Socialism and Planning

...We have the precise calculation of the experts .. . for every branch of industry...

...The implicit premise was that one set of coordinators was replacing another, but the socialist managers would be more "socially minded" than the capitalist ones and thus be more responsive to the commonweal...

...Yet "planning" could remain as a normative economic tool, a shadow "tableau economique" to model different paths of growth and different assumptions of optimality and cost, against which the actual economy could be judged...

...The "left" point of view, advanced by Preobrazhensky (supported covertly by Trotsky), self-consciously advanced the formula of "primitive socialist accumulation," on the model of Marx's "primitive capitalist accumulation," as described in Part VIII of Volume One of Capital: breaking peasant "autarky," squeezing out the small traders, raising capital by state manipulation of prices, and funneling all investment into heavy industry and electrical energy...

...We have a material and financial (in gold rubles) balance sheet of electrification (about 370,000,000 working days, so many barrels of cement, so many bricks, so many poods of iron, copper, etc., the power of the turbogenerators, etc...

...2 To return to the Soviet economy...

...Money and the market (as Georg Simmel pointed out long ago) were the means of freedom because, with money, one could choose where to live and buy what one preferred...

...By 1921 the Soviet economy was in chaos and on the brink of disintegration, and Lenin realistically retreated to the New Economic Policy (NEP...

...In his little book The Living Thoughts of Marx, Trotsky, in one of his characteristic aphorisms, advanced the argument that under capitalism each man thinks for himself, and no one thinks for all...

...The "precise calculations" were, of course, wild guesses based on a primitive kind of economic arithmetic, a point of view as "sophisticated" as the statement of Lenin earlier in State and Revolution that running the administration of the state was as complex as running the post office...

...6 Planning thus becomes a series of as ifs, a set of different "games" to judge and debate different policy actions and their consequences...

...Lange's answer, briefly put, is that "socialist administrators" would have the same information as "capitalist managers" and could "solve" the price equations on the basis of market-clearing trial-and-error adjustments...

...Yet in particular industries this "cartelization" continued, such as with the famous "Pittsburgh Plus" system in the steel industry...

...this policy will play an increasingly important role...

...Yet Schumpeter, with typical Central European If anyone had located the "secret" of growth, it was Schumpeter in his emphasis on the need of an economic system flexibly combining technological and market forces to shift capital and resources into the more productive sectors generated by the new technologies—as amply demonstrated by Japan in the past thirty years in moving successively from light industry (textiles and apparel) to heavy industry (steel, auto, shipbuilding) to instruments (optical goods) and, in the last decade and a half, into knowledgeintensive electronics, computer, and telecommunications sectors...

...In Capitalism, Socialism and Democracy, written in 1942 but receiving critical attention only four years later with a new edition, Schumpeter wrote that "technological possibilities are an uncharted sea," and it is technology, as utilized by the entrepreneur, that prompts economic growth...

...One argument, advanced by Bukharin (designated as "the right"), was to mollify the peasants ("Enrichissez-vous," he said, consciously echoing Guizot's famous remark— revolutionists always used metaphors from the past), who would be encouraged by economic incentives to "grow into socialism...

...See, too, the appreciation by Robert Heilbroner...

...Stabilization of business" seems to be both the slogan and the accomplishment of this period.' In the United States, during the depression in 1931, the head of General Electric, Gerard Swope, proposed "The Swope Plan," a corporatist model of the economy to provide a price floor for industry and to allocate market shares of production...

...The marketable output of agriculture rose 65 percent from 1922 to 1925...

...Again, it was the Supreme Court that declared the practice illegal...

...A more telling indictment of capitalism, now familiar today under the rubric of market imperfections, was the argument put forth by Oskar Lange (building on the work of A. C. Pigou) that private enterprise does not pay the social costs generated by its activities...

...In 1959, the Russian mathematical economist Leonid Kantorovich (who in the 1940s worked out a technique of linear programming that, independently, was also worked out by George Dantzig at the Rand Corporation) wrote a volume, The Best Use of Economic Resources (published in English in 1964 by Harvard University Press), in which he sought to show that with mathematical models and high-speed computers, one could write a single economic plan for the country that would, through Leontieff input-output matrices, provide the optimal distribution of economic resources with valuations of production corresponding to full economic costs...

...We have here a curious economistic version of Rousseau's "general will...

...In Soviet parlance there was the need for transition from "restoration" (which was NEP) to "reconstruction" — perestroika...

...and, as socialist "practice" showed, government bureaucrats and socialist factory managers were more mindful of their own interests—the pollution of the environment is the gravest illustration of all—than of the commonweal...

...But who is the "one" who 50 • DISSENT Socialism and Planning could think for all...

...This was taken over almost completely in the first days of the Roosevelt administration through the National Recovery Act (NRA), which set up industry codes and price fixing to provide stability for the system...

...This "optimal growth" problem was generally treated as a planning exercise...

...Much as "perfect competition" and "general equilibrium" become heuristic tools to measure the adequacy of economic efficiency as means, so planning models become a tool of "utopia," a way of setting forth different assumptions of distributive justice—from Rawlsian maximin to Pareto-optimalities — and seeing how far the existing economies, based on the power and income relations that exist, depart from those assumptions...

...A socialist economy would be able to put all the alternatives into its economic accounting . . . it would be able to convert its social overhead costs into prime costs...

...He writes: There was an alternative, frankly normative tradition, dating back to Frank Ramsey [the famous Cambridge University logician and mathematician, 1903-30...

...But as we now know, given the nature of bureaucracies, the administrative difficulties in implementing it would probably weltschmerz, felt that capitalism was doomed—doomed by the hostility of the intellectuals, "the new class," and by the bureaucratization of business, what J. K. Galbraith later called the "techno-structure" that would atrophy the entrepreneurial function...

...The technical economic issues apart, what Lange and other socialist economists ignored is what Max Weber stated in 1920: that a socialist society would be more bureaucratized than a capitalist one...

...And in Soviet planning, as I have indicated in the footnote reference to Preobrazhensky, even the "law of value" was "suspended" in order to exploit labor for the purposes of "primitive accumulation...

...The measures worked...

...The output of large-scale industry, which had fallen to 14 percent of its prewar level by 1920, rose to 75 percent by 1925, and so on...

...Capital investment in industry had to be limited to what the peasantry would tolerate, if Soviet power was to be consolidated...

...I am grateful to Mr...

...There are still today price floors for farmers in milk and agricultural products maintained by huge government subsidies...

...In December 1920, "Goelro," the State Commission for the Electrification of Russia ("Communism," said Lenin in a famous phrase, "is the Soviet power plus the electrification of the whole country"), set forth the first, single economic plan for the country...

...But we need to live in modest times.' q Notes Werner Sombart, "Capitalism," in the Encyclopedia of the Social Sciences (New York: The Macmillan Company, 1930), p. 208...

...In wartime there is a recognition of the role of the government as the major "consumer" shaping production for some specified needs...

...2 For a recent reprise of the Lange—von Mises debate, see Robert Heilbroner, "Analysis and Vision in the History of Modern Economic Thought," Journal of Economic Literature, 28, no...

...the word was used at the time...

...Lange is right, but what we have learned, as in the costs of the environment and pollution, is that corrections can be undertaken in a democratic society through legislative intervention...

...But there is also the recognition that such a centralized system would be impossible in a diverse and free economy that would be responsive to individual "consumer sovereignty...

...There will probably always be more demand—new needs, new wants—for a limited amount of goods...

...5 For an early discussion of Schumpeter's themes, see my essay "The Prospects of American Capitalism," in The End of Ideology (The Free Press, 1960...

...As Werner Sombart wrote of the period of "late capitalism" (in 1930...

...reprinted with an Afterword, Harvard University Press, 1988), especially pp...

...If one accepts the fact that the problems of production and allocation remain, then it is also clear that such an economy can only be coordinated through a price system that accurately reflects the costs of resources both with respect to a "production function" (that is, the relative mix of capital and labor) and the supply and demand of consumer items at relative prices...

...For Schumpeter, economic growth was a function of two forces, neither of which was integral to neoclassic economic theory: technology and the role of the entrepreneur...

...A market economy without a civil society is an individualistic monstrosity...

...In his 1941 work, Fiscal Policies and Business Cycles, Hansen argued that we were beached at the end of a series of long waves, as well as a decline in population growth, the disappearance of new territory for expansion, and the growth of monopoly, which inhibited the introduction of new machinery and investment...

...But it was just the fact that techniques of production do change rapidly under capitalism that was decisive for Schumpeter...

...Instead of asking how such and such an economy would behave, one asked how it should behave if its goal were to maximize a time-additive utility functional dependence only on the time-path of consumption per person...

...These were the pronouncements of Alvin Hansen of Harvard, building on the TNEC monographs of the late 1930s (mostly written by left-wing economists led by Paul Sweezy) and the theory of oversavings of Keynes...

...The forced industrialization had begun its long march...

...Even if one distinguishes, as the late Fred Hirsch did, between "distributional" goods (those that can be multiplied easily) and "positional" goods (those that are intrinsically scarce, such as the number of houses on the top of a mountain), the allocative problem remains...

...Solow for permission to quote this pregnant paragraph...

...Within a highly skewed income distribution, the market allocates goods on the "weighted average" of money, which may be unjust, especially if the money is not earned...

...A modest role, perhaps...

...The entrepreneurial group has been consciously striving for stability as in the cartels and trade associations...

...54 • DISSENT...

...3 (September 1990...

...For a comprehensive review of this crucial controversy, see Alexander Erlich, The Soviet Industrialization Debate, 1924-1928 (Cambridge: Harvard University Press, 1960...

...Public authorities have intervened to offset business fluctuations by withholding orders in periods of prosperity and granting them more generously in periods of depression...

...Clearly, this is wrong...

...But what if these markets are skewed or rigid...

...This, as Alexander Erlich points out, "was what 52 • DISSENT Socialism and Planning Stalin, at first, for political reasons, sided with Bukharin against Trotsky and, following that victory, turned against Bukharin...

...The first was the idea of the "anarchy of the market...

...From 1925 to 1928 the great Soviet industrialization debate took place in the Soviet Union...

...We have—one small example—a calculation of the production of footwear at the rate of two pairs per person (300,000,000 pairs...

...What it meant was a shift of resources to the state sector, by manipulation and compulsion, over and above what the latter could obtain as a result of the operation of the law of value in a competitive market...

...As Lange wrote: An economic system based on private enterprise can take but very imperfect account of the alternatives sacrificed and realized in production...

...And if scarce resources among competing individuals remain the issue, the question is whether a market system or a command system is to be preferred...

...But industrialization, driven from a center, has its limits, and by the 1960s the Soviet economy had begun its long period of deceleration and stagnation...

...But he thought of labor as the only kind of scarce resource to be distributed between different uses and wanted to solve the problem by the labor theory of value...

...46-80...

...Historically, most goods were allocated by command, the distributions made by a Lord or the benefices (food and lodging) received by the monks...

...Steel and Bethlehem, could dominate the industry...

...And the slackening of industrial output was leading to the argument that new measures for industrialization were necessary...

...And the lack of an interest-rate mechanism (because of dogma, derived from Marx, that interest was usurous and exploitative) meant that it could not measure the true costs of capital and make allocations efficiently...

...In principle, the mobilized economy was little different from the wartime economy of the War Production Board in the United States and the Ministry of Supply in the United Kingdom...

...By doing so it would avoid much of the social waste connected with private enterprise...

...The curious fact is that before World War II few capitalists used the phrase "free enterprise...

...What one also had was planning by physical WINTER • 1991 • 51 Socialism and Planning targets—the number of planes, ships, tanks required—and the control and allocation of key materials (such as steel, copper, tin) to designated factories along with the control of wages and prices...

...in Daniel Bell and Irving Kristol, eds., The Crisis in Economic Theory (New York: Basic Books, 1981), pp...

...What is remarkable is how clearly each side understood the consequences of its positions...

...5 the famous 'law of primitive socialist accumulation' actually amounted to...

...8085...

...The crux of the turn, for Stalin knew how recalcitrant the wily peasant could be, was the forced collectivization of agriculture, the famine in the Ukraine, and the deportation and murder of tens of thousands of "kulaks...

...The price system is a mechanism for the relative allocation of goods and services within the framework of the existing distribution of income and the cultural patterns of socially shaped monetary demands...

...We now know that the issue of "production" may never be solved...

...So there was no economic advantage in ordering locally, and the large oligopolistic firms, such as U.S...

...Marx never had a theory of a planned economy, for he thought— from The Communist Manifesto to the penultimate chapter of Volume One of Capital—that capitalism would solve the problem of "production," that is, overcome scarcity through the "forces of production," restrained only by the private property "social relations of production," and that socialism was essentially a distributive problem to be solved cooperatively by the new, socialized owners of the means of production...

...What, then, if any, is the role of planning...

...To return to the question, at least in principle, of a planned economy...

...The NRA was not opposed by the large capitalist firms: it was declared unconstitutional by the Supreme Court...

...One could play, in the planning models, different kinds of non–zero-sum games to see the different outcomes in the distribution of goods and services and different growth paths in the economy...

...small-scale and medium-scale industry and trade were denationalized, and the bulk of the nationalized large-scale enterprises was put on the basis of "cost accounting...

...The possibility of decentralizing it through the operation of intertemporal prices occurred naturally to modern economists, though it had not been part of Ramsey's mental furniture...

...How can one establish the parameters of an economy if one wishes to see what other patterns may prevail with other values...

...Yet there were problems as well, notably a "repressed inflation" by 1925 that was threatening to tear the economy apart...

...Most capitalists wanted planning of a corporatist kind...

...And while Jesse Helms may not like rent control, he does want price supports for tobacco...

...3 Marx was aware of the problems of allocation of resources in a socialist economy (as is evident in a letter to Kugelmann in 1868...

...But the second, more compelling argument was that under capitalism major industries tended toward monopoly or oligopoly and distorted prices or restricted production through administered controls, or that capitalist firms sought to exempt themselves from the hazards of the market through cartels or price-fixing rings...

...6 In a recent, unpublished paper on "Growth Theory," Robert M. Solow recalls the idea of planning as a normative idea...

...In the "pure" market system, these decisions are guided by consumers with respect to their preferences and by producers who provide supply in response to such demand...

...Curiously, in the United States, twenty-five years before, there had been a theory of maturity and stagnation...

...What ultimately provides the direction for the economy, as Veblen pointed out long ago, is not the price system but the value system in which the economy is embedded...

...Socialists put forth the proposal for planning from two theorems, one of which was patently wrong...

...The man who broke the back of that argument was Joseph Schumpeter, also at Harvard...

...For a discussion of economic theory as a normative device, see my essay "Models and Reality in Economic Discourse...

...It targeted physical outputs (for example, tonnage of steel) and used a system of material balances to measure the success of achievement with no measure of actual costs...

...But how is "economic calculation" possible in a socialist economy, as Ludwig von Mises set the challenge...

...It is "a genuinely scientific plan," wrote Lenin...

...As I have indicated, the Soviet economy was never a planned economy but a mobilized economy with two fundamental deficiencies...

...So if we are to have a market economy, we also need a definition of citizenship (what I have called "the public household") that permits individuals to participate fully, in the market as well as the polity, as members of a civil society...

...But if there is to be a market economy, then social justice requires a fair, not unequally skewed distribution of income, so that individuals can bid evenly against one another for the goods they desire...

...On the Economic Theory of Socialism, University of Minnesota Press, 1938, p. 104...

...4 * As Preobrazhensky admitted, the "law of value," which governs the operation of the competitive market and makes the exchange ratio between goods depend upon the relative amounts of "socially necessary labor" contained in them, had to be suppressed as far as possible...

...Under this arrangement, a nationwide uniform price system was maintained throughout the country, so that even if a firm in Chicago ordered steel from a nearby mill, the price was based not on local costs but as from Pittsburgh plus transportation...

...The indiscriminate requisitioning of peasant produce was abolished, and peasants were allowed to sell freely part of their surplus...

...Keynes, said Schumpeter, dealt with "phenomena whose range was limited by his assumption that techniques of production remain unchanged...

...WINTER • 1991 • 53 Socialism and Planning be insuperable, and in practice the market would have to be the mechanism whereby the economy would run...

...The point of all this history is that socialists, such as Oskar Lange and A. P. Lerner, argued that distortions of production were inevitable under capitalism and that only under socialism could one have free markets and "consumer sovereignty...

...Even with this refinement, it remained a planning exercise...

...No one...

...In retrospect, it is extraordinary how simpleminded were the notions of planning that first guided the Soviet economy...

...In Soviet history there are some important lessons, as much for the idea of planning as for the necessity of markets, They are the lessons of complexity and growth...