summary of calculation debate

[Ken Hanly <khanly@xxxxxxxxxxxxxxx>]

As a non-expert I found this a useful summary of the calculation
debate. No doubt the experts will pick it apart. I had no idea
that Otto Neurath the logical positivist was part of the debate.
   Cheers, Ken Hanly

> The Socialist Calculation Debate
>
>
>
> 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 Walrasian 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 fluctations, 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. The issue of
> "finding" correct prices and the stability of the market were 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.
>
> Resources
>
>      Peter Boettke's ""Economic Calculation: The Austrian Contribution to Political Economy"
>      Allin Cottrell and W. Paul Cockshott's " Calculation, Complexity and Planning: The socialist
>      calculation debate once again" - ROPE, 1993 - PDF download
>      Allin Cottrell and W. Paul Cockshott's "Information and Economics: A Critique of Hayek"
>      "Post-Lange Market Socialism" by James A. Yunker
>
>
>
>
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