Pat Devine?s book Democracy and economic planning (Polity Press, 1988) is a contribution to the Socialist Calculation Debate. The debate was launched by Ludwig von Mises, the iconic right-wing libertarian economist, in 1920 when he declared socialism (by which he meant any society where the principal means of production are owned in common) to be impossible.
Why? Mises asserted that economic calculation involves achieving what we want at least cost. In order to do this we need to compare the relative scarcities of resources available to us. Prices measure these relative scarcities and enable us to make rational choices. The determination of prices requires a market, including a market in the prices of ?factors of production? such as land and capital. If these are owned in common, they can have no price and their relative scarcities cannot be compared. But if a market and rent, interest and profit are reintroduced into the economy, what is left of socialism?
This argument is not completely ridiculous. It may be rational in an advanced capitalist country where labour is scarce and wages high for one worker to dig a hole with the aid of a mechanical digger. In an underdeveloped country with mass unemployment it may make sense for many workers to dig the hole with spades. A revolutionary government in such a country may well begin the process of socialist construction with a mass programme of labour-intensive useful public works, such as irrigation schemes, partly in order to mop up unemployment.
Oskar R. Lange (Polish economist and diplomat most known for advocating the use of market pricing tools in socialist systems) and other advocates of socialism argued against von Mises that production managers under socialism could use shadow prices to mimic the operation of the market while the means of production remained in common ownership. Problem solved!
Unfortunately Lange?s solution meant managers obeying rules drawn from the whole canon of neoclassical economics, such as marginal cost pricing 1. It also produced a market socialist model with a ?free? labour and consumer goods market.
We all recognise in any case that money and markets cannot be done away with on the day after the socialist revolution. Russia, in the period of Stalin?s over-centralised and dictatorial five year plans maintained a labour market and a consumer goods market with some ?distortions?, such as cheap housing and subsidised basic foodstuffs.
Friedrich Hayek, another fervent defender of classical liberalism and a right-wing guru, retreated to a second line of defence in the case against socialism. He admitted in 1935 that, ?Mises had originally used the somewhat loose statement that socialism was impossible, while what he meant was that socialism made rational calculation impossible.?
Hayek argued that planning was complex, involving the solution of millions of equations. This is because the market is a vast cobweb of prices, all interdependent upon one another. If one price changes all the others must adjust marginally. How can all these adjustments, which occur automatically in a market economy, be consciously replicated in a planned economy? Hayek?s source for this insight was surprising ? Leon Trotsky. (Brooks, 1990, Market vs. Plan The Interwar Socialist Calculation Debate):
If there existed the universal mind, that projected itself into the scientific fancy of Laplace (…) such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of hectares of wheat and down to the last button for a vest. (L. Trotsky, The Soviet Economy in Danger, 1932).
Trotsky was among the first to argue that over-centralised Stalinist planning was bound to founder upon the problem of complexity. He realised that this complexity was really a problem of the lack of workers? democracy, a lack of involvement of the workers in the planning process. In the article quoted he argued for three requirements for the success of the Five Year Plan: a network of central and local plan commissions, the market as a check on the results of the Plan and Soviet democracy as a further check on the planners. In Hayek?s view it was better to leave decision-making under private enterprise in the hands of the entrepreneurs with their ?tacit knowledge?.
In fact Lange and the other proponents of socialism in the debate had partly dealt with the problem of complexity raised by Hayek in their market socialist model, which decentralised decision-making to the production managers and left many outcomes to the operation of the market:
The only equations which would have to be solved would be those of the consumers and managers of production. They are exactly the same equations which are solved in the present economic system and the persons who do the solving are the same also (…) Professor Hayek and Professor Robbins themselves solve at least hundreds of equations daily, for instance in buying a newspaper or in deciding to take a meal in a restaurant, and presumably they do not use determinants or Jacobians for that purpose.
The problem of complexity was ignored in USSR-style planning because the working class was entirely ignored in the planning decisions that emanated from the centre. Given the nature of the Stalinist dictatorship, this was hardly surprising. As a result the Soviet economy was run by command rather than genuine planning, which requires feedback from the localities, all with their own unique ?tacit knowledge? to contribute. Devine sees the problem of complexity, outlined by Hayek and co., as a major reason for the failure of Stalinist planning and the collapse of the Soviet Union.
Hayek seemed to think that entrepreneurs were in unique possession of this ?tacit knowledge? incorporated in market prices. Capitalist apologists are purblind in this regard. This elitist view shows little awareness of the real nature of decision-making in modern corporate capitalism.
Devine thinks Hayek and co. had a point but he develops it further. USSR-style planning failed because the mass of the population, with their ?tact knowledge? were not involved in the planning process. Devine is also aware of the weakness of market socialist models (to be dealt with in a separate review). Democratic socialist planning aspires to involve everyone (not just the entrepreneurs), use what they alone know and incorporate it in the plan, as an alternative to relying on market mechanisms.
Devine sees this as a purely technical problem (p.67). As a longstanding Communist Party supporter he is reluctant to draw up an objective balance sheet of the USSR and its satellite regimes. He advocates that there should be appropriate layers of decision-making and negotiation in the planning process. These are detailed in the book. They are a useful guide to the basic principles of democratic planning, though they are necessarily rather vague.
Some decisions need to be taken centrally. Most of the socialist side in the interwar debate accepted that the level of investment, and major investment projects, should be decided democratically by society as a whole. Hayek would regard this as ?arbitrary?. Investment decisions under capitalism are certainly arbitrary. One reason for this is secondary uncertainty (dealt with in Devine pp.17-8). Primary uncertainty means we can never be certain of the future. Under capitalism, decision-makers can be paralysed (for instance on whether to invest) because they do not know what others may decide. Planning breaks the logjam.
Devine?s book offers an utopia. Market socialism is an alternative utopia to Devine?s. The experience of post-revolutionary societies like Bolshevik Russia shows desperate improvisation on account of the overwhelming need to survive. E.H. Carr describes the nationalisations that took place as either ?spontaneous? or ?punitive?, not part of the rolling out of a plan for an ideal society. What use are utopias in such situations? Inspirational though it may be, there is an unbridgeable gap between the model in Devine?s book and the likely tasks facing a socialist government.
- A pricing scheme in which the price received by a firm is set equal to the marginal cost of production. This is not only the efficient outcome achieved by competitive markets, it is commonly used for comparison of other regulatory policies, such as average-cost pricing, that are used for public utilities (especially those that are natural monopolies). The bad thing about marginal-cost pricing for natural monopolies is that a normal profit is not guaranteed. The good thing about marginal-cost pricing is that marginal cost is equal to price, and the public utility is operating according to the price equals marginal cost (P = MC) rule of efficiency. ↩