VIII. Socialist Calculation II: The State of the Debate (1935)
1
Criticism of socialism has significantly influenced socialist thought, though many still ignore these critiques. The existence of a planned system in Russia leads some to mistakenly believe that major issues are resolved. Yet, many leaders in socialist thought recognize the problems posed by central economic direction, especially concerning freedom of choice for consumers and careers in complex modern societies. While some defend the idea of central planning theoretically, practical solutions are rare. Recent plans often try to address these difficulties by proposing alternative socialist systems that avoid previous issues.
2
The effectiveness of economic planning is a debated topic, especially regarding its ability to achieve its goals. This summary focuses on how real-world experiences relate to theoretical ideas. First, it's important to understand that while production may continue, central planning can lead to poorer resource use. This means that output might be lower compared to a market where prices are free to change. Central planning can result in certain industries growing too much without good reasons, sometimes investing in advanced technology that does not fit the economy's needs.
To judge if planning is successful, two main tests should be used: what goods are actually delivered to consumers and how rational the decisions of the planning authority are. Current findings suggest that the overall benefits for consumers are not good, especially for most people. Comparisons to pre-war conditions can be misleading. Some argue that better planning could have resulted in a higher standard of living.
The experiences in Russia have largely confirmed earlier concerns about the problems associated with central planning. Past failures highlight difficulties that are common in these systems. Today, there seems to be a move toward more random decision-making rather than scientific methods, which does not solve the core issues of central planning. Therefore, a closer look at different economic systems is needed to better understand these challenges.
3
The discussion about how to organize economies in literature began later and at a complicated level. The first major ideas came from two Americans, F. M. Taylor and W. C. Roper. They suggested that if we had all the necessary data, we could use economic theories to figure out the values and amounts of goods to produce. While this idea makes sense logically, it overlooks the reality of how difficult it would be to apply in real life. The practical use of this method requires a vast amount of information, making it nearly impossible to implement.
In a centrally planned economy, it would not be enough to only set broad guidelines; detailed decisions about every business would be necessary. This includes figuring out how much material and machinery each business needs and at what cost. Every asset would have to be considered as unique rather than as part of a similar group, taking into account its condition, location, and other specifics. This makes the planning task enormous because the authority would have to look at many particular goods, far more than what simple classifications would suggest.
Also, managers in a centrally planned economy could not change one type of product for another freely. This means that each product would need specific details to be calculated and included in the planning process, creating a huge statistical challenge. Gathering and processing all this information would not only be hard but nearly impossible, especially since even small details can greatly affect how well a business operates.
There’s another problem regarding the technical knowledge required for making good decisions. In a competitive economy, many people with various skills help to innovate and adapt. By contrast, a centralized system places this responsibility on a very small group of people, which is not realistic. Much of the knowledge is not formally documented; employees often come up with solutions quickly when faced with new challenges. It is impractical to assume that a few people have all the necessary information and creativity.
A centrally planned economy would also need to know a lot about consumer goods. This means understanding how many units of each product people would buy at different price levels, which is a complex task that relies on accurate predictions. As consumers’ tastes change frequently, keeping this information up to date adds to the difficulty.
Even if the initial data collection challenges could be handled, the planning authority would still face the daunting task of making concrete decisions based on the collected information. This task becomes much more complex, as the number of different commodities could reach hundreds of thousands. Continuous decision-making and quick communication of these decisions would be incredibly challenging with today’s technology.
The size of the task involved in centralized planning is beyond our current abilities. Therefore, any claim that such a system could work as efficiently as a competitive economy is not realistic. Simply trying to adjust and adapt through trial and error while transitioning from one system to another ignores the major changes involved. Overall, the idea that centralized planning could manage economic decisions effectively and flexibly is misguided.
4
Central planning faces significant challenges, primarily because consumers have unpredictable preferences that can disrupt carefully made plans. It has become widely accepted that the freedom of consumers and central planning cannot coexist. Some thinkers, like Maurice Dobb, suggest that sacrificing consumer freedom could help make socialism workable. While Dobb believes eliminating consumer choice could simplify planning, this view overlooks the complexity of production and the need for pricing. Without free choice, production may lack a clear purpose, leading to inefficient resource use and potentially lowering living standards. In a centrally planned economy, a dictator may attempt to prioritize needs according to his views, but this approach doesn't eliminate the necessity for understanding consumer preferences or adapting to unforeseen events. Factors like weather changes, population health, and resource availability require constant adjustments to plans. Ultimately, the idea that central planning would be easier without consumer freedom may not hold true, as substantial problems would remain, and vital principles would be sacrificed.
5
Dr. Dobb's extreme idea for socialism is not widely accepted, which has led many younger socialists to explore bringing back competition. This idea has been talked about more in Germany, while in England it is still developing. Some economists suggest having independent entrepreneurs who run businesses but work for the state and do not own the production means. Instead of seeking profit, they aim to cover costs and sell goods at reasonable prices. This raises questions about whether this system is still socialist and how planning fits in. One main concern is whether competition can manage the economy without a central authority telling people what to do. There are two possible systems: one where entire industries compete against each other, or one with many firms competing within the same industry, which challenges the traditional ideas about private ownership and responsibility.
6
When industries are completely controlled by a central authority but still compete for consumers, questions arise about how well competition works. Some believe that creating monopolies could help organize and improve the chaos of free competition. However, this might lead to wasteful use of resources, as monopolies can prevent the best economic outcomes. While the idea of having separate unions for every industry seems attractive, it can create unstable prices because industries are connected. This instability affects not only economists but also how resources are used. Instead of focusing on producing the best goods, monopolies often try to maximize their profits. Although production may not decrease overall, resources might be distributed unfairly among industries. As a result, monopolies can exploit consumers and fail to use resources efficiently, which harms the economy.
7
Reorganizing industries into monopolies has significant downsides, mainly because it leads to waste. Many people claim that these changes would save money, but closer examination shows that this isn’t true. Some argue that competition stops new technology from being used or forces industries to adopt machines they don't want. However, competition actually helps use resources effectively. If old equipment still exists with new technology, it might mean that either the newer method is not better or it should never have been built because it doesn’t make financial sense.
If the newer technology is truly better but facing financial problems, keeping the old ways can raise prices for consumers without providing benefits. A better solution would be to adjust the value of the old equipment and allow competition to set fair prices based on real production costs. Trying to keep the value of outdated equipment might prevent new technologies from being used, which could result in inefficiency. Introducing new inventions is important for progress, and maintaining old capital only benefits those who own it while denying society the improvements that new technology can bring.
8
There are concerns about how monopolies in a capitalist system focus on maximizing profits, while integrated industries in a socialist state would work differently by charging prices that only cover their costs. Previous discussions centered on capitalism, but they also touched on some benefits and issues of planning in a socialist system. One major challenge is figuring out the costs of production when monopolized industries act as if they have competition.
Economists often think costs have a clear meaning in competitive markets. However, in real life, defining production costs can be complicated, especially when production methods are unique and rarely repeated. The costs of production are affected by future product prices, making this a difficult question to answer.
In competitive markets, certain costs, known as quasi-rents, help businesses make decisions about how much to produce, even though they depend on prices. Some production tools are so specialized that they can’t be replaced or sold in a market, which complicates figuring out costs. This situation is similar to issues seen in regulating public utilities, where it’s hard to create conditions that mimic competition in monopolized industries.
Some might think that in a socialist society, fixed costs could be ignored, just as they sometimes are in a capitalist system when looking at short-term production. However, this is not the case. For a fair distribution of resources, capital must be replaced from the industry’s earnings, and returns on that capital need to be competitive. The value of production tools must consider how much profit they can generate in the future and what other uses they may have.
In a monopolized industry, not having competition makes it hard to find out true costs, which can lead to waste instead of monopoly profits. Profits also help adapt to changes, especially in competitive markets. To successfully tackle economic challenges in a socialist system, there must be not just competition between different industries, but also competition within industries.
9
A socialist system with competition within and between industries faces many challenges, similar to competitive capitalism, but these challenges are complex. Important questions include what the basic business unit will be, who will manage it, how resources will be shared, and how success will be measured. A strong central economic authority is still needed to oversee resource distribution and management. This authority cannot simply act as a bank; it must take on risks and manage ownership of resources.
Initially, resources might be distributed based on how industries are already organized, and managers will be selected based on their efficiency and experience. However, whenever conditions change, this central authority will need to reorganize again, making decisions about who should manage resources based on future expectations. Since there is no objective way to measure risks, the authority will likely rely on past performance, which complicates the decision-making process.
Determining success can be tricky because entrepreneurs might face losses that are not their fault, like new technology or shifts in demand. Unlike in capitalism, where the chance for profit encourages people to take risks, a socialist system might discourage this, leading people to avoid risky projects. However, taking risks is still important for progress and innovation.
When it comes to deciding how to share resources, it’s not clear how to judge which company is using its resources effectively. If one entrepreneur promises better returns than another, it raises questions about how to decide who gets the resources. This is similar to the challenges in capitalism but could be more difficult in a socialist framework. Ultimately, trying to create true competition while ensuring that decision-makers are held accountable can lead to serious bureaucratic issues that limit initiative and responsibility.
10
Managing a pseudo-competition system, which operates without private property, is very challenging compared to traditional competition based on private ownership. The proposals for this new system seem less practical than older ideas for centrally planned economies. Some younger socialists believe it’s possible to mimic competition without private property, but this means giving up many hopes associated with socialism. For instance, the idea that a planned economy would be much more productive than a competitive one is now seen as unrealistic, and the goal is simply to match capitalism's efficiency.
The belief in a fair distribution of income based on justice must also change, with some dependence on income from production to support workers’ pay. The expectation that the wage system would disappear and that managers would act differently than profit-driven capitalists is also mistaken. Just like in capitalism, a competitive socialist economy might not avoid economic crises or unemployment. While wage adjustments could be easier in a planned economy, a competitive one does not have special tools to prevent these issues.
The main goal of socialism is to improve workers’ lives by allowing them to share in profits from land and capital. However, this might not guarantee higher incomes for workers. Deciding the impact of these systems on national income and weighing the desire for income equality against possible drops in productivity is complicated. It is crucial to know whether socialism will be planned or competitive to have a meaningful conversation about its effectiveness.
11
The conclusions suggest that current discussions around alternative socialist systems indicate we lack the intellectual tools needed to effectively plan our economic system without hurting productivity. It's not a lack of experience but rather an inability to fully understand the problem. There's a possibility that for years, thoughts have been misguided, leading to less beneficial outcomes. The criticism of planning points to the potential for economic decline if we continue down this path. Although there may be some emerging ideas against planning, the prevailing trend leans toward it. Critics have contributed to clarifying the problems, even if they are pessimistic about finding solutions.
1
Criticism of socialism has significantly influenced socialist thought, though many still ignore these critiques. The existence of a planned system in Russia leads some to mistakenly believe that major issues are resolved. Yet, many leaders in socialist thought recognize the problems posed by central economic direction, especially concerning freedom of choice for consumers and careers in complex modern societies. While some defend the idea of central planning theoretically, practical solutions are rare. Recent plans often try to address these difficulties by proposing alternative socialist systems that avoid previous issues.
2
The effectiveness of economic planning is a debated topic, especially regarding its ability to achieve its goals. This summary focuses on how real-world experiences relate to theoretical ideas. First, it's important to understand that while production may continue, central planning can lead to poorer resource use. This means that output might be lower compared to a market where prices are free to change. Central planning can result in certain industries growing too much without good reasons, sometimes investing in advanced technology that does not fit the economy's needs.
To judge if planning is successful, two main tests should be used: what goods are actually delivered to consumers and how rational the decisions of the planning authority are. Current findings suggest that the overall benefits for consumers are not good, especially for most people. Comparisons to pre-war conditions can be misleading. Some argue that better planning could have resulted in a higher standard of living.
The experiences in Russia have largely confirmed earlier concerns about the problems associated with central planning. Past failures highlight difficulties that are common in these systems. Today, there seems to be a move toward more random decision-making rather than scientific methods, which does not solve the core issues of central planning. Therefore, a closer look at different economic systems is needed to better understand these challenges.
3
The discussion about how to organize economies in literature began later and at a complicated level. The first major ideas came from two Americans, F. M. Taylor and W. C. Roper. They suggested that if we had all the necessary data, we could use economic theories to figure out the values and amounts of goods to produce. While this idea makes sense logically, it overlooks the reality of how difficult it would be to apply in real life. The practical use of this method requires a vast amount of information, making it nearly impossible to implement.
In a centrally planned economy, it would not be enough to only set broad guidelines; detailed decisions about every business would be necessary. This includes figuring out how much material and machinery each business needs and at what cost. Every asset would have to be considered as unique rather than as part of a similar group, taking into account its condition, location, and other specifics. This makes the planning task enormous because the authority would have to look at many particular goods, far more than what simple classifications would suggest.
Also, managers in a centrally planned economy could not change one type of product for another freely. This means that each product would need specific details to be calculated and included in the planning process, creating a huge statistical challenge. Gathering and processing all this information would not only be hard but nearly impossible, especially since even small details can greatly affect how well a business operates.
There’s another problem regarding the technical knowledge required for making good decisions. In a competitive economy, many people with various skills help to innovate and adapt. By contrast, a centralized system places this responsibility on a very small group of people, which is not realistic. Much of the knowledge is not formally documented; employees often come up with solutions quickly when faced with new challenges. It is impractical to assume that a few people have all the necessary information and creativity.
A centrally planned economy would also need to know a lot about consumer goods. This means understanding how many units of each product people would buy at different price levels, which is a complex task that relies on accurate predictions. As consumers’ tastes change frequently, keeping this information up to date adds to the difficulty.
Even if the initial data collection challenges could be handled, the planning authority would still face the daunting task of making concrete decisions based on the collected information. This task becomes much more complex, as the number of different commodities could reach hundreds of thousands. Continuous decision-making and quick communication of these decisions would be incredibly challenging with today’s technology.
The size of the task involved in centralized planning is beyond our current abilities. Therefore, any claim that such a system could work as efficiently as a competitive economy is not realistic. Simply trying to adjust and adapt through trial and error while transitioning from one system to another ignores the major changes involved. Overall, the idea that centralized planning could manage economic decisions effectively and flexibly is misguided.
4
Central planning faces significant challenges, primarily because consumers have unpredictable preferences that can disrupt carefully made plans. It has become widely accepted that the freedom of consumers and central planning cannot coexist. Some thinkers, like Maurice Dobb, suggest that sacrificing consumer freedom could help make socialism workable. While Dobb believes eliminating consumer choice could simplify planning, this view overlooks the complexity of production and the need for pricing. Without free choice, production may lack a clear purpose, leading to inefficient resource use and potentially lowering living standards. In a centrally planned economy, a dictator may attempt to prioritize needs according to his views, but this approach doesn't eliminate the necessity for understanding consumer preferences or adapting to unforeseen events. Factors like weather changes, population health, and resource availability require constant adjustments to plans. Ultimately, the idea that central planning would be easier without consumer freedom may not hold true, as substantial problems would remain, and vital principles would be sacrificed.
5
Dr. Dobb's extreme idea for socialism is not widely accepted, which has led many younger socialists to explore bringing back competition. This idea has been talked about more in Germany, while in England it is still developing. Some economists suggest having independent entrepreneurs who run businesses but work for the state and do not own the production means. Instead of seeking profit, they aim to cover costs and sell goods at reasonable prices. This raises questions about whether this system is still socialist and how planning fits in. One main concern is whether competition can manage the economy without a central authority telling people what to do. There are two possible systems: one where entire industries compete against each other, or one with many firms competing within the same industry, which challenges the traditional ideas about private ownership and responsibility.
6
When industries are completely controlled by a central authority but still compete for consumers, questions arise about how well competition works. Some believe that creating monopolies could help organize and improve the chaos of free competition. However, this might lead to wasteful use of resources, as monopolies can prevent the best economic outcomes. While the idea of having separate unions for every industry seems attractive, it can create unstable prices because industries are connected. This instability affects not only economists but also how resources are used. Instead of focusing on producing the best goods, monopolies often try to maximize their profits. Although production may not decrease overall, resources might be distributed unfairly among industries. As a result, monopolies can exploit consumers and fail to use resources efficiently, which harms the economy.
7
Reorganizing industries into monopolies has significant downsides, mainly because it leads to waste. Many people claim that these changes would save money, but closer examination shows that this isn’t true. Some argue that competition stops new technology from being used or forces industries to adopt machines they don't want. However, competition actually helps use resources effectively. If old equipment still exists with new technology, it might mean that either the newer method is not better or it should never have been built because it doesn’t make financial sense.
If the newer technology is truly better but facing financial problems, keeping the old ways can raise prices for consumers without providing benefits. A better solution would be to adjust the value of the old equipment and allow competition to set fair prices based on real production costs. Trying to keep the value of outdated equipment might prevent new technologies from being used, which could result in inefficiency. Introducing new inventions is important for progress, and maintaining old capital only benefits those who own it while denying society the improvements that new technology can bring.
8
There are concerns about how monopolies in a capitalist system focus on maximizing profits, while integrated industries in a socialist state would work differently by charging prices that only cover their costs. Previous discussions centered on capitalism, but they also touched on some benefits and issues of planning in a socialist system. One major challenge is figuring out the costs of production when monopolized industries act as if they have competition.
Economists often think costs have a clear meaning in competitive markets. However, in real life, defining production costs can be complicated, especially when production methods are unique and rarely repeated. The costs of production are affected by future product prices, making this a difficult question to answer.
In competitive markets, certain costs, known as quasi-rents, help businesses make decisions about how much to produce, even though they depend on prices. Some production tools are so specialized that they can’t be replaced or sold in a market, which complicates figuring out costs. This situation is similar to issues seen in regulating public utilities, where it’s hard to create conditions that mimic competition in monopolized industries.
Some might think that in a socialist society, fixed costs could be ignored, just as they sometimes are in a capitalist system when looking at short-term production. However, this is not the case. For a fair distribution of resources, capital must be replaced from the industry’s earnings, and returns on that capital need to be competitive. The value of production tools must consider how much profit they can generate in the future and what other uses they may have.
In a monopolized industry, not having competition makes it hard to find out true costs, which can lead to waste instead of monopoly profits. Profits also help adapt to changes, especially in competitive markets. To successfully tackle economic challenges in a socialist system, there must be not just competition between different industries, but also competition within industries.
9
A socialist system with competition within and between industries faces many challenges, similar to competitive capitalism, but these challenges are complex. Important questions include what the basic business unit will be, who will manage it, how resources will be shared, and how success will be measured. A strong central economic authority is still needed to oversee resource distribution and management. This authority cannot simply act as a bank; it must take on risks and manage ownership of resources.
Initially, resources might be distributed based on how industries are already organized, and managers will be selected based on their efficiency and experience. However, whenever conditions change, this central authority will need to reorganize again, making decisions about who should manage resources based on future expectations. Since there is no objective way to measure risks, the authority will likely rely on past performance, which complicates the decision-making process.
Determining success can be tricky because entrepreneurs might face losses that are not their fault, like new technology or shifts in demand. Unlike in capitalism, where the chance for profit encourages people to take risks, a socialist system might discourage this, leading people to avoid risky projects. However, taking risks is still important for progress and innovation.
When it comes to deciding how to share resources, it’s not clear how to judge which company is using its resources effectively. If one entrepreneur promises better returns than another, it raises questions about how to decide who gets the resources. This is similar to the challenges in capitalism but could be more difficult in a socialist framework. Ultimately, trying to create true competition while ensuring that decision-makers are held accountable can lead to serious bureaucratic issues that limit initiative and responsibility.
10
Managing a pseudo-competition system, which operates without private property, is very challenging compared to traditional competition based on private ownership. The proposals for this new system seem less practical than older ideas for centrally planned economies. Some younger socialists believe it’s possible to mimic competition without private property, but this means giving up many hopes associated with socialism. For instance, the idea that a planned economy would be much more productive than a competitive one is now seen as unrealistic, and the goal is simply to match capitalism's efficiency.
The belief in a fair distribution of income based on justice must also change, with some dependence on income from production to support workers’ pay. The expectation that the wage system would disappear and that managers would act differently than profit-driven capitalists is also mistaken. Just like in capitalism, a competitive socialist economy might not avoid economic crises or unemployment. While wage adjustments could be easier in a planned economy, a competitive one does not have special tools to prevent these issues.
The main goal of socialism is to improve workers’ lives by allowing them to share in profits from land and capital. However, this might not guarantee higher incomes for workers. Deciding the impact of these systems on national income and weighing the desire for income equality against possible drops in productivity is complicated. It is crucial to know whether socialism will be planned or competitive to have a meaningful conversation about its effectiveness.
11
The conclusions suggest that current discussions around alternative socialist systems indicate we lack the intellectual tools needed to effectively plan our economic system without hurting productivity. It's not a lack of experience but rather an inability to fully understand the problem. There's a possibility that for years, thoughts have been misguided, leading to less beneficial outcomes. The criticism of planning points to the potential for economic decline if we continue down this path. Although there may be some emerging ideas against planning, the prevailing trend leans toward it. Critics have contributed to clarifying the problems, even if they are pessimistic about finding solutions.