Reading Through the Socialist Calculation Debate

I’m glad that we started out with the readings on the socialist calculation debate. I’ll tell you why. I love Marx. The Marx I fell in love with was the Marx of the Manifesto that my girlfriend was mad that she was being forced to read for a political science class. But the problem with the Manifesto is the same problem as with all the old movies: once you ride off into the sunset, happily ever after does not just happen. Happily ever after must be theorized. Proletarier aller Länder, vereinigt euch!, sure but then what? And then of course as Marx progresses in his career what does he do if not show us the way by developing a much more in-depth analysis of the capitalist mode of production and exchange in the first volume of Capital and then working towards more volumes and then dying without completing his valedictory work. Even more contemporary activists struggle to explain the plan of the future as criticism of the current system is much easier to show injustice than to create. Mises, in his “Economic Calculation in the Socialist Commonwealth identifies the problem as how “[Utopians] invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly in the mouth of their comrades, but they omit to show how this miracle will take place” (2).

Economic argument did not sleep between the 1848 Manifesto and 1920, when Mises published his broadside against socialism, the previously quoted paper “Economic Calculation in the Socialist Commonwealth,” but it is here that we begin our examination. The six papers we will examine all are in response to Mises’s provocation — Lange and Lerner writing in an effort to show where Mises was mistaken, and Hayek writing a repost in support and expansion of Mises’s original point. In this brief paper, we will examine several claims in the original paper and look at the responses.

The role of consumption goods in a socialist economy

The first thing to we want to look at is the role of consumption goods in a socialist society. Mises claims that in the socialist society, it is “who is consuming and what is to be consumed by each which is the crux of the problem of socialist distribution” (Calculation 4). For Mises, the problem is that under socialism, “It is characteristic of socialism that the distribution of consumption goods must be independent of the question of production and if its economic conditions” (Calculation 4). For Mises, we see there is a separation between the question of production and consumption, and this difference exposes the inherent problem with the socialist economy. For Oskar Lange, in his “Economic Theory of Socialism: Part One,” this fundamental issue identified by Mises does not exist. In fact, he does not see the common ownership of the productive machinery of 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” (60). Both Lange and Lerner go to pains to show that this apparent contradiction identified by Mises is no such thing, showing how in their estimation a socialist market might work.

The problem with value in a socialist economy

One of these methods of looking at the potentiality for trade in the socialist economic system is the question of how you value the outputs of the economy. For Mises this is a problem. He sees an economy where “distribution will be determined upon the principle that the state treats all its members alike […] each comrade receives a bundle of coupons, redeemable within a certain period against a definite quantity of certain specified goods” (Calculation 5). In this economy he can see exchange building up based on these individual preferences, but he makes a point to say that this exchange will be limited and confined to exchange, and that since “no production good will ever become the object of exchange, it will be impossible to determine its monetary value” (Calculation 5–6). What happens according to Mises is that once market exchange develops and relative values are determined then that brings into question the value of labor. He assumes that a socialist society would be completely remunerated based on labor input “The comrade is thus marked up for every hour’s work put in and this entitles him to receive the product of one hour’s labor” (Calculation 6) and even though looking at a case where “labor is not a uniform” so in the end for Mises it becomes impossible to split the labor inputs and how to divide the yield of the labor socially (Calculation 7).

Mises goes deeper in the second section. It is in these pages that he makes the central claim of the work — “Without economic calculation, there can be no economy” (Calculation 14). This does not come from left field. He builds his argument by dividing goods between production goods and consumption goods, he makes the distinction between higher order and lower order goods. It is these higher order goods that he focuses on. Small individual exchange can happen, but higher-level coordination needs 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” (Calculation 13).

Of course, these claims do not go without being addressed. Lerner takes this head on by asserting that Mises is trying to import the whole paradigm of the capitalist economy and lay it over a socialist economy. In fact, he notes “the competitive price system has to be adapted to socialist society. If it is applied in toto we have not a socialist but a competitive society” (Economic Theory and the Socialist Economy 55). And Lange notes that Mises is making a definition error, thinking that what is needed to make decisions is a monetary price, but a higher level relative valuation can work since what the planners utilize is the economic problem as a “choice between alternative” (On the Economic Theory of Socialism 54).

The separation of consumption and production in a socialist economy

From above, the starting point for Mises was the problem is that under socialism, “It is characteristic of socialism that the distribution of consumption goods must be independent of the question of production and if its economic conditions” (Calculation 4). This separation led to the whole issue of needing to value goods and then the introduction of money and then the problem with labor and higher order production goods. But as we have seen, demand doesn’t just go into a black box. 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” (55). Hayek would argue that this would not be enough. The entrepreneurs are in aggregate, but if there was only one board they could have the same chance of making a mistake in production as any one entrepreneur would have but the distributed knowledge would make the system work: “the sort if 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” (524). Where the consumer and producer are rent by socialism, the advocates of the competitive society see the market bringing them back together.

The virtues or vices of a “competitive society”

Within our reading, the strongest advocate for the competitive society was in Hayek’s “The Use of Knowledge in society”. In it, he show how the decentralized nature of the competitive society is the more useful way to respond to the constant change the economy faces: “If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances” (524). He goes on to emphasize that we must solve it be some form of decentralization. And is this decentralized society that most have lived in and that Mises points out that it “has obtained for some thousands of years” (14), but his destruction of the possibility of socialism relies less on building up the idea of the competitive economy, but instead taking it as the ideal status quo which to prove the impossibility of the socialist state.

The socialist side of the debate is not wholly critical of the competitive society. In fact, Oscar Lange thanks (though how much tongue in cheek, I do not know) for Mises forcing “socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy” (53). Far from the impossibility of taking the good parts from the capitalist system and overlay it on the socialist system, Mises arose the socialist theorists and made them look at their own system in the new light, so much that Lange offers up a statue of Mises in the economic planning bureau — an image so memorable that Hayek cites it in his own paper ten years later (529).

The virtues or vices of a socialist society

If you’re Ludwig von Mises, the whole point of your effort in writing was to prove not that socialism is bad, but that it is on the face impossible. But interestingly, he concedes at the end that no matter what he argues, the socialists will not listen, as he writes “Whoever is prepared himself to enter upon socialism on ethical grounds on the supposition that the provision of goods of a lower order for human beings under a system of common ownership of the means of production is diminished or whoever is guided by the ascetic ideals in his desire for socialism will not allow himself to be influenced in his endeavors by what we have said (33). Which is good, since Mises did not have the last word, in fact, as we looked at above, this paper set off the debate so much that he deserves a statue in Red Square.

One thing that really struck me was that I had been expecting to read about the waste of the capitalist system and the unequal distribution of resources between the workers and the capital owners in the reading. Though tangential, it had seemed as if the battle lines had already been drawn. It was not until the second part of Lange’s paper where anyone makes full throated appeal for socialism and against the capitalist mode of production and distribution, where he makes claims such as “Only a socialist economy can distribute incomes so as to attain the maximum social welfare” and “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” (On The Economic Theory of Socialism: Part Two 123).

Conclusion:

One thing I noticed specifically in the reading for this week was that I have motivated reading. I took the wrong route and started reading the socialists responses before I read Mises because I was more sympathetic to them and the packet was smaller, honestly. That deprived me of the context I had to get by rereading while I was working on typing this up and able to see all the papers as a whole. It is a different way of looking at things so that it is more a becoming of an understanding — even though I know I’m only scratching the surface here. The other piece was not about the order I read things in, but in how I read them. I found that reading the socialists was more about reading for understanding, while reading the Mises piece I was reading prepared to criticize. Once I realized I was doing that I moved onto the Hayek essay with a much more open mind than the first time I read Hayek eight years ago.

Works Cited

Ludwig von Mises, 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).

Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review, Vol. 35, №4. (Sep., 1945): 519–530.

Abba. P. Lerner, “Economic Theory and Socialist Economy,” The Review of Economic Studies, Vol. 2, №1 (Oct., 1934): 51–61.

Abba. P. Lerner, “Theory and Practice in Socialist Economy,” The Review of Economic Studies , Vol. 6, №1 (Oct., 1938): 71–75.

Oskar Lange, “On the Economic Theory of Socialism: Part One,” The Review of Economic Studies, Vol. 4, №1 (Oct., 1936): 53–71

Oskar Lange, “On the Economic Theory of Socialism: Part Two,” The Review of Economic Studies, Vol. 4, №2 (Feb., 1937): 123–142