David R. Henderson  

Don Lavoie on the Socialist Calculation Debate

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The late Don Lavoie was one of the most informed and insightful modern economists on the ins and outs of the famous "socialist calculation debate." One socialist economist who thought he had solved the problem was Fred M. Taylor, who spoke about it in his December 1928 presidential address to the American Economic Association. Here's what Lavoie writes about Taylor's purported solution:

In the first part of Taylor's discussion, he poses the problem, How should socialist decision makers allocate resources? Under the assumption that they are able to make rational judgments of the "effective importance" (or the producer and consumer evaluations) of the resources in question. The effective importance of any factor is to be "derived from and determined by the importance of the innumerable commodities which emerge" from "the vast complex of productive processes in which it participates" and is to be "embodied . . . in arithmetic tables" that Taylor calls "factor-valuation tables." (p. 46). These tables are supposed to take the place of money prices under capitalism in supplying quantitative information concerning the relative "effective importances" of the various factors of production. For the first two-thirds of his paper, Taylor explicitly assumes "that the authorities of our socialist state will have proved able to ascertain with a sufficient degree of accuracy these effective importances or values of all the different kinds of primary factors (p. 46), but the (dynamic) question of how to ascertain these values--that is, of how to fill in the factor-valuation tables with the right numbers--is taken up in fewer than five pages at the end of his paper.

It should be evident, in the light of the preceding chapter, that Taylor's first problem begs the question of the calculation difficulty that had been raised by Mises, whose argument was that money prices are the only workable indicators of the relative "effective importances" that Taylor assumes are already embodied in factor-valuation tables. It surely would not have surprised Mises that if one assumes that these tables contain the same knowledge that competitive bidding imparts to prices under capitalism, the calculation problem is easily solved.[italics added]

I would have loved for the next sentence to be, "But factor-valuation tables without actual market prices are like Hamlet without the Danish prince."

This quote is from Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered, Cambridge University Press, 1985, p. 87.

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COMMENTS (5 to date)
John writes:

If only Rivalry and Central Planning were still in print...

Greg Jaxon writes:

Not having read Taylor's address or his theory of "factor-valuation", I'm just guessing that it tries to decompose "value", analyze the contributing factors, and sum all contributing sub-values into a price. How this approach would ever occur to someone who has watched prices form during negotiation or at auction beats me.

Another misconception about the signaling role of prices is that change in the price of the good itself is necessary to transmit some signal of a change in the costs of production or rate of consumption. This is not at all necessary or desirable. Normal (small) changes in the rate of consumption of a Good modulates the volume of outstanding orders for it. In the clearing system associated with that good's production chain, the order volume functions as a money supply. It is the discount rates and exchange rates on the orders (bills) which attract or repel new resource to the production of said good. Consumers tend to pay the same price year in and year out, seasonality almost notwithstanding. But brokers in the clearing system who move resources through the production chain haggle over the discounts on orders each step of the way. Those marginal rates can vary much more and much faster than prices for finished goods can change. The brokers experience the seasonality or other variations of demand and supply for the product; their arbitrage activity guides resources to enter or leave the production chain and smooths out the mismatch between supply and demand, even over time, and at a(n approximately) constant price to the end-user. The "prices" that carry the effective market signals are the internal discount rates on orders for the production factors.

M.R. Orlowski writes:

While we are on the topic of socialist calculation, I feel that George Reisman wrote an excellent account of the problem socialist calculation in his book Government Against the Economy Government Against the Economy, or chp. 8 of his other book Capitalism.

Shayne Cook writes:

So, if I understand this correctly, Socialist/Central Planners face much the same problem as Marketing Managers in a Capitalist system; "[how to] make rational judgments of the 'effective importance' (or the producer and consumer evaluations) of the resources in question."

It's a pity actual consumers don't fully cooperate with the "rational judgements" of either Socialist Central Planners or Marketing Managers. Of course Marketing Managers in a Capitalist system have invented the price mechanism as a means of adjusting for the mis-match. Wonderful thing, Capitalism.

Shayne Cook writes:

Follow-up ...

I didn't mean to imply that Socialist Central Planners haven't invented their own mechanism for addressing the mis-match between actual consumer preferences and their "rational judgements". Marketing Managers only have the price mechanism, Socialist Central Planners have guns.

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