Socialist Renewal: Lessons from the “Calculation” Debate
Fikret Adaman and Pat Devine (from Studies in Political Economy, 43, Spring 1994)
The crisis of confidence confronting socialists today has various causes. The most insistent, immediate reason is the historic failure of the Soviet model, with the attendant disintegration of country after country formerly within the Soviet sphere of influence, and the precipitate attempts of the ruling elites of these countries to restore or create some form of capitalism. In the short term, this experience has placed all socialists on the defensive, including those who have long criticized the Soviet model in the name of socialism itself. This might be expected to pass as the realities of “actually existing” global capitalism make themselves felt. Indeed, the removal of the Soviet model of “actually existing” socialism from the historical stage creates space for the emergence of alternative, non-oppressive visions of socialism, more in line with the values of human freedom and emancipation historically associated with the socialist project.
However, the prevailing the crisis of confidence in the possibility of socialism is not just due to the Soviet experience and the absence of any examples of socialism in practice. It is also, and in the long run more seriously, due to the absence of any convincing theoretical model of how a socialist society, and in particular a socialist economy, might be organized. Important insights into the requirements of such a model can be gained from a re-examination of the “economic calculation” (or wirtschaftsrechnung) debate that took place during the 1920s and 1930s and revived during the 1980s. The debate was about whether rational economic calculation was possible under socialism- defined as state ownership of the means of production. Its principal protagonists were economists from the Austrian school, who denied the possibility, and socialist economists, most notably Oskar Lange, who affirmed it.
Until recently the calculation debate was regarded primarily as part of the history of economic thought, having little relevance to the actual problems of constructing a socialist economy in practice. In the 1980s however, the situation began to change. On the one hand growing awareness of the systemic problems of the Soviet model led to a renewed interest in market socialism and a modern school of market socialism, tracing its roots back to Lange’s model. This has become the predominant paradigm within which work on the economics of socialism is currently being undertaken.[1] On the other hand, a modern neo-Austrian school began to contest the standard account of the calculation debate, arguing that it is based on a misunderstanding of the original Austrian challenge,[2] and that a proper understanding of the Austrian position finally disposes of any possibility of an effective economic system not based on private property and markets- including, of course, modern market socialism.[3]
| "participatory planning enables both the social mobilization of tacit knowledge and the ex ante coordination of major interdependent decisions- indeed, [each] is a necessary condition for the other." |
This paper seeks to draw some lessons from the calculation debate, both the original and its recent revival, for the renewal of socialism. Part one contends that the arguments of all the major protagonists in the original debate were problematic in that they were set largely within a static neoclassical framework. This is developed through an examination of the work of Maurice Dobb, whose largely ignored contribution to the debate first addressed the limits of this framework, and through an analysis of the arguments of the neo-Austrian school, which approached the issue in a very different manner. We argue that Dobb made a signal contribution in identifying the limits of Lange’s celebrated decentralized model. Lange failed to address the unavoidable uncertainty associated with atomistic decision-making, especially in relation to investment, a feature which Dobb emphasized in his arguments on behalf of central planning. The principal insight of the neo-Austrians, on the other hand, lies in their recognition of the importance of tacit knowledge. This was also implicit in the original Austrian position.
The second part of the paper assesses the overall position of Dobbs and the neo-Austrians. We suggest that the neo-Austrians advocacy of capitalism as the only effective way of mobilizing tacit knowledge fails to confront satisfactorily the insights of Dobb’s contributions concerning the inefficiencies of atomistic decision-making. Dobb’s analysis, however, fails to recognize the importance of tacit knowledge, making his advocacy of central planning unconvincing as it stands. The paper ends by arguing that a process of participatory planning enables both the social mobilization of tacit knowledge and the ex ante coordination of major interdependent decisions- indeed, that each is a necessary condition for the other.
Part One: Two Analytic Failures in the Historical “Neo-classical” Debate
Although the challenge to the possibility of rational economic calculation under socialism came primarily from two prominent Austrians, Mises and Hayek, it was taken up primarily by socialist economists operating within a neoclassical framework. These “neo-classical” socialists interpreted the challenge as denying the possibility, in the absence of real markets for means of production, of a arriving at a Pareto optimal static equilibrium. They, therefore, sought to show how equilibrium could be achieved without such markets. The standard account of the debate accepts this neoclassical interpretation of the issue at stake and concludes that the socialists were successful in demonstrating that rational economic calculation is possible in an economy based on state ownership of the means of production.[4]
Mises’ initial challenge was directed at a moneyless model of socialism in which the allocation of all means of production was decided centrally. Without prices for means of production, he argued, there would be no way of calculating costs and therefore no way of rationally allocating scarce resources among alternative uses.[5] This was the issue taken up in the subsequent debate, with first centralized and then decentralized solutions offered as responses to Mises’ challenge. However, Mises also argued that the problem of economic calculation would not arise in a static state, but was only an issue in conditions of change and uncertainty; “the problem of economic calculation is of economic dynamics; it is no problem of economic statistics.”[6] It is this argument, largely ignored in the historical debate, that is regarded by today’s neo-Austrians as his central point.
The centralized solutions to the problem of rational economic calculation were essentially developments of Walras’ analysis, in which a general equilibrium is reached through a tatonnement procedure mediated by an imaginary auctioneer. The simultaneous equations underlying Walras’ analysis can, in theory, be solved directly, rather than through an iterative process, provided that the data on productive functions and the relative utility functions are known. This had already been demonstrated by Barone, using the mathematical techniques developed by Pareto, who showed that his “Ministry of Production” would arrive at exactly the same marginal equivalences as would a perfectly competitive market economy.[7]
Both Pareto and Barone emphasized the fact that although it was analytically possible to solve their systems, it would not be practically possible, due to insuperable informational and computational problems. Despites this, however, the standard account of the calculation debate attributes the practical argument against socialism above all to Hayek. This is not really surprising; since Hayek gave much greater prominence to the argument that the practical problems of data collection and analysis would be insuperable than did his predecessors.[8] Indeed, it was his emphasis on the practical problems that led the neoclassical advocates of the possibility of rational calculation under socialism to conclude that Hayek’s positions represented a retreat. Mises’ claim of theoretical impossibility was regarded as a stronger objection than the claim of practical impossibility.
The neoclassical socialists responded to the alleged practical impossibility of rational calculation under socialism by developing decentralized models that economized on the information collecting and computing demands made on the Central Planning Board. The best known of these models is that of Lange, perhaps the seminal work of market socialism.[9] In Lange’s preferred blueprint the Central Planning Board takes the place of Walras’ auctioneer. Wages and prices for consumer goods are set in real markets but prices for means of production are announced by the Central Planning Board. Manages of state-owned enterprises and sectors treat prices (market determined and Central Planning Board announced) as parameters and follow two rules- minimize costs and set price equal to marginal cost. Enterprises hire labour and sell consumer goods in real markets, and buy and sell means of production from/to one another in simulated (pseudo) markets. The Central Planning Board observes movements in stocks of means of production and adjusts prices accordingly, and this process of ex post coordination continues until an equilibrium set of prices is reached. Thus, it was claimed, rational economic calculation, resulting in a Pareto optimal allocation of resources, was possible under conditions of state-ownership of the means of production, just as it was under conditions of private ownership. There were, of course, many additional aspects to Lange’s model, and many problems with it have been identified, not least the question of managerial motivation and, stemming from this, the need for the Central Planning Board to monitor enterprise adherence to the rules. However, the standard account of the debate is that Lange’s model and subsequent refinements settled the argument in favour of the possibility of rational socialist calculation.
Thanks to the modern neo-Austrian school, we now know that this interpretation can only be sustained within the static equilibrium framework of the neoclassical paradigm, in which two crucial sources of imperfection of knowledge are assumed away and data are assumed to be given. Dobb and the Austrians can be seen as having challenged this neoclassical analysis, but Dobb’s main contribution was largely ignored, and the Austrians’ positions was not clarified sufficiently for its full significance to be understood.
Dobb’s Insight
For Dobb, when comparing capitalism and socialism, “the essential contrast is between an economy where the multifarious decisions which rule production are taken each in ignorance of all the rest, the economy where such decisions are coordinated and unified.”[10] His major contribution to the economic calculation debate was to argue that Lange and the other principal participants on the socialist side missed the essence of socialism by a “narrowing of the focus to problems of exchange-relations,”[11] and that this prevented them from understanding that the central economic questions in relation to socialism are primarily those of production and treatment of dynamic problems. Dobb rejected the path of seeking to mimic the working of the competitive market and argued instead for planning.
Dobb’s arguments for the advantages of planning may be summarized as follows. First, when decision makers are atomized, as they necessarily are in the market mechanism, the expectations, on the basis of which they make their decisions, are formed in a context of uncertainty. This uncertainty is unavailable in an atomistic economy but can be overcome by planning. In a market economy disequilibrium can only be corrected after the event. It “is only reached through the mechanism of fluctuations, which are themselves conditioned by the uncertainties inherent in production for a market when each autonomous decision is necessarily “blind” in part with respect to related decisions.[12] Economic planning, by contrast, consists of an attempt to make interdependent decisions in a coordinated way, in advance of any commitment of resources. As Dobb put it, “[t]he advantage of a planned economy per se consists in removing the uncertainties inherent in a market with diffused and autonomous decisions, or it consists in nothing at all.”[13] In response to Lerner’s argument that with the same degree of foresight an atomistic and a planned economy would reach the same result,[14] Dobb replied, “[t]o speak of a competitive economy achieving the same result, if it had the same degree of foresight, is to ignore the fact that its essential nature is that it does not and cannot possess the same degree of foresight.”[15]
A second advantage of planned ex ante coordination, according to Dobb, arises in relation to external effects in production and consumption. Since interrelated decisions would be coordinated before they were implemented, it would be possible to take account of the wider social effects of production that fall outside the balance sheet calculations of atomized decision-making units. These social effects include not the only the influence that the development of one industry or sector has on the possibilities for development of other sectors, but also the external effects of infrastructural development and of infant industries. Dobb also raised the question of planning in relation to consumption, in order to tackle the issues, among other things, of public goods and externalities in consumption.
Thirdly, only through planning can things which figure as “data” in a static context be converted into “variables” in a dynamic framework. Among the decisions which Dobb included in this category were those of the rate of investment between capital and consumer goods industries, the choice of techniques, the regional distribution of investment, the relative rates of growth of transport, fuel and power, and of agriculture in relation to industry, the rate of introduction of new products and their character, and the degree of standardization or variety in production that the economy at its stage of development feels able to afford.[16]
In summary, the analysis of the necessary imperfections of knowledge associated with the market process is what underlies Dobb’s case for planning in production and consumption. In his 1953 review of the calculation debate Dobb notes,
The quintessential function of planning as an economic mechanism is that it is a means of substituting ex ante co-ordination of the constituent elements in a scheme of development- i.e. Before decisions have been embodied in action and in actual commitments- for the co-ordination ex post which a decentralized pricing system provides (via the “revising’ effect of price movements which are the subsequent, and generally delayed, effect of previous decisions, when the latter have borne fruit in actual input- or output-changes).[17]
The Neo-Austrians’ Insight
There is disagreement, or at least a difference of emphasis, among modern neo-Austrians about the extent to which Mises and Hayek were themselves responsible for the fact that their socialist opponents in the economic calculation debate interpreted their challenge within the neoclassical framework. Lavoie, the principal exponent of the revisionist interpretation of the debate, argues that the learning and discovery aspects of the market mechanism, the hallmark of the modern neo-Austrians; analysis and the aspects that, above all, distinguish the Austrian from the neoclassical position, were already present in the early contributions of Mises and Hayek.[18]
Kirzner, on the other hand, suggests that the underlying Austrian position was developed through the wirtschaftsrechnung debate and only crystallized into a coherent and complete analysis in the later contributions of Mises and Hayek in the 1940s. Indeed, Kirzner argues that neither Mises nor Hayek were aware in the 1930s of just how sharply the Austrian concepts differed from those of the neoclassical school. He quotes Mises, writing in 1933, as follows:
The Austrian and the Anglo-American Schools and the School of Lausanne…differ only in their mode of expressing the same fundamental idea and…are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.[19]
| "Competition motivates the mobilization of knowledge about more efficient ways of utilizing the factors of production. Thus, in the Austrian view, rivalrous entrepreneurial activity, allocating and reallocating resources to meet constantly changing conditions, is the most important characteristic of economic life." |
However, while there may be differences over the extent to which the Austrian contributions of the 1920s and 1930s anticipated subsequent developments, there is broad agreement among modern neo-Austrians about the distinctive features of their present analysis. The fundamental weakness of the neoclassical school is seen as its assumption that information on prices and costs is objectively given. Instead, the neo-Austrians argue, knowledge is essentially subjective and can only be discovered in the course of competition, with the corollary that this inarticulate or tacit knowledge can neither be objectified and codified nor transferred. This Austrian notion of subjectivism, arising from the continuously changing environment, the dynamics of adjustment, and the inherent unpredictability of human activity, is a much wider concept than that of the neoclassical approach, which restricts subjectivism to price theory.
According to the modern Austrian school, the economic problem is not, as the neoclassical maintains, the allocation of limited resources among limitless wants, but rather the question of how dispersed and fragmented knowledge can be socially mobilized. In this context, the function of the market process in coordinating the use of dispersed knowledge, and the activity of entrepreneurs operating in conditions of uncertainty, are complementary ways of understanding the same reality. The market mechanism is conceptualized as selecting the efficient from inefficient, on the basis of how well they respond to the information signaled about potentially profitable opportunities, and rewarding them accordingly. The crucial point is that the function of the market mechanism is not to achieve equilibrium but to transmit information and provide incentives. The transmission of knowledge is not a passive activity. Competition motivates the mobilization of knowledge about more efficient ways of utilizing the factors of production. Thus, in the Austrian view, rivalrous entrepreneurial activity, allocating and reallocating resources to meet constantly changing conditions, is the most important characteristic of economic life. As Barry puts it, in the Austrian paradigm, “competition and entrepreneurship explain how an economy moves through time; how it is that through a process of evolutionary adaptation dispersed knowledge is coordinated so that an order is produced.”[20]
The modern Austrian position has been clearly summarized by Lavoie. He identifies three “cognitive functions of markets” – computation, incentive and discovery. The first two functions are recognized by both Austrians and neoclassicals, but for the Austrians
[w]hat is crucial to [the market’s] cognitive function…is that it provides a discovery process that by its very nature cannot be centrally directed but depends on a bi-directional communicative interplay between the participants.[21]
This discovery process is crucial because it “produces a kind of social intelligence that depends on, but goes beyond, the individual intelligence of the system’s participants.”[22] It follows from this analysis that, as Kirzner puts it,
[I]nstead of judging policies or institutional arrangements in terms of the resource-allocation pattern they are expected to produce (in comparison with the hypothetically optimum pattern), we can now understand the possibility of judging them in terms of their ability to promote discovery.[23]
To summarize the argument so far, two analytic failures have been identified in the neoclassical socialists’ solution to the problem of rational economic calculation: first, the failure to address the uncertainty confronting atomized decision makers that arises from ignorance of one another’s interdependent actions (as pointed out by Dobb); and, second, the failure to address the uncertainty inherent in the subjective nature of tacit knowledge, which can only be discovered by a process of social interaction among individuals (as pointed out by the Austrians). However, the responses of Dobb and the Austrians to the failures they identified are diametrically opposed. Dobbs seeks to remove the uncertainty necessarily associated with atomized decision making by replacing the market process with planned coordination ex ante, and assumes that the relevant information can be centrally gathered and processed in one way or another. The Austrians, by contrast, insist that only the market process, based on the rivalrous actions of individual entrepreneurs, can discover and mobilize the potential of dispersed tacit knowledge. They accept that the ex post coordination of the market mechanism involves inefficiencies due to mistakes, but argue that this is inherent in the nature of economic reality. As Kirzner puts it,
[t]o describe the competitive process as wasteful because it corrects mistakes only after they occur seems similar to ascribing the ailment to the medicine which heals it, or even blaming the diagnostic procedure for the disease it identifies.[24]
Part Two: A Resolution of Two Insights – Participatory Democratic Planning
The insights of both Dobb and the (modern) Austrians are powerful. At the risk of over simplification it could be said that, at a technical level, Dobb’s insight identifies the fundamental systemic problem of capitalism,[25] while the Austrians’ insight identifies the fundamental systemic problem of centralized administrative command planning. Yet Dobb’s advocacy of central planning fails to address the Austrians’ insight, and the Austrians’ advocacy of the capitalist market fails to address Dobb’s insight. Participatory democratic planning (unlike market socialism) offers a way of combining the two insights.[26]
| "Democratic participatory planning is postulated as a process in which the values and interests of people in all aspects of their lives interact and shape one another through negotiation and cooperation. This process enables tacit knowledge to be discovered and articulated, and economic decisions to be consciously planned and coordinated on thebasis of that knowledge." |
The participatory planning alternative seeks to combine planning with articulation of tacit knowledge. At first sight, such a task seems impossible. Planning, for Dobb, involves restrictions on the autonomy of enterprises and hence seemingly affords little scope for economic agents to participate actively in decision-making processes in order to discover and articulate their tacit knowledge. The way in which the Austrians understand the process of discovery and articulation categorically rules out planning. The contradiction arises, however, because in neither context do there exist institutions to facilitate participation. Instead, people are subject to the corrective power of either administrative commands from the hierarchically organized planning mechanism or market forces operating with inherently unpredictable and unintended consequences.
Democratic participatory planning is postulated as a process in which the values and interests of people in all aspects of their lives interact and shape one another through negotiation and cooperation. This process enables tacit knowledge to be discovered and articulated, and economic decisions to be consciously planned and coordinated on the basis of that knowledge. However, for a process of participatory planning to be possible, two prerequisites can be identified.
First, people must have access to the material and personal resources that are necessary for their participation in the social process of discovery to be real. This highlights a striking paradox in the Austrians’ position. While correctly insisting on the universal importance of tacit knowledge, they also insist that such knowledge can only be discovered by entrepreneurs competing in a market process based on private ownership. This necessarily excludes the tacit knowledge potential of non-entrepreneurs from the social process of discovery and mobilization. At the level of the enterprise this omission might be overcome by various forms of worker participation. But such arrangements, although a move in the right direction, do not deal with the tacit knowledge of people outside the enterprise. It follows that if Kirzner’s criterion for judging institutional arrangements (“their ability to promote discovery”) is adopted, there is a prima facie case that market processes based on private ownership are socially inefficient. A set of institutional arrangements that generalizes access to the resources needed for the participation in the social process of discovery would not only be more democratic and more just, but also more efficient.
The second prerequisite for participatory planning is that decision making at all levels takes place through a participatory process involving all those affected by the decision. This, of course, contrasts sharply with the Austrian position in which participation is confined to the micro level. For Austrians, this is not a matter of choice but a necessary fact of life. As Hayek puts it:
The main point of emphasis is that the conflict between, on the one hand, advocates of the spontaneous extended human order created by a competitive market, and on the other hand, those who demand a deliberate arrangement of human interaction by central authority based on collective command over available resources, is due to a factual error by the latter about how knowledge of these resources is and can be generated.[27]
However it is mere assertion to state that social processes of discovery can only take the form of rivalrous behavior in markets based on private ownership. Participatory planning at each level of decision making would enable knowledge of previously unarticulated interests, possibilities and interdependencies to be discovered and rendered transparent, through a process of social interaction among those affected. It is precisely this possibility that enables a more general social mobilization of tacit knowledge than that envisaged by the Austrian to be combined with the ex ante coordination of major interdependent decisions that Dobb considered to be the essence of planning. At the same time, participatory planning, unlike Dobb’s concept of planning, is not vulnerable to the Austrian critique that central planning is premised on a misunderstanding of the tacit nature of knowledge.
| "the importance of a process for discovering the tacit, qualitative, knowledge of people about how they would be affected by innovation in their various roles- as producers, consumers, citizens, members of different communities- cannot be overemphasized. Such knowledge, combined with the available scientific knowledge about the most likely impact of innovation on the environment, is likely to be an essential input into the process of negotiating a more sustainable relationship between economy and ecology." |
The two prerequisites of participatory planning may be linked by the concept of social ownership.[28] Social Ownership is neither private ownership nor state ownership, but rather ownership by those who are affected by the use of the assets involved. The principle underlying the concept of social ownership is that the right to decide on the use of assets should be vested in those who are affected by the decisions. The people who are affected by decisions over the use of assets will vary according to the assets involved, and the type of decision in question. Thus, the set of people who are affected by the use of the assets of an individual enterprise will be less inclusive than the set of people who are affected by the interdependent investment decisions of the industry to which the enterprise belongs. Social ownership at the level of the enterprise, defining the set of people who participate in enterprise decision-making, will be different from social ownership at the level of the industry, where a wider set of people would participate. Similarly, participatory planning at the level of a national economy, would involve social ownership and decision-making by those affected by the decisions taken at those levels (or by their representatives).
Several models that incorporate participation and differing degrees of planning have recently been developed,[29] a recurring theme in discussion of these models has been the question of their ability to deal with innovation. /this is the obverse of the claim that generalized participation would result in a more efficient social mobilization of tacit knowledge than the that resulting from the private entrepreneurial activity celebrated by the Austrians. The incentive to innovate within one possible participatory institutional structure has been elaborated elsewhere.[30] In the context of this paper, however, the importance of a process for discovering the tacit, qualitative, knowledge of people about how they would be affected by innovation in their various roles- as producers, consumers, citizens, members of different communities- cannot be overemphasized. Such knowledge, combined with the available scientific knowledge about the most likely impact of innovation on the environment, is likely to be an essential input into the process of negotiating a more sustainable relationship between economy and ecology.
The intellectual climate of our postmodern age discounts the possibility of purposeful, rational human action. /planning, understandably, has come to be associated with grand designs gone wrong. The sobering experience of the Soviet experiment has reinforced Hayek’s judgment of socialism as “The Fatal Conceit,” and his advocacy of a more modest “spontaneous extended human order.” Socialist must take this challenge seriously.[31]
However, we do not think this is an insurmountable challenge. The key to any future that socialism may have is likely to be found in the concept of participatory democracy. With respect to a socialist economy this concept makes it possible to render the Austrian insight into the nature of knowledge compatible with planning. This does not negate but rather reinforces the underlying belief of socialists in the ability of people to create a self-governing society of self-activating subjects.