Bryan Caplan  

The Socialist Calculation Debate: Me Against the World

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Well, not quite the world, but in the latest issue of Critical Review I debate Pete Boettke, Pete Leeson, David Gordon, Rodolfo Gonzalez, and Ed Stringham. The subject: My earlier CR article, "Is Socialism Really 'Impossible'?", which argued that the Austrians have (a) no sound theoretical argument that lack of calculation makes socialism impossible, and (b) no good empirical evidence that lack of calculation was the main reason for the economic failures of socialism:

The collapse of Communism has led many to proclaim that "Mises was right." Yes, he was right that socialism was a terrible economic system; indeed, only the collapse of Communism has shown us how bad it really was. However, history does nothing to show that economic calculation was the difficulty facing socialist economies. There is no instance of a socialist economy that suffered solely from its lack of economic calculation. Indeed, the experience of collectivization in less-developed economies comes close to the opposite natural experiment: since calculation had generally not taken root in these places to begin with, the subsequent dislocations must be largely chalked up to bad incentives.

So what do my critics have to say? Boettke and Leeson stand their ground, and claim that I just don't understand Mises' proof. Gordon, Gonzalez, and Stringham admit that Mises doesn't have a proof, but argue that the Austrian position should be interpreted as an empirical claim, anyway.

My favorite part of the debate: Gonzalez and Stringham argue that the Soviets didn't know how to improve incentives, so the root of their economy's distress was a knowledge problem. I respond:

Hedrick Smith (1974, 281-84) reviews a number of Soviet agricultural experiments that sharply increased output with better incentives alone. The most notable was the "link" system, which made the pay of small teams of farmers proportional to their harvest. "The theory was simple: If pay depended on results and the work force was organized in small enough units, each individual could see the benefit of producing well, just as on a private plot" (ibid., 281). Productivity skyrocketed without any help from economic calculation. In one experiment, a "10-man link could triple the yield of tract normally worked at various times by 80 people." In another, "labor productivity . . . was 20 times higher than on neighboring farms." (ibid, 281-2)

If GS and Olson were right, the Soviet system would have eagerly adopted the link system. They could have raised lump-sum taxes substantially without even starving anyone. Instead, the experiments were closed down. Ivan Khudenko, the brains behind the biggest experiment, was sent to die in prison. As a Soviet journalist explained, "The experiment lasted only for one harvest and then it became clear that if Khudenko was right, the entire agricultural leadership was wrong" (ibid., 283). Once again, the bad incentives of socialist leaders were the foundation for the bad incentives of socialist workers.

This exchange confirms my suspicion that a sure-fire cure for loneliness is to attack Austrian economics. As Harold Demsetz knows, once you argue with the Austrians, you'll never be ignored again!


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Scott Scheule writes:

This seems like as good a time as any to ask a question I've wondered about. I read your previous paper, and note you believe that calculation without prices is impossible.

I wonder how you (or anyone) would respond to this counter-argument (which I found and quote from the Wikipedia entry on the Socialist Calculation Debate):

"A related point sometimes made by socialists (or, for a different purpose, Rothbard-inspired anarcho-capitalists) is that in actually existing capitalism, prices are often set by central planners. Large corporations set retail prices by central policies, which must in turn be determined by calculations of the sort that, arguably, ought to be impossible according to proponents of the calculation argument. For example, in response to the road-construction example above, it might be claimed that the costs and benefits of the impact on travel time couldn't be determined ahead of time by judgement-free summing of prices alone in even the most free-market economy."

Scott Scheule writes:

Additionally, I think it obvious that socialism is possible (and that you are right). It works well in the context of the traditional family or a small firm. Only larger incarnations suffer problems as the incentives of actors begin diverging significantly.

James writes:

Central planning by big corporations works when the benefit from technological economies of scale exceeds the costs associated with trying to engage in central planning. Socialists want one planning board to run the entire economy rather than expanding just to the point where centralization is advantageous.

Bryan may be right about incentives and wrong about the Austrians. It may be that if socialism were actually implemented, the incentive problems would bankrupt the system before the calculation problems that loom farther off.

The neat thing about the Austrian argument is that one need not deny the socialist claim that when the people's revolution comes, individual incentives will become unnecessary because everyone will want to serve the interests of the proletariat. Bryan's argument is perfectly good too, and it convinces those of us who understand the importance of incentives, but it requires an appeal to an assumption that the socialists never shared.

Matt writes:

I like how a third of Caplan's paper is devoted to defining the word "socialism" before he tells us that the Mises argument that socialism is an impossibility is false. Mises would surely admit that any idiot (replace "idiot" with your favorite "socialist" dictator) can take over a country's factors of production, eliminate private property and do whatever else your definition of socialism includes. Mises' claim is that it is impossible for standards of living under the authority of "one will" to be higher than those achieved with the "will" found in market economies. Oh, and bad incentives exist because of problems with economic calculation. Duh.

Barkley Rosser writes:

One reason why the socialist calculation arguments were not really all that relevant to the past actually existing socialism was that capitalism continued to exist elsewhere. Therefore, there always were referent prices available. When the planners chose to use other prices, they did so knowingly.

While it is possible to have incentive schemes in socialism, the bigger problem seems to have been technological innovation. This was something mentioned by Mises and Hayek, but not made all that much of. However, in the longer run, it seems that the lack of incentives to innovate from the lack of private property was the real kicker in how the US just surged ahead of the USSR, along with the related quality issue. Grain production does not involve quality, but cars and shoes do.

BTW, not well known studies show in fact that in a static sense, many Soviet producers by the end of the 1980s were actually more technically efficient than their counterparts. They had really figured out how best to produce given their technology. This advantage was part and parcel of the fact that the tech did not change, which was the real kicker.

liberty writes:

>Large corporations set retail prices by central policies, which must in turn be determined by calculations of the sort that, arguably, ought to be impossible according to proponents of the calculation argument. For example, in response to the road-construction example above, it might be claimed that the costs and benefits of the impact on travel time couldn't be determined ahead of time by judgement-free summing of prices alone in even the most free-market economy.

In a free market economy there is supply and demand and other prices set by them. Large corporations can set a price based on costs that they know exist, without knowledge of demand (eg cost and benefit on travel time) and charge what they will - then demand becomes known as persons are willing to pay tolls, use public transport etc. This is known because in a free market persons must pay for using various modes of transport. Ina socialist economy, all of those would be paid for by a centralized source and no supply and demand calculation is available, in fact no prices are available for calculation at all. If it is difficult to know ahead of time, then a firm can base things on costs that are known (which are harder is even possible in a socialist economy where prices are not truly known for anything) and then the price can later adjust to reflect actual supply and demand. In a socialist economy there is no possibility of later adjustment based on supply and demand as they are not known. If all travel is free then it is impossible to know to what extend consumers prefer one form of travel to another - everyone will take a limousine if they can. Then there are long lines for the limousines and some people will take the tram; but counting the numbers of people on line for the limousine and adding more of them or more trams to accomidate still does not give you a clear picture of money-demand, just a vague sketch of the desire of people when all things are equal. And what is the cost to run the tram? If you pay all persons equally, and there is no market for electricity, and you don't know the demand, and you have no market for competing tram-car-makers, how do you know the real difference in cost between trams for the people and limousines?

A good book that addresses these kinds of calculation problems (and assumes no incentive problems) in various kinds of socialist economies is Economic Calculation in the Socialist Society by T. Hoff (1949).
http://www.amazon.com/gp/product/0913966940/sr=8-1/qid=1142716743/ref=sr_1_1/104-7172395-4817549?%5Fencoding=UTF8

>Additionally, I think it obvious that socialism is possible (and that you are right). It works well in the context of the traditional family or a small firm. Only larger incarnations suffer problems as the incentives of actors begin diverging significantly.

Just because it works in a small family doesn't mean that only incentive problems cause the issues that come up when attempted on a larger scale. Obviously calculation issues become a greater concern at the large scale as well. In fact these economic calculation problems were recognized in Russia by Bukharin, Stalin and others at various times and widely discussed by Soviet economists.

In the appendix of the book I mentioned, the pricing system in Soviet Russia is discussed and at that time there were seven separate pricing schemes for retail prices - town, country-coop, commercial, conventional, open-market (price capped but otherwise determined by supply and demand), bread-price, gold/ruble prices for foreign shops. The different prices meant that the same money was worth a different amount depending on who has it and where they may shop, ie depending on class.

The problem of calculation is intimately ties to the problem of incentives. In 1935 a speech was given to the American Economic Association about the accuracy of calculation in Russia descibing how investment undertaken without regard to costs had resulted in extremely inefficient allocation of resources.

Because demand is not discovered through a market system, even those profits which are known on paper cannot tell you whether the industry is efficient or whether the resources are efficiently allocated. For example, a firm may consume a lage quantity of scarce raw material, show a profit on paper but it will not be seen that another, more efficient use of that rare marterial is not produced and would have had greater utility for the people. The people cannot demand the second use, there are no profits to be made so that no new entrants will have incentive to enter, but the central government cannot provide an incentive either BECAUSE IT'S UNKNOWN, because there is no market in which to discover the demand. If the demand both both of the two uses were known, then the cost of using the material for the lesser-demanded and less-efficient use could be known, and the true cost understood.

I could go on about this all day, I will end there.

Eric J Rhoades writes:

Differing economic models are dependent upon differing sets of circumstances to make them function. This would include in the case of western style capitalism things such as a expanding population base and a culture of low corruption to fuel growth, and so create the incentive and ability to accumulate wealth.

To use the Soviet model as a sign of why socialism cant work is actually more in the line with saying what circumstances may prevent socialism from working. Differing circumstances may not only make socialism more viable, but especially in the case of select industries which benifit from the creation of monopolies, may also make it favorable.

liberty writes:

>To use the Soviet model as a sign of why socialism cant work is actually more in the line with saying what circumstances may prevent socialism from working. Differing circumstances may not only make socialism more viable, but especially in the case of select industries which benifit from the creation of monopolies, may also make it favorable.

It is extremely disturbing that so many intellectuals still imagine this. Are 100 million lives not enough to sacrifice in this absurd experiment?

No, no circumstances can make socialism feasible, let alone desirable.

As I explained above, without supply and demand, there are no prices, without prices calculation is impossible, without calculation - and without infinate knowledge of the consequences that will occur due to the centralized control of the market - dispersion of wealth across the population and over time is impossible, and long lines, stagnation and poverty are inevitable.

Nothing - no amount of wishful thinking, forethought or genius - will change it.

Eric J Rhoades writes:

There are certainly issues that are thorny in the implementation of state control of industries, for instance how to retain effective price signals, how to allow need to dictate the allocation of resources, and how to deal with labor concerns with job security as balanced by productivity incentives.

Still as is apparent from the U.S.'s experimentation with privatisation/deregulation of the energy sector an answer is bound to not be a black or white issue. It is possible to have a proper policy mix, and effective leadership, to make public control of some industries effective. This is seen in many public works institutions, it is also seen in various degrees of success with the health care industry.

Imagine this. Producivity increases and the cost of mechanization have reached a point where where the only way most industries cycle capital back into the economy is through profits. Yet competitive pressures have caused profits to follow the cost of overhead downward. Aside from additional costs perhaps associated with things like utilities, or R&D, the main cost the economy may incur is through social support programs for the disadvantaged who used to rely on wage based income. Taxes rates then become the main support for prices by increasing while labor overhead is reduced. In such a scheme ownership of industries reamins in private hands while pricing structure is largely determined by public costs. Connected with associated business regulation this amounts to a few hairs shy of socialism. A far flung scenario? Perhaps. But not outlandishly so, and potentially near enough to possible that it brings to mind state control of some industries, in some form.

liberty writes:

What you are missing is the dynamism of markets. Why are there profits? Because people keep innovating and finding new low costs and new ways to increase profits - eg by making their brand popular and hence being able to charge more. This has always happened and will always happen so long as the market is free. That is the nature of markets and people. You say (it could happen that):

"Producivity increases and the cost of mechanization have reached a point where where the only way most industries cycle capital back into the economy is through profits. Yet competitive pressures have caused profits to follow the cost of overhead downward."

Does Walmart make less profit than other shops - supermarkets, drug stores etc? No. They reduced costs in order to charge less and make *more* profit. Competitive pressures always push down prices and profits but the incentive to make profit is what brings in the new innovation, newly low costs, nobody could have imagined the cost-saving measures created by Walmart - yet here they are, making more profits than any previous competitor. This is the nature of markets, and regardless of what Marx said, it will continue and profits will still exists and wages will still continue to rise.

" Aside from additional costs perhaps associated with things like utilities, or R&D, the main cost the economy may incur is through social support programs for the disadvantaged who used to rely on wage based income."

Suddenly wages will go down? No. Marx's philosophy aside (as he was clearly wrong about all of it and this has been proven again and again), wages are not going down. Wages keep going up - real wages, after inflation and after benefits are included, all wages have been going up, that is all quintiles, all deciles, the standard of living in America across the board keeps rising. Only in recessions have real wages temporarily fallen. If we reduce taxes and benefits, wages will only go up that much faster. Again its in the nature of markets and the facts support this.


" Taxes rates then become the main support for prices by increasing while labor overhead is reduced. In such a scheme ownership of industries reamins in private hands while pricing structure is largely determined by public costs."

eg in Sweden where taxes have been so high and markets so heavily regulated, no firm may hire and fire at will and at the desired costs. It exists but it is stifling, wages are flat, growth is incredibly low and they are constantly having to free areas of the economy in order to survive. Because it isn't actual central control they are not in poverty - calculation is possible if imperfect, but the policy is awful and keeps them poor. They also depend heavily on trade with free market countries.

" Connected with associated business regulation this amounts to a few hairs shy of socialism. A far flung scenario? Perhaps. But not outlandishly so, and potentially near enough to possible that it brings to mind state control of some industries, in some form."

It exists in places like Sweden and performs very poorly compared with America. The idea that socialism of that sort - a market socialism - can exist and maintain some level of supply and demand, price signals and so forth, has been proven. The fact that it is a very poor imitation of a true market economy and hence staganat and poor has also been proven, the fact that it falls way short of the ideals of socialism and is a poor imitation therefore of that ideal is also obvious.

abhinay writes:

Prof. Caplan,

Should "But this looses sight " be "But this loses sight " instead?

liberty writes:

Indeed between "Collectivist economic planning;: Critical studies on the possibilities of socialism" and the book I mentioned above ("Economic Calculation in the Socialist Society"), the proof and answers to whether and how much economic calculation makes socialism impossible are answered. The proposal regarding calculation in kind is addressed, the reality of the problems of calculation in actual socialist societies is addressed. The only argumetn left is that Mises did not address these questions himself: fine. But it does not mean that his conclusion was wrong, just that he did not support it well.

Barkley Rosser writes:

liberty,

Well, a lot of this does depend on what we mean by "socialism." Certainly a pure form of total (and politically totalitarian) command socialism will have the problems you mention, both econmically in terms of functioning over the long run, and politically/civilly in terms of oppression and lack of human rights.

However, if one defines "socialism" more precisely (and I would argue correctly) as a system in which a majority of the means of production is owned by the state at some level or other, we most definitely see some successful examples. Thus, China, which certainly has a rapidly expanding strictly market capitalist sector, is one of the world's most rapidly growing economy, arguably in spite of its declining socialist remnant. Of course it continues to be politically repressive.

However, let us consider an economy such as that of the actually existing post-WW II economy of Austria. For most of that period up to about 1990 or so, a narrow majority of the capital stock was owned by the state. It was more socialist than capitalist. Of course it did not have command or even indicative planning, but it did have a very intense form of corporatists state-level collective bargaining that set economy-wide wage rates. Of course it was democratic and relatively civilly free through most of that period, although not so hot on women's rights or the rights of some minorities such as the Slovenes. In any case, its overall macro performance has been very good, with consistently low inflation and low unemployment and consistently remaining in the top ten on real per capita income. Of course it is privatizing now.

I would note that the political problem is not one of ownership per se, but of command planning. What we have never seen is a system that was a permanent command economy, even a technically capitalist one like Nazi Germany, that was also democratic. We have seen democratic and normally market capitalist economies temporarily become command economies during wartime when confronting a command enemy, with the US in WW II a good example. No private autos were produced during WW II, not because of market forces but because of orders of the US government. But the auto companies remained privately owned throughout, just as the industrial giants of Nazi Germany remained.

liberty writes:

>However, if one defines "socialism" more precisely (and I would argue correctly) as a system in which a majority of the means of production is owned by the state at some level or other, we most definitely see some successful examples.

You make some interesting points. However, your definition is less precise than mine. My definition, as was the definition for many years, was that The whole of the means of production or at least the "commanding heights" are centrally owned. That is the definition used by Marx and Engels and their followers and those who debated with them. A "Market Socialism" which has private ownership will have some regular incentives - profit - and a market whereby prices can be determined. Yes, in such a system neither my objection (calculation) nor Caplan's (incentives) is nearly such a concern.

However, "market socialism" is not what Mises was arguing against, nor what Caplan was discussing.

The reason it irks me so much that he argues that lack of calculation is not the downfall making Socialism impossible is that the Socialists are arguing the same thing - they beleive that in-kind calculation or some other savior will allow them to build the state and the people won't require incentives because they love the state. If you cave in on the calculation (which they are completely wrong about) then they will happily argue that people love a worker's paradise and will work for free. Then all they need to do is use propaganda, useful idiots and the glory of their good intentions, and the "revolution" starts all over again. Prepare for 100 million more deaths next century.

In fact, a good hard study of the facts shows that calculation was a major part of the downfall of Socialism and was tightly intertwined with incentive problems, making them much worse than they might have otherwise been. A market is a complex system; just as the change of incentive structures have unintended consequences, so does the lack of the market that provides prices and price signals via supply and demand have many unforeseen consequences.

-- In addition, I would argue that the half-way cases that you cite have some of the same problems; not half because the market is not linear, a little market can go a long way; yet a wrench in the market can also cause far more damage than expected.

Sven writes:

"It exists in places like Sweden and performs very poorly compared with America. The idea that socialism of that sort - a market socialism - can exist and maintain some level of supply and demand, price signals and so forth, has been proven. The fact that it is a very poor imitation of a true market economy and hence staganat and poor has also been proven, the fact that it falls way short of the ideals of socialism and is a poor imitation therefore of that ideal is also obvious."

If this has been proven, then name some empirical evidence on Sweden.

The statement that the government in Sweden is constantly opening free markets is not just true. There are some, but it has been going on for some 15 years - with a very slow pace. But the main reasons for this has been the EU and the rightwing government in the 1990´s, hence political incentives and not economical.

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