Socialism Without Marx
Seligman, Ben B.
I One of the more ironic incidents in the history of economic thought was the development of a theory of socialism utilizing the very ideas employed to attack Marx. Dismayed by the sharply...
...and his answer is: "Of course it can...
...They did this in order to facilitate outlining certain fundamental patterns of economic behavior which were supposedly universal...
...All the Board need do is to work out the ratio of productivity to the cost of a project and in this way work up a list of priorities which would enable it to plan investment over the long period...
...Schumpeter's institutional setup includes a Central Planning Board, although there might be a parliament or other elective body to set basic policy...
...Consumer choice, argues Dobb, is not a reliable guide, for individual desire may easily conflict with social requirements...
...The guiding rule is a simple one: factory managers are to be instructed to increase output so long as the value of the marginal product of any factor is greater than its price...
...What the theory says is that economic behavior has a large and significant rational component which, revolving as it does about measurable pecuniary quantities, is subject to analysis...
...Another thorny question stems from the apportionment of labor among the different occupations...
...Welfare socialism could not overcome this condition since some trades would be receiving more income by virtue of a higher social valuation of their output or because of greater relative scarcity...
...The result is a kind of Gresham's law of taste in which the baser satisfactions begin to dominate the social outlook...
...Schumpeter stressed the point, often voiced by 19th century socialists, that a socialist society to be successful, ought to inherit from its capitalist predecessor a full endowment of skills, experience and techniques...
...9 The principles of this counterattack are relatively uncomplicated...
...Commodity prices would be based on cost, defined as the "drain on the economic resources of the community," an unfortunately none too clear concept (which becomes even more obscure when Taylor hints that what he has in mind is the drain on primary materials...
...The Austrians particularly were determined to root out this alien influence in Western economics and they chortled approvingly when Eugen von Bohm-Bawerk announced the complete and utter demise of the Marxian heresy and the end of socialist doctrine.' Yet, it was the very marginalism that stemmed from Austrian theory which provided the building blocks with which a non-Marxian socialist theory could be constructed...
...Opportunity cost is of no aid in working up major decisions regarding the proper choice "among the few technological alternatives involving large indivisibilities and fixed coefficients...
...To Schumpeter there is no question but that this is entirely possible...
...Unfortunately for Mr...
...The clerk would still look at a Sunday football game through socialist TV while experts, professionals and politicians would abound...
...But this, unfortunately, is not the case...
...This assures independence of consumer choice...
...Within this framework, marginalism becomes a rather powerful analytical tool...
...Thus, consumer sovereignty does not necessarily imply the development of desirable goals, it is averred...
...The process of finding a maximum is precisely what is involved in the concept of allocating scarce resources to alternative uses...
...The consequent "profit" can be used to finance further investment...
...A trial and error solution of price determination would result in a clearing of the market (the economist's equilibrium) and at the same time solve the problem of imputed value for capital goods...
...Hayek's refusal to concede that planning might be an effective instrument for overcoming conditions of imperfect knowledge is odd, for business men more and more seek through such methods as market and motivation research to reduce bits and pieces information to measurable form...
...Such knowledge, he agrees, would have to be transferred to the central authorities under socialism...
...his Political Economy and Capitalism, London, 1937, pg...
...6 This must be so, since economic knowledge is of the bits and pieces variety, existing in but scattered parts, in a dispersed and incomplete form in the minds of many individuals...
...He thought that there were practical difficulties in establishing on paper the necessary numerical equivalents...
...As suggested, one of their many noteworthy ventures was a broadside attack on Marxism...
...Naturally, different behavior patterns would induce alterations in the parametric set...
...Hayek persisted in his view that a socialistic solution to the problem of resource allocation was impracticable simply because complete knowledge of all the relevant data would be unavailable to the authorities...
...How, asks Mises, can it be carried on in the absence of markets...
...It is inevitable that such a society would require a large number of administrators...
...II, pg...
...The subtlety of the argument is not denied and the technical effectiveness of a command economy has been well demonstrated by Russian industrial achievements...
...Individual utility scales could not be added to create a kind of social utility, for there is no way, said Hayek, in which inter-personal comparisons could be legitimately validated...
...Space limitations do not permit a detailed discussion of these writers...
...5 cf...
...Granting that a collective economy might approach a solution by ordering the community's needs in some pre-ordained way, he does not believe, however, that it could account for the costing problem...
...What Dobb suggests is that the socialist economy forego present needs in the interest of building up future satisfactions...
...That is, no commodity should be produced unless its importance is greater than the alternative which had been foregone...
...In fact, equal incomes, say these critics, would simply distort the cost structure unless a system of bounties and taxes were instituted...
...But when Mises admits in the same breath the possibility of socialist productive requirements being affected by demand, one begins to wonder whether his entire argument can really stand up...
...Carl Landauer, Theory of National Economic Planning, Berkeley, 1944...
...The economic problem is to do this in a way that will bring about maximum results in pro ductivity, in profits, in taxes, in sales, in satisfaction...
...13 (The earlier articles were somewhat pedantic quarrels with other writers on definitions of overhead cost, prime cost, and which significant marginal concepts should apply in a socialist state...
...Decisions must be made centrally, for action by individual enterprises would only lead to uneven development...
...Individualism and the Economic Order, Chicago, 1948, Especially Chap ter IV...
...in the interest of the community as a whole...
...There would be no demi-gods about, only ordinary citizens...
...But it is not viable, communicable, scientific knowledge...
...The purchasing power distributed by the Ministry would provide the basis for constructing the necessary supply and demand schedules leading to the allocation of labor and savings...
...Says Lerner, "...every individual in trying to minimize his own sacrifice of alternatives when he spends his money income to his own best advantage, is led automatically and even unconsciously to minimize the social sacrifice in producing what gives him most satisfaction...
...Investment, says Dobb, can be self-financing, for when a price is set for investment goods, wages will tend to increase because of the resulting increased demand, causing prices to rise...
...Simply enough, socialism can no longer be discussed purely in economic terms...
...When the Austrian utility analysis is adopted, valuation of consumer and producer goods take place through exchange value based on psychic entities...
...Such writers as Maurice Dobb, Paul Baran and Paul Sweezy, knowledgeable as they are in the ways of ordinary economics, reject welfare theorems as thoroughly unsuitable to a socialist economy...
...Change, he insists, requires compulsion...
...He argued that the theory of market exchange in Vol...
...Dismayed by the sharply critical turn he had given to classicism, economists in the late 19th century resorted to the psychological notions of utility as an escape from the radical implications he had underscored...
...This gets quite close to Adam Smith's invisible hand...
...At best, we learn only that economic law is concerned with how man handles materials, a trite and none too informed proposition...
...But this should not be difficult in a socialist state...
...Yet Barone felt that the equations could be tested only by an experimental approach, for they do not lend themselves to easy calculation...
...This view was supported by Friedrich A. von Hayek, whose name is frequently associated ideologically with Mises.5 Hayek interprets the problem a bit more subtly, however...
...Clearly, if this is possible there must be a more intimate economic value relationship between the various sectors of the economy, even in a socialist system...
...His analysis, presented in an unfinished article, "The Ministry of Production in a Collective State," developed socialist equilibrium equations somewhat analogous to Leon Walras' general equilibrium system for a free enterprise economy...
...the reduction of inequality of income...
...Abba Lerner's original ideas were developed in 1936 when he still considered himself to be a socialist and was quite anxious to develop marginal analysis for the solution of economic problems in a socialist society...
...In capitalism, such a decision is brought to fruition in the market without any conscious action on the part of particular personalities...
...THERE WERE OTHER economists who developed interesting variants of the Taylor-Lange model, among them Abba P. Lerner, H. D. Dickinson and E. F. M. Durbin...
...That it has anything to do with socialist ethics and socialist values is doubtful...
...Nor is Dobb able to specify the nature of economic law in his centralist socialism, unless it be diktat from the top administrative body, as with the Soviets...
...the minimizing of failures through "trial and error" procedures...
...He also assumes that plant managers would need some degree of freedom to decide on production: in fact, a socialist economy could not function effectively until a modus vivendi had been established between managerial latitude and central control...
...Choice under competitive conditions, says Dobb, reveals a bias toward a greater variety of goods than is necessary for the collective interest...
...Wieser's Social Economics, New York, 1927, Espec...
...But to dictate what proportion of income should be saved might detract from "welfare," hence it may be preferable to employ a system of premiums in order to bring saving into balance with investment...
...the others successively to new capital...
...The significant point in Barone's model is that the individual is left free to make his own choices among consumption goods...
...However, he does score a point in his debate with Mises-Hayek when he argues that to measure the efficiency of a socialist bureaucracy one ought to compare it with the work of corporation officials rather than a capitalist civil service...
...his Capitalism, Socialism and Democracy, New York, 1942, pg...
...Enterprises will know what their production schedules should be as soon as prices are announced and consumer demand is known...
...A basic prerequisite, as in all these systems of diffused control, is freedom of action and choice in both commodity and factor markets...
...The analysis of the relation of wage income to the value of consumer goods is little more than a restatement of Marx's surplus value theory in the phraseology of re ceipts and costs...
...14 cf...
...The Baran-Dobb attitude merely explains why economic theory has progressed so little in the Soviet Union...
...This would mean that adjustments in the labor force would depend solely on the operation of impersonal marginalist relationships rather than on the will of the Planning Board and consequently would be "clearly irrational...
...Saving, interest and net investment will all have to be provided for...
...There is no reason why socialism cannot provide the institutional setting for guiding choice and selecting alternatives...
...The fact is, that even under capitalism trial and error underlies the business of satisfying consumer needs and allocating resources...
...This was known as marginalism, and it is one of the dominant themes in economics today...
...One can only question whether sovietism is genuine socialism, for as Baran concedes, the state would have to 27I mould consumer choice...
...Dobb's version of the socialist scheme begins with a set of equations in which wages equal consumption goods and "profit" is equal to a certain share of consumer goods...
...Since these can be expressed as "schedules of quantitative relationships" it becomes logically feasible to subject these patterns to a kind of mathematical treatment...
...Decisions on alternative investment possibilities should be made by inspection...
...Quite obviously, Dobb and Baran prefer a "command economy...
...That is to say, as a theoretical matter, socialism was entirely feasible...
...The only guiding rule the Ministry should observe is to "maximize welfare...
...But he insists, no civilized people would tolerate such a situation (thus quite underestimating the extreme limits to which the human being can be pushed...
...It is the latter concept that has meaning for a socialist society, for it is precisely this notion which has relevance for the problem of allocation...
...Technically speaking, the basic question is whether the economic data of socialism would permit the formulation of equations which are consistent and sufficient in number to permit for a solution of all the unknowns...
...ism, opportunity cost and consumer choice have always exemplified mere bourgeois prejudice to orthodox Marxists...
...He simply dismisses it as irrelevant, for it is an unwarranted assertion to say that the kind of "welfare" stemming from capitalism is equivalent to that of a socialist state...
...111 Curiously enough, the proper response to this seemingly devastating argument was available during the century's first decade in the writings of Vilfredo Pareto and some of his followers...
...Just why this should be so is not made clear although it is evident that to Mises the problem lies in the inability, in the absence of a market, to relate values of output to rewards of factors: in technical terms, so the argument runs, imputed values cannot be calculated without market prices...
...This is, of course, an allocation problem and lends itself to analytic maximizing techniques...
...Too low a price would lead to shortages...
...the final cost of goods and services (which equals the prices of the factors of production...
...The labor theory of value cannot be used for this allocation task...
...DOBB IS EVEN MORE CENTRALIST in his views than Baran...
...The legal and political superstructures were put to one side, on the supposition that these reflected the "ends of existence," something supposedly irrelevant to pure economics...
...The demand and supply of capital could be adjusted by the Central Planning Board by altering the rate of interest which, contrary to Marxist theory, would become part of long period cost...
...It is not clear how goods would be exchanged in Lerner's scheme, although barter arises as a possibility...
...Lange does concede that arbitrary decisions regarding the rate of interest would be a disadvantage, since this would not necessarily reflect consumer wishes...
...and the cost of production, which equals the prices of the final product plus the services of new capital...
...high standards of production can be established...
...The latter implies a calculus of utility and it was the validity of this that he rejected...
...there is no other meaning which can be given to his advice than that the planning authorities "violate the principle of equimarginal returns and apply a different time discount to different sections of an industry.15 " That this is a theoretical justification for Soviet experience is inescapable...
...It is Schumpeter's contention that socialism could be as superior to big business capitalism as the latter is to the 18th century competitive system...
...E. F. M. Durbin, Problems of Economic Planning, London, 1949...
...The implication was that such a procedure could be easily stated in monetary terms...
...When cost of production is minimized and the value of the output corresponds to such minimum cost, then equilibrium will have been achieved...
...Pareto's hint was developed further in a genuinely remarkable way by an Italian economist, Enrico Barone...
...From this it was easy to derive the notion that a capitalist and socialist economy were governed by the same basic "economic laws...
...PERHAPS THE FINAL WORD On the kind of socialism we are discussing was given by Joseph A. Schumpeter...
...In fact, the...
...If prices of output were set at levels higher than the cost of the resources absorbed in their manufacture the citizenry would in effect suffer a diminution of income...
...But it is an argument for totalitarianism nevertheless...
...A great adept at rather careless invective, Mises' opus Socialism' purports to be a massive sociological compendium on the subject...
...Even Gustav Cassel, the noted Swedish economist and a rather strong opponent of Socialism, was able to demonstrate how a socialist economy might function in his classic Theory of Social Economy...
...Furthermore, the lowest average cost of production can be assured if the distribution of resources is such as will make the marginal productivity of inputs equal in all possible uses...
...The only hesitation that Barone expressed involved the enormous variability of the economic factors, rather than the technical ones...
...For example, a central planning authority, he avers, would have to treat two similar machines located in different places as distinct means of production...
...The objective of the controlled economy, therefore would be to work toward the conditions necessary for achieving an optimum...
...This would make the problem of calculation insuperable...
...The premise here is that marginal cost will increase with further output, so that production beyond the equality of marginal cost to price would merely incur losses...
...Marginalist theory merely substituted psychology for the facts of economic life...
...Socialism can't work because under socialism there is no exchange of production goods...
...it is rather, knowledge of time and place and is not the kind of information that can be subject to testing and measurement by a single agency...
...Baran's essay on economic planning in Survey of Contemporary Economics, Homewood, 1952, Vol...
...That is to say, a socialist society should follow a mature capitalism...
...In an early essay he insisted that socialist economics could be discussed only in terms of the Soviet scheme of things...
...Although the work discusses the economics of socialism, the major emphasis is on the theory of control in a capitalist society...
...But the chief merit of a socialism rooted in welfare concepts lies in its clear revelation of the true nature of economic phenomena, something all too obscure in capitalism...
...However, the transactions are entirely objective in themselves and they abstract from any utility comparisons...
...But, he insists, central planning could employ only scientific or statistical data and such information is mainly technological in nature...
...Aside from the fact that this is as much a technological as it is an economic problem, it also offers a neat justification for a policy of applying up to one-fourth of national output to gross investment...
...Changes in climate, population, and the consumption package itself makes it dubious that "rational ideal" planning is a practicable proposition...
...At this point the marginal substitutability of goods would be equal for all...
...10 Reprinted, op...
...Here, the need to balance rewards with "disutilities of work" would lead to unequal incomes, an outcome directly in conflict with the objective of an equal income distribution...
...Socialism, we are told, can create a democratic administrative machinery if it develops an atmosphere of publicity and responsibility...
...Hence, no purpose can be served by establishing socialist optimums which are borrowed almost in their entirety from an individualistic economics...
...In small industry and farming, where competition was still effective, there would be no need to alter property relationships, for all that a socialistic economy should do is to assure, at the very least, a formal competitive system...
...This would eliminate uncertainty...
...control would be maintained over key decisions rather than diffused through the economy...
...OSKAR LANGE, a brilliant theoretical economist who spent some years in the U.S...
...Such knowledge—of a particular skill, of the existence of some surplus stocks, of a sudden need for roofing—cannot enter into statistics and therefore cannot be conveyed to the planners...
...Insofar as the Lange-Mises debate is concerned, it is the latter who is in error...
...before returning to post-war Poland, supported Taylor's argument with a persuasive series of articles in the Review of Economic Studies in 1936 and 1937.10 Lange categorically rejected the contention that economic calculation is impossible in a socialist society...
...and above all, the elimination of instability and unemployment...
...monopoly, advertising and product differentiation set up barriers which impede the attainment of welfare...
...This is, of course, the short run view: in the long run new investment would be undertaken if the return from the added output would be equal to or even greater than the long period cost incurred...
...YET THE SUBJECTIVISM of the Austrians provided a rational, logical set of ideas which could be used to describe the proper functioning of a socialist society...
...Competition, he thought, could be a risky affair, "where the stronger would too often find opportunities of mercilessly exploiting the weaker...
...V One might have thought that Schtimpeter's approach would have met with the approval of even those for whom Marx has always had the last word...
...In actuality, the problem would be a good deal more complicated than Lerner's rule suggests, for in putting the matter this way the operational difficulties were simply pushed to one side...
...I One of the more ironic incidents in the history of economic thought was the development of a theory of socialism utilizing the very ideas employed to attack Marx...
...The objective of this so-called "welfare" approach is to avoid centralizing investment and output decisions...
...38 $. 13 New York, 1944...
...Beginning with W. Stanley Jevons (an interesting theoretician in spite of his silly sunspot business cycles notions) and the Austrian economists, Carl Menger, Friedrich von Wieser and Eugen von Bohm-Bawerk, a new approach to economics was worked out...
...In such a framework the competitive solution of market socialism seems by far the more desirable objective...
...However, should it be possible to process such data—and in this day of the electronic calculator this is no wild notion—there would be no serious analytical problems to face...
...16 The values and aims, he argues, which determine economic choice, are conditioned by the features of a particular social system...
...Means of production would be applied to frivolous uses or entirely wasted...
...Marginal...
...Lerner argues that his is a middle of the road economics, quite neutral in its political implications...
...naturally, this would be in accordance with the marginalist rule, for "as long as this rule is being observed no element of productive resources can be devoted to any other line of production without causing destruction of as much consumer's values, expressed in terms of consumer's dollars, as that element would add to its new employment...
...355 $. 17 cf...
...In a socialist society the prices of finished goods as well as those of the factors of production are to be set by a process of trial and error...
...Other noteworthy discussions may be found in James E. Meade, Planning and the Price Mechanism, New York, 1949...
...Lerner's major objective became an attempt to reveal those operations of the price mechanism which would be applicable to laissez-faire as well as collectivism...
...17 Since capitalist class relations are done away with, the coordination of production must be more direct than the market allows...
...Now, the Central Planning Board would doubtless discover how intricate the task is to compare the value of marginal products, presumably necessary to judge relative efficiencies...
...Therefore, socialism is not a real economic system, at least not in the Mises-Hayek meaning...
...The Central Planning Board would allocate basic resources to individual plants on condition that managers pursue economical means and follow marginal principles in their pricing policies...
...Taylor, however, makes no comment on the pattern of income distribution, merely assuming that the state, in the interest of maximizing welfare, would so distribute income as to benefit the entire citizenry...
...Mises' main point is that markets in which prices are set for land, labor and capital, do not exist under socialism...
...He too sees the choice between socialism and capitalism revolving about the ability to distribute resources among alternative uses...
...In fact, it seems reasonable to suggest that the way in which a socialist economy works must be in consonance with the moral and political aims that socialists seek to attain...
...The economics of control suggest, however, that governments have the responsibility to see to it that all resources are properly employed, that monopoly is minimized and income distributed in the most efficacious manner...
...It must be done all at once in those areas where it will operate most effectively, or else the "withdrawal of efficiency" by opponents will ensue...
...The Planning Board, in other words, would have to decide for itself an appropriate rate of capital accumulation...
...12 It was in his Economics of Control that Lerner first set forth a positive statement of his views...
...This must be so since it is the degree of participation and utilities that determines value...
...Again, satisfactions could be increased by shifting incomes about from those whose usefulness for money is less to those whose utility is greater...
...From the vantage point of marginalism, Bohm-Bawerk could be extremely critical of Marxism...
...His view was that prices must be so set that resources freed by reduced output would be sufficient to produce an equal sum of another good...
...In fact, he's made a career of it...
...Errors can be quickly corrected since they would be localized rather than distributed throughout the economy...
...His realm is that of resource decision-making, wherein the correct apportionment of limited resources is the major objective...
...The basic precondition is simply that a pattern of income distribution be enforced which will maximize welfare in the Paretian sense...
...The central problem in the new society, says Lange, is the growth of bureaucracy, which can easily become ossified and inflexible in dealing with subtle matters of economic planning...
...and B. P. Beckwith, Marginal Cost Price—Output Control, New York, 1955...
...For these reasons, says Dobb, competitive socialism is an illusion...
...His preference was for a mixed economy.3 11 The major attack on socialism as a practicable notion was leveled by Ludwig von Mises, a Viennese economics professor (now at NYU) for whom all the world's ills can be traced to a political disease called statism...
...While there may be an exchange of consumer goods under socialism and it may be that money will be utilized as a kind of numeraire, his only important point is that production goods cannot be evaluated, making genuine economic calculation impossible...
...The best way out of the dilemma is to simply allow plant managers to price output according to ordinary markets procedures...
...But despite the serious administrative problems stemming from a flowering of government staff, socialism could still function more effectively than capitalism, for the very element that absorbs the full energy of the capitalist, uncertainty, will have been abolished...
...Pareto had some rather sharp things to say about socialism in his Les Systemes Socialistes.7 Yet there stemmed from his ideas the notion that the general economic principles worked out for a capitalism could apply to socialism equally as well...
...Yet Hayek must admit that the capitalist market does transmit such information, since business men do react to bits and pieces knowledge in a way in which he would approve...
...Mises, however, can only assert that "it is in the very nature" of socialist production that the shares of land, labor and capital are indeterminate...
...Said he: "It is irreconcilable with the nature of the communal ownership of productive goods that [socialism] should rely even for a part of its distribution upon the economic imputation of the yield to the particular factors of production...
...In fact, he said, reflecting his concept of economics as neutralist mechanics, the principles of a socialist economy could hold for any kind of society, so long as the marginalist rules were observed...
...also Pareto's Manuel d'Economique Politique, Paris, 1907...
...Every society, whether it is Crusoe's, Jefferson's or Carnegie's, has but limited resources which must be distributed efficiently among competing needs...
...The Central Planning Board is concerned mainly with technological decisions: the size of plants, their number and location, the labor input and the like...
...Friedrich von Wieser, a leader of the Austrian group, was one of the first to suggest that a general economic theory could be evolved to describe a socialist regime, for the problem of allocating scarce resources to alternative ends in order to maximize satisfactions was evident in any social order, whatever its political form.2 Wieser had worked out the notion of opportunity cost, a concept which measured the real cost of a venture in terms of next best alternatives...
...The book was begun as a treatise on socialist economics, but in the process of composition Fabian socialist ideas were displaced by New Dealism...
...new plants would produce new goods rather than duplicate old ones...
...The purchases of the citizens would in effect constitute a social judgment...
...4 Second edition, New Haven, 1951...
...This suggests that in Barone's view production equilibrium in a socialist society depends on income distribution...
...By deducting a part of income, it would be possible for the authorities to produce new capital in excess of amortization, that is, to engage in economic expansion...
...If socialism begins its economic functioning with free consumer choice in the selection of both goods and employment then the Central Planning Board's "artificial" price system represents exactly the same sort of parameter to which producers and consumers would have to react under capitalism...
...Even the economic arguments in its favor are impressive: freedom of choice to consumers...
...Equilibrium is reached by so adjusting the prices of these commodities as to eliminate surpluses or deficits...
...245 $. 9 Reprinted in On the Economic Theory of Socialism, Minneapolis, 1938...
...Lange would overcome this anomaly by supplying suitable doses of free incomes—leisure, parks, social services and the like—all of which would create the effect of equal income...
...This would merely perpetuate uneven income distribution, they say...
...The state would give its citizens a money income and authorize them to spend it in any way they desired...
...Dobb's main point is that production requires a proper balance between component elements at different points of time, so that each stage of production is defined as part of the process of making a finished commodity in the distant future...
...At the same time, Hayek sought to reply to the welfare economists' approach, whose views we shall shortly examine...
...2 Friedrich von Wieser, Natural Value, reprint, New York, 1956 3 cf...
...Should the equipment have been installed during different time periods, there certainly would be no question as to the need to characterize these as dissimilar units, each of which must appear in the "equations" a central planning body must solve...
...I. He insisted that the subjectivist marginal approach was logically superior to cost of production notions such as the labor theory of value...
...Where competition already exists there is no need to disturb the situation...
...In their view socialism cannot function unless it is highly centralized with all the decisions predetermined by some planning board...
...But the Planning Board cannot follow the marginalist principle in doing all this, he says, for then the amount of employment would be governed entirely by the investment process...
...idem...
...14 He begins by asking, "Can socialism work...
...A money economy might be instituted through the distribution of a proper numeraire...
...Lange's views on these matters reveal a certain naivete regarding the complexities involved in achieving a political and economic transformation...
...The admission that rationing might be employed to supplement the efforts of the Central Planning Board must certainly vitiate the applicability of his rules for governing the economy, for this would necessitate the utilization of output quotas in order to achieve a given production goal...
...Taylor's excellent essay argued that production in a socialist state would be guided in quite the same way as under private enterprise...
...In it he speaks of chiliastic urges, collectivism, guild socialism, speculation, free love, the disutilities of labor as well as economic calculation...
...W. A. Lewis, Principles of Economic Planning, London, 1949...
...An army colonel and later professor of political economy who also wrote film scripts, Barone was "a prodigy of speed in assimilation and simplification...
...The argument about having to "solve" hundreds of these equations is otiose, says Lange, for Hayek and Mises solve these equations every time they buy a newspaper, as do millions of consumers and doubtless there are few mathematicians among them...
...Whatever the pattern is, the Central Planning Board need only see to it that all the vouchers distributed are equal to the total available consumer goods...
...The fact is, said Lange, Mises-Hayek were confused by misreading the function of prices, which are not only ratios of exchange but also general propositions for judging the economic terms on which alternatives are offered...
...Capital goods, however, are fully amenable to evaluation by imputation, or derivation from the value of consumer goods...
...The behavior of firms is concerned fundamentally with purchases of labor and other resources, conversion of these into products, and the sale of what is put out...
...III of Das Kapital contradicted the theory of Vol...
...8 While in the latter the simultaneous answer for all the variables yields a solution for both production and distribution, a socialist economy would have to decide on distribution in advance...
...However, the economic calculations that come out of this process are short run ones, avoiding price variability over the long haul or factors outside the cash nexus of the exchange equation...
...Implicit in this is the assumption that the business man always wants to maximize his profit...
...No choice is to be allowed to people, and the putative higher requirements of the state are to dominate even unto the exclusion of the rights of the public to decide for itself its own fate...
...But above all, the saving in cost through the elimination of economic strife would be enormous...
...This can be done by so adjusting production as to reduce the need for individual movement...
...A superb mathematician, he developed in greater detail the Paretian optimum idea, especially as it might be applied to the planning of production in a collective society...
...But why this should be so, Dobb seldom makes clear...
...6 cf...
...Needless to say, the kind of socialism which Dobb found so attractive before the war has hardly come up to the expectation that its primary concern would be humanity...
...Surprisingly enough, Wieser has some doubts about the efficacy of capitalism's market...
...While Lerner acknowledges that the technique for achieving this aim might at best be an approximate one he doubts that this would represent any real impediment...
...Producers, instead of pursuing a course which under capitalism is intended to maximize profit, now follow the instructions of the Planning Board...
...In fact, the more one could abstract from an historically determined system, be it capitalism or socialism, the purer the economics...
...Incorporated into his treatment of economic calculation (the key question in a non-Marxian socialist theory) the basic ideas were couched in terms of comparing the economics of the household, business enterprise and government...
...Economic activity would be absolutely chaotic, for without a pricing mechanism the central authority would have no data for allocating resources or determining consumer demand...
...There would be no waste of resources or delays in timing and the reserves for conducting economic warfare, so characteristic of a capitalist economy, would be eliminated...
...The last merely implies that with a given set of prices, consumers distribute their income as between spending and saving in a certain way: it does not suggest an inquiry into utility or satisfaction...
...In actuality, efforts are always made to get behind forces that influence prices, for no businessman wishes to consign his future to the realm of total ignorance...
...and "unnecessary" products would be forbidden...
...Why such collective choices should be superior to individual action is not made clear...
...In a completely egalitarian society income will be divided evenly: but a less than completely egalitarian socialism is also conceivable...
...Insofar as the political framework was concerned, Lange at that time, did not suggest that the institutional changes he was advocating would abolish private property...
...that is, to order the economy in a way that would make everyone satisfied with his current situation...
...The conclusion is obvious: only knowledge of time and place, mysteriously entering the price system, provides the basis for economic decisions, something that central planning cannot accomplish...
...He derided it because the transformation of value into prices was a logical mish-mash...
...Only then might the decisions regarding production be worked out...
...Costs are "advantages to be derived from the use of given resources in other directions...
...Too high a valuation would induce sparse utilization and lead to factor surplus: a low valuation would create shortages...
...The socialist authorities, said Taylor, should be able to work up "factor valuation tables" which should give satisfactory results in costing items such as sewing machines or drill presses...
...His concern is to justify the Soviet crash program and to this end he develops a theory of investment saturation...
...The planning board would still have enough work to do, says Lerner wryly, in supervising managerial operations...
...The fact is that in the competitive situation price must be regarded as a parameter, that is, a variable constant, over which the individual producer has no direct influence...
...Taylor concluded confidently "that if the economic authorities of a socialist state would recognize the equality between cost of production on the one hand and the demand price of the buyer on the other as being . . . adequate proof that the commodity in question ought to be produced, they could...
...Cost, revenue and productivity in their marginal form are said to simplify economic thinking...
...No doubt is possible about that," he continues, `once we assume, first that the requisite stage of industrial development has been reached and second, that transitional problems can be successfully resolved...
...It is rather in the market that the required economic calculation is established...
...Moreover, he says, the presumption that consumer choice would be any more rational under welfare socialism than under capitalism is unwarranted...
...But the main point, he avers, is that individuals would be induced to pursue those economic measures that in themselves result in social gains...
...That is to say, without a market, a socialist order would have no way of connecting the value of consumer goods with the process of production...
...Yet of all the writers on this problem, Schumpeter, whose abhorrence for socialism was well known, was the only one to realize that the new society had to be more than a matter of the full stomach: socialism, he held, implied a new kind of human being, toward the development of which economics was no great help...
...confidence that they would never make any other than the right use of the economic resources placed at their disposal...
...a minimum of controls over plant managers...
...Producers maximize their profits through achieving an optimum scale of output, which is reached at the point where marginal cost equals price...
...The determination of priorities in production through marginalist analysis, he insists, is unnecessary, for it may be essential for socialism to invest as heavily as possible in capital goods...
...Given these equations as the basic economic model for production, there is no reason why a socialist Ministry cannot solve them as effectively as the free market...
...HAYEK S APPROACH is rooted in a concern with economic structure...
...Moreover, marginalist theory was capable of much greater theoretical generality and could be employed to evaluate extramarket phenomena...
...8 Reprinted in Collectivist Economic Planning, pg...
...Thus, there is no need for the Central Planning Board to follow the competitive solution, for this would only duplicate capitalist calamities...
...Decision making stems from the way in which prices are structured, and this in turn is rooted in the many acts of many people...
...Ordinarily, saving, consumption and income are the outcomes of disconnected acts, but with planning these are all "separate facets of a single decision...
...Furthermore, combining the factors of production and establishing rules for setting price policy are really distinct matters, but in Lerner"s guide book these were subsumed in a single set of "instructions...
...For them, the assumption of consumer sovereignty is somewhat silly, since lopsided distribution of income makes "voting" in the market a patently uneven affair...
...167 $. 15 Maurice Dobb, On Economic Theory and Socialism, London, 1955, pg...
...The basic data essential for establishing the equilibrium conditions of the socialist equations include information on available capital, productive capacity and coefficients of consumer tastes...
...Marginalism sets up conduct models of the firm...
...Welfare socialism means a diffusion of decisions and consequently a diffusion of results so that the old tendency to disequilibrium would be simply carried over...
...In a theoretical sense consumers "maximize total utility" by spending their income so that the marginal utility derived from all applications is equal...
...All the Central Planning Board need do is to decide on the total amount to be invested, while the managers guide the direction of investment and output in consonance with the principle just outlined...
...Therefore, the only approach to a theory of resource allocation was through choice as reflected in the determination of market price under capitalism...
...The recent history of Britain and Scandinavia suggest that there is validity in these arguments...
...The systems of priorities could not be worked out via the labor theory and they have had to devise techniques which can only be described as virtually marginalist...
...No longer would plant operations have to be predicated on the probability of rival operations, for these would be known through the Central Planning Board...
...Investment decisions would have to be decided upon by the central authority...
...The Austrians began their theorizing with the case of Robinson Crusoe...
...Decisions on output and investment are to be made by plant managers on the assumption that resources will be utilized up to the point at which the cost of producing an additional unit will just be covered by the prevailing unit return...
...The Central Planning Board has only to set prices at that level which would clear the market...
...This, then, brings Lerner around to the very "competitive solution" from which he originally demurred, for only by assuring that market impediments would not arise could the Central Planning Board point toward a welfare goal...
...The only rules they must obey are those which require a proper combination of factors so that the scale of production set by the equality of marginal cost to price will be achieved...
...Again, as did Lange, Schumpeter saw bureaucracy as a major problem...
...The latter would require information regarding how inputs relate to outputs, or what is known as the production function, in order to judge alternatives...
...7 Paris, 2 volumes, 1902-03...
...they would observe carefully the results of their decisions and make adjustments as needed...
...1 Eugen von Bohm-Bawerk, Karl Marx and the Close of His System, reprint, New York, 1949...
...The Marxist response, however, was that BohmBawerk was asking the wrong question: the basic economic problem was to analyze the social process of production...
...But, economic calculation requires pricing...
...All that Mises and Hayek are interested in is the market itself and the wonderful job it does, for no human mind can encompass the "bewildering mass of intermediate products and potentialities of production...
...At the same time that Hayek was developing these seemingly devastating arguments against the collective society, Mises came up with the further notion that socialism, by sundering distribution from production, would compound its inner difficulties...
...Baran's thesis, some leading Russian economists have been stumbling toward opportunity cost notions...
...185 ff...
...Yet Lerner does acknowledge that private enterprise as constituted today cannot fulfill the requirements of "optimum allocation...
...This gives his system an uncomfortable resemblance to the Soviet economic order...
...F. A. von Hayek, ed., Collectivist Economic Planning, London, 1935...
...An ideal socialism would be impelled by its very nature to guide its actions in accordance with consumer decisions...
...And when account is taken of goods in progress and those transported, it appears obvious that not all the relevant data can be made available to even formulate the necessary equations...
...The marginalist rules that are worked out are intended to control both price and output...
...The latter point is, of course, central to Mises' position, and there is no doubt that he raised the question more sharply than anyone else...
...57 $. 11 Originally published 1918, translated New York, 1924...
...However, socialism cannot be brought about by gradual means, argued Lange...
...12 A. P. Lerner, Essays in Economic Analysis, London, 1953, pg...
...It is even possible that a socialist bureaucracy might develop useful incentives that would not hamper the proper functioning of the economy...
...In more modernistic terminology, it attempts to delineate a decision-making procedure...
...The latter, it is said, will be at an optimum when it is no longer possible to increase welfare or satisfactions by further shifting goods among the citizenry...
...Thus, quite subtly, Barone has brought us to a point where there is no distinction between the system of equations in a collective society and that in free enterprise...
...Seeking to create a sound psychological basis for economic science, the marginalists concentrated on the behavior of individual firms rather than the totality of economic action...
...The economic theorist is unconcerned with ultimate social ends: he leaves that to the philosopher...
...But as Abba Lerner remarked, Dobb seems to be searching for a transcendental optimum in which an attempt would be made to create an ethic of social behavior based on some kind of undefined collective consensus...
...Since it is only in such circumstances that the textbook version of the market really comes into existence, it may be said, somewhat paradoxically, that perfect competition can exist only in a socialist society...
...socialist management could attain [its goal] with less disturbance and loss without necessarily incurring the disadvantages that would attend attempts at planning progress within the framework of capitalist institutions...
...Four sets of equations are developed by Barone: the first relates to the physical basis of production...
...Paul Baran's reaction to welfare socialism is even sharper, if less subtle...
...Schumpeter grants that under socialism political decisions will guide the initial distribution of income...
...In fact, society might very well spare the work of some occupations, such as that of lawyers, for in the absence of private property and capitalism's typically complex tax structure, what would they have to do...
...enterprises would conduct their affairs as if the tables were correct...
...perform their duties with well founded...
...IV The definitive response to the Hayek-Mises broadside was given in the modern welfare approach beginning with Fred M. Taylor's famous 1928 presidential address to the American Economic Association...
...It should be obvious that the Mises-Hayek approach purports to make socialism a logical impossibility...
...The prices of capital goods—again the imputation problem—can be worked out by starting with the historical costs available to the Planning Board when it is created and subsequently working out trial and error adjustments...
...Argued Taylor: "It would be necessary to multiply the valuation of each factor used in producing that machine by the quantity of that factor so used and add together these different products...
...38 $. 16 cf...
...The Central Board could also adjust its investment program so that the trade cycle would become an archaic phenomenon...
...the utilization of pecuniary incentives for socialist purposes...
...Whatever knowledge was available would supply the information for the factor valuation tables...
...As Vilfredo Pareto once remarked, if with 100 people and 700 commodities there would be 70,699 equations, what happens when there are several million inhabitants and several thousand commodities...
...Socialist rationality, continued Schumpeter, is superior to capitalist rationality: technological improvements in a capitalist society must simmer through the economy via gradual adoption by individual firms, while under socialism such improvements can be adopted simultaneously by all enterprises...
...Questions of value, cost and returns were appropriate to any society, they said: in the long run, neither history nor sociology were really necessary for economic analysis...
...In fact, the latter is anathema to many economists...
...In Baran's view, socialist will not be based on consumer sovereignty...
...The argument is basically simple: those who control the socialist economy have to account for used-up resources, assuming that the objective of rational behavior has meaning for such a society...
...As Paul Samuelson has said: "it is a tribute to his work that a third of a century after it was written there is no better statement of the problem in the English language to which the attention of the students may be turned...
...Since he takes the Soviet economy as a model, it is necessary to grant him this premise...
...There seems no logical reason why a central planning authority could not adopt similar devices...
Vol. 6 • July 1959 • No. 3
