The Economic Realms: The Socialist Calculation Debate

Tuesday, 8 October 2013

The Socialist Calculation Debate

From Wikpedia

The Socialist calculation debate (sometimes known as the Economic calculation debate) refers to an ongoing discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money and financial prices for capital goods and 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]
Another central aspect of the debate concerned the role and scope for 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 Ludwig von Mises' critique of socialism.^[2] The historical debate was cast between the Austrian school of economics, represented by Ludwig von Mises and Friedrich Hayek, who argued against the feasibility of socialism, and between neoclassical economists and Marxian economists, most notably Cläre Tisch (as a forerunner), Oskar Lange, Abba Lerner, Fred M. Taylor, Henry Douglas Dickinson and Maurice Dobb, who took the position that socialism was both feasible and superior to capitalism.
The debate was popularly viewed as a debate between proponents of capitalism and proponents of socialism, but 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.^[3] 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.^[4]
Debate among socialists has existed since the emergence of the broader socialist movement between those advocating market socialism, centrally planned economies and decentralized economic 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.

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 worker 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.^[5]
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.^[6]
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 Mutualist philosophy 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 over-accumulation of capital and lack of conscious control over the surplus product.^[7] As a result, this perspective played little to no role during the socialist calculation debate in the early 20th century.
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 Leon Trotsky, Peter Kropotkin and Pierre-Joseph Proudhon. 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 worker's 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.

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.^[8]

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, etc).^[9]
In the 1930s, Soviet mathematician Leonoid 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, thus money would have a slightly different role in socialism.^[10]

Labor-time calculation

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Interwar debate

Economic calculation problem

Main article: Economic calculation problem

"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.“ -Ludwig von Mises, Economic Calculation in the Socialist Commonwealth^[11]

Ludwig von Mises' argument against socialism was in response to Otto Neurath. 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.^[12]

Criticisms of the calculation problem

Bryan Caplan, an anarcho-capitalist economist, has criticized the version of the calculation problem advanced by Mises arguing that socialist calculation was impossible, stating that the scale of the problem is taken out of proportion because economic calculation was not a major problem for the centrally planned economy of the former Soviet Union. He points to evidence from the economy of the Soviet Union indicating that calculation was not a major issue, attributing the main problems of Soviet system with bad incentives arising out of the single-party political system and degree of power granted to the party-elite.^[13]

The knowledge problem

"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^[14]

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 demonstrated 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 worker's self-management could be introduced in the public enterprises.^[15]
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 acting as the abstract Walrasian auctioneer in Walrasian economics. 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 Hayek provided an analysis of the dynamics of capitalism that is more consistent with Marxian 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 gives an unexpected endorsement to socialism that is more sophisticated than Lange's superficial defense of "socialism".^[16]

Contemporary contributions

Cybernetic coordination

Paul Cockshott and Allin Cottrell, David McMullen and Andy Pollack have proposed new forms of coordination based on modern information technology for non-market socialism.

Participatory economics

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

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.^[17]

Critique of neoclassical economics

In his book Whither socialism?, Joseph Stiglitz has 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, which refutes both free-market capitalism and market socialism.^[18]
Alec Nove and Janos 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.^[19] In his book The Economics of Feasible Socialism Alec Nove 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.

Notes

^ Levy, David M. and Sandra J. Peart. "socialist calculation debate." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 2 February 2013 <http://www.dictionaryofeconomics.com/article?id=pde2008_S000535> doi:10.1057/9780230226203.1570
^ A Companion to the History of Economic Thought, Wiley-Blackwell by Biddle, Jeff and Samuels, Warren and Davis, John. 2006. (P.319): "What became known as the socialist calculation debate started when von Mises (1935[1920]) launched a critique of socialism."
^ Economic Calculation under Socialism: The Austrian Contribution, by Vaughn, Karen. 2004. Economic Inquiry, vol. 18, issue 4, p. 537, 1980: Although it is conventional to treat the economic calculation controversy as a debate between those who favored socialism and those who opposed it, this is not descriptive of the actual course of events...by that time, the real debate, in so far as one took place in the journals, was among the socialists themselves..."
^ Adam Buick and Pieter Lawrence (1984). "How Socialism Can Organise Production Without Money". Libertyandsocialism.org. Retrieved 13 February 2013.
^ The Rise and Fall of Socialist Planning, Ellman, Michael. (P.17): "Marx devoted most of his life to the analysis of capitalism and was notoriously opposed to attempts to design utopias. Nevertheless, from his scattered observations about socialism, and from those of his close comrade Engels, his followers drew the idea that in a socialist economy the market mechanism would be replaced by economic planning...Similarly, the superiority of planning, which would enable society as a whole to coordinate production ex ante, became a widespread view in the international Marxist movement."
^ Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 20. ISBN 978-0-8047-7566-3. "According to nineteenth-century socialist views, socialism would function without capitalist economic categories - such as money, prices, interest, profits and rent - and thus would function according to laws other than those described by current economic science. While some socialists recognized the need for money and prices at least during the transition from capitalism to socialism, socialists more commonly believed that the socialist economy would soon administratively mobilize the economy in physical units without the use of prices or money."
^ McNally, David (1993). Against the Market: Political economy, market socialism and the Marxist critique. Verso. ISBN 978-0-86091-606-2.
^ Gregory and Stuart, Paul and Robert (2004). Comparing Economic Systems in the Twenty-First Century, Seventh Edition. George Hoffman. pp. 120–121. ISBN 0-618-26181-8.
^ Calculation in-Natura, from Neurath to Kantorovich, Cockshott, Paul. (P.12): ""
^ Karl Kautsky (1924). "The Economic Revolution". The Labour Revolution. Ruskin House, 40 Museum Street, W.C.1. Retrieved 3 March 2013.
^ Economic calculation in the Socialist Commonwealth, 1920
^ Calculation in-Natura, from Neurath to Kantorovich, Cockshott, Paul. (P.9): "Mises was initially debating against Otto Neurath. In an article dated 1919 Neurath had argued that a socialist economy would be able to operate calculations in-natura rather than by means of money."
^ Is socialism really "impossible"?, by Caplan, Bryan. 2004. Critical Review, vol. 16, p. 33-52, January 2004.
^ Leon Trotsky (October 1932). "The Soviet Economy in Danger". Marxism.org. Retrieved 13 February 2013.
^ Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, by Auerbach, Paul and Sotiropoulos, Dimitris. 2012. Kingston University London, Economics Discussion Paper 2012-6, p. 1-2: "Lange took up the challenge of Mises’ claim of the impossibility of constructing a socialist economy. He readily acceded to the need for efficiency calculations to be made in value terms rather than using purely natural or engineering criteria, but claimed that these values could emerge along lines consistent with neoclassical value theory, without the need for a market in capital goods and without private ownership over the means of production. Lange drew heavily upon the dominant neoclassical tradition to defend socialism"
^ Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, by Auerbach, Paul and Sotiropoulos, Dimitris. 2012. Kingston University London, Economics Discussion Paper 2012-6, p. 2-3: "Hayek implicitly realized the danger of undermining functional capitalist behaviour and therefore the nature of capitalist relations. If we see economic behaviour in capitalism as the outcome of capitalist social relations of power, then Hayek’s perspective renders capital markets as a central arena in the organization of capitalism as a system of exploitation. He also perceives every movement towards collective ownership of the means of production as a real threat to the reproduction of the logic of capitalism. In this sense, he implicitly ends up giving an unexpected endorsement to socialism that is much deeper and sophisticated than the superficial ‘defence’ of Lange."
^ Yunker, James (April 1992). Socialism Revised and Modernized: The Case for Pragmatic Market Socialism. Praeger. pp. 29–31. ISBN 978-0275941345.
^ Stiglitz, Joseph (January 1996). Whither Socialism?. The MIT Press. ISBN 978-0262691826. "."
^ Nove, Alec (1991). The Economics of Feasible Socialism, Revisited. Routledge. p. 216. ISBN 978-0043350492. "The point of all this is to stress that a perfect ‘socialist’ capital market is just as unimaginable as ‘rational’ investment under assumptions of neo-classical perfection."

The Economic Realms