2010s >> 2019 >> no-1380-august-2019

Socialism and Planning Part 2: ‘Feedback’

Socialism and Planning: The Need for Feedback

Last month we explained why socialism could not possibly be organised on the basis of ‘society-wide’ planning – that is, a single vast plan encompassing everything. Though the numerous production (and distribution) units would obviously all be engaged in planning, the overall pattern of production would be unplanned. Meaning it would be the emergent outcome of many different plans. What would ensure these plans co-ordinated to produce a coherent outcome is something called ‘feedback’.

Any large scale, technically advanced society requires information in the form of feedback to function. ‘Feedback’ is an attribute of dynamic systems, when the ‘outputs of a system are routed back as inputs as part of a chain of cause-and-effect that forms a circuit or loop’ (Wikipedia). In this way the system is able to adjust its behaviour to accommodate changing circumstances.

The market is a good example. A contraction in the market for frozen fish fingers, perhaps because of some scandal concerning contaminated fish stock, causes a drop in prices and a decline in profits, resulting in some factory closures and reduced output. Here the relevant information takes the form of market prices. However, there is another kind of feedback system that operates alongside market prices and is, in fact, of far greater significance inasmuch as any kind of large scale society (including capitalism) utterly depends upon it. This is the feedback intrinsic to a ‘self-regulating system of stock control’.

Here, the basic information takes the form, not of prices, but of physical quantities – for example, counting the number of cans of baked beans stocked in your local supermarket. This is called ‘calculation-in-kind’. The supermarket simply tracks how many cans have been removed from the shelf – these days this is often computerised – and calculates the quantities needed to sufficiently replenish the stock to meet future demand, (taking into account the rate at which it is being depleted). That automatically triggers an order for fresh stock from the suppliers.

The beauty of the system is that any shifts in the pattern of demand can be picked up and almost instantaneously responded to, given the power of modern computer technology. This is precisely the kind of feedback system a socialist society can make full use of, enabling it to monitor and respond to the fluctuations in the demand for any conceivable kind of good produced in that society. We don’t need to reinvent the wheel. This system already exists and functions today under our very noses.

Misunderstanding socialism

In a chapter entitled ‘Understanding the Market’, Norman Barry lists three possible ways of ‘organising a society for the production of wanted goods and services’ – altruism, central command and the market:

Altruism presupposes that individuals, without either the incentives of personal gain or fear of punishment, will satisfy the wants of others in a system of generalised reciprocity. It is now generally agreed that this places impossible burdens on a fragile human nature and on human knowledge. In a large society, even if people were uncommonly well-disposed towards each other, how could they know what others’ wants were? In fact altruism is only conceivable in very small communities where there is broad agreement about ends and purposes’ (The State or the Market, 1991)

Since socialists reject both ‘central command’ and the ‘market’, it would seem we are left with only ‘altruism’ with all the limitations Barry imputes to it. However, his argument is plainly wrong on two counts.

Firstly, to take his point about not being able to know what other people want, this is simply not true. It seems to naively assume that to do that you have to directly ask them what they want. Now it is certainly true that customer surveys and the like can provide useful pointers when it comes to product innovation and design but it would be impractical to canvas the entire population; only a small sample is required. It is also unnecessary since, as we have seen, the great bulk of information concerning individual wants in a socialist society can be acquired indirectly in an aggregated form via the aforementioned procedure of stock control. Since this is an open-ended procedure, the question of the size of the society is completely irrelevant.

Secondly, regarding his point about motivation, it is misleading to suggest that socialism would be a society based purely on altruism. For sure, people can and do behave altruistically and a socialist society will draw abundantly upon this very human quality of feeling concern for the wellbeing of others. Barry equates this altruistic concern with a ‘system of generalised reciprocity’ but fails to properly comprehend what that means. Yes, it denotes helping others out of concern for their wellbeing without expecting any direct or immediate return (what is called a quid pro quo transaction). However, it emphatically does not mean there is no expectation whatsoever of these others reciprocating in due course. It is not purely altruistic in that sense as the very word ‘reciprocity’ itself suggests.

Actually, ‘generalised reciprocity’ denotes a system of moral, (rather than economic) transactions, governed by the ethos that we should all contribute to the common good rather than free ride on the contributions of others. It implies a generalised expectation that we help each other rather than just one-sidedly sacrifice our own interests for the sake of others. As such, this is a fair description of the kind of social dynamics that would operate in a future socialist society. It is not something completely unfamiliar to us today or necessarily confined to only small scale face-to-face societies. Even under capitalism, there are plenty of examples around. Indeed, the internet itself has been compared to a gigantic ‘gift economy’. (http://wiki.p2pfoundation.net/Gift_Economy)

Ironically, the accusation that socialism ‘places impossible burdens on a fragile human nature’ in assuming humans should expunge any concern for their own interests – can be thrown back at critics like Barry himself. If according to the market ideology they embrace, individuals are purely driven by self-interest, then why do the great majority today put up with a social arrangement that so demonstrably works against their interests? Why permit a tiny owning class to accumulate vast fortunes at their expense? Clearly, it is not out of self-interest that workers allow this to continue.

Economic calculation

Apart from enabling us to respond to the ever-changing pattern of consumer wants, feedback in the form of a self-regulating system of stock control will also facilitate the efficient allocation of resources by ensuring these are allocated in a way that economises most on those that are least abundant. Here, we are alluding to the ‘Law of the Minimum’ formulated by the 19th century agricultural scientist, Justus von Liebig, who demonstrated that the total output of a crop is determined, not by the total amount of resources available for plant growth but, rather, by the scarcest resource or ‘limiting factor’ – for example, nitrate fertiliser. Increasing the supply of this input would then mean some other input becoming the limiting factor – perhaps, irrigation water. The point is that it is entirely possible to grade all the relevant inputs required to produce a given output in terms of their relative availability and determine the degree to which this constrains output.

In 1920, the Austrian economist and prominent opponent of socialism, Ludwig von Mises, published a tract called ‘Economic Calculation in the Socialist Commonwealth’. In it he set out to prove that socialism was impractical since, without market prices, it would be unable to make the economic calculations needed to efficiently allocate resources. As he put it:

It would be evident, even in a socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 litres of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e., economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. 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. It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption-goods only: it completely fails when it comes to deal with goods of a higher-order. And as soon as one gives up the concept of a freely established monetary price for goods of a higher-order, rational ownership of the means of production, rational production becomes impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.’

Mises could not have been more mistaken. His unwarranted belief that calculation-in-kind could apply only to consumption goods and not ‘higher order’ production goods stems from a peculiar blind spot at the very heart of his ‘economic calculation’ argument. This is the taken-for-granted assumption that the allocation of these higher order goods would be undertaken by a single planning authority acting on behalf of society what he meant by his ‘Fuhrer principle’. As we saw last month, that means establishing, in advance, production targets for each and every one of the millions of different production and consumption goods in the economy within a single giant plan.

However, what that does is to eliminate the very possibility of a feedback system and, therefore, a means of efficiently allocating resources. If, instead, you had a polycentric system of planning in place this would permit such a feedback system to come into play and thus enable you to rationally allocate resources in the light of known stock levels.

Contrary to Mises’ claim, calculation-in-kind is applicable not just to consumer goods but ‘higher order’ production goods too. Thus, if a particular consumer good, M, consists of three components, X, Y and Z, it is entirely possible to calculate how much of M we can produce, given the available supplies of X, Y and Z. If there were sufficient supplies of X and Y, but not enough of Z, to meet the demand for M (thus making Z the ‘limiting factor’ in this example) you then have two options if you want to fully satisfy the demand for M. Either you modify the ‘technical ratio’ (discussed in Part One) involved in producing M so as to reduce the quantity of Z needed or you divert supplies of Z from other end uses. This latter option would entail ‘opportunity costs’ that can be readily quantified in terms of the reduction of output for those other end uses.

In either case, the Misesian claim that socialism cannot resort to economic calculation to efficiently allocate resources is refuted. What remains to be done is to establish the social priorities to guide resource allocation (which Mises conceded was possible) and, also, when to switch resources from one end use to another depending on supply and demand neither of which strictly relate to the question of ‘economic calculation, as such.

The first boils down to a question of society’s values. Establishing a hierarchy of production priorities (perhaps informed by concepts like Maslow’s famous ‘hierarchy of needs’ model) might, for instance, entail classifying different consumer goods according to a rough-and-ready ‘points system’ to guide resource allocation. The second, concerning when to switch resources, could make use of such indices as the rate of take up of particular lines of stock or planning tools like consumer surveys. In neither case is pinpoint accuracy required; what matters is that the general thrust of decision-making broadly moves in the direction society deems desirable and that we have the means of ascertaining what society desires by fully utilising all the available means of communication.

Mises never really grasped this way of looking at socialism because he was too fixated on the idea that it would be a system of society-wide central planning. However, as we have seen, that precludes the very possibility of feedback so crucial to the refutation of his entire theory.

ROBIN COX