand and so on. Such a process of networked economic feedback would work on the same principle as modern systems of inventory and distribution found in major commercial warehouses. [27] [28] Many companies today use a range of sensors and sophisticated tracking means to understand rates of demands, exactly what they have, where it is or where it may be moving and when it is gone. [29] [30] It is ultimately an issue of detail and scalability to extend this kind of awareness to all sectors of the economy, macro and micro. [31]

Not only is price no longer needed to gain critical economic feedback, but the information price communicates is long delayed and incomplete in terms of economic measures required to dramatically increase efficiency. Mechanisms related networked digital feedback systems make it possible to efficiently monitor shifting consumer preference, demand, supply and labor value, virtually in real time. Moreover, it can also be used to observe other technical processes price cannot, such as shifts in production protocols, allocation, recycling means, and so on. [32] As of February 2018, it is now possible to track trillions of economic interactions related to the supply chain and consumer behavior by way of sensors and digital relay as seen with the advent of Amazon Go. [33]

Cybernetic coordination

Paul Cockshott, Allin Cottrell, and Andy Pollack have proposed new forms of coordination based on modern information technology for non-market socialism. They argue that economic planning in terms of physical units without any reference to money or prices is computationally tractable given the high-performance computers available for particle physics and weather forecasting. Cybernetic planning would involve an a priori simulation of the equilibration process that idealized markets are intended to achieve. [34]

Participatory economics

Proposals for decentralized economic planning emerged in the late 20th century in the form of participatory economics and negotiated coordination.

Decentralized pricing without markets

David McMullen argues that social ownership of the means of production and the absence of markets for them is fully compatible with a decentralized price system. In a post-capitalist society, transactions between enterprises would entail transfers of social property between custodians rather than an exchange of ownership. Individuals would be motivated by the satisfaction from work and the desire to contribute to good economic outcomes rather than material reward. Bids and offer prices would aim to minimize costs and ensure that output is guided by expected final demand for private and collective consumption. Enterprises and startups would receive their investment funding from project assessment agencies. The required change in human behavior would take a number generations and would have to overcome considerable resistance. However, McMullen believes that economic and cultural development increasingly favors the transition. [35] [36]

Market socialism

James Yunker argues that public ownership of the means of production can be achieved the same way private ownership is achieved in modern capitalism through the shareholder system that separates management from ownership. Yunker posits that social ownership can be achieved by having a public body, designated the Bureau of Public Ownership (BPO), owning the shares of publicly-listed firms without affecting market-based allocation of capital inputs. Yunker termed this model pragmatic market socialism and argued that it would be at least as efficient as modern-day capitalism while providing superior social outcomes as public ownership of large and established enterprises would enable profits to be distributed among the entire population rather than going largely to a class of inheriting rentiers. [37]

Mechanism design

Beginning in the 1970s, new insights into the socialist calculation debate emerged from mechanism design theory. According to mechanism design theorists, the debate between Hayek and Lange became a stalemate that lasted for forty years because neither side was speaking the same language as the other, partially because the appropriate language for discussing socialist calculation had not yet been invented. According to these theorists, what was needed was a better understanding of the informational problems that prevent coordination between people. By fusing game theory with information economics, mechanism design provided the language and framework in which both socialists and advocates of capitalism could compare the merits of their arguments. As Palda (2013) writes in his summary of the contributions of mechanism design to the socialist calculation debate, "[i]t seemed that socialism and capitalism were good at different things. Socialism suffered from cheating, or 'moral hazard', more than capitalism because it did not allow company managers to own shares in their own companies. [...] The flip side of the cheating problem in socialism is the lying or 'adverse selection' problem in capitalism. If potential firm managers are either good or bad, but telling them apart is difficult, bad prospects will lie to become a part of the firm". [38]

Relation to neoclassical economics

In his book Whither Socialism?, Joseph Stiglitz criticized models of market socialism from the era of the socialist calculation debate in the 1930s as part of a more general criticism of neoclassical general equilibrium theory, proposing that market models be augmented with insights from information economics. [39] Alec Nove and János Kornai held similar positions regarding economic equilibrium. Both Nove and Kornai argued that because perfect equilibrium does not exist, a comprehensive economic plan for production cannot be formulated, making planning ineffective just as real-world market economies do not conform to the hypothetical state of perfect competition. [40] In his book The Economics of Feasible Socialism, Nove also outlined a solution involving a socialist economy consisting of a mixture of macro-economic planning with market-based coordination for enterprises where large industries would be publicly owned and small- to medium-sized concerns would be organized as cooperatively-owned enterprises. [41]

See also

Related Research Articles

A planned economy is a type of economic system where the distribution of goods and services or the investment, production and the allocation of capital goods takes place according to economic plans that are either economy-wide or limited to a category of goods and services. A planned economy may use centralized, decentralized, participatory or Soviet-type forms of economic planning. The level of centralization or decentralization in decision-making and participation depends on the specific type of planning mechanism employed.

The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.

In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any other external authority. Proponents of the free market as a normative ideal contrast it with a regulated market, in which a government intervenes in supply and demand by means of various methods such as taxes or regulations. In an idealized free market economy, prices for goods and services are set solely by the bids and offers of the participants.

Private property is a legal designation for the ownership of property by non-governmental legal entities. Private property is distinguishable from public property, which is owned by a state entity, and from collective or cooperative property, which is owned by one or more non-governmental entities.

<i>Human Action</i>

Human Action: A Treatise on Economics is a work by the Austrian economist and philosopher Ludwig von Mises. Widely considered Mises' magnum opus, it presents the case for laissez-faire capitalism based on praxeology, his method to understand the structure of human decision-making. Mises rejected positivism within economics, and defended an a priori foundation for praxeology, as well as methodological individualism and laws of self-evident certainty. Mises argues that the free-market economy not only outdistances any government-planned system, but ultimately serves as the foundation of civilization itself.

<span class="mw-page-title-main">Economic system</span> System of ownership, production, and exchange

An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

<span class="mw-page-title-main">Oskar R. Lange</span> Polish economist and diplomat (1904–1965)

Oskar Ryszard Lange was a Polish economist and diplomat. He is best known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism. He responded to the economic calculation problem proposed by Ludwig von Mises and Friedrich Hayek by claiming that managers in a centrally-planned economy would be able to monitor supply and demand through increases and declines in inventories of goods, and advocated the nationalization of major industries. During his stay in the United States, Lange was an academic teacher and researcher in mathematical economics. Later in socialist Poland, he was a member of the Central Committee of the Polish United Workers' Party.

In economics, a price system is a system through which the valuations of any forms of property are determined. All societies use price systems in the allocation and exchange of resources as a consequence of scarcity. Even in a barter system with no money, price systems are still utilized in the determination of exchange ratios between the properties being exchanged.

<span class="mw-page-title-main">Criticism of socialism</span> Overview of criticism of an economic system and political ideology

Criticism of socialism is any critique of socialist economics and socialist models of organization and their feasibility, as well as the political and social implications of adopting such a system. Some critiques are not necessarily directed toward socialism as a system but rather toward the socialist movement, parties, or existing states. Some critics consider socialism to be a purely theoretical concept that should be criticized on theoretical grounds, such as in the economic calculation problem and the socialist calculation debate, while others hold that certain historical examples exist and that they can be criticized on practical grounds. Because there are many types of socialism, most critiques are focused on a specific type of socialism, that of the command economy and the experience of Soviet-type economies that may not apply to all forms of socialism as different models of socialism conflict with each other over questions of property ownership, economic coordination and how socialism is to be achieved. Critics of specific models of socialism might be advocates of a different type of socialism.

The Lange model is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving economic equilibrium and Pareto efficiency. In this model, the state owns non-labor factors of production, and markets allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to marginal cost in order to achieve Pareto efficiency. By contrast, in a capitalist economy, private owners seek to maximize profits, while competitive pressures are relied on to indirectly lower the price, this discourages production with high marginal cost and encourages economies of scale.

Economic planning is a resource allocation mechanism based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which together comprise the productive apparatus of the economy.

<i>Economic Calculation in the Socialist Commonwealth</i> 1920 article by Ludwig Von Mises

Economic Calculation in the Socialist Commonwealth is an article by Austrian School economist Ludwig von Mises. Its critique against economic calculation in a planned economy triggered the decades-long economic calculation debate.

Calculation in kind or calculation in-natura is a way of valuating resources and a system of accounting that uses disaggregated physical magnitudes as opposed to a common unit of calculation. As the basis for a socialist economy, it was proposed to replace money and financial calculation. In an in-kind economy products are produced for their use values and accounted in physical terms. By contrast, in money-based economies, commodities are produced for their exchange value and accounted in monetary terms.

Production for use is a phrase referring to the principle of economic organization and production taken as a defining criterion for a socialist economy. It is held in contrast to production for profit. This criterion is used to distinguish communism from capitalism, and is one of the fundamental defining characteristics of communism.

Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.

State socialism is a political and economic ideology within the socialist movement that advocates state ownership of the means of production. This is intended either as a temporary measure, or as a characteristic of socialism in the transition from the capitalist to the socialist mode of production or to a communist society. State socialism was first theorised by Ferdinand Lassalle. It advocates a planned economy controlled by the state in which all industries and natural resources are state-owned.

The socialist mode of production, sometimes referred to as the communist mode of production, or simply (Marxist) socialism or communism as Karl Marx and Friedrich Engels used the terms communism and socialism interchangeably, is a specific historical phase of economic development and its corresponding set of social relations that emerge from capitalism in the schema of historical materialism within Marxist theory. The Marxist definition of socialism is that of production for use-value, therefore the law of value no longer directs economic activity. Marxist production for use is coordinated through conscious economic planning. According to Marx, distribution of products is based on the principle of "to each according to his needs"; Soviet models often distributed products based on the principle of "to each according to his contribution". The social relations of socialism are characterized by the proletariat effectively controlling the means of production, either through cooperative enterprises or by public ownership or private artisanal tools and self-management. Surplus value goes to the working class and hence society as a whole.

Social ownership is a type of property where an asset is recognized to be in the possession of society as a whole rather than individual members or groups within it. Social ownership of the means of production is the defining characteristic of a socialist economy, and can take the form of community ownership, state ownership, common ownership, employee ownership, cooperative ownership, and citizen ownership of equity. Within the context of socialist economics it refers particularly to the appropriation of the surplus product, produced by the means of production, or the wealth that comes from it, to society at large or the workers themselves. Traditionally, social ownership implied that capital and factor markets would cease to exist under the assumption that market exchanges within the production process would be made redundant if capital goods were owned and integrated by a single entity or network of entities representing society. However, the articulation of models of market socialism where factor markets are utilized for allocating capital goods between socially owned enterprises broadened the definition to include autonomous entities within a market economy.

Market socialism is a type of economic system involving social ownership of the means of production within the framework of a market economy. Various models for such a system exist, usually involving cooperative enterprises and sometimes a mix that includes public or private enterprises. In contrast to the majority of historic socialist economies, which have substituted the market mechanism for some form of economic planning, market socialists wish to retain the use of supply and demand signals to guide the allocation of capital goods and the means of production. Under such a system, depending on whether socially owned firms are state-owned or operated as worker cooperatives, profits may variously be used to directly remunerate employees, accrue to society at large as the source of public finance, or be distributed amongst the population in a social dividend.

Socialist economics comprises the economic theories, practices and norms of hypothetical and existing socialist economic systems. A socialist economic system is characterized by social ownership and operation of the means of production that may take the form of autonomous cooperatives or direct public ownership wherein production is carried out directly for use rather than for profit. Socialist systems that utilize markets for allocating capital goods and factors of production among economic units are designated market socialism. When planning is utilized, the economic system is designated as a socialist planned economy. Non-market forms of socialism usually include a system of accounting based on calculation-in-kind to value resources and goods.

References

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Further reading