IX. Socialist Calculation III: The Competitive “Solution”
1
The discussion about socialism's economy has changed a lot, especially in two areas. First, people used to think socialism could get rid of value calculations completely and only rely on physical things like energy units. Economists now largely reject this idea. Second, the proposal that a planning authority could use math to set values instead of letting competition do it has also faced criticism. Although some think this could work, analysts like Pareto argue that even with perfect data, the number of complicated equations needed would be almost impossible to solve, especially in large economies.
Currently, the conversation is focused on new ideas about competitive socialism, proposed by people like Professor Lange and Dr. Dickinson. Some earlier ideas about how a socialist economy works, which were debated around 1920, are now being looked at again. Critics like Ludwig von Mises pointed out that for socialism to function well, it has to use the same economic principles as capitalism. However, Lange seems to misunderstand this criticism. He suggests that critics are backing away from important points, when in fact, these principles are key for any rational economy. Additionally, the idea that critics are just making fun of the use of complicated math to determine values is not correct, as some socialist writers have actually suggested this method before.
2
The discussion focuses on the introduction of competition as a solution for determining values in a socialist system. Two key works are highlighted: an earlier essay by Lange and a recent book by H. D. Dickinson. Lange’s essay, while lively and comprehensive, is critiqued for its lack of depth, especially in explaining the arguments. Dickinson's book stands out for being well-organized and engaging, offering a thorough examination of the economic theory related to socialism. Both authors propose a hybrid approach, suggesting that while competition can help set prices, the actual determination of prices should be managed by a central authority based on market conditions. However, neither author explains the reasoning behind not fully restoring the market price mechanism. The overall impact of these proposals raises questions about their effectiveness in achieving the goals of a planned socialist economy versus the chaos of competition. The reliance on competition may lead to disappointment among those who hoped planning would eliminate competitive issues.
3
The proposed method of setting central prices, while allowing firms and consumers to adjust their demand and supply, raises questions about its effectiveness. Critics argue that this approach, likened to trial and error, is not realistic for complex economic systems. A comparison is made between a rigid price system and a market-driven one, emphasizing that a market allows participants to respond quickly to opportunities. There is speculation about whether a central authority, which could change prices effectively, can actually exist in practice, as real-world conditions are constantly changing. The ability to quickly adjust to these changes is critical for achieving a balance in supply and demand.
The idea of perfect competition also complicates the suitability of the central price-fixing method. In markets with standardized products, this approach might work temporarily; however, it is impractical for customized goods, especially in heavy industries. Prices for these products are often determined by specific contracts rather than a standardized market. If a central authority were to set prices, they would need to analyze individual cases, which could create delays and complicate the process. Overall, the proposed system may not match the dynamic nature of real markets and could hinder efficient economic operation.
4
Both authors propose a socialist system where individuals can freely choose their occupations, guided mainly by wages and consumer choices. They suggest that prices for consumer goods should be determined by market processes, although one author is unsure about this. They also agree that not all industries should be socialized, allowing some small private enterprises to exist alongside socialized ones. However, they focus mainly on the idea of a fully socialized industry for the discussion.
The central economic authority, known as the Supreme Economic Council, is responsible for setting prices for all goods except consumer goods and wages. The details about how prices will be changed and announced are more elaborated by one author than the other. One author mentions "factor valuation tables," which would list prices for production means, but it is unclear how long these prices would stay fixed. The authors differ on how prices should adjust—one leans towards fixed prices for a period while the other suggests ongoing adjustments based on statistical demand and supply assessments. Overall, they propose a planned approach to managing prices, but there are gaps in their proposed systems.
5
The S.E.C. (Socialist Economic Control) system for setting prices has two main problems: price changes happen more slowly than in a competitive market, and prices are set more uniformly for similar goods, ignoring differences in quality, location, and time. In a real market, prices can quickly adjust based on current conditions, but under this system, changes can only be made after reports are filed and verified, which creates delays. Because of this, producers cannot take advantage of specific local opportunities, as they cannot adjust their prices based on those situations. This means prices will often be quite different from those in a free market. As a result, managers cannot make decisions based on real market conditions, making the economy less efficient and slowing the response to changes in supply and demand. Overall, this pricing method can limit how well the economy functions.
6
The management of industrial units in a socialist economy lacks clear structure and definitions. There is ambiguity about what constitutes an industry and who the “managers of production” are, whether they oversee entire industries or individual plants. These managers are primarily focused on determining production quantities and methods based on prices set by the State Economic Committee (S.E.C.), aiming to minimize costs and align production with those prices for better economic efficiency.
A significant issue arises in the comparison between how socialist and capitalist industries manage production costs, particularly concerning decreasing marginal costs. Socialist sectors would theoretically expand production until prices match marginal costs. However, the effectiveness of the S.E.C. in maintaining these price levels is questioned, especially since price competition—often a driving force for reducing costs in a capitalist economy—would be absent. This lack of competition could stifle innovation, as potential improvements in production methods must first gain approval from the S.E.C., limiting the ability of new ideas to be tested and implemented.
7
There are several problems in the relationship between managers of production and the planning authority, often referred to as the S.E.C. Managers are tasked with producing goods at the lowest possible marginal cost while ensuring that this cost matches the selling price. However, they can only adjust the quantities of resources they use, as they cannot influence suppliers or buyers at the set prices. This limitation can lead them to resort to low-quality substitutes or non-efficient methods to meet production goals if they cannot acquire necessary materials at the required prices.
Another challenge stems from frequent price changes imposed by the authority. Managers must decide how to act when they anticipate these changes, leading to confusion about responsibility for losses incurred due to timing issues in price adjustments. Additionally, managers' costs are influenced by their ability to predict future price movements, making their success dependent not only on current prices but also on their ability to plan effectively.
Financial responsibility is crucial for managers, as it ensures they take careful risks. However, without personal investment in outcomes, managers might hesitate to take necessary risks, knowing others will judge their decisions. This environment may stifle innovation and decision-making that requires risk-taking, leading to a reliance on strict central planning instead.
8
Managing new investments in a socialist economy presents significant challenges, especially in deciding how to distribute capital and how fast to accumulate it. Even though it’s important to have some form of interest system for allocating capital, a free market for capital is not really possible. Planning authorities cannot just act like banks that lend money to the highest bidders because they would take on all the risks without guaranteed returns.
These planning authorities need to directly manage resources, which means they have to make decisions about how to use machinery and factories based on expected returns. However, there are not many clear solutions on how this control would work in practice, particularly in dividing responsibilities between central planners and the managers of individual businesses.
Despite claims that a planned economy could better manage investments, this idea assumes that planning authorities will have the same knowledge as individual entrepreneurs. Real competition is valuable because it uses knowledge from many different sources. Central planning would struggle to work well if decision-makers are not also accountable for their choices, affecting who is responsible for the results.
Overall, the problems with directing investments are still unclear. Effective central planning would require a lot of oversight, making it hard to have true competition while ensuring that those making decisions are responsible for their mistakes. This situation could turn into a system that seems competitive but actually limits initiative and complicates accountability.
9
The debate about how much control a socialist system can have over the economy is important for understanding both economic efficiency and personal freedom. Some thinkers are aware that having a central authority plan everything can threaten personal freedoms, so they suggest a version of socialism called competitive socialism to address this issue. This idea proposes that production could mainly depend on what consumers want, shown through prices, with the central authority stepping in only when absolutely necessary. However, a lot of power still rests with the central authority, especially regarding investments that heavily influence what gets produced.
Planners would also have to make arbitrary decisions about how to allocate resources, which needs to be met, and how to adjust wages. Some argue that if wages are too low in one industry, it is the planner's job to fix that, showing a reliance on planning instead of the free market. There is also a suggestion that advertisements could be used to promote socially good products, which may limit true choices for consumers.
Moreover, having to coordinate production with national trade is hard to do while maintaining free trade. This could result in limited freedom for individuals. In a planned economy, economic and political issues become mixed together, which could lead to an authoritarian system. Planners may need people to agree on values to make their plans work, but if there is no agreement, they might need to use force or propaganda to enforce their ideas. This raises concerns that socialism, instead of freeing people, could become totalitarian.
10
The two books discussed raise complex issues that the initial examination only begins to address. A detailed analysis would require much more space, as many questions remain unanswered. Important topics include the mix of private and socialized sectors, the international relations of a socialist community, and monetary policy, which are only lightly covered. The authors' arguments sometimes include outdated beliefs, which may conflict with their innovative ideas. Overall, while the books are unconventional, their proposed solutions may not seem practical to all socialists.
1
The discussion about socialism's economy has changed a lot, especially in two areas. First, people used to think socialism could get rid of value calculations completely and only rely on physical things like energy units. Economists now largely reject this idea. Second, the proposal that a planning authority could use math to set values instead of letting competition do it has also faced criticism. Although some think this could work, analysts like Pareto argue that even with perfect data, the number of complicated equations needed would be almost impossible to solve, especially in large economies.
Currently, the conversation is focused on new ideas about competitive socialism, proposed by people like Professor Lange and Dr. Dickinson. Some earlier ideas about how a socialist economy works, which were debated around 1920, are now being looked at again. Critics like Ludwig von Mises pointed out that for socialism to function well, it has to use the same economic principles as capitalism. However, Lange seems to misunderstand this criticism. He suggests that critics are backing away from important points, when in fact, these principles are key for any rational economy. Additionally, the idea that critics are just making fun of the use of complicated math to determine values is not correct, as some socialist writers have actually suggested this method before.
2
The discussion focuses on the introduction of competition as a solution for determining values in a socialist system. Two key works are highlighted: an earlier essay by Lange and a recent book by H. D. Dickinson. Lange’s essay, while lively and comprehensive, is critiqued for its lack of depth, especially in explaining the arguments. Dickinson's book stands out for being well-organized and engaging, offering a thorough examination of the economic theory related to socialism. Both authors propose a hybrid approach, suggesting that while competition can help set prices, the actual determination of prices should be managed by a central authority based on market conditions. However, neither author explains the reasoning behind not fully restoring the market price mechanism. The overall impact of these proposals raises questions about their effectiveness in achieving the goals of a planned socialist economy versus the chaos of competition. The reliance on competition may lead to disappointment among those who hoped planning would eliminate competitive issues.
3
The proposed method of setting central prices, while allowing firms and consumers to adjust their demand and supply, raises questions about its effectiveness. Critics argue that this approach, likened to trial and error, is not realistic for complex economic systems. A comparison is made between a rigid price system and a market-driven one, emphasizing that a market allows participants to respond quickly to opportunities. There is speculation about whether a central authority, which could change prices effectively, can actually exist in practice, as real-world conditions are constantly changing. The ability to quickly adjust to these changes is critical for achieving a balance in supply and demand.
The idea of perfect competition also complicates the suitability of the central price-fixing method. In markets with standardized products, this approach might work temporarily; however, it is impractical for customized goods, especially in heavy industries. Prices for these products are often determined by specific contracts rather than a standardized market. If a central authority were to set prices, they would need to analyze individual cases, which could create delays and complicate the process. Overall, the proposed system may not match the dynamic nature of real markets and could hinder efficient economic operation.
4
Both authors propose a socialist system where individuals can freely choose their occupations, guided mainly by wages and consumer choices. They suggest that prices for consumer goods should be determined by market processes, although one author is unsure about this. They also agree that not all industries should be socialized, allowing some small private enterprises to exist alongside socialized ones. However, they focus mainly on the idea of a fully socialized industry for the discussion.
The central economic authority, known as the Supreme Economic Council, is responsible for setting prices for all goods except consumer goods and wages. The details about how prices will be changed and announced are more elaborated by one author than the other. One author mentions "factor valuation tables," which would list prices for production means, but it is unclear how long these prices would stay fixed. The authors differ on how prices should adjust—one leans towards fixed prices for a period while the other suggests ongoing adjustments based on statistical demand and supply assessments. Overall, they propose a planned approach to managing prices, but there are gaps in their proposed systems.
5
The S.E.C. (Socialist Economic Control) system for setting prices has two main problems: price changes happen more slowly than in a competitive market, and prices are set more uniformly for similar goods, ignoring differences in quality, location, and time. In a real market, prices can quickly adjust based on current conditions, but under this system, changes can only be made after reports are filed and verified, which creates delays. Because of this, producers cannot take advantage of specific local opportunities, as they cannot adjust their prices based on those situations. This means prices will often be quite different from those in a free market. As a result, managers cannot make decisions based on real market conditions, making the economy less efficient and slowing the response to changes in supply and demand. Overall, this pricing method can limit how well the economy functions.
6
The management of industrial units in a socialist economy lacks clear structure and definitions. There is ambiguity about what constitutes an industry and who the “managers of production” are, whether they oversee entire industries or individual plants. These managers are primarily focused on determining production quantities and methods based on prices set by the State Economic Committee (S.E.C.), aiming to minimize costs and align production with those prices for better economic efficiency.
A significant issue arises in the comparison between how socialist and capitalist industries manage production costs, particularly concerning decreasing marginal costs. Socialist sectors would theoretically expand production until prices match marginal costs. However, the effectiveness of the S.E.C. in maintaining these price levels is questioned, especially since price competition—often a driving force for reducing costs in a capitalist economy—would be absent. This lack of competition could stifle innovation, as potential improvements in production methods must first gain approval from the S.E.C., limiting the ability of new ideas to be tested and implemented.
7
There are several problems in the relationship between managers of production and the planning authority, often referred to as the S.E.C. Managers are tasked with producing goods at the lowest possible marginal cost while ensuring that this cost matches the selling price. However, they can only adjust the quantities of resources they use, as they cannot influence suppliers or buyers at the set prices. This limitation can lead them to resort to low-quality substitutes or non-efficient methods to meet production goals if they cannot acquire necessary materials at the required prices.
Another challenge stems from frequent price changes imposed by the authority. Managers must decide how to act when they anticipate these changes, leading to confusion about responsibility for losses incurred due to timing issues in price adjustments. Additionally, managers' costs are influenced by their ability to predict future price movements, making their success dependent not only on current prices but also on their ability to plan effectively.
Financial responsibility is crucial for managers, as it ensures they take careful risks. However, without personal investment in outcomes, managers might hesitate to take necessary risks, knowing others will judge their decisions. This environment may stifle innovation and decision-making that requires risk-taking, leading to a reliance on strict central planning instead.
8
Managing new investments in a socialist economy presents significant challenges, especially in deciding how to distribute capital and how fast to accumulate it. Even though it’s important to have some form of interest system for allocating capital, a free market for capital is not really possible. Planning authorities cannot just act like banks that lend money to the highest bidders because they would take on all the risks without guaranteed returns.
These planning authorities need to directly manage resources, which means they have to make decisions about how to use machinery and factories based on expected returns. However, there are not many clear solutions on how this control would work in practice, particularly in dividing responsibilities between central planners and the managers of individual businesses.
Despite claims that a planned economy could better manage investments, this idea assumes that planning authorities will have the same knowledge as individual entrepreneurs. Real competition is valuable because it uses knowledge from many different sources. Central planning would struggle to work well if decision-makers are not also accountable for their choices, affecting who is responsible for the results.
Overall, the problems with directing investments are still unclear. Effective central planning would require a lot of oversight, making it hard to have true competition while ensuring that those making decisions are responsible for their mistakes. This situation could turn into a system that seems competitive but actually limits initiative and complicates accountability.
9
The debate about how much control a socialist system can have over the economy is important for understanding both economic efficiency and personal freedom. Some thinkers are aware that having a central authority plan everything can threaten personal freedoms, so they suggest a version of socialism called competitive socialism to address this issue. This idea proposes that production could mainly depend on what consumers want, shown through prices, with the central authority stepping in only when absolutely necessary. However, a lot of power still rests with the central authority, especially regarding investments that heavily influence what gets produced.
Planners would also have to make arbitrary decisions about how to allocate resources, which needs to be met, and how to adjust wages. Some argue that if wages are too low in one industry, it is the planner's job to fix that, showing a reliance on planning instead of the free market. There is also a suggestion that advertisements could be used to promote socially good products, which may limit true choices for consumers.
Moreover, having to coordinate production with national trade is hard to do while maintaining free trade. This could result in limited freedom for individuals. In a planned economy, economic and political issues become mixed together, which could lead to an authoritarian system. Planners may need people to agree on values to make their plans work, but if there is no agreement, they might need to use force or propaganda to enforce their ideas. This raises concerns that socialism, instead of freeing people, could become totalitarian.
10
The two books discussed raise complex issues that the initial examination only begins to address. A detailed analysis would require much more space, as many questions remain unanswered. Important topics include the mix of private and socialized sectors, the international relations of a socialist community, and monetary policy, which are only lightly covered. The authors' arguments sometimes include outdated beliefs, which may conflict with their innovative ideas. Overall, while the books are unconventional, their proposed solutions may not seem practical to all socialists.