[Marxism] Debunking Austrian Economics Socialist Calculation Problem

David McMullen dfmcmullen at gmail.com
Wed May 3 01:24:29 MDT 2017

Transcript to YouTube video


Debunking Austrian Economic's Socialist Calculation Problem

The so-called Austrian school of economics makes much of what they call 
the socialist calculation problem. They argue that a society based on 
social ownership could not have an effective price system and therefore 
could not have the decentralized decision-making we see in a market economy.

The claim was first made by Ludwig Von Mises in the 1920s. Really all he 
is saying is that transfers between enterprises using a decentralized 
price system must be market exchanges. Without explaining why, he rules 
out the possibility of such transfers occurring between socially owned 
enterprises where there is no exchange of ownership but simply a 
transfer of socially owned property from one custodian to another. I am 
thinking here of a transfer between a supplier and user of some 
component in production. Without predicting what will actually happen in 
the communist future we could easily imagine production units using 
decentralized pricing to determine least costs methods of production and 
assigning output to the highest bidder. We could also easily imagine 
such a system being ultimately driven by consumer demand.

Then we had the intervention of Frederick Hayek in the 1930s and 40s. He 
demolished the rather lame decentralized socialist model devised by the 
economist Oskar Lange. That model confines decentralized price 
adjustments to consumer goods while price adjustments for intermediate 
goods are carried out by a central agency that is keeping an eye on 
inventory levels. Hayek correctly points out the inadequacy of such an 
arrangement and how it does not represent a fully functioning price 
system. Discrediting the Lange model is all very well, but Hayek did not 
then go on to show that an economy based on social ownership would in 
fact be limited to the Lange model. In other words he did show that 
there is something about social ownership that would prevent the use of 
decentralized price adjustment in the allocation of intermediate goods. 
So I think I can justly say that all that Hayek has done is refute a 
straw man.

OK now we come to the final version of the argument and this was 
developed in the 1980s by Don Lavoie of George Mason University. He 
conceded that a socially owned economy could have a price system but 
that  it would not be a very good one. In his book Rivalry and Economic 
Planning, he contends that any price system under social ownership would 
be inferior to a market based one because it would be unable to reflect 
the discovery process that emerges from competition between market 
participants. According to Lavoie, it is important, in the presence of 
uncertainty, to have numerous participants trying out different 
approaches to problems, based on their own opinions, guesses and 
hunches. Those who come up with the best and most highly valued products 
using the cheapest methods win out in this competitive contest. I fully 
agree with what he is saying. However, if, as I contend, decentralized 
custodianship is an important part of social ownership, diversity of 
approach should not be a problem.

Under social ownership, it would still be very common for an individual 
enterprise or facility to be just one of many producing the same good or 
close substitutes and each of them would be free to try out different 
production methods and product designs. Some would be new entrants who 
were either existing enterprises moving into a new field with synergies 
or starts ups established by enthusiasts with ideas that the incumbents 
were not open to or capable of developing. This diversity would be 
greatly assisted by having numerous independent agencies being 
responsible for disbursing funds in each industry and making their own 
assessment of what were good investments. At the same time, enterprises 
would be free to choose their suppliers based on cost and quality, and 
would have to outbid other users of a resource or intermediate good. 
Discovering and adopting the best methods and products would of course 
mean that it would be common to see activities abandoned and enterprises 
closed or reorganized. So, the only real obstacle to a decentralized 
price system would be the absence of daring and conscientious custodians 
and this gets us back to the question of whether we can do without the 
profit motive. Can we do our best just because we enjoy the work and 
want to contribute? As I argue elsewhere this does not strike me as 
being all that fanciful if we are sharing high and increasing affluence 
and all the unpleasant work is performed by robots and computers.

So the calculation argument is not a separate argument from the standard 
one about whether we need the profit motive.

I think it is appropriate to point out that there is no reason to be 
smug about economic calculation under capitalism. Communist workers 
could hardly do a worse job of allocating investment funds than do 
highly fluctuating interest rates and exchange rates produced by 
capitalist finance. And there are good reasons for thinking that 
economic decision-making would be far superior to that under capitalism. 
To begin with, the absence of ownership barriers would increase the 
scope for coordination, and lessen the scope for secrecy and deception.

So to sum up. My basic point is that when it comes to economic 
calculation, communism will be able to do anything capitalism can and do 
a better job of it.

I have links below to a number of articles that go into more detail on 
this topic. You might like to look at them. And I also have a playlist 
of  of videos on libertarian issues.

Don't forget to subscribe. See you next time.



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