The economic calculation debate
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Even within mainstream economics departments Austrian economics is viewed as ideological. I don’t think we need to spend too much time with it.
Dan’s reply:
Dear all
Thanks for the responses to the article. Let me start with the point made by Bijou Drains about the inefficiencies, or ‘externalities,’ of the market. As they say, in the worst cases, this can mean a tragic, avoidable loss of life. I agree with you that in assessing the possibility of a socialist alternative to capitalism, it is a matter of weighing these market failures and the inequalities of capitalism against the scale and significance of any failures/ inefficiencies that might occur under socialist planning. A speculative argument can be made that the scale of any failures/ inefficiencies under socialism would be relatively modest compared with the scale of inequalities and market failures under capitalism. What we are talking about here, as you say, is an attempt to compare the extent of failures, inefficiencies under two different systems.
Reading through some of the further points, they reaffirm my view that, as we argue in the article, it is useful to distinguish between ‘supply’ and ‘demand’ side calculation (if we can be forgiven for using this arguably ‘bourgeois’ terminology (!).
The demand side, as we define it, concerns the process of deciding upon a target set of final goods and services/ outputs to be produced. I agree that such decisions require consideration of a range of qualitatively different criteria, and should not be left entirely to a single numerical indicator such as the monetary prices generated by markets. Of course, even under capitalism, states have a role in providing public goods (education, health, green spaces, etc) and decisions about them are not left entirely to the market. As we argue, political/ democratic processes and other kinds of institutions/ non-market processes have important capacities for addressing demand side calculation.
I should point out here as well that, such non-market processes of decision-making are also needed for the necessary task of setting constraints on the use of resources (e.g. pollution limits, limiting the use of non-renewable resources, etc). I would agree that such important decisions need to be made in-kind.
Again regarding demand side calculation, some of you have commented on Philipp Dapprich’s case for tokens. It’s a while since I read his article and I’m not going to express a view here on the arguments for and against this proposal, compared with the free access proposal of the SPGB.
Where I would wish to express a strong view here is on the supply side calculation problem as defined by the article, following Mises’ original definition of the problem. i.e. how to choose a set of production methods, once the above forms of calculation have been addressed – i.e. a target set of outputs is defined and factor constraints established.
Amongst the various posts, DJP gives a direct response to this calculation problem. This is to accept that the non-market production model put forward by the SPGB, based on calculation in kind, would suffer inefficiencies but such concerns are dwarfed by the scale of market failures and inefficiencies under capitalism. This view accepts the validity of the supply side calculation problem yet understandably places it in a wider context.
While DJP does honestly and directly respond to the supply side problem, I just question how widely convincing such a response can ever be. Those who are sceptical about the feasibility of socialism can reply along Austrian lines by emphasising the vast complexity of supply side resource allocation in modern economies. How, they can ask, would producers decide on which production methods to adopt, given the vast array of different factors of production, in the context of ever-changing supply and demand, etc etc….
In my view, proponents of non-market socialist planning can do better than DJP’s response to this supply side calculation argument (and better than that of the SPGB in general). I agree with the approach of Young Master Smeet which is to acknowledge the significance of Kantorovich’s work. Kantorovich sought to develop a computational approach, implicitly acknowledging the significance of the supply side problem as Mises defined it. As our article points out, computational technology and techniques have of course moved on since Kantorovich’s time beyond anything he could have dreamt of. As we comment in the article, machine learning/ AI techniques, combined with vast increases in computing power, have completely transformed the capacity for solving highly complex optimisation problems.
Ironically, both the Austrians and the SPGB seem to have one characteristic in common. Both are dismissive of the implications of these computational advances for the question of the feasibility of non-market, socialist planning. Our approach is to challenge both positions. We start from a recognition of the significance of the supply side problem defined by Mises. We then challenge the Austrian argument that the problem is necessarily insoluble on philosophical grounds. Our point is that the question of the solubility of the supply side problem is a contingent one. While perfect optimal planning seems impossible, adequate, adaptable forms of non-market planning may well be feasible. Our main argument in the article is that computational advances provide grounds for expecting that a system of supply side calculation for complex modern economies is feasible (though there is still much scope for developing working systems that would demonstrate this more fully).
Once the solubility of the supply side calculation problem is recognised and further demonstrated ( a point which I’d suggest requires significant further work – the problem is not a trivial one!), the debate can move on to questions about the demand side, which forum members here have, perhaps understandably, found to be much more interesting!
I realise that the above does not respond to Stuart’s post which raises important questions but I just thought I should focus on defending the main point of our article, at least for now….
Best wishes
Dan
“Where I would wish to express a strong view here is on the supply side calculation problem as defined by the article, following Mises’ original definition of the problem. i.e. how to choose a set of production methods, once the above forms of calculation have been addressed”
“Those who are sceptical about the feasibility of socialism can reply along Austrian lines by emphasising the vast complexity of supply side resource allocation in modern economies. How, they can ask, would producers decide on which production methods to adopt”
The Mises criticism is predicated on a blank slate situation. “How to chose a set of production methods”, “How would producers decide on which production methods”. Framed that way, it does look overwhelmingly difficult. However, the socialist position is that it is a matter of adapting existing production methods towards socialist aims and objectives. It’s not a matter of starting from scratch, as Mises assumes.
Actually, Dan, we have also dealt with the so-called “supply side” aspect of the question. Here is an extract from an article submitted to the Socialist Standard and which will be published in full in due course:
“In his Economic Calculation in the Socialist Commonwealth Mises claimed that the application of in-kind calculation would be feasible only on a small scale. However, it is possible to identify extant or past examples of calculation-in-kind being implemented on a fairly – or even, very large – scale. For instance, Cockshott refers us to the fascinating case of the first Pyramid at Saqqara, built under the supervision of Imhote – an enormous undertaking by any standard – involving nothing more than calculation-in-kind. Another case in point was the Inca civilisation, a large-scale and complex civilisation that effectively operated without money.
However, it was really the emergence of linear programming that has effectively delivered the coup de grâce against this particular line of argument against calculation-in-kind peddled by Mises and others. It has made this argument more or less completely irrelevant since it has removed what Mises considered to be the main objection to this form of accounting – that it could not be applied on a large scale basis.
Linear programming is an algorithmic technique developed by the Soviet mathematician Leonid Kantorovich in 1939 and, around about the same time, the Dutch-American economist, T. C. Koopman. As a technique it is widely and routinely used today to solve a variety of problems – such as the logistics of supply chains, production scheduling, and such technical issues as how to best to organise traffic flows within a highly complex public transportation network with a view to, say, reducing average waiting times.
To begin with the computational possibilities of this technique were rather limited. This changed with the development of the computer. As Cockshott notes:
‘Since the pioneering work on linear programming in the 30s, computing has been transformed from something done by human ‘computers’ to something done by electronic ones. The speed at which calculations can be done has increased many billion-fold. It is now possible to use software packages to solve huge systems of linear equations’ (Paul Cockshott, 2007, ‘Mises, Kantorovich and Economic Computation’, Munich Personal RePEc Archive, Paper No. 6063)
Computerised linear programming allows us to solve some very large scale optimisation problems involving many thousands of variables, in a matter of mere seconds. It can also help to solve small scale optimisation problems.
In short, linear programme provides us with a method for optimising the use of resources – either by maximizing a given output or by minimizing material inputs or both. The problem with any single scalar measure or unit of accounting (such as market price or labour values) is that these are unable to properly handle the complexity of real world constraints on production which, by their very nature, are multi-factorial. Calculation-in-kind in the guise of linear programming provides us with the means of doing precisely this since it is directly concerned with the way in which multiple factors interact with – and constrain – each other.
While a non-market system of production could operate well enough without linear programming, there is little doubt that the availability of such a tool has now put the matter of whether such a system is feasible or not, beyond dispute.”
The trouble with all this discussion about calculation is that there is a background assumption that all that matters can be quantified and therefore calculated. That is a highly ideological position. ‘Efficiency’ is not some kind of neutral or value free measurement.
While socialist society could and would need to make use of some kind of calculations, seems to me that these would be the beginning and not the end of the matter. We are not talking about some hyper rationalised consumer society where producers follow the dictacts of a plan, but a self-ruling democratic commonwealth where what society does is decided through deliberation. Such deliberation involves paying heed to considerations about autonomy, quality of life, appreciation of nature etc.
What could be viewed as “ineffeciant” in the context of a market economy that produces for profit, could well be the most preferable method for a society that produces for need.
Actually, in his 1920 polemic against full state capitalism and socialism, Mises conceded that monetary calculation could not measure use-value. He also conceded that a socialist society would have no problem in deciding what to produce (what use-values to produce). His criticism was that it wouldn’t be able to decide “rationally” what methods and materials to use to produce them.
Monetary calculation, he wrote in chapter 2 of that article,
“can never obtain as a measure for the calculation of those value determining elements which stand outside the domain of exchange transactions. If, for example, a man were to calculate the profitability of erecting a waterworks, he would not be able to include in his calculation the beauty of the waterfall which the scheme might impair, except that he may pay attention to the diminution of tourist traffic or similar changes, which may be valued in terms of money. Yet these considerations might well prove one of the factors in deciding whether or not the building is to go up at all.
It is customary to term such elements “extra-economic.“ This perhaps is appropriate; we are not concerned with disputes over terminology; yet the considerations themselves can scarcely be termed irrational. In any place where men regard as significant the beauty of a neighborhood or of a building, the health, happiness and contentment of mankind, the honor of individuals or nations, they are just as much motive forces of rational conduct as are economic factors in the proper sense of the word, even where they are not substitutable against each other on the market and therefore do not enter into exchange relationships.”And
“Any extension of the sphere of monetary calculation causes misunderstanding. It cannot be regarded as constituting a kind of yardstick for the valuation of goods, and cannot be so treated in historical investigations into the development of social relationships; it cannot be used as a criterion of national wealth and income, nor as a means of gauging the value of goods which stand outside the sphere of exchange, as who should seek to estimate the extent of human losses through emigrations or wars in terms of money? This is mere sciolistic tomfoolery, however much it may be indulged in by otherwise perspicacious economists.”
(I had to look up “sciolistic” too.)
Some of his followers, and others, have disagreed with this and have tried to put a price on everything.
This article, which says that Hayek was right to say that you can’t plan the market, seems relevant to this discussion. But then socialists don’t want to plan the market but to organise the production and distribution of useful things and services directly for use, not to be sold on a market.
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