Market v Plan The Interwar Socialist Calculation Debate

posted 27 Jun 2011, 04:40 by heiko khoo
Market v Plan  
by Mick Brooks

The document attached was a dissertation originally submitted in 1990 in part fulfilment of a Master’s Degree in Political Economy at Middlesex Polytechnic. It is therefore written in an academic style. Since the debate it discusses was carried out within the canons of neoclassical economics, some of the discussion in the document is quite technical.  

Its subject is the inter-War socialist calculation debate conducted in the English language. Most activists have never heard of this debate, but a knowledge of the issues raised is important to all socialists. The anti-socialist side argued that under socialism it was impossible to plan the economy rationally and that there were invincible problems of complexity and providing incentives. Socialism was therefore bound to fail. These arguments constantly recur in modern political discourse.
This controversy is not the same as a debate on ‘capitalism v socialism’, but is an important aspect of that argument. Actually nearly all socialists accept that we need to go through what Lenin called an ‘era’ of transition after a socialist revolution before we achieve full socialism. Markets will not be abolished; they will wither away over time. But it is important to make the case for socialist planning.

The debate was inaugurated by von Mises, who asserted that rational calculation was impossible if the means of production were owned in common. Socialism, by definition, entails social ownership of the means of production.
To make the argument simpler, consider this example. Let us assume the socialists take power first in Tunisia. All Trotskyists know that you can’t build socialism in one country, but you have to start somewhere and the national class struggle has its own rhythm and momentum. In our fictitious example Tunisia is the country where the power of capital is broken first. Tunisia is a poor small country and we can assume that our socialists all accept that they need to catch up and surpass the advanced capitalist countries as quickly as possible. To do this they will trade with the capitalist world – if they are allowed to.
Let us consider one of the means of production – land. The socialists boil the choice of use down to two; they can grow wine for export or they can turn it over to golf courses for tourist development. How do they extract the maximum possible moolah from the pockets of the rich capitalist nations – a necessity the Tunisian socialists thoroughly approve of? We are assuming here that Tunisians don’t play golf or drink wine. Von Mises’ point is they have no way of knowing the more productive use of the land.
Under capitalism, the means of production, including the land, would be privately owned. The capitalists anxious to cover the country with golf courses would bid for its use. So would those who want to turn the country into one great vineyard. The ones who could get more money out of the foreigners would be able to outbid the other lot in the price of land. That is how you are supposed to get rational, optimising behaviour under capitalism. If you suppress that market through social ownership, you will have economic chaos.
It was quite simply assumed that, if land were privately owned, the owners would naturally put it to the most profitable, and therefore most efficient, use. (‘Profitable equals efficient’ is a huge mental leap, and a classic apology for capitalism, which is severely questioned in the document.)
How would the capitalists know whether golf courses or vineyards would make more money? Presumably some would open golf courses and others vineyards. As it became clear that one was more profitable than the other, all would switch to the more lucrative trade.
Why should a socialist commonwealth not achieve the same result by running trials – opening a golf course and a vineyard and seeing what provided more export earnings? Why can’t the citizens come to a democratic decision in the light of the evidence?  If that were to happen, the ‘impossibility’ of rational calculation under socialism disappears up in smoke. 


The assumption on both sides of the inter-War debate was that the ‘socialist state’ was bound to be an unaccountable monolith. Actually that is a monstrous distortion of the socialist ideal. But Stalinist Russia, the only ‘socialist’ state in existence at the time, was a horrible caricature of socialism.
The socialists in the debate were not, for the most part, Marxists. They were rooted in neoclassical economics. The Lange-Taylor solution, named after two of the advocates of socialism, urged the continued use of the price mechanism. They argued that efficiency would be achieved by working with what are nowadays called shadow prices, that is by mimicking the working of the market. The socialists are generally reckoned to have ‘won’ the debate.
Quite naturally their work was picked up by dissidents in the Stalinist states who advocated market socialism in the post-War period. Alec Nove showed his sympathy for this approach in his book, The Economics of Feasible Socialism (George Allen & Unwin, 1983), where he raise the question of complexity as an argument against socialist planning. Nove asserted there were 12 million commodities in Stalinist Russia. How on earth would it be able to plan, working out the interconnections of each of 12 million commodities? Bureaucratic bumbling was inevitable:
“The economy cannot be planned and run ‘like the post office’. It is not just a matter of technique accounting-arithmetic, as Lenin (before 1918) seemed naively to imagine…In the USSR at this time” (1983 – MB) “there are 12 million identifiably different products (disaggregated down to specific types of ball-bearings, designs of cloth, size of brown shoes, and so on). There are close to 500,000 industrial establishments, plus, of course, thousands of construction enterprises, transport undertakings, collective and state farms, wholesaling organs and retail outlets.” (Economics of Feasible Socialism p 33)
Nove has been answered by a little piece posted on the internet by L. Proyect (Computers and Alec Nove’s market socialism). Nove was not an expert on computerisation, and neither am I – but Proyect is. “I have worked as a systems analyst, database administrator and computer programmers since 1968 and am astonished Nove does not recognise that these types of tasks have long since been relegated to large-scale automation… For example, a system which can automate the assembly and subassembly of parts and components is known in my trade as a ‘bill of materials’ database application. It enables managers to keep track of what parts are required to put together an automobile, an aircraft engine, a mainframe computer, etc…
“I was won over to socialism in the same year I first became a computer programmer. I always used to stress to comrades that it seemed that computers (in those days IBM 360s) made socialism objectively possible for the first time in history. If nothing else, this conviction has only deepened while bureaucratic socialism has entered into crisis or disappeared.
Proyect concludes, “I think that Lenin’s claim is as true as ever if it is modified in the following manner. ‘Capitalism has simplified the work of accounting and control, has reduced it to a comparatively simple system of bookkeeping that any literate person can do with a computer’.”
The third argument against the possibility of socialism was that of incentives. The anti-socialists heroically argued that firms under capitalism are run by the entrepreneurs who own them. Their incentive would be the survival of their firm. This is not how modern corporate capitalism works. Are the incentives supposed to be necessary for the capitalist owners (mainly passive shareholders) or for management?
Joseph Stiglitz took upthe question of incentives in a belated contribution to the debate called Whither Socialism?( MIT, 1994). Stiglitz concluded that the criticism of lack of incentives is no more applicable to the Lange-Taylor solution than to capitalism. “The socially acceptable (or desirable) distribution of wealth almost inevitably entail a separation of ownership and control, leading to the same kind of incentive problems for market economies as are associated with nonmarket economies” (Whither Socialism? p 63).
Outside the arena of orthodox economics it has been well understood, and firmly in accordance with common sense, that most of the participants in a profit making firm have no incentive whatsoever to maximise shareholder value. These ‘participants’ are called workers. Here’s Herbert Simon. “Most producers are employees, not owners of firms…Viewed from the vantage point of classical theory, they have no reason to maximise the profits of firms, except to the extent that they can be controlled by the owners…Moreover there is no difference in this respect among profit-maximising firms, non-profit organisations and bureaucratic organisations…The conclusion that organisations motivated by profits will be more efficient than other organisations does not follow in an organisational economy from the neo-classical assumptions.” (Quoted in Stiglitz – The Roaring Nineties Penguin, 2004 pp 284-85)
All the evidence Stiglitz provides in his concrete analysis points to the fact that really markets are fading away. “The market socialist model – and the neoclassical model – both fail to recognise the importance of the interface between producers and those who use the products being produced. The central message of these models, that communication between producers and consumers could be limited to price signals, is fundamentally wrong.” (Whither Socialism? p 85) Actually that is the case for democratic planning in a nutshell.
Recent experience has seen bank managers and other ‘experts’ filling their pockets with obscene bonuses and pay packets while they crashed the banks they ran, and the world economy with it. They then walked away from the wreckage with their wealth intact, leaving millions unemployed and homeless all over the world. At least we can hope that will stop the silly chatter forever about the need for these ‘masters of the universe’ to have sufficient incentives.
The inter-War debate was conducted abstractly. The best single analysis from a Marxist point of view of the problems of the interaction between market and plan in the transition to socialism is Preobrazhensky’s The new economics (Oxford, 1965) the classicTrotskyist contribution to the Soviet industrialisation debate of the 1920s.
heiko khoo,
27 Jun 2011, 06:13