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The "Socialist Calculation" debate emerged at the end of the 19th Century. With the crushing poverty of the industrial revolution as evidence, Socialists, Marxians and other critics of laissez-faire argued that free markets had, in effect, failed and that a benevolent government with control over the means of production and distribution, could allocate goods in a more efficient and equitable manner. The "Socialist Calculation" debate took off when proponents of laissez-faire argued that markets could allocate resources "better" or at least "no worse" than an even infinitely wise government could. Although the debate had been effectively on during the emergence of the Marxian School, the formal "Socialist Calculation" debate was first seriously discussed by the Lausanne economist Enrico Barone in a 1908 article on "Ministry of Production in a Collectivist State" which followed up on Pareto's (1896; 1906: p.266-9) own speculations. Barone made the argument that, at least in principle, a socialist economy could do as well as a capitalist one as prices should be seen merely as the solution to a set of equations in a Walrasian system - whether these were solved by the government or the market was irrelevant. But might a socialist system actually do better? The question was posed by Otto Neurath. Neurath observed that during World War I, European governments ran a "war economy" that maintained employment high, eliminated business fluctuations, etc. That, Neurath felt, was due to the fact that the government was not profit-seeking during the War and seemed to be an efficient organizer of resources and maximization of production for the war effort. Could not the same occur in peacetime? Neurath thought so - with the additional benefit of the elimination of money in such a system as "real values" would be sufficient if there was collective control. Other Marxian economists such as Otto Bauer and Emil Lederer, who were involved with the German socialization committee in the aftermath of that war were not as adamant as Neurath about the elimination of money, but they certainly thought that, particularly with the existence of industrial concentration, the socialist solution was more efficient. This question was also posed by Fred M. Taylor in his famous 1929 AER article and answered in the affirmative - yes, a socialist state could be at least "as efficient" as a private enterprise economy - with the benefit that in a collective system, initial income (or endowment) distribution would be an additional variable of control the government possessed which a market economy did not have at its disposal. What about consumption? Maurice H. Dobb (1933) went further and argued that consumer sovereignty was itself overrated: if government controlled consumption as well as production decisions, there would be no issue of "inefficiency". The Austrians entered the fray under with a cannonade by Ludwig von Mises. In a famous 1920 article "Economic Calculation in the Socialist Commonwealth", Mises went on the attack - arguing that pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a Socialist system and not "objects of exchange" (unlike final goods) - thus they were unpriced and hence the system would be necessarily inefficient. But Mises's argument was erroneously construed - as H.D. Dickinson (1933) was quick to point out. After all, as Barone and Taylor had shown, if we see the world as a system of Walrasian equations which need "solutions", there is no issue about not being able to price internal products. The ball was back in the Austrian court, and it was up to Friedrich von Hayek (1935) to construct an argument. The system of equations Barone and Taylor envisioned, Hayek argued, required too much information that would certainly not be easily available and the ensuing calculations (for "thousands of equations") would be too difficult. Similarly, the economic incentives provided in a market economy could not be reproduced in a collective system. The Paretian economists, notably Taylor (1928), Jacob Marschak (1923), Oskar Lange (1936, 1938) and Abba Lerner (1934) argued that a state-run economy could at least be as efficient - provided government planners used the price system as if in a market economy. This, of course, was merely an application of the Paretian welfare theorems. Furthermore, in practical terms, a market economy can easily encounter market failures (e.g. from imperfect competition, externalities or transaction costs) that prevent the price mechanism from achieving an efficient allocation; a government which set prices as if in a fully-competitive system could overcome this and would thus be more efficient. Oskar Lange's argument was particularly compelling. Prices, he argued, are merely rates of exchange of one good for another (or, as Pareto (1906: p.155) would argue, they are an "accounting device in connection with the distribution of goods and their transformation"). Even if we see them as parameters for decision-makers, then whether they are provided by a central planner or by a market is irrelevant as long as managers of state enterprises are given instructions to act as cost-minimizers. Lange's solution to the issue of "finding" correct prices and the stability of the market was remarkable: let the government act as the mythical Walrasian "auctioneer" - searching for prices via tatonnement. Furthermore, on the issue of socialist economies' lack of incentives, Lange reiterated that in a modern capitalist economy, with the growing division between ownership (stockholders) and managers (CEOs, etc.), the incentives were just as twisted (Lange appealed to the work of various Institutionalists for this). Friedrich Hayek refined his position in response to this new argument. He did this in a series of seminal articles (1937, 1940, 1945, 1948, 1968) where he essentially argued that a state-run economy could not achieve greater efficiency in resource allocation than a capitalist one largely because the information conveyed by the price-mechanism of a market economy was greater than the information any planner could possibly acquire. This led on to the work on information and self-organization that dominated the second half of Hayek's career. Among the more interesting results of this debate was the adoption, in the Soviet Union itself, of the techniques suggested by Lange. This led to the development of linear programming by Leonid Kantorovich which demonstrated that efficient allocation in a planned economy required effectively the same of use of prices as in a competitive market economy. This was also discovered by Tjalling C. Koopmans in his formal discussion of efficiency in a multi-market scenario. In their conclusion, that a collectivist economy could do no better than a private market system in the idealized Walrasian world - but it might also do no worse. In short, they confirmed Barone's original conjecture - at least in theory. The Austrians have held on to Hayek's position on the "informational" role of prices and the incentives problem. _________________________________________________________________ E. Barone (1908) "The Ministry of Production in the Collectivist State", Giornale degli Economisti, as translated in Hayek, 1935, editor, Collectivist Economic Planning, London: Routledge. O. Bauer (1919) Der Weg zum Sozialismus, Vienna: Ignaz Brand. M.H. Dobb (1933) "Economic Theory and the Problem of a Socialist Economy", Economic Journal, vol.43 (Dec) M.H. Dobb (1937) Political Economy and Capitalism: Some essays in economic tradition. H.D. Dickinson (1933) "Price Formation in a Socialist Community", Economic Journal, vol.43 (Jun), p.237-50 H.D. Dickinson (1939) Economics of Socialism. Oxford. F.A. Hayek (1935) "The nature and history of the problem" and "The state of the debate", in F.A. Hayek, editor, Collectivist Economic Planning. London: Routledge. F.A. Hayek (1937) "Economics and Knowledge", 1937, Economica, vol. 4, p.33-54. F.A. Hayek (1940) "Socialist Calculation: the Competitive 'Solution'," Economica, vol. 7 (May) F.A. Hayek (1945) "The Use of Knowledge in Society", 1945, American Economic Review, vol. 35 (4), p.519-30. A.P. Lerner (1934) "Economic Theory and Socialist Economy" Review of Economic Studies, vol. 2 (Oct) A.P. Lerner (1936) "A Note on Socialist Economies" Review of Economic Studies, vol. 4 (Oct) A.P. Lerner (1937) "Statics and Dynamics in Socialist Economics", Economic Journal, vol. 46 (Jun), p.253 A.P. Lerner (1944) The Economics of Control: Principles of welfare economics. New York: Macmillan. O. Lange (1936) "On the Economic Theory of Socialism", Review of Economic Studies, vol. 4 (Oct) O. Lange (1937) "On the Economic Theory of Socialism", Review of Economic Studies, vol. 4 (Feb) O. Lange and F.M. Taylor (1938) On the Economic Theory of Socialism (ed. B. Lippincott), 1964 reprint, New York: McGraw-Hill. O. Lange (1942) "The Foundations of Welfare Economics", Econometrica, Vol. 10 (3), p.215-28. J. Marschack (1923) "Wirtschaftsrechnung und Gemeinwirtschaft", Archiv fur Sozialwissenschaft und Sozialpolitik. L. von Mises (1920) "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen", Archiv fur Sozialwissenschaft und Sozialpolitik, vol. 47 [Engl. trans: "Economic Calculation in the Socialist Commonwealth", in F.A. Hayek, ed., 1935, Collectivist Economic Planning, p.87] L. von Mises (1922) Die Gemeinwirtschaft. [English 1937 trans. Socialism: An economic and aociological analysis]. O. Neurath (1919) Durch die Kriegswirtschaft zur Naturalwirtschaft, Munich: Callwey. F.M. Taylor (1929) "The Guidance of Production in a Socialist State", American Economic Review, vol. 19 (1) V. Pareto (1896-8) Cours d'économie politique. 2 volumes. 1964 edition, Geneva: Librairie Droz. V. Pareto (1906) Manual of Political Economy. 1971 translation of 1927 edition, New York: Augustus M. Kelley. _________________________________________________________________ Resources
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