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

Burczak, Theodore A. Socialism after Hayek. Ann Arbor: University of Michigan Press, 2006.

Coase, Ronald H. “The Nature of the Firm.” Economica 4, no. 16 (November 1937): 386–405. Accessed March 15, 2018. JSTOR.

Hayek, Friedrich. “The Road to Serfdom.” (1945). Institute of Economic Affairs. Accessed March 15, 2018. https://iea.org.uk/publications/research/the-road-to-serfdom.

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

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

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

Lavoie, Don. Rivalry and central planning: the socialist calculation debate reconsidered. Arlington, VA: Mercatus Center, 2015.

Stiglitz, J. E. “The Contributions of the Economics of Information to Twentieth Century Economics.” The Quarterly Journal of Economics, vol. 115, no. 4, 2000, pp. 1441–1478., doi:10.1162/003355300555015.

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).

Hughes's "Fair Shot": What a UBI looks like when a Liberal looks at a UBI

I’m skeptical about Hughes writing for a guaranteed income. 

Mainly it was because he’s been so lucky. Though he fought up from class position, he did end up as a white kid at Harvard. Then he became even luckier by having Mark Zuckerberg as a roommate. That’s given him millions of dollars to play with. First, he bought a magazine then he’s been doing this advocacy work.

The book is short and functions as a bit of biography and a bit of a policy proposal. The meat is the proposal, and as meat, it’s kind of gristly. His proposal is for a $500 monthly disbursement for everyone making less than $50K a year. It’s small, but even then, he wants a slow roll out. Significantly, it is tied to work – very broadly drawn.

For me, if we as a society are going to move towards a UBI, this kind of thing is the last sort of proposal we need. I complained to my friends as I was reading it that Hughes had reinvented the EITC. I was a little shocked when I was reading later that this is the model he has in mind. The only real difference is that he wants payouts monthly instead of yearly.

I’m personally on the edge about what a UBI might mean socially. However, the way Hughes draws it creates all the problems of administering another social program. It is not basic, nor universal. My concern when reading was that the 50K level is a huge drop-off. You make 49.5 and you get the payment, but one dollar over gets nothing (this is addressed many pages after the basic proposal is laid out, in one line). He also wants to have an adjustment based on cost of living.

So, his proposal is for a new program of a smaller sum (not to downplay how much an extra 500 bucks a month would play in my life) targeted towards the poor with a huge bureaucratic element thrown in. I’m really not sure how Hughes sees this being implemented, but in a political environment where even broader-based government programs are under attack, I can’t see this having a chance of being implemented.

The size and work requirements are what really get me. Dude hit the lottery and understands the power of receiving cash grants (he looks at similar income schemes in developing countries) but he’s still fetishizing work. The grant he proposes isn’t enough to live on and you to have worked the year before to qualify, so we’re still using an 18^th century model of relief for the 21^st century, with loads of uncertainty of what work will look like for the next generation. 

The very point of a UBI is that within a capitalist framework it can be emancipatory since it is enough for basic subsistence and that is universal. If you do well enough, we can tax it away on the back end. There’s still bureaucracy in place, but if everyone gets a check, there’s less chance for those fun racially coded republican arguments against it. (And what’s really galling is that Hughes uses handwaving about his failure at the New Republic as a justification against a larger grant – UBI is literally a safety net for everyone, just like he had with his Facebook Money. Oh, and also that in a couple places he says he wants the book to “start a conversation” when the conversation has been going on for decades. Sigh. 

So, it’s good that the Facebook bro writes a book for a basic income and gets blurbbed on the back by Bill Gates and Arianna Huffington. But the problem is that he’s doing that weird liberal thing where you pre-concede your position and ask for less than what’s really needed. (So we don’t see a whole program here of state-provided health care or schooling through the bachelor’s level to address other structural inequities.) I guess it’s a start.     

Iconoclasm Sells Books: The Writings of N. N. Taleb

The story goes that Socrates was the wisest man in Athens, because only he admitted he knew nothing. Taleb is the Socratic inverse, because he believes that only he knows everything.

I have a lot of feelings about Nassim Taleb, most of them not charitable. He’s got me blocked on social media for reasons unknown to me. He brags about liking to win, but that’s not a win.

I actually dislike him so much that whatever value his ideas have are lost in the presentation. I dislike him so much when people I respect show their respect for Taleb, it doesn’t make me reassess Taleb, it makes me question those people. I have to ask, what is wrong with Branko Milanović, what is wrong with Miles Kimball. I dislike Taleb so much that I made a point of checking this book out of the library instead of spending my money and having some of that pass through to him.

And it’s a shame. I really liked the Black Swan. It was smart and well-written and fun to read and taught me things I hadn’t thought about. The problem was that it was successful. So that gave Taleb the freedom to say no to his editors and just write and be arrogant. Antifragile was overwritten and under edited – oddly in that he decries people loading up books with more and more argument in this book (specifically here to attack Piketty).  

So instead of looking at each book as a distinct whole, at some point he decided that they were linked and gave them a name. This isn’t “In search of lost time,” Naseem. But I suppose you want it to be, flashing your erudition out there for your readers, posting polyglot sentences and footnoting them, bringing in obscure references and belittling those who would need to google what the heck he’s talking about.

Because there’s the elephant in the room you have to talk about when you talk about Naseem Taleb. He has that sort of self-confidence that makes him think he’s above the social norms, like a Donald Trump or a school shooter. You can call him a bully or arrogant, but he likes that because he likes being confrontational. He is certain his worldview is correct, no matter how much it feels like some back-formed justification of who he already is.

But he’s smart enough to know that foundation of rhetoric: audience matters. You write [infinitive] [noun]. Here I’m writing to persuade readers. I’m not sure who the audience for these books are. This one, to get to the point, is also overwritten – rambling and unfocused though it is only 250 pages. The weird thing is there is a 15-page technical appendix at the end that is written clearly and readably and void of the personal attacks that fill the rest of the book. Because he does hold grudges – against Stephen Pinker and Sam Harris and the Saudis – he rides these like horses that as a reader get tired. And then there’s the weird thing that he really wants to identify with the cultures to the west of his homeland. Though Lebanese Christian, Turkey is about as Asian as his referents are; Africa ends on the banks of the Nile.

The shame is that there’s the seeds of an interesting book here. It just fails to grow.

Co-Ops and the Panoptic Society

In class, we were talking about the structural benefits of co-ops, using the Craig and Pencavel paper as a jumping off point.

Last night when I get home, reading Polanyi - he references Bentham.

It made me think of one aspect of the co-op that may be a downside we didn't talk about.

In a previous life, Bentham was known to me more because of his idea being referred to in Foucault's Discipline and Punish.

Foucault uses the Panopticon to expand from the prison to the panoptic society. It is a society where we are all being watched, not just by someone above us, but by each other (so much for having no bosses, everyone is simultaneous a boss and a subordinate).

This might extend to the co-op literature. There are fewer no direct supervisors in a co-op situation.

In classical firms, if you have one, you can shirk (like I'm doing right now). You might have more or less autonomy, but you can also take just a bit longer in the bathroom than you really need.

But in a co-op, every is a boss, always being watched and at the same time having to perform the role of the boss since there's no principal agent problem here. One could imagine that this increases the intensity of work on its own, and that's even before adding the extra hours.