Sunday, April 15, 2018

Just Pay ‘Em: Basic Income Across Ideologies



The story is told of a creator, who in seven days consecutively made the world that we live in. The creator took several steps and put this place together: heaven and earth; water; sky; land; plants; stars; animals. The very last thing the creator did was to create humankind. To humankind he gave the gifts he had created the previous days. Then exhausted by his efforts, he took the next day off (NIV: Genesis 1:1-31)


But the creator was not done. He took his creation and in a land bounded by four rivers he made a beautiful garden save for one tree, which he told of the man: “‘You are free to eat from any tree in the garden;  but you must not eat from the tree of the knowledge of good and evil, for when you eat from it you will certainly die.’” (NIV: Genesis 2:1-17)


We know how the rest of the story goes. The man was given a companion who was tempted by the serpent and they both ate of the tree. The creator got mad and cast the man and women out of the garden. The creator’s curses were not finished. To the woman he gave pain in childbirth. To the disobedient man, he created work: “Cursed is the ground because of you; through painful toil you will eat food from it all the days of your life. 18 It will produce thorns and thistles for you, and you will eat the plants of the field.  By the sweat of your brow you will eat your food until you return to the ground, since from it you were taken; for dust you
are and to dust you will return.” (NIV: Genesis 3:1-19)

The bottom line is that in this cosmology, work doesn't just suck. It’s a curse from God.

The above story is a creation story told by an agrarian society about how the world
started. Most cultures have their own creation stories about how the world came to be, but
this one has been passed down over the past five thousand years and has been literally the first chapter of our culture as the mythology of the eastern Mediterranean overtook the mythology of the northern peninsulas. Importantly, it is the dominate cosmology in the west and the one we labor under.


We are no longer laboring under an agrarian society. The economic system has developed to the point where most people no longer must toil in the earth to get their bread from the sweat of their brow. In fact, this transition has been rather quick on a historical scale. Robert Gordon, in The Rise and Fall of American Growth shows the rapid change in the composition in the American workforce. In 1870, right as reconstruction got off the ground, fully 46% of American workers toiled on the farm. At the same time another 33.5% were in the blue-collar field such as craft workers, operatives and laborers. Just over 20% combined were in the service or professional fields. As of 2009, those totals have essentially reversed. Only 1.1% of all American workers were farmers, and blue-collar jobs were only 19.9%. The workforce in 2009 was made up much more by those in the service industry (41.4%) and in the professions (37.6%) (Gordon, 2016, 53).  The story of the economy in the last hundred years is a move away from the fields and factories and into the offices and shops. But it does no good to look at the past as an idealized time that we should move back to. It makes as much sense to idealize a large factory in Detroit as the economy we should move back towards as it does to say what we should be doing is having more people hitch a plow behind a mule and break sod on the south forty.

The idealized past is the past because technological change and innovation happened. We no longer need half of the workforce toiling in the fields to grow food to support themselves and the other half. Aside from “wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals” (Marx and Engels, 1848: Ch 1), capitalism’s success has been more mundane but highly impactful in decreasing the disutility of work for broad swaths of the population. Even the one percent still in the fields in the United States are not walking behind a plow. They’re on the tractors. And this change came fast: Gordon notes that by 1935 the time it took to harvest an acre or wheat had dropped to a third of 1880 levels (265).


The change of composition of the workforce did not catch everyone off guard. As early as 1930 even as the Great Depression was talking hold across the land, economists were
thinking about this change and what it meant in terms of the nature of work as it looked in the future. In “The Economic Possibilities for Our Grandchildren,” John Maynard Keynes looked at technological change and what it meant for the future so that everyone was able to reap the full fruits of capitalism. In this essay, Keynes looks at the changes we have above, and he projects into the future. In his view, the economy of the world will have grown eightfold from the base when he was writing (365). This growth leads Keynes to envision a world where the economic problem is solved, and actual needed work is scarce: “But beyond this, we shall endeavor to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!” (369).  The grandchildren of Keynes would have other problems and greed would wither away: “The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” (369). We are the grandchildren of Keynes. Though he did not foresee the war, the world economy is in line with what he saw almost 100 years ago. And yet we do not enjoy the fruits of the change. We still toil, though not behind a plow or in a factory
or deep in the mines. Instead we sit at our computer or stand behind the counter at shops for 40 hours or more - and that is if the worker can get those hours they need to support their activities of daily living. Instead, we live in a world where wealth concentration has grown to mirror the time when Keynes was writing. A world where “The richest 1% of families controlled a record-high 38.6% of the country's wealth in 2016, according to a Federal Reserve report,” and on top of that it is also “nearly twice as much as the bottom 90%, which has seen its slice of the pie continue to shrink.” (Egan 2017). The world of today is a far cry from a world in which everyone has the leisure to work 15-hour days and those that hoard resources are excoriated in the media. Quite the opposite, in fact.

The world we live in, where the few have much and the many have little, has replicated itself throughout history. The few have had different titles - they have been high priests and kings and Silicon Valley Entrepreneurs. Their faces have graced coins and paintings and the cover of Fortune Magazine. The division between the haves and the have nots was seen as inevitable. No less a personage than the creator’s son, in the myth who was sent down to save mankind from the disobedience we saw earlier, is quoted as saying “The poor you will always have with you” (NIV: Matthew 26:11). The acceptance of inequality as a universal constant has been influential in the rhetoric and policy of what, if any, intervention those with access to resources should do.

This is not to say that there have not been interventions in alleviating the lot of the masses of the poor. In The Great Transformation (1944), Karl Polanyi examines the emergence of paupers as a class in England with the rise of industrial capitalism in that country. It was in the first half of the sixteenth century that the poor first “appeared” and traces their “gradual transformation into a class of free laborers” and the response was two sided where there was “a
fierce prosecution of vagrancy” but at the same time this emergent class aided the “fostering of domestic industry which was powerfully helped by a continuous expansion of foreign trade” (109).   As England developed, Polanyi explores how ideas of how to treat the poor developed. No less a thinker than Bentham wanted to put those without work to work but for their own ends.
Bentham proposed setting up “Industry-Houses” on his panopticon design to put the poor to work (113). Others lamented charity, like Daniel Defoe, who “insisted that if the poor were relieved, they would not work for wages; and if they were put to manufacturing goods in public institutions, they would create more unemployment in private manufactures” (Polanyi 114).

In our own country, though industry developed behind that of England, the concerns of what to do with the poor were the same. Robert Gordon notes that the poor were not just those that did not work, but the working class as well: “Workers were subject not just to unemployment resulting from macroeconomic business cycles, but also to day-to-day and week-to-week uncertainty about the number of hours they would be able to work at a particular employer” (Gordon 314). This uncertainty about employment haunted the working classes for he first 150 years of the country’s existence. Individual charity existed, but there was no large-scale intervention by the state until the Great Depression. Gordon lists the achievements of the New Deal Legislation of that period: “The first legislation with a long-term impact was the Federal Deposit Insurance Corporation, which almost completely eliminated bank failures and the consequent loss of life savings by depositors.” He adds, “Next came Social Security in 1935,” as well as “unemployment benefits began as part of the 1935 Social Security Act and by 1938 had been adopted by all states”. Importantly, all these interventions were only partial, as even at their peak unemployment benefits did not replace all wage income and they were time limited (315).  Further, the Social Security Act was exclusionary, giving rise to charges of racially motivated policy. It included only workers in commerce and industry: “the coverage decision made in 1935 was not to exclude farm and domestic workers, which, had that been the factual circumstance, might have lent more credence to a charge of racial bias. Rather, the decision was to include only those workers regularly employed in commerce and industry” (DeWitt, 2010).


The limited reach and the exclusionary policy of federal intervention in the United States has not changed. Hearkening back to the original sin - or the Protestant Work Ethic - the idea exists that there is a certain type of person who is deserving of aid. Often the line between the deserving or undeserving is racialized. In the recent past Ronald Reagan used racial dog-whistles to demonize “a ‘Chicago welfare queen’ with eighty names, thirty addresses, [and] twelve Social Security cards [who] is collecting veteran’s benefits on four non-existing deceased husbands. She’s got Medicaid, getting food stamps, and she is collecting welfare under each of her names.” (Haney-Lopez 2014).  Even if today those racialized hints have been dropped from the discourse, policy makers want to create hurdles. In the welfare reform signed by Bill Clinton, work requirements and time limits were put into the new cash grant program. Even today, there is a move to insert work requirements into hunger alleviation programs, the farm bill which contains allocations for the SNAP program including language to “require able-bodied adults ages 18 to 59 to work or participate in job training for 20 hours a week to qualify,” the bill’s supporters in the legislature quoted as saying “SNAP provides an important safety net for many Americans, but I want it to be an on-ramp to success, not a lifestyle for work-capable adults." (Hilburn 2018). Further judgement is passed onto those who receive aid in terms of how they consume it. In a recent op-ed in the Wall Street Journal, the musician Moby chides recipients for eating cheaper, more calorie dense food: “To reduce SNAP’s costs, some have pushed stricter work requirements. This is silly; most SNAP participants are either children or elderly. A better approach would be to focus the program on cheap, healthy foods like beans, vegetables, fruit and whole grains” (Moby 2018).      

What is to be done then? We as a society have progressed to the point that Keynes foresaw, where we have riches unimagined. The problem is that we also have the problem that Jesus foresaw, where we still have the needy amongst us. The answer we argue for is to just give everyone money. The idea of giving everyone money is not a new idea. It has been bouncing around in the air for a while and rises to prominence as a potential policy and then is overtaken by events. It has gone by many names. Some call it a negative income tax. Others call it a basic
income. The manner and timing of just when to give people the money vary, but many people agree that giving people cash and letting them decide the best way to spend it is the far more efficient an intervention that conditional, restrictive aid programs from food to housing.

Importantly, the idea is not just some left-wing, hippy idea percolating in the blog-o-sphere and Twitter. On the right, it can be traced as far back as Friedrich Hayek. Writing
in The Road to Serfdom, a book based on the thesis that central planning would inevitably lead to political monsters like Hitler or Stalin taking over, Hayek still recognizes the need for a basic level of sustenance: “There is no reason why in a society that has reached the general level of wealth which ours has attained, the first kind of  security should not be guaranteed to all without endangering general freedom. There are difficult questions about the precise standard which should thus be assured; there is particularly the important question whether those who thus rely on the community should indefinitely enjoy all the same liberties as the rest” (Hayek 1944, 148). Hayek was not alone on the right in advocating for some basic level of sustenance. His fellow Mont Pelerin Society member Milton Friedman argued along very similar lines in his book  Capitalism and Freedom, Friedman’s thesis being that the absence of the state from most affairs gives the economic actor the most freedom. And yet even he argues: “Suppose one accepts, as I do, this line of reasoning as justifying governmental action to alleviate poverty to set, as it were, a floor under the standard of life of every person in the community. There remain the questions, “how much and how” (Friedman 191). The mechanism that Friedman proposes in his chapter on “The Alleviation of Poverty” is the arrangement that recommends itself on purely mechanical grounds is a negative income tax” (Friedman 191-2).

The idea of a basic income is still in the air. A website that covers basic income lists current experiments running in Finland, Ontario, Barcelona, the Netherlands, and Scotland. (McFarland 2017) A large pilot program in Kenya was run, where the authors found “ a strong consumption response to transfers, with an increase in household monthly consumption from $158 PPP to $193 PPP nine months after the transfer began. Transfer recipients experience large increases in psychological well-being” (Haushofer and Shapiro, Abstract). So some experiments have worked to achieve their goals while others are still in progress. The idea of basic income is in the air because there is great worry about what continued technical change will mean for the great mass of workers. There are many now who could benefit from their floor being raised, but in the future as technological change progresses there might be many more. As we saw how farm working declined and then factory work declined, the concern with the rise of AI and big data and the robots and other buzzwords is that there will be no employment waiting for the people who are at the other end of technology. They will have the Keynesian fifteen hour day, but there will be no policy response to fill in the gap so that they will be able to consume at their  accustomed level. Some projections show a massive possible dislocation in the near future. Reporting on one McKinsey Global Institute study shows that they anticipate “between 400 million and 800 million of today’s jobs will be automated by 2030,” and those who need to worry the most are “the middle class that has the most to fear, with office administrators and construction equipment operators among those who may lose their jobs to technology or see their wages depressed to keep them competitive with robots and automated systems” (Meyer 2017). Without a policy response to such massive changes the political repercussions will be large. We may in fact already being living through it, as skills-based technological change and globalization has displaced factory workers and given rabble-rousers talking points to rally around with rosy looks into the past rather than realistic views forward.

The same concerns were in the air 40 years ago. Johnson’s Great Society legislations were seen as an extension and logical conclusion of the New Deal and a way to make movement on the late President Kennedy’s priorities. Then, as now, though there was a desire to move forward with a form of cash grant that was more generalized than the existing welfare programs from a large enough segment that experiments were run. In the late 60s to the early 70s, the Office of Economic Opportunity helped run four different basic income experiments. They were based in Seattle and Denver; Gary, Indiana; New Jersey and Pennsylvania; and Vermont. Each experiment tried to look at labor market responses to different levels of income grants and effective marginal tax rates for different family compositions. These experiments generated literature after the fact, but as Johnson-era initiatives, they withered on the vine under Nixon and subsequent administrations. What they did lead to was a contemporaneous report detailing the partial results of the studies. Unfortunately, this report to the Senate Finance Committee on Income Maintenance only covers the New Jersey experiment, and not even the full three year span of that experiment. For our purposes though, we will look at these results because ultimately we need to turn from theory to the empirical results gathered by prior researchers to determine if the theory is correct, or if just giving people money will make them remove themselves from the labor force and just sit around all day at the pub. Can we move past the curse of Adam?  

In reading the Senate Report, there are to be some tradeoffs. There is a bit of a vindication of the idea that people will stop working for the New Jersey experiment covered in the report, but that is balanced out by increased pay (9, 38). The idea being that the jobs that people find are better, so that in the end they work less for essentially the same pay.

One thing of note is across the results of the study is that they do not show enough “significance” even though they had the Oomph. In the results on page 103 (table 9) show a 9.1% increase increase in wages per worker  while having working hours drop by over 10%. The problem for the experimenters is neither of these results are noted as  statistically significant and the overall is a two percent drop. One way of looking at these results is that the ultimate cost of the intervention is not worth it if in the end the people you wanted to help end up losing money, especially since in the New Jersey experiment there is the large administrative cost as they experimenters are focusing just on the already poor and near poor. By focusing on the poor, you introduce a data-collection element to the experiment. The writer of the preliminary report on the experiments notes that “given the variability of the income flows among the poor, regular reporting of income and prompt adjustments of payments is essential to keep program costs within tolerable bounds (11).  The other way to look at the results is to see that the experimental subjects are ultimately better off since that 10% drop of hours means that they can move into leisure or on work uncompensated in the marketplace. 

From the top level results, we can examine the design and methodology of the New Jersey experiment specifically. It is an urban setting, so we don’t know what the effects would be on a similar experiment covering rural or suburban workers. One huge piece of how this will not show us what we’re looking for is based on the constrictions of the experiment. The experiment only made to run for three years (22). Even in the report they say that responses to payments will be different in the last year as aid recipients will change their behavior (50). The limitations leave the experimenters with a year of people getting used to being on the program, a year of whatever normalcy is possible, and then a year of winding down. The theoretical point of the basic income guarantee is that it will always be there. It is not a one-time lump sum payment that people will have to budget for and either spend it on investment goods, but the response shows experimental families spending aid on larger-ticket items like furniture, appliances, or televisions rather than saving it (78). The response in the data brings to mind the permanent income hypothesis where there is a different theoretical behavioral response one time payments as opposed to ongoing increased income. For example, if someone who hit the lottery for $25,000 would act in a very different way than if they received the same amount of money as a flow. The New Jersey experiment was not designed with this in mind, so whatever results that we do get that are either economically or statistically significant are somewhat suspect as they relate to possible .

The other part missing from the earlier studies of basic income is that in a universe of universal income support no matter how you break it down, there’s two sides to the job market. The New Jersey experiment just looked at labor supply. With the small number of families involved in the experiment relative to the larger labor pool in the experimental unit, then the labor market would be largely unaffected. In an environment where everyone was eligible for income support at some level, we would imagine that there would be significant changes in the market demand for labor both in kinds of jobs, hours, and the difficulty of labor. With an universal income floor, the providers of employment would likely respond by decreasing the disutility of labor in the jobs they offer. By increasing the marginal cost of the jobs offered, this would also incentivize employers to move to more mechanization of the job processes where possible. The testing of the hypothesis is not possible with the limited experimental design in the New Jersey that does not explore the demand side of labor. The experimental design of such an intervention is hard to fathom unless experimenters where to find an isolated community dominated by monoscopic or monopolistic employer - say a mountain town with one large saw mill. Then the experimenters would have to run the intervention on everyone.      

Unfortunately, there is no small mountain town to run the experiments we want. Thankfully there is the state of Alaska, who has been giving its residents a cash grant since 1982 based on diversion of mineral wealth to a dedicated fund. In “The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund,” Damon Jones and Ioana Marinescu specifically explore how this fund affects the labor market in Alaska. Labor market responses are especially salient in light of the idea that “Policy makers may be concerned that a universal basic income could discourage work through an income effect” (Jones and Marinescu, 2018, 1). Again we encounter the idea that what truly matters in alleviating poverty and making life worth living is that this is only feasible if there are no notable labor market effects. But that is environment within which proponents of the basic income are working in. As seen above, there are enough people who will divide the pool of recipients into deserving and undeserving, so that even if everyone is a participant, those that scale back their involvement in the labor market can be painted as shirkers and undeserving.    

The problem with using the full state of Alaska as an experimental subject is the same with so many experiments in economics. There is only one Alaska and one timeline. We cannot in one timeline implement a permanent fund dividend and in the other timeline avoid treatment effect. The experimenters use a method to create a fake version of the state of Alaska as a comparative baseline: “The synthetic control method chooses a weighted average of control states to best match Alaska for the outcome of interest and other observable characteristics before the dividend payments begin. This method therefore combines elements of matching and difference-in-differences (DD) estimators, and allows us to measure labor market outcomes in Alaska relative to matched controls after the beginning of the Alaska Permanent Fund dividend payments”  (Jones and Marinescu, 2018, 2). Ultimately the authors find “virtually no difference
— 0.001 percentage points — in the average employment rate between Alaska and synthetic
Alaska during the post-period. The data suggest that the dividend did not have a meaningful
impact on employment in Alaska,” (Jones and Marinescu, 2018, 15). The result runs counter to the hypothesis that on the macroscale a income guarantee will lead to more leisure, a result we saw in the New Jersey experiment where the treatment population did in fact decrease their labor time. The authors used the same method to examine labor hours, and “estimate an average increase in the part-time rate of 1.8 percentage points. This represents an increase of 17 percent relative to the average part-time rate in the pre-period (Jones and Marinescu, 2018, 16-7). The authors make a point of declaring the result not just significant against the null, but herald the treatment as both significant in the standard way of looking as well as economically significant since the effect is so large (Jones and Marinescu, 2018, 19).

    Ultimately, we want to look at these experiments across time to see if the theory is backed up by what happens in practice. We do this with the desire to decide if the policy is one that should move from idea to practice. As we saw above, there are genuine concerns that the economy of the future will look different than the one we encounter today. Even today’s economy presents challenges to so many people who have made investments in their own human capital but find the skills they developed with no buyer. We expect the problem to only get worse.

There can be optimism that we are not being imaginative enough about the jobs of the future and that there will be work for everyone that wants it, but it will do us well as a society if we plan for a world where there are fewer jobs that humans have to do while output keeps rising. There are other alternatives that could be explored in a larger treatment such as a jobs guarantee or a mandated higher minimum wage, but adopting a basic income guarantee is preparing us socially for a time when there are fewer jobs to pay any minimum wage or a job guarantee would funnel people into the labor-force in make-work style employment.  What we can see  experimentally both in the early 70s and then again today is with a basic income guarantee there is not a huge removal of people from the labor force. If we want to maintain a connection with the labor market for all economic actors, the connection is existent and free money does not just create a great vacation.

Finally, there is a lot of work to be done theoretically and experimentally in answering several questions about the basic income guarantee. Determinations about the level of the guarantee are crucial. Would we want to design one that was a full income replacement at the poverty level or higher, or a more modest guarantee like that of the dividends from the Alaska permanent fund. The authors of the Alaska study point to evidence that their results are generalizable to larger guarantees, but this hypothesis begs for more empirical work to ensure there is still some economic activity to support the guarantee. A related question needing more examination is the proper funding mechanism. The Alaska situation is unique in that the state has mineral wealth to divert to its people and in the fairly recent past had the political will to setup such a unique structure.  At a larger scale nationally, such a plan even at the Alaskan level of $2,000 a person would rely on a level of redistribution that makes implementation feel like a pipe dream in the current political environment in spite of the theoretical backing of Hayek and Friedman.

   
   














Bibliography

Genesis 1: https://www.biblegateway.com/passage/?search=Genesis+1&version=NIV
Genesis 2: https://www.biblegateway.com/passage/?search=Genesis+2&version=NIV
Rise and fall of American Growth. Robert Gordon
Keynes - the economic possibilities for our grandchildren Essays in Persuasion, New York: W. W. Norton & Co., 1963, pp. 358-373.
Matt Egan, “Record inequality: The top 1% controls 38.6% of America's wealth” http://money.cnn.com/2017/09/27/news/economy/inequality-record-top-1-percent-wealth/index.html

Dewitt The Decision to Exclude Agricultural and Domestic Workers from the 1935 Social Security Act https://www.ssa.gov/policy/docs/ssb/v70n4/v70n4p49.html
The racism at the heart of the Reagan presidency, Haney-Lopez
Food Stamps Shouldn’t Pay for Junk

Hayek, Friedrich, The Road to serfdom university of chicago press

Existing and Upcoming BI-Related Experiments By Kate McFarland
Transfers to the Poor: Experimental Evidence from Kenya
Johannes Haushofer Jeremy Shapiro The Quarterly Journal of Economics, Volume 131, Issue 4, 1 November 2016, Pages 1973–2042, https://doi.org/10.1093/qje/qjw025

Robots May Steal As Many As 800 Million Jobs in the Next 13 Years David Meyer
Senate Finance report on income maintainence experiments https://www.finance.senate.gov/imo/media/doc/Sprt24.pdf

The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund Damon Jones Ioana Elena Marinescu
Feb 5, 2018
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3118343




McCloskey, Deirdre N., and Stephen Ziliak. "The Standard Error of Regressions." Journal of Economic Literature, 34, no. 1 (March 1996): 97-114.
Ziliak, Stephen T., and Deirdre N. McCloskey. The Cult of Statistical Significance. Proceedings of Joint Statistical Meetings, Washington, DC. JSM, 2009. 2302-316.

Friday, March 23, 2018

Hayek and the Impossibility of Socialist Calculation

with Maxwell Siegrist

   
In “Economic Calculation in the Socialist Commonwealth”, Ludwig Von Mises makes a clarion call for what we now call the Socialist Calculation debate: “Without economic calculation, there can be no economy” (Mises, 14). The paper is a forceful argument meant to counter socialists of his day who, in his opinion paint too glamorous of a picture of how “[r]oast pigeons will in some way fly into the mouths of the comrades, but […] omit to show how this miracle will take place.” (Mises, 2). Mises builds on his central claim by dividing goods between production goods and consumption goods. The production goods he labels as the higher order and the consumption goods he describes as the lower order. In his argument, Mises focuses on the higher order goods to make his case against the possibility of calculation in a socialist economy. Small individual exchange can happen at the consumption good or lower order level, but production good or higher level coordination needs proper valuation to give production goods meaning: “The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location” (Mises, 13). For Mises, trade could simply happen between cigars and cigarettes, but someone has to know how many cigar factories the economy will need in comparison to cigarette factories. Using the labor theory of value as his guide, Mises argues that the higher coordination is impossible because the price system is needed to make the consumer decisions and heterogeneous labor inputs makes it impossible to even derive a single unit which to use as the foundation of value: “The second defect in calculation in terms of labor is the ignoring of different qualities of labor” (Mises, 20).
Many socialist theorists disagree with the conclusions of Mises, including contemporary economists such as Oscar Lange and Abba Lerner and continues to this day with academic economist such as Theodore Burczak as they seek to show that Mises was mistaken and that socialism can work in the details. The debate is not academic for these earlier writers — capitalism was a system of great waste and privation. For example, Oskar Lange, writing in support of socialism and against the capitalist modes claimed “Under capitalism the distribution of the ownership of the ultimate productive resources is a very unequal one, a large part of the population owning only their labor power,” and that “Only a socialist economy can distribute incomes so as to attain the maximum social welfare” (Lange 1937, 123).

To Oskar Lange, in his “Economic Theory of Socialism: Part One,” the fundamental issue of calculation problem identified by Mises does not exist. In fact, Lange does not see the common ownership of the productive machinery as society being an impediment to free choice in consumer goods: “The fact of public ownership of the means of production does not in itself determine the system of distributing consumers’ goods and of allocating people to various occupations, nor the principles guiding the production of commodities,” continuing, “In the socialist system as described we have a genuine market” (Lange 1936, 60). Lange then shows how a socialist market might work. He uses the framework of the neoclassical marginalists to show that the equilibrium process could be met by a central planning board using the trial and error method, ever changing the prices in the economy to do the same work the market and the price system do in a capitalist economy. As Lange notes, “The administrators of a socialist economy will have exactly the same knowledge, or lack of knowledge, of the production functions as the capitalist entrepreneurs have” (Lange 1936, 55). Once these prices are set up, then “all managers of plants, industries, and resources do their accounting on the basis of the prices fixed by the Central Planning Board” (Lange 1936, 63). Lange acknowledges that the price setting is not a one-time event and mistakes could happen. However, “any mistake my by the Central Planning Board in fixing Prices would announce itself in a very objective way: by a physical shortage or surplus of the quantity of the commodity or resources in question, and would have to be corrected in order to keep production running smoothly” (Lange 1936, 64). The process could continue in a never-ending cycle; so while there is no market as in the capitalist mode, it is replaced: “The Central Planning Board performs the functions of the Market” (Lange 1936, 64). As Austrian economist Don Lavoie notes in his book examining the Socialist Calculation debate, “there was a remarkably wide consensus that Mises was wrong” (Lavoie, 13) and that the defenders of socialism successfully explained how a socialist version of the market mechanism would work.
Friedrich von Hayek was not convinced that Lange’s ideas won and argued that the Central Planning Board would not be enough. An economy has many entrepreneurs, but if there was only one board they could have the same chance of making a mistake in production as any private entrepreneur would have. Distributed knowledge is what would make the system work: “the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form” (Hayek 1945, 524). For Hayek the Central Planning Board looks at the economy as a whole, but loses focus on the small things- minor differences that were held as knowledge much closer to the point of production.

Hayek believed full control of production was impossible. He thought anyone possessing the ability to know exactly what each consumer needs to reach optimization was impossible as well. Hayek saw both the micro and macro effects of socialism; he lived through the after effects of the first war in Europe and then saw the Depression and rise of Nazism and Stalinism leading to a second war in Europe. He was also active of the theoretical debates starting with Mises which persisted for two decades. We argue that Hayek solved the Socialist Calculation Debate as begun by Mises, though extent of settlement needs to be examined. We also argue that Hayek’s argument was extended by free market economists such as Mises and Coase and that sections of Lange’s countering work lend support to Hayek’s specific attacks on the possibilities of calculation in a socialist economy.
Hayek’s argument must first be addressed by the concept of knowledge within economic systems — both who knows information and what the information entails. In a free market society, a farmer will grow and produce soybeans, and sell them at the market price. Does this farmer know the exact quantities needed to produce and the asking price each year? Hayek would argue he would not, but the farmer’s lack of foreknowledge is no detriment. Since the farmer’s production is privately owned, any excess or shortage of soybeans can be used to his discretion. Hayek believed that social coordination is key to reach a properly functioning economy and the most knowledge obtained will lead to the most efficient coordination. But in a centrally planned board, as Mises stated: “[Consumption goods] will be apportioned according to individual needs, so that he gets most who needs most, or whether the superior man is to receive more than the inferior, or whether the superior man is to receive more than the inferior, or whether a strictly equal distribution is envisaged as the ideal, or whether service to the State is to be the criterion, is immaterial to the fact that, in any event, the portions will be meted out by the State” (Mises, 4–5). Central Planning Boards will limit the accessibility of knowledge to other managers in the system to maintain the “equilibrium.”

Lange argues socialist states will use retroactive knowledge to determine price and quantities for all goods. Even with full retroactive knowledge, the board cannot forecast what is to come. As Ronald Coase, in his work examining how firms interact in the market, explains, “the fact of uncertainty means that people have to forecast future wants” (Coase, 400). Hayek sees two problems with Lange’s structure. The first problem is that in the use of knowledge such as prices, technology, preferences, etcetera are pieces of knowledge that are constantly evolving. In the socialist system, the Central Planning Board retrieves the knowledge, processes the knowledge, and then disperses the knowledge to managers. As Hayek put it, the planning “will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner” (Hayek 1945, 520). The second, and more important problem, is that all the knowledge — which is essential for a properly functioning socialist system — is dispersed and cannot possibly be fully obtained. Hayek states the problem is never concentrated, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” (Hayek 1945, 519). Hayek recognized that the system does not need to obtain all knowledge to make calculations, only that which is necessary. Stiglitz built off the point that although we will not use all knowledge presented, it will not go unused, or “the benefits of information increase with the scale of its production (utilization)” (Stiglitz, 1456). The argument that knowledge is held widely and not in a concentrated manner is the strongest blow against the Central Planning Board of Lange. For Lange, the Board sets prices and lets the economy run and then resets prices when there is a surplus or shortage. Hayek asks how we can even know there is a surplus or shortage without an independent price mechanism.

When it came to pricing calculations, Hayek recognized the thought processes that needed to occur. Due to the processes, he believed that centralized systems were dishonest and mechanical. Mises does not believe prices can exist in a socialist economy and “it is impossible in fact to gauge the relationship between expenditure and income” (Mises, 4). In the free market, the pricing mechanism relies on the level of production which coincides with consumer preferences.

Hayek cannot take full credit for the general settlement of the calculation debate. In fact, Lange himself helped support the capitalist claim; not in theory but in practice. Twice in Lange’s “Theory of Socialism” he implies that a socialist economy does not work. The first is when describing the market for capital goods, and the distribution of wages in relation to occupation. Lange said that social dividend cannot interfere with the distribution of the labor market, where “the marginal product of services of labour in different industries and occupations proportional to the marginal disutility of working in those industries…” (Lange 1936, 64). Hayek would claim that the distribution would lead to a stagnant economy because people must work hard for profits, and if there are no incentives in place, growth will not occur. The second is his thought on the process of transitioning to a socialist system, where the Central Planning Board must change all at once. Lange implies that if the execution is not done perfectly, then the system will fail: “In the best case the constant friction between the supervising government agencies and the entrepreneurs and capitalists would paralyse business. After such an unsuccessful attempt the socialist government would have either to give up its socialist aims or to proceed to socialisation” (Lange 1937, 133). A system lacking robustness in the transition to a market socialism platform does not help support the socialist argument since it implies the knowledge difference between the entrepreneurs and the central planning board, highlighting the importance of the distributed knowledge in the individual economic actors.

Hayek’s career was in part defined defending the free market at the expense of socialism. In the earlier “Road to Serfdom” (Hayek 1944), Hayek notes that socialism and centrally planned systems arise when the worst actors forcibly come to power and thus end up on top. Hayek explained the rise as such:
In order to achieve their ends the planners must create power — power over men wielded by other men — of a magnitude never before known. Their success will depend on the extent to which they achieve such power. Democracy is an obstacle to this suppression of freedom which the centralized direction of economic activity requires. Hence arises the clash between planning and democracy. (Hayek 1944, 40).
Hayek takes a liberal stance on planning, which supports his idea of free market knowledge. The issue he addresses is “whether we should create conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether we should direct and organize all economic activities according to a ‘blueprint’, that is, ‘consciously direct the resources of society to conform to the planners’ particular views of who should have what’” (Hayek, 45). The idea is that private firms need to plan, based off the knowledge that is available to them, to determine the level of production or even the size of their firm.

Hayek’s insights were extended by other writers. Ronald Coase, similar to Stiglitz, was another economist who further supported Hayek’s ideas of free markets when he established the concept of private firms in his writing, The Nature of the Firm. Coase went further into this point by stating that the level of production is directly influenced by the pricing mechanism, therefore economic calculation needs to exist for proper planning to occur. As he put it, “the most obvious cost of ‘organising’ production through the price mechanism is that of discovering what relevant prices are” (Coase, 390). This point directly supports Hayek’s theory of knowledge: we need knowledge to determine production, which then affects economic calculation. Extending that point, Coase recognized that we will never possess the adequate knowledge to achieve long run outlooks, or “the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do” (Coase, 391). Through the anarchy of the market and the pricing mechanism a more rational level of output will exist than it possibly could be with the Central Planning Board.

Hayek’s influence is still felt today. Socialist thinkers have to take the Hayekian knowledge problem into account as they theorize about the potential organization of a socialist society in the twenty-first century. Theodore Burczak, writing in “Socialism After Hayek” concludes that it is “prudent for practical socialists to be open for market-friendly, evolutionary proposals […] that promise to move us to more extensive worker appropriation and the expansion of capabilities equality.” (Burczak, 146). A socialism taking Hayek into account is one that devolves from the workers with a world to win than if they lose their chains to one where there are more worker co-ops. Not to denigrate the idea but it is not one that arouses the passions and imagination.

Noting the continuing influence of the Hayekian argument and current attempts to struggle with a new socialism, we can say the Socialist Calculation Debate is settled. Though the left wing theorists had a good argument on the marginalists’ terms, the issue that Mises raised was ultimately not the problem. Hayek showed that it could not be solved at the higher-level that Mises identified not because the price mechanism breaks down with production goods. Instead the issue is one of information, and how it is spread thin and diffuse across various economic actors. Lange’s market socialism theory did not work, and we can observe from our historical vantage that all the states that tried to center the socialist method of planning either did it incompletely or failed entirely. The dreams of Lange still live out there but even having the data collection or computing technique to simultaneously solve all the equations would not be enough to make the socialist economy work based on the informational challenges Hayek identified. Hayek was not the only economist to settle the debate. He was assisted by economists of his time on both sides. Their theories in conjunction with his helped mold what was to become the outcome of the calculation debates. Knowledge, illustrated by Hayek and Mises, allows for individuals to react to changes in preferences. They argue the centralization of knowledge takes away the primary function of a pricing system. However, Hayek, in accordance with Coase, does recognize the benefits of government intervention and a level of planning. Planning within privately owned firm is the utilization of the freely accessible knowledge, which is used to influence the pricing mechanism.


Works Cited
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Hayek, Friedrich A., “The Use of Knowledge in Society,” American Economic Review, Vol. 35, №4. (Sep., 1945): 519–530.
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Von Mises, Ludwig, Economic Calculation in the Socialist Commonwealth (1920 [1990]): 1–46. The present translation was first published in F.A. Hayek, ed., Collectivist Economic Planning (London: George Routledge & Sons, 1935; reprint, Clifton, N.J.: Augustus M. Kelley, 1975).