<\/p>\n\n\n\n
The economic calculation argument (ECA) has to do with the claim that, in the absence of market prices, a socialist economy would be unable to make rational choices concerning the allocation of resources and that this would make socialism an impracticable proposition. Tracing the historical development of this argument, this article goes on to consider some of its basic assumptions about how the price mechanism actually works in practice; in so doing, it attempts to demonstrate that the argument is based upon fundamentally shaky foundations. A rational approach to the allocation of resources in a socialist economy is then sketched out. Such an approach is predicated on a particular view of socialism as entailing a largely decentralised \u2013 or polycentric \u2013 structure of decision-making in contrast to the view typically held by proponents of the ECA that socialism would entail central \u2013 or society-wide \u2013 planning. Applying a decentralised model of socialist decision-making, this article identifies a number of key components of such a model and goes on to show how, through the interactions of these key components, the objections to socialism raised by the ECA are decisively overcome. <\/em><\/p>\n\n\n\n 1. HISTORICAL BACKGROUND<\/p>\n\n\n\n The \u201ceconomic calculation argument\u201d (ECA) is principally linked with the Austrian economist, Ludwig von Mises, who wrote a seminal tract (\u201cEconomic Calculation in the Socialist Commonwealth\u201d) in 1920, purporting to show that socialism was not a realisable system. Mises was not alone in developing this argument; his contemporaries Boris Brutzkus and Max Weber had independently arrived at the same conclusions that same year. Moreover, a number of earlier commentators \u2013 for example, Gossen, Wicksteed, Wieser, Bohm-Bawerk, Pareto, Barone and particularly the Dutch economist, Nikolaas Pierson \u2013 had all developed partial elaborations of the ECA before Mises1<\/a>.<\/p>\n\n\n\n Following the Russian \nrevolution and the emergence of Soviet state capitalism, a vigorous \ndebate ensued on the feasibility of socialism, a term which had been \nwidely understood to be synonymous with Marx\u2019s non-market communism (or,\n at the very least, meant a system lacking a market for \u201cfactors of \nproduction\u201d if not consumer goods). The developments in Russia, while \nserving to stimulate the debate, nevertheless helped to muddy the waters\n considerably. Thus, Lenin departed sharply from the classical Marxian \ndefinition of socialism as a synonym for communism by portraying it \ninstead as a stage between capitalism and communism. The aborted attempt\n to introduce so called \u201cwar communism\u201d in 1918-1921 (in reality, a \nrigorous system of centralised rationing which, moreover, still retained\n elements of the market, rather than \u201cfree access\u201d communism) was a \nfurther source of confusion; it allowed anti-socialists to argue that \nsocialism had been shown to be impracticable in practice and not just in\n theory. This, of course, completely overlooked the fact Marxists too \nhad argued that socialism was not feasible in Russia at the time given \nthat the necessary preconditions for a socialist revolution to occur had\n not yet ripened \u2013 a mass working class imbued with socialist \nunderstanding and a sufficiently developed means of production.<\/p>\n\n\n\n O\u2019Neill contends that it is wrong to suppose there was just one single unified debate at the time. Instead, there were \u201cat least two debates that concerned two independent objections to socialism\u201d2<\/a>. The first of these was about \u201crational choice and commensurability\u201d which is central to the ECA itself. The second, mainly instigated by Mises\u2019 torchbearer, F A Hayek, had to do with an \u201cepistemic objection to socialism\u201d concerning centralised \u2013 or society wide \u2013 planning and the dispersal of knowledge among economic actors in an economy. While these two different streams of discourse may have been conducted along relatively independent lines I will argue (later) that they are nevertheless organically linked. Indeed, much of what is demonstrably false about the ECA stems from a misconceived and myopic assumption that socialism can only be a centrally planned economy, a claim that Mises himself tirelessly promoted. This, however, effectively precludes the possibility of a spontaneously ordered or decentralised version of socialism which alone, I would maintain, decisively overcomes the objections to socialism raised by the ECA.<\/p>\n\n\n\n The high watermark of the \n\u201ceconomic calculation\u201d controversy was in the 1920s and 30s. O\u2019Neill \ndistinguishes between an earlier and relatively neglected \nGerman-speaking phase of the debate which pitted Mises and his \nsupporters against the likes of Otto Neurath, Karl Polanyi and Otto \nBauer, and a later English-speaking phase which involved neoclassical \n\u201cmarket socialists\u201d like Fred Taylor and Oskar Lange. In the 1940s Mises\n reputation as a free market economist waned along with the free market \nitself, as the fashion for Keynesian state intervention took hold. It \nwas only after the failure of Keynesian reformism in the 1970s and the \ncollapse of state capitalist regimes in Eastern Europe in the1980s that \nMises\u2019 ideas were rescued from obscurity and underwent a partial \nrevival.<\/p>\n\n\n\n 2. AN ILLUSTRATIVE EXAMPLE<\/p>\n\n\n\n So what exactly is the ECA \nabout? To elucidate its core claims it would be helpful to use a \nhypothetical \u2013 and highly simplified \u2013 example.<\/p>\n\n\n\n Assume a factory in socialism\n manufactures a particular kind of consumer good, X. Assume that in \norder to manufacture X only two kinds of inputs are needed, A and B. Let\n us then suppose that there are three different methods for producing 1 \nunit of X which involve three different combinations of A and B, as \nfollows:<\/p>\n\n\n\n Method 1 requires 9 units of A\n and 10 units of B Method 2 requires 10 units of A and 9 units of B \nMethod 3 requires 10 units of A and 10 units of B<\/p>\n\n\n\n This prompts the question: \nwhich method should this factory chose in order to produce 1 unit of X? \nOne might argue that it would make sense to use as few resources as \npossible to produce a given output since that would leave more resources\n over for doing other things. This alludes to what economists call \n\u201copportunity cost\u201d. The opportunity cost of doing something is the best \nalternative you forego as a result. If you use a certain quantity of \nresources to produce one thing then you deny yourself the opportunity of\n using those same resources to produce something else. By minimising \nyour opportunity costs you maximise the amount of resources that can be \nused for other purposes.<\/p>\n\n\n\n In terms of our example, this\n would require our factory at the outset to reject method 3. Why? \nBecause while method 3 uses the same number of units of B as method 1, \nit uses more units of A. Compared with method 2, on the other hand, it \nuses the same number of units of A but more of B. So methods 1 and 2 are\n both more \u201ctechnically efficient\u201d than method 3. This means they do not\n make use of any more of either A or B than method 3 while using less of\n at least one of these inputs than method 3. In other words, there is no\n opportunity cost involved in rejecting 3 in favour of 1 or 2 assuming \nthe output is identical in each case. However it is possible method 3 \nmay result in a slightly higher quality version of X because of the \nadditional unit of A or B used (compared to method 1 or 2) in which case\n a small opportunity cost might be incurred.<\/p>\n\n\n\n All this is fairly \nstraightforward and there is no suggestion by proponents of the ECA that\n a socialist economy cannot ascertain whether one method of producing \nsomething is more \u2013 or less \u2013 technically efficient than another. A \nsocialist economy will have no problem in seeing the need to reject \nmethod 3. The problem arises when we come to chose, in the case of our \nexample, between the remaining methods 1 and 2. How would we know which \nof these two methods made least use of resources, thereby freeing up \nmore resources for other uses? Here we encounter a quite different \nnotion of efficiency \u2013 namely, economic efficiency. According to the ECA\n this requires us to directly compare A and B by reducing each to a \ncommon denominator so that we can select the least costly combination of\n A and B \u2013 method 1 or method 2 \u2013 to produce 1 unit of X. For that, it \nis argued, you need a price system, allowing units of A and B to be \ncosted in money terms. So if 1 unit of A cost one dollar and 1 unit of B\n cost 2 dollars, the total cost of producing 1 unit of X using method 1 \nwould be 29 dollars and 28 dollars using method 2. Therefore, it would \nbe advisable for the factory to select method 2 as the \u201cleast costly \ncombination\u201d of inputs A and B.<\/p>\n\n\n\n The problem is that a socialist factory would not have recourse to monetary prices in order to make such a \u201crational decision\u201d. Socialism is based on the common ownership of the means of production. Without private property in the means of production, according to Mises, there can be no market for the means of production. Without a market for a means of production, it will be impossible to attach monetary prices to the means of production. Without monetary prices, reflecting the relative scarcity of these inputs, socialist decision-makers will be unable rationally to calculate how best to allocate these inputs in a way that ensures economic efficiency. In other words they will be unable to compare the proceeds of any economic activity with the costs incurred to determine whether it was worthwhile or not \u2013 that is to say , whether or not it realises a \u201cnet income\u201d. The likelihood then is that these decision-makers \u201cgroping in the dark\u201d will select more, rather than less, costly combinations of inputs and so use up more resources than would be the case had they recourse to a system of monetary prices. The cumulative effect of such economically inefficient decision-making would be to precipitate a sharp fall in output and living standards which the population is unlikely to accept. Hence Mises\u2019 claim that \u201cSocialism is not a realizable system of society\u2019s economic organization because it lacks any method of economic calculation\u201d3<\/a>.<\/p>\n\n\n\n 3. PRELIMINARY CRITICISMS OF THE MISESIAN MODEL<\/p>\n\n\n\n At first blush, the ECA would\n appear to be highly plausible. However, on closer inspection we can \ndiscern hairline fractures in the very foundations of this model which \nrender it highly vulnerable to sustained criticism. Let us consider some\n of these defects first before turning our attention to the organisation\n of production and the allocation of production goods in a socialist \neconomy.<\/p>\n\n\n\n A) Subjective valuation and price<\/p>\n\n\n\n According to Mises and the Austrian School of Economics, the value of goods and services is necessarily subjective and does not inhere in the good or service in question; economic costs are essentially subjective, opportunity costs and utility preferences can only be expressed along an ordinal scale \u2013 i.e. ranked \u2013 as opposed to a cardinal scale which entails precise measurement. How then do we arrive at the necessary data upon which a system of economic calculation is predicated? Salerno puts it thus. The problem with socialism, he claims, is that it lacks \u201ca genuinely competitive and social market process in which each and every kind of scarce resource receives an objective and quantitative price appraisal in terms of a common denominator reflecting its relative importance in serving (anticipated) consumer preferences. This social appraisal process of the market transforms the substantially qualitative knowledge about economic conditions acquired individually and independently by competing entrepreneurs, including their estimates of the incommensurable subjective valuations of individual consumers for the whole array of final goods, into an integrated system of objective exchange ratios for the myriads of original and intermediate factors of production. It is the elements of this coordinated structure of monetary price appraisements for resources in conjunction with appraised future prices of consumer goods which serve as the data in the entrepreneurial profit computations that must underlie a rational allocation of resources.\u201d4<\/a><\/p>\n\n\n\n But what is actually \nhappening in this \u201ctransformation process\u201d whereby the \u201cincommensurable \nsubjective valuations\u201d of individuals purportedly come to be expressed \nas objective exchange ratios or prices? Do the latter in fact actually \ncapture the former? There is a kernel of truth in the claim that they do\n in that obviously if someone is willing to pay a price for a good he or\n she must ipso facto<\/em> subjectively value that good. Otherwise \nthe \u201cwillingness to pay\u201d for it would not have arisen. But, of course, \nin a market economy mere \u201cwillingness to pay\u201d is not enough; the means \nof payment \u2013 purchasing power- is what is crucially required and it is \nonly willingness to pay that is backed up by purchasing power that \nactually affects prices. This is what economists call \u201ceffective demand\u201d\n (presumably to be distinguished from \u201cineffective demand\u201d). The \nsubjective valuation that a pauper places on a square meal may be \nconsiderable but in the absence of the wherewithal to pay for such a \nmeal, this counts for nothing. In short, the subjective valuations \nindividuals place on goods cannot reasonably be said to be captured or \nembodied by the objective prices such goods attract in the market. \nIndeed, one might add that to suggest that they do, flatly contradicts a\n key myth of bourgeois economics \u2013 namely, that our wants are \nessentially \u201cinfinite\u201d and the resources to meet them, limited.<\/p>\n\n\n\n It may be objected that while\n it does not aim to \u201cquantify\u201d our wants as such (along a cardinal \nscale), price does nevertheless reflect our subjective valuations \ninsofar as it sheds light on our preferences (along an ordinal scale). \nThus, if we prefer roast beef to a McDonald\u2019s hamburger this will be \nreflected in the higher price we would be willing to pay for such an \nitem. However, this still does not get round the basic problem: in a \nmarket economy you cannot express a preference if you do not have the \nmeans to do so: purchasing power. You might prefer roast beef but after \nconsulting your wallet may discover to your consternation that you will \njust have to resign yourself to the hamburger instead. While, according \nto conventional economics, effective demand determines price in \nconjunction with supply of the goods demanded, this effective demand is \nitself grossly unequally distributed by virtue of the unequal \ndistribution of income. Austrians respond to this by arguing that such \ndifferentials reflect the valuations individuals place on different \noccupations and the different contributions they make to society (which \n\u201csociety\u201d duly \u201crewards\u201d them for) but there is no way of testing this \nclaim since such valuations are themselves subject to the limitations of\n \u201ceffective demand\u201d. Salerno\u2019s \u201cintegrated system of objective exchange \nratios\u201d (prices) reflects or is conditioned by, this unequal \ndistribution of effective demand. Thus, frivolous luxury goods can be \n\u201cvalued\u201d more highly \u2013 i.e., attract a higher price \u2013 than food for the \nhungry because a rich elite has vastly more purchasing power at its \ndisposal to competitively bid for, and so push up the price of, the \nformer compared to the latter.<\/p>\n\n\n\n We should bear these points \nin mind in considering the merits or otherwise of the ECA; it is based \non so-called objective data that are fundamentally biased or skewed and \ncannot be said to correspond truthfully to the subjective valuations of \neconomic actors in the market as claimed. To believe otherwise is to \ncommit what is called the Fallacy of Composition \u2013 the illusion that \nwhat is true for each part of a whole must be true for the whole It is \nan error that overlooks the interrelationships between the different \nparts of the whole.<\/p>\n\n\n\n B) What do we mean by \u201ccosts\u201d?<\/p>\n\n\n\n D R Steele contends: \u201cThe total cost of producing anything is the total effect in reducing production of other things because of the factors used up. This what we mean by the \u2018cost of production\u2019. It is this that we always want to minimise when we produce anything\u201d5<\/a>. As we saw earlier, this definition of cost equates with opportunity cost. Opportunity costs are often counter-posed to accounting costs . The latter are usually taken to denote the explicit costs represented by the cash outlays that a firm makes in purchasing its inputs, whereas the former are associated with implicit or hidden costs and may be difficult or impossible to quantity, or even be completely unknown. For example, the opportunity cost of spending more money on a new school may be to forego spending this money on improving the local ambulance service which could have meant more lives being saved. But just how do you weigh up the cost of a life?<\/p>\n\n\n\n Going back to our example of \nconsumer good X, we can see that the ECA relies on the notion of \naccounting cost rather than opportunity cost, despite its copious lip \nservice to the latter. This is because it involves comparing the \nexplicit cash outlays to be made on different combinations of A and B to\n arrive at a notional \u201cleast cost combination\u201d. Certainly there is an \nopportunity cost in making that decision \u2013 this almost goes without \nsaying \u2013 but this is not what this example of economic calculation is \nabout. It is not measuring what a factory foregoes in opting to produce 1\n unit of Y using method 2. Choosing a least cost combination of factors \nhas essentially to do with accounting costs, not opportunity costs. That\n being so, one might well ask, how does this help one to calculate the \n\u201ctotal effect in reducing production of other things because of the \nfactors used up\u201d? Acknowledging there is, theoretically speaking, a \n\u201ctotal effect\u201d is not the same as saying that this is what is being \nprecisely measured \u2013 or, indeed, that it can ever be precisely measured.\n Moreover, who decides which is the \u201cbest alternative foregone\u201d? One \nperson\u2019s preference may not be another\u2019s. Such considerations are simply\n brushed under the carpet by the ECA.<\/p>\n\n\n\n Nevertheless, it is on the point of \u201cprecise measurement\u201d that the ECA presses its claim. As Steele points out: \u201cIn this case, it so happens that it would be sufficient merely to know which was \u2018more\u2019 or \u2018less\u2019 but that is just an accident of the way I have set up the example. Generally, we should have to know exactly how much more or less. For instance, if the choice were between a method using 4lbs of rubber and 5 pounds of wood and a method using 5 lbs of rubber and 3 pounds of wood, it would not be enough to know that wood were more costly by weight, then rubber; we should need to know how much more costly\u201d6<\/a>.<\/p>\n\n\n\n Certainly, accounting costs \nare amenable to \u201cexact calculation\u201d using monetary prices but the \nquestion is what exactly is being accounted for in the process?. \n\u201cPrecise measurements\u201d doesn\u2019t tell us much; a game of monopoly entails \nprecise measurement too but nobody suggests this implies some \nearth-shattering insight we would be foolish to overlook. What then is \nthe significance of what is being precisely measured using monetary \nprices?<\/p>\n\n\n\n The ECA asserts that a \nsocialist economy would be unable rationally to chose between different \ncombinations of factors to arrive at a least cost combination. In answer\n to the obvious retort that a socialist economy would not concern itself\n with costs in this monetary form, it might be contended that there will\n still be a need to reckon costs in some other guise and that it is \nprecisely these substantive costs \u2013 or if you like, \u201creal world\u201d costs \u2013\n that the price mechanism is able faithfully to represent via its \npattern of objective exchange ratios. But how could this be proven.? To \nprove this is the case one would have to demonstrate a precise \ncorrelation between these \u201csubstantive costs\u201d and their monetary \nrepresentations. One can determine whether such a correlation exists \nonly by measuring one against the other. But that presents a problem for\n the ECA since, in doing this, one would have inadvertently shown that \ncosts can indeed be independently measured, and rendered calculable, \nwithout recourse to market prices.<\/p>\n\n\n\n This places the proponents of the ECA in a invidious position since failure to demonstrate a putative correlation between these substantive costs and their alleged market representations means that all they have to fall back on is a tautology: that only a market economy is able to perform economic calculations couched in market prices. Steele himself has attempted to circumvent this argument with the (specious) claim that it is \u201cparallel to arguments which have frequently been levelled against general theories. Thus every year or so some new genius discovers that Darwin\u2019s theory of natural selection is vacuous, because it says that the fit survive, but there is no way to measure who are fit except by seeing who survive\u201d7<\/a>. But, of course, the analogy is completely inapt; the relationship between \u201cfitness\u201d and \u201csurvival\u201d is a causal one which simply does not apply in this case. What is involved here is nothing quite so grand as a \u201cgeneral theory\u201d but a modest proposition concerning the alleged statistical correlation between two sets of data without causation being invoked in any way.<\/p>\n\n\n\n Finally, if the ECA is really\n about narrow accounting costs rather than opportunity costs as such \nthen presumably we have a solid basis for testing the proposition that a\n system of market prices can faithfully calculate the costs incurred in \nproduction decisions. Here we are referring to \u201ccosts\u201d in their positive\n sense, not opportunities foregone. It is evident that in this sense, \nmarket-based calculations are far from adequate. There is an enormous \nliterature on the problem of externalities and spill-over effects which \nillustrates this point very well. Suffice to say that in a competitive \nmarket economy there will always be an obvious in-built incentive for \ncompeting firms to externalise their costs as far as practically \npossible or to the extent to which they can get away with doing this. \nPollution costs are one example of this and typically necessitate some \nintervention by the state to impose curbs on the offending firm in \nquestion in the interests of other firms who may have to indirectly pick\n up the tab. \u201cSocial costs\u201d are another example. A firm may consider it \nnecessary to lay off part of its workforce to reduce its production \ncosts and remain competitive. However, this reduction of its labour \ncosts has costly repercussions for the workers involved and society in \ngeneral which tend not to be accounted for on the firm\u2019s own balance \nsheet.<\/p>\n\n\n\n Attempts to get round the problem of externalities and spill-over effects through the application of concepts such \u201cwillingness-to-pay\u201d (WTP) and \u201cwillingness-to-accept\u201d (WTA) are problematic and provide little, if any, comfort for proponents of the ECA. WTP has to do with what people would be prepared to pay to mitigate or avert some undesirable effect while WTA refers to the level of financial compensation they would be willing to receive for having to put up with such an effect. Mainstream economists tend to regard the costs involved in both instances as roughly equivalent but there is considerable evidence based on surveys to suggest that this is simply not the case \u2013 not according to people\u2019s \u201csubjective evaluations\u201d of environmental losses and gains, at any rate.8<\/a> In fact, environmental losses tend to be more highly valued than environmental gains even where similar sums of money are involved. There are a number of other problems associated with these techniques (e.g. the tendency to underestimate the value of future resources; the problem of non-use values and option values which are to do with resources that you do not yourself make use of or might only do so at a later date) all of which highlight the shortcomings of market valuations, shortcomings which the ECA tends to gloss over.<\/p>\n\n\n\n C) The problem of \u201cnet income\u201d<\/p>\n\n\n\n According to the ECA not only\n is there a need to discover the least cost combinations of inputs \nrequired to produce a given good; there is also a need to ensure that \nthe revenue obtained from the sale of this good is sufficient to cover \nthe cost of producing it. This can only be done by attaching prices to a\n firm\u2019s inputs (A and B in our example) as well as its output (good X).<\/p>\n\n\n\n \u201cNet income\u201d is the difference between a firm\u2019s revenue or proceeds and its costs. Positive net income is what is usually referred to as profit; negative net income, as loss. As Mises put it, \u201cEvery single step of entrepreneurial activities is subject to scrutiny by monetary calculation. The premeditation of planned action becomes commercial pre-calculation of expected costs and expected proceeds. The retrospective establishment of the outcome of past action becomes accounting profits and losses\u201d9<\/a>.<\/p>\n\n\n\n This statement is revealing. \nIt inadvertently highlights a serious flaw in the ECA. The ability to \ncompute profit and loss is what in theory is supposed to ensure the \nefficient \u2013 that is \u201cprofitable\u201d \u2013 allocation of resources. But it turns\n out that it ensures nothing of the sort. Just because a system of \nmarket prices affords one a set of figures with which one can perform \nprecise calculations does not mean that these figures will turn out to \nbe correct \u2013 that is to say, will unerringly guide the entrepreneur \ntowards a positive net income.<\/p>\n\n\n\n As Steele puts it: \u201cSince all production decisions are about the future and the future is always uncertain, decision makers have to make guesses, take gambles, play hunches and follow their experienced noses.\u201d10<\/a> and \u201cIn the market, entrepreneurs anticipate, speculate, agonise, guess and take risks. They also frequently perform elaborate calculations, aware that the results of such calculations are only as good as their assumptions. Always enveloped in a cloud of ignorance, market decision-makers strain to discern the indefinite contours of the changing shapes that loom ambiguously out of the fog.\u201d11<\/a><\/p>\n\n\n\n This seems unambiguous enough\n but then, curiously, Steele feels prompted to ask: \u201cDoes the fact that \nproduction is actually guided by estimates of future prices, and not by \nreading off \u2018current\u2019 (recent) prices, destroy the force of the Mises \nargument? Apparently not, for two reasons: 1. past prices are a guide \nwhich helps people to make more accurate (though still fallible) \nestimates of future prices; and 2. people\u2019s estimates of future prices \nare eventually confirmed or refuted. There is an objective test of the \naccuracy of the estimates: profit and loss.\u201d12<\/a><\/p>\n\n\n\n Steele\u2019s first point rather undercuts his previous claim that production cannot actually be guided by current (recent) prices and he does not quite seem able to make up his mind on how relevant the latter are. By his own admission, entrepreneurs can and often do get things spectacularly wrong when relying on current \/recent prices \u2013 the energy crisis of the 1970s being a case in point. It is also to be noted that these current\/recent prices are a record of accounting costs, not opportunity costs, and so do not shed much light on the opportunities foregone in making a production decision since the latter are a \u201ctacit reference to hypothetical future income\u201d13<\/a> which can only be guessed at. He admits that entrepreneurs are fallible yet does not seem to see the inconsistency in admitting this and claiming that the price system ensures \u201cexact calculation\u201d.<\/p>\n\n\n\n Steele\u2019s second point \u2013 that \nthere is an objective test of the accuracy of entrepreneurial estimates \u2013\n is presumably the more important one but, even so, holds no water. \nRemember that what we are looking for is some way of reliably guiding \nthe entrepreneur to make sound production decisions concerning net \nincome in the future \u2013 otherwise there would be little point in going on\n about the need for \u201cexact calculation\u201d. The fact that the market \nprocess is retrospectively \u201cself-correcting\u201d in eliminating or \nbankrupting those firms that err (incur an economic loss) in their \nfuture estimates is completely irrelevant. The resource allocations \nthese firms committed themselves to constitute what economists call \n\u201csunk costs\u201d and cannot be retrieved once made. Bygones, as the saying \ngoes, are bygones. More importantly, there is no guarantee that those \nentrepreneurs, having had the good fortune to estimate future prices \naccurately, will continue to do so. We are emphatically not talking \nabout some selective process at work here which incrementally refines \nthe abilities of entrepreneurs generally to make sound economic \njudgements which Steele seems to be implying. If this were the case then\n the history of the market economy would manifest itself as a \nprogressive reduction in uncertainty and risk.<\/p>\n\n\n\n On another matter, when Steele refers to profit and loss as an objective test of the accuracy of estimates of future prices one presumes he is using \u201cprofit\u201d here to mean accounting profit or net income. However, this is a little confusing. This is because he also uses the term \u201cprofit\u201d in another, more specialised, sense as well. The entrepreneur\u2019s return on her capital, he contends, is called \u201cinterest\u201d (or what we would normally called profit) and where this is equal to her accounting profits \u201cthere is no profit in the strict economic sense. True profit is a return above interest; loss, a return below interest\u201d14<\/a>. The irony is that such profit can only arise where the economy departs form the abstract model of perfect competition and optimal resource allocation. As Lachmann observes \u201cprofits are earned whenever there are price-cost differences; they are thus a typical disequilibrium phenomenon\u201d15<\/a>. Thus , according to the free marketeers\u2019 own theory of how the market behaves, the very imperfections which they deplore (such as monopolistic tendencies) \u201care, in fact, key profit-generating dynamics in the economic system. In other words, market imperfections are the main source of profit in the economy\u201d16<\/a>. Such profit, as Steele points out, is the result of the entrepreneur outguessing the market and benefiting society in the process. Presumably, such benefits would not be forthcoming in the idealised (and completely unrealistic) competitive model of the free market which free marketeers strive to realise and that what is needed instead is a less competitive model in which price distortions are allowed more free play. But that, of course, undermines an important assumption of the ECA about the need for market forces to be given free rein in order to ensure the \u201caccuracy\u201d of market prices.<\/p>\n\n\n\n According to the ECA, in the \nabsence of market prices that allow entrepreneurs to make profit and \nloss computations, economic efficiency cannot be assured. This, it is \nargued, is incompatible with the maintenance of a developed economic \ninfrastructure. However, we have seen just how problematic such profit \nand loss computations are in the real world despite the evidence of a \ndeveloped economic infrastructure around us (which the proponents of the\n ECA themselves delight in pointing out and attributing to the market). \nThis suggests that there must be something seriously awry with the \ntheory itself.<\/p>\n\n\n\n In any event, the claim that a\n socialist economy would need to be able to calculate \u201cnet income\u201d in \nsome sense does not stand up to close scrutiny. The notion of \u201cnet \nincome\u201d in fact derives purely from the functional requirement of \ncapitalism to realise profit through market exchange \u2013 that is, it is \nsystem-specific. Certainly, this requires inputs and outputs to be \nreduced to a common denominator \u2013 to facilitate comparison and thereby \nensure that when one commodity is exchanged for another, they are \nequivalent to each other. Indeed, market transactions necessitate such \nequivalence. However, it does not follow that this kind of comparison \nmaking use of a common denominator would be required in a socialist \neconomy. In such an economy, \u201ceconomic exchange\u201d of any sort would no \nlonger apply. It would not be necessary to determine whether \u201cmore\u201d or \n\u201cless\u201d wealth in general was being created than was being used up in the\n production of that wealth for the very simple reason that the concept \nof wealth \u201cin general\u201d, a completely abstract and crudely aggregated \nnotion of wealth, is of no practical use in itself and would be utterly \nmeaningless outside the context of commodity exchange. This emphatically\n does not mean that a socialist economy will have no way of ensuring \nthat resources would be efficiently allocated (which I will consider \nlater); it simply means that such an economy does not need to \noperationalise this wholly unsatisfactory notion of \u201cnet income\u201d in \norder to achieve this efficient allocation.<\/p>\n\n\n\n D) Estimating the negative effects of misallocation<\/p>\n\n\n\n Mises was clearly adamant that socialism could not be realised because it lacked any method of rational calculation. The implication of such a claim is that the effect of not having such a method would be so devastating as to prevent socialism from ever being realised. However, as Bryan Caplan points out, this flatly contradicts Mises own opinion that \u201ceconomic theory gives only qualitative, not quantitative laws\u201d17<\/a>. According to Mises in Human Action (quoted in Caplan), \u201ceconomics is not, as ignorant positivists repeat again and again, backward because it is not quantitative. It is not quantitative because there are no constants\u201d. But if that is the case, how could you quantity the negative effects of this supposed misallocation in a hypothetical socialist economy and come to the conclusion that they were so severe as to make socialism infeasible?<\/p>\n\n\n\n The Misesian argument would appear to rest on the claim that while there is only a finite number of options concerning the use of inputs that would lead to their efficient allocation, whereas there is an infinity of options that would result in those same inputs being misallocated. The chances are that without the means of making economic calculations, decision-makers in a socialist economy would chose one of the latter options. As Mises put it, economic calculation \u201cprovides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgements of value which apply directly only to consumption goods \u2013 or at best to production goods of the lowest order \u2013 to all goods of higher orders. Without it, all production by lengthy and roundabout processes would be so many steps in the dark \u2026 And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation\u201d18<\/a>.<\/p>\n\n\n\n However, as we shall see later, a socialist economy would be quite capable of avoiding this fate through the institutionalisation of a set of constraints that steer decision makers towards the efficient allocation of resources. In any case, Mises\u2019 claim about the lack of a reliable compass to guide these decision makers might as well be directed at market capitalism. This is what can be inferred from the Theory of The Second Best formulated Richard Lipsey and Kelvin Lancaster in 1956 19<\/a>. Looking at the \u201cgeneral equilibrium\u201d model of the economy, they argued that in order for equilibrium (pareto optimal allocation) to obtain a number of equilibrium conditions need to be simultaneously satisfied such as the supply of all goods being exactly equal to the demand for them, the output price of goods being equal to marginal cost of producing them and the long term profit for all firms being equal to zero. Where just one of these optimal conditions is not met then the \u2018second best\u2019 position can only be reached by departing from all the other Paretian conditions. To put it in a nutshell, any single price distortion leads to all other prices being distorted because of its ramifying consequences for exchange ratios throughout the economy and since price distortions are inevitably going to arise in the market, capitalist decision makers will likewise have to contend with whole ocean of possible and imaginable economic permutations in which their ability to perform precise calculations using market prices will be to little avail. This is because such prices, being distorted as it were, will almost by definition be unable to provide a reliable guide (in terms of price theory). Of course the notion of a \u201cgeneral equilibrium\u201d is merely an abstraction and has no empirical basis in fact. While Mises acknowledged this he did not seem to perceive the devastating consequences that this had for his own theory of \u201ceconomic calculation\u201d.<\/p>\n\n\n\n The implication of Mises\u2019 \nargument is that the more scope one allows for the free interplay of \nmarket forces the more efficient and reliable the allocation process. \nCan this claim be empirically tested? It is often argued for example \nthat so-called free market economies perform better than their more \ninterventionist, state capitalist, competitors. But this can be for any \nnumber of reasons other than \u201ceconomic calculation\u201d: differences in \nnatural and labour resource endowments, the prevalence of natural \ndisasters, historical circumstances (e.g. civil conflict), the incentive\n problem in oppressive regimes (a point that Caplan makes) and economic \ndependence (a reference to \u201cdependency theory\u201d and the argument that the\n already developed First World systematically \u201cunder-develops\u201d the Third\n World). There is a further problem of disentangling cause and effect. \nFor example, is it the case that relatively successful economies are \nsuccessful as a result of implementing free market policies or are those\n policies themselves the result of economic success? Those economies \nthat are more competitive are likely to be more favourably disposed \ntowards free trade for the obvious reason that they have little to fear \nfrom competition, whereas, conversely, less competitive or economically \nsuccessful economies will tend to want to adopt a more protective and \ninterventionist approach to protect their own interests. Indeed this is \nwhat enabled Germany, at the end of the 19th century to overtake Britain\n in terms of industrial production: Whereas the latter was still \nrelatively laissez-faire in its outlook, Germany and other continental \neconomies at the time relied heavily on tariffs and other \ninterventionist measures to build up their industries.<\/p>\n\n\n\n Empirical support for the economic calculation thesis is thus remarkably weak. In any case, there is not, never has been and never will be such a thing as a strictly \u201cfree market\u201d economy in the real world. In the real world, the market necessarily operates closely in tandem with the capitalist state, varying only in the degree to which this happens. As Karl Polanyi has noted: \u201cThe road to the free market was opened up and kept open by an enormous increase in continuous, centrally organised and controlled intervention\u201d20<\/a>.<\/p>\n\n\n\n E) The costs of economic calculation<\/p>\n\n\n\n What is often overlooked is \nthat accounting, while it might concern itself with cutting costs, is \nitself a significant cost. This has important implications for the ECA. \nParallel to a system of physical accounting (see section 5) what we have\n today as well is a system of monetary accounting. Monetary accounting \nis a highly complex process in which all enterprises in a capitalist \neconomy must of necessity engage, even though it plays a supernumerary \nrole as far as the physical process of organising production is \nconcerned. In earlier class-based social formations money played a \nsecondary role in the economic life of society; in modern capitalism, \nhowever, its influence is all-pervasive. Its purpose is not to ensure \nthe efficient allocation of resources as such but to expedite market \nexchanges by providing a universal equivalent against which all other \ncommodities exchange, so enabling the computation of profits and losses \nby competing actors engaged in these market exchanges. That is why it \neventually supplanted the traditional system of barter \u2013 because of the \nobvious structural shortcomings of the latter which impeded market \nexchanges. For example, you cannot swap your pig for two chickens from \nyour neighbour if he or she already has an ample supply of pigs; paying \nyour neighbour in cash overcomes this problem.<\/p>\n\n\n\n As well as enjoining economic\n actors to engage in monetary accounting, the development of capitalism \ngave rise to a whole plethora of institutions and economic activities \ndirectly or indirectly concerned with the handling and circulation of \nmoney rather than the production of use values as such \u2013 for example, \nbanks, insurance companies, pay departments, building societies and so \non. Indeed, this already vast and steadily proliferating sector of the \neconomy is a natural outgrowth of the systemic needs of an economic \nsystem centred on the competitive accumulation of capital; such \ninstitutions and activities arose precisely to service those needs. One \nmight want to argue that a bank, for example, performs a useful role in \nthat it lends money to a factory and thus enables the latter to \nmanufacture useful things that consumers in a market economy may value. \nTherefore, banks perform no less a useful role than factories in the \nproduction of these useful things. But this is to engage in a sleight of\n hand; it is to overlook the distinction that needs to be made between \nthe specific conditions under which a factory has perforce to operate \nwithin a given socio-economic system and the physical process of \nproduction itself. It is the former that is precisely being questioned \nwhich proponents of the ECA, on the other hand, take wholly for granted \nand assume is seamlessly linked to the latter. That is to say, they \nassume what they need to prove: that you cannot operate a modern system \nof production without market prices (and hence those kind of \ninstitutions \u2013 like banks \u2013 linked with market exchanges in capitalism).<\/p>\n\n\n\n It is the elimination of such activities and institutions , essential though they may be to a functioning market economy but unproductive in themselves from the standpoint of producing use values or meeting human needs, that constitutes perhaps the most important (but by no means only), productive advantage that a socialist economy would have over a capitalist economy. The elimination of this structural waste intrinsic to capitalism will free up a vast amount of labour and materials for socially useful production in socialism. Just how much resources will be made available for socially useful production in this way is a moot point. Most estimates suggest at least a doubling of available resources by comparison with the present.21<\/a> Yet the proponents of the ECA, while claiming that socialism would sink into the slough of inefficiency and falling output without the guidance of market prices, seem wilfully determined to deny socialism this particular productive advantage that it has over capitalism by positing the necessity for institutions such as banks \u2013 or some analogue of banking \u2013 in a socialist economy. This is a specious claim; it is unwittingly reading into socialism the functional requirements of capitalism.<\/p>\n\n\n\n 4 SOCIALISM AND THE RED HERRING OF CENTRAL PLANNING<\/p>\n\n\n\n One of the sacred cows of the\n Left is the idea of a \u201cplanned economy\u201d. This can be quite misleading. \nGiven the Left\u2019s traditional hostility towards the \u201cfree market\u201d, this \nmay convey the impression that the free market is somehow antithetical \nto \u201cplanning\u201d. But this is not the case at all. The free market is \nreplete with plans of every kind. The difference is that the \ninterconnections or interrelationships between these myriad plans are \nunplanned, spontaneous and anarchic.<\/p>\n\n\n\n \u201cCentral planning\u201d is the \nproposal to eliminate altogether this unplanned spontaneity by \nassimilating these different plans into a single society-wide plan. For \nfree market critics of socialism like Mises and Hayek, it is taken for \ngranted that a socialist economy would be a centrally planned economy in\n this sense of the term. It is argued that this central direction of \neconomic activity would necessarily go hand in hand with a command \nstructure (what Mises called the \u201cFuhrer principle\u201d) to ensure \nproduction targets are met in accordance with the central plan and \nwithout any deviations that would threaten the coherency of the plan. \nThe ineluctable consequences that flow from this are that a socialist \neconomy could not be run democratically, that centralised rationing \nwould have to replace free access and that voluntary labour would have \nto give way to coerced labour. In short, we would no longer be talking \nabout \u201ccommunism\u201d or \u201csocialism\u201d as these terms were traditionally \nconceived by individuals like Marx, Engels, Morris and Kropotkin.<\/p>\n\n\n\n It is beyond the scope of \nthis article to consider in detail the problematic nature of this \nparticular notion of \u201ccentral planning\u201d. Suffice to say, it would be \nlogistically impossible to collate together all the dispersed \ninformation concerning the supply and demand for every conceivable kind \nof production good or consumer good throughout the economy. In theory, \nthat would entail constructing a stupendously complicated and \nlabyrinthine input-output matrix to accommodate all this information \nbut, even then, unforeseen changes such as natural disasters or \npopulation movements would seriously disrupt the input-output ratios \nwith ramifications that would spread uncontrollably to every other area \nof the economy. This would necessitate a reformulation of the plan in toto<\/em>.\n Since change is an endemic fact of life, it follows that the plan would\n never have the opportunity to be put into effect; it would be \nconstantly confined to the drawing board assuming a big enough drawing \nboard could be found for this purpose. While this does not strictly \ntouch on the ECA as such, it can be seen as a supplementary argument to \ndemonstrate the impossibility of socialism (or communism) as a form of \neconomic organisation. Indeed this explains why critics of socialism so \noften maintain that the abandonment of a price mechanism could only \nreally work at the level of a \u201cRobinson Crusoe\u201d economy; given the \ncomplexity of modern production, it is impossible for any single mind \u2013 \nlike Crusoe\u2019s \u2013 to grasp the totality of the interconnections this \nentails.<\/p>\n\n\n\n Is the assumption that a communist or socialist economy would entail centralised or society-wide planning a reasonable one to make? It might if it could be shown that is what was being advocated by supporters of such an economy. Steele is unequivocal in thinking this is the case. He cites Marx\u2019s and Engels\u2019 objections to the anarchy of capitalist production and the allocation of resources \u201cbehinds the backs of the producers\u201d as well their advocacy of \u201cconscious social control\u201d and the implementation of a \u201cdefinite social plan\u201d22<\/a>. It may seem a reasonable inference from such language that what Marx and Engels had in mind was indeed the kind of society-wide \u2013 or central \u2013 planning. to which Steele refers.<\/p>\n\n\n\n However, as Steele himself acknowledges, the word \u201cplan\u201d has many shades of meaning23<\/a>;\n it could embody just a set of intentions or it could embrace also the \nmeans to execute these intentions. Some of the points that Steele makes \nflatly contradict his claim that Marx and Engels stood unequivocally for\n central planning. Thus, he acknowledges that \u201cMarx sees the communist \nadministration as a federation of self-governing groups largely \nconcerned with their internal affairs and collaborating for the \ncomparatively few purposes that concern all the groups\u201d24<\/a>. This vision of communism is unquestionably incompatible with Steele\u2019s version of \u201ccentral planning\u201d.<\/p>\n\n\n\n The reference to \u201canarchy of \nproduction\u201d is highly misleading and it does seem very much that Steele \nhas got the wrong end of the stick in assuming that Marx and Engels \nimplied by this the desire to replace a situation in which you had a \nmyriad of plans (and the unplanned interconnections between them) with a\n single society-wide plan where the total pattern of production is \nplanned. On the contrary, it seems more reasonable to assume that by \n\u201canarchy of production\u201d, Marx and Engels were referring to the blind \nungovernable economic laws of capitalism which intercede in human \naffairs and get in the way of conscious human intentions. Often this \nphrase is linked in their writings to the capitalist trade cycle which \nis a particularly apt manifestation of those ungovernable laws. Here you\n have a perverse situation of \u201coverproduction\u201d alongside increased \nmisery and want. What could better convey the idea of subjective \nintentions being wilfully denied and flouted by forces operating beyond \nthe control of those very intentions?<\/p>\n\n\n\n Further evidence in support of this interpretation of \u201canarchy of production\u201d is provided by Engels\u2019 claim in Socialism: Utopian and Scientific<\/em> that anarchy in capitalism grows to a \u201cgreater and greater height\u201d. This is an allusion to the increasing severity of economic crises he imagined would occur in capitalism. Whether or not he was correct in supposing this is besides the point. Steele maintains that Marx and Engels subscribed to the idea that there was an inherent tendency in capitalism towards centralisation and concentration \u2013 in other words a gradual diminution in the area of unplanned spontaneity existing between competing units by virtue of the decline in the number of such units competing in the market. Strictly speaking, this would imply less \u201canarchy\u201d on Steele\u2019s interpretation of the word but as we see in Engels\u2019 case, such anarchy is likely to grow to a \u201cgreater and greater height\u201d. Clearly this directly contradicts Steele\u2019s claim that \u201cFor Marx, anarchy of production is not an emergent quality of the market. The market does not cause anarchy of production. Anarchy of production causes the market.\u201d25<\/a><\/p>\n\n\n\n But even if Marx and Engels \nwere advocates of central planning, that does not mean that every \nsocialist or communist must necessarily follow suit. What of those who \nclearly do not advocate central planning and, indeed, explicitly reject \nthe idea? Insofar as they embrace a vision of a future society which \nentails a multitude of interacting plans and significant \ndecentralisation, this may be said to conform to Steele\u2019s notion of \n\u201canarchy of production\u201d. The question is, does such anarchy of \nproduction necessarily \u201ccause the market\u201d as he provocatively contends?<\/p>\n\n\n\n Steele has little to say on \nthe subject and other attempts to deal with concept of relatively \ndecentralised non-market economy \u2013 such as Kevin McFarlane\u2019s tract, Real\n Socialism wouldn\u2019t work either (Libertarian Alliance<\/em> 1992 \nEconomic notes no.46 ) have been theoretically slight or plainly \nmisconceived. Such is the grip of central planning on the thinking of \nfree market critics of socialism that they find it difficult to envisage\n it being organised on any other basis.<\/p>\n\n\n\n As I suggested earlier, this \nhas profound repercussions for the discussion on economic calculation. \nIt is not that the ECA necessarily implies or, in itself, relies on a \nvision of socialism entailing central planning. However, insofar as \nsupporters of the ECA do hold such a vision, it is precisely this, I \nwill argue, that prevents them from coming to recognise an effective \nresponse to the ECA. That is predicated on a solution that necessitates a\n vision of socialism that, on the contrary, is relatively decentralised \nand spontaneously ordered. It is to just such a vision that we now \nfinally turn.<\/p>\n\n\n\n 5. ANATOMY OF A SOCIALIST ECONOMY<\/p>\n\n\n\n By \u201csocialism\u201d or \n\u201ccommunism\u201d, as we saw earlier, was traditionally meant a society \nwithout markets, money, wage labour or a state. All wealth would be \nproduced on a strictly voluntary basis. Goods and services would be \nprovided directly for self determined need and not for sale on a market;\n they would be made freely available for individuals to take without \nrequiring these individuals to offer something in direct exchange. The \nsense of mutual obligations and the realisation of universal \ninterdependency arising from this would profoundly colour people\u2019s \nperceptions and influence their behaviour in such a society. We may thus\n characterise such a society as being built around a moral economy and a\n system of generalised reciprocity.<\/p>\n\n\n\n Free access to goods and services is a corollary of socialism\u2019s common ownership of the means of production; where you have economic exchange you must logically have private or sectional ownership of those means of production. Free access to goods and services denies to any group or individuals the political leverage with which to dominate others (a feature intrinsic to all private-property or class based systems). This will work to ensure that a socialist society is run on the basis of democratic consensus. Decisions will be made at different levels of organisation: global, regional and local with the bulk of decision-making being made at the local level.26<\/a> In this sense, a socialist economy would be a polycentric, not a centrally planned, economy.<\/p>\n\n\n\n Over and above these broad \ndefining features of a socialist economy one can identify a number of \nderivative or secondary features which interact with each other in \ncoherent fashion and have particular relevance to the question of \nresource allocation. As with consumption goods, production goods would \nbe freely distributed between production units without economic exchange\n mediating in this process. We can list these various interlocking \nsecondary features of a socialist economy as follows:<\/p>\n\n\n\n A) Calculation in kind<\/p>\n\n\n\n Calculation in kind entails \nthe counting or measurement of physical quantities of different kinds of\n factors of production. There is no general unit of accounting involved \nin this process such as money or labour hours or energy units. In fact, \nevery conceivable kind of economic system has to rely on calculation in \nkind, including capitalism. Without it, the physical organisation of \nproduction (e.g. maintaining inventories) would be literally impossible.\n But where capitalism relies on monetary accounting as well as \ncalculation in kind, socialism relies solely on the latter. This is one \nreason why socialism holds a decisive productive advantage over \ncapitalism; by eliminating the need to tie up vast quantities of \nresources and labour implicated in a system of monetary accounting.<\/p>\n\n\n\n A criticism of calculation in\n kind is that it does not permit decision makers to compare the total \ncosts of alternative aggregates of bundles of production factors to \narrive at a \u201cleast cost\u201d combination. This as we saw earlier, is based \non a complete misunderstanding. In a socialist economy there will be no \nneed to perform such an operation. However this does not mean that it \nwill not be possible to compare alternative bundles of factors \u2013 like \nmethods 1, 2 and 3 in our example \u2013 on some other basis and arrive at a \ndecision as to which is the most efficient to use as we shall see later.<\/p>\n\n\n\n Possibly the most prominent advocate of calculation in kind was Otto Neurath. Neurath wrote up a report to the Munich Workers Council in 1919 entitled \u201cThrough War Economy to Economy in Kind\u201d which Mises later attacked. In this report, Neurath argued that the Germany\u2019s war economy had demonstrated the possibility of dispensing with monetary calculation altogether. However his position at the time was somewhat weakened by virtue of the fact that he also subscribed to a system of central planning. This made him vulnerable to the Misesian arguments against central planning about the problems of collating the dispersed information of economic actors in an economy. Neurath in later life moved away from a centrally planned conception of socialism and developed instead an \u201cassociational conception of socialism\u201d which entailed a \u201cdecentralised and participatory account of socialist planning\u201d.27<\/a><\/p>\n\n\n\n In his debate with Mises, Neurath was scathing in his criticism of the \u201cpseudorationalism\u201d employed by Mises and the mistaken assumption that rational decisions require commensurability of different values28<\/a>. This, as O\u2019Neill points out, reduced decision making to a \u201cpurely technical procedure\u201d which left out \u201cethical and political judgement\u201d (as we saw in our discussion of externalities). One of the advantages of a system of calculation in kind is that it opens up the possibility of a much more rounded and nuanced approach to decision-making and gives more weight to factors such as environmental concerns often overlooked in market calculations.<\/p>\n\n\n\n B) A self-regulating system of stock control<\/p>\n\n\n\n The problem with a centrally-planned model of socialism is inter alia<\/em>\n its inability to cope with change. It lacks any kind of feedback \nmechanism which allows for mutual adjustments between the different \nactors in such an economy. It is completely inflexible in this regard. A\n decentralised or polycentric version of socialism, on the other hand, \novercomes these difficulties. It facilitates the generation of \ninformation concerning the supply and demand for production and \nconsumption goods through the economy via a distributed information (and\n today, largely computerised) network in a way that was possibly \nunimaginable when Marx was alive or when Mises first wrote his tract on \neconomic calculation. This information, as we shall see, would play a \nvital role in the process of efficient resource allocation in a \nsocialist economy.<\/p>\n\n\n\n Stock or inventory control \nsystems employing calculation in kind are, as was suggested earlier, \nabsolutely indispensable to any kind of modern production system. While \nit is true that they operate within a price environment today, that is \nnot the same thing as saying they need such an environment in order to \noperate. The key to good stock management is the stock turnover rate \u2013 \nhow rapidly stock is removed from the shelves \u2013 and the point at which \nit may need to be re-ordered. This will also be affected by \nconsiderations such as lead times \u2013 how long it takes for fresh stock to\n arrive \u2013 and the need to anticipate possible changes in demand. These \nare considerations that do not depend on the existence of a market \neconomy at all. Interestingly, Marx wrote in Capital<\/em> Vol. II of the need for a socialist economy to provide a buffer of stock as a safeguard against fluctuations in demand.<\/p>\n\n\n\n A typical sequence of \ninformation flows in a socialist economy might be as follows. Assume a \ndistribution point (shop) stocks a certain consumer good \u2013 say, tins of \nbaked beans. From past experience it knows that it will need to re-order\n approximately 1000 tins from its suppliers at the start of every month \nor, by the end of the month, supplies will be low. Assume that, for \nwhatever reason, the rate of stock turnover increases sharply to say \n2000 tins per month. This will require either more frequent deliveries \nor, alternatively, larger deliveries. Possibly the capacity of the \ndistribution point may not be large enough to accommodate the extra \nquantity of tins required in which case it will have to opt for more \nfrequent deliveries. It could also add to its storage capacity but this \nwould probably take a bit more time. In any event, this information will\n be communicated to its suppliers. These suppliers, in turn, may require\n additional tin plate (steel sheet coated with tin), to make cans or \nbeans to be processed and this information can similarly be communicated\n in the form of new orders to suppliers of those items further down the \nproduction chain. And so on and so forth. The whole process is, to a \nlarge extent, automatic \u2013 or self regulating \u2013 being driven by dispersed\n information signals from producers and consumers concerning the supply \nand demand for goods and, as such, is far removed from the gross \ncaricature of a centrally planned economy.<\/p>\n\n\n\n It may be argued that this \noverlooks the problem of opportunity costs which lies at the heart of \nthe ECA. For example, if the supplier of baked beans orders more tin \nplate from the manufacturers of tin plate then that will mean other uses\n for this material being deprived by that amount. However, it must be \nborn in mind in the first place that the systematic overproduction of \ngoods that Marx talked of \u2013 i.e. buffer stock \u2013 applies to all goods, \nconsumption goods as well as production goods. So increased demand from \none consumer\/producer, need not necessarily entail a cut in supply to \nanother \u2013 or at least, not immediately. The existence of buffer stocks \nprovides for a period of re-adjustment. This brings us neatly to our \nsecond point \u2013 namely that this argument overlooks the possibility of \nthere being alternative suppliers of this material or indeed, for that \nmatter, more readily available substitutes for containers (say, \nplastic). Thirdly, and most importantly, as we shall see, even if we \nassume a worse case scenario \u2013 that we face a stark choice between \nhaving more tins of baked beans and less of something else by virtue of \ndiverting supplies of tinplate to the manufacture of additional tins \u2013 \nthere is still a way of arriving at a sensible decision that would \nensure the most economically efficient allocation of resources under \nthese constrained circumstances.<\/p>\n\n\n\n C) The Law of the Minimum<\/p>\n\n\n\n The \u201claw of the minimum\u201d was \nformulated by an agricultural chemist, Justus von Liebig in the 19th \ncentury. What it states is that plant growth is controlled not by the \ntotal amount of resources available to a plant but by the particular \nfactor that is scarcest. This factor is called the limiting factor. It \nis only by increasing the supply of the limiting factor in question \u2013 \nsay, nitrogen fertiliser or water in an arid environment \u2013 that you \npromote plant growth. This however will inevitably lead to some other \nfactor assuming the role of limiting factor.<\/p>\n\n\n\n Liebig\u2019s Law can be applied \nequally to the problem of resource allocation in any economy. Indeed \nLiebig\u2019s dismissal of the claim that it is the total resources available\n to a plant that controls its growth finds an echo in the socialist \ndismissal of the claim that we need to compare the \u201ctotal costs\u201d of \nalternative bundles of factors. For any given bundle of factors required\n to produce a given good, one of these will be the limiting factor. That\n is to say, the output of this good will be restricted by the \navailability of the factor in question constituting the limiting factor.\n All things being equal, it makes sense from an economic point of view \nto economise most on those things that are scarcest and to make greatest\n use of those things that are abundant. Factors lying in between these \ntwo poles can be treated accordingly in relative terms.<\/p>\n\n\n\n To claim that all factors are\n scarce (because the use of any factor entails an opportunity cost) and,\n consequently, need to be economised is actually not a very sensible \napproach to adopt. Effective economisation of resources requires \ndiscrimination and selection; you cannot treat every factor equally \u2013 \nthat is, as equally scarce \u2013 or, if you do, this will result in gross \nmisallocation of resources and economic inefficiency. On what basis \nshould one discriminate between factors? Essentially, the most sensible \nbasis on which to make such a discrimination is the relative \navailability of different factors and this is precisely what the law of \nthe minimum is all about.<\/p>\n\n\n\n Indeed one can go further. \nBecause a socialist economy would to a large extent be a self-regulating\n economy involving a considerable degree of feedback and mutual \nadjustment, it would be driven willy-nilly in the direction of efficient\n allocation by the kind of constraints alluded to in Liebig\u2019s law of the\n minimum. These supply constraints will operate inevitably in every \nsector of the economy and at every point along every production chain. \nWhen a particular factor is limited in relation to the multifarious \ndemands placed on it, the only way in which it can be \u201cinefficiently \nallocated\u201d (although this is ultimately a value judgement) is in \nchoosing \u201cincorrectly\u201d to which particular end use it should be \nallocated (a point we shall consider shortly). Beyond that, you cannot \nmisuse or misallocate a resource if it simply isn\u2019t available to \nmisallocate (that is, where there are inadequate or no buffer stocks on \nthe shelf, so to speak). Of necessity, one is compelled to seek out a \nmore abundant alternative or substitute (which would be the sensible \nthing to do in this circumstance).<\/p>\n\n\n\n The relative availability of \nany factor is determined 1) by the crude supply of this factor vis-\u00e0-vis\n other factors in any aggregate of factors required to produce a given \ngood, as revealed via the self-regulating system of stock control and 2)\n the technical ratio of all those factors in this aggregate, including \nour factor in question, required to produce this given good. This ratio \ntells us how much of each factor is needed which we can then be compared\n with the supply of each factor in order to arrive at some idea of the \nrelative availability of the factor in question in relation to other \nfactors.<\/p>\n\n\n\n Let\u2019s look at how this might \nwork in practice. Let us say one unit of a given good Y can be produced \nusing 3 units of factor M and 2 units of factor N. If there are 6 units \nof M and 6 units of N then we easily work which of these factors \u2013 M or N\n \u2013 is the limiting factor. In this case it is M because if 1 unit of Y \ncan be produced using 3 units of M and there are only 6 units of M it \nfollows that you can only produce 2 units of Y altogether (if you \ndisregard N). On the other hand, if 1 unit of Y can be produced using 2 \nunits of N and there are 6 units of N altogether this would allows us to\n produce 3 units of Y (if we disregard M). If the total demand for Y was\n only 2 units or less then we might not have much cause for concern. \nHowever if the demand was for more than 2 units of Y we might have to \nconsider ways of increasing the supply of Y, for example by altering the\n technical mix of inputs so that it requires fewer units of M and more \nof N. In other words we would be reducing the supply constraints that M \nexerts in limiting the output of Y. Note that all of this is perfectly \nfeasible without recourse to market prices whatsoever. Note also that it\n takes cognisance of, and puts into operation, the concept of \nopportunity costs with which the ECA is ostensibly concerned. Thus, if \nwe decided to divert 4 units of N away from the production of Y to the \nproduction of another good \u2013 let us call it Z \u2013 then we know very well \nwhat we have foregone by thus cutting back on the supplies of N needed \nto produce Y. The 2 units of N that we are left with after the other 4 \nhave been diverted to Z will only suffice for the production of 1 unit \nof Y. Whereas before we could produce 2 units of Y where M was the \nlimiting factor diverting 4 units of N to Z would mean, in effect, that N\n would replace M as the limiting factor in producing Y and that the \nopportunity costs of diverting 4 units of N to Z would amount to the \nloss of 1 unit of Y.<\/p>\n\n\n\n Slowly but ineluctably we are\n closing the net around the ECA. It remains for us to identify just one \nmore of socialism\u2019s interlocking production features to close the circle\n completely.<\/p>\n\n\n\n D) A hierarchy of production priorities<\/p>\n\n\n\n In any economy there needs to\n be some way of prioritising production goals. In capitalism , as we \nhave seen, this is done on the basis of purchasing power. From the \nstandpoint of meeting human needs, however, this can be extraordinarily \ninefficient. The economist, Arthur Pigou argued in his influential work Economics of Welfare<\/em>\n that it is \u201cevident that any transference of income between a \nrelatively rich man to a relatively poor man of similar temperament, \nsince it enables more intense wants to be satisfied at the expense of \nless intense wants, must increase the aggregate sum of satisfactions.\u201d29<\/a>\n Pigou\u2019s point is that the marginal utility of, say, a dollar to a poor \nman was worth much more than it was to a rich man. Thus society as a \nwhole would benefit \u2013 that is, its total utility would be enhanced \u2013 \nwere an income transfer to take place between the latter and the former.\n The problem is that this kind of income distribution, however much it \nmakes for a palpably inefficient outcome is not only a consequence, but \nalso a functional requirement, of a market economy. Indeed, this is a \npoint which advocates of a free market economy themselves routinely \nmake. Redistribution, they claim, is likely to undermine the very \nstructure of incentives upon which a thriving economy depends.<\/p>\n\n\n\n It is this grossly unequal \ndistribution of income or purchasing power which has become even more \nglaringly unequal in recent decades at both the national and global \nlevels, which exerts such a profound effect on the whole pattern and \ncomposition of production today \u2013 and the consequent allocation of \nresources that underpins this. It is reflected in the kind of production\n priorities that manifest themselves around us: conspicuous consumption \nin the midst of the most abject poverty. Such consumption is the \ncornerstone of a system of status differentiation which, in turn, \nprovides the ideological underpinnings of an accumulative capitalist \ndynamic. It is from such a dynamic that the myth of insatiable demand \nsprings. The logic of economic competition expresses itself as an \neconomic imperative that enjoins competing enterprises to seek out and \nstimulate market demand without limit. Increased consumption translates \ninto increased status while, at the same time, conveniently affording \nthose enterprises increased opportunities to realise profit.<\/p>\n\n\n\n As Thorstein Veblen suggested in his work The Theory of the Leisure Class<\/em> (1925), within such a status hierarchy in which social esteem is closely related to an individual\u2019s \u201cpecuniary strength\u201d it is how those at the top of this hierarchy exercise their pecuniary strength that provides the key signifier of social esteem in this hierarchy. Hence the emphasis is on extravagant luxury which only the rich can really afford. But as Veblen shrewdly observes this does not prevent those lower down this hierarchy from imitating those higher up \u2013 even if this means the wasteful diversion of their limited incomes from meeting more pressing needs: \u201cNo class of society, not even the most abjectly poor, forgoes all customary conspicuous consumption. The last items of this category of consumption are not given up except under stress of the direst necessity. Very much of squalor and discomfort will be endured before the last trinket or the last pretence of pecuniary decency is put away.\u201d30<\/a><\/p>\n\n\n\n The irony is that even a \nmodest redistribution of wealth, if it were possible, would \nsignificantly enhance the productive potential of hundreds of millions \ntrapped in the mire of absolute poverty by improving their mental and \nphysical capacities. To put it simply such inequality is not only \nmorally offensive; it is also grossly inefficient.<\/p>\n\n\n\n In a \u201cfree access\u201d socialist \neconomy the notion of income or purchasing power would, of course, be \ndevoid of meaning. So too would the notion of status based upon the \nconspicuous consumption of wealth. Because individuals would stand in \nequal relation to the means of production and have free access to the \nresultant goods and services, this would fundamentally alter the basis \nupon which society\u2019s scale of preferences was established. It would make\n for a much more democratic and consensual approach altogether and \nenable a system of values reflecting this approach to emerge and shape \nthis agenda. It is perhaps this that really lies behind the notion of \nsociety wide planning \u2013 some co-ordinated and commonly agreed approach \nin setting society\u2019s priorities.<\/p>\n\n\n\n How might these priorities be determined? Here Maslow\u2019s \u201chierarchy of needs\u201d springs very much to mind as a guide to action. It would seem reasonable to suppose that needs that were most pressing and upon which the satisfaction of others needs were contingent, would take priority over those other needs. We are talking here about our basic physiological needs for food, water, adequate sanitation and housing and so on. This would be reflected in the allocation of resources: high priority end goals would take precedence over low priority end goals where resources common to both are revealed (via the self regulating system of stock control) to be in short supply (that is, where the multifarious demands for such resources exceeds the supply of them). Buick and Crump speculate, not unreasonably, that some kind of \u201cpoints system\u201d might be used31<\/a> with which to evaluate a range of different projects facing such a society. This will certainly provide useful information to guide decision makers in resource allocation where choices have to be made between competing end uses. But the precise mechanism(s) to be used is something that will have to be decided upon by a socialist society itself.<\/p>\n\n\n\n CONCLUSION<\/p>\n\n\n\n We have seen that a socialist economy would need to have some system of production priorities and how this might be arrived at. We have seen how this would impact on the allocation of resources where the supply of such resources falls short of the demand for them. We have looked at the mechanism of a self-regulating system of stock control, using calculation in kind, which would enable us to keep track of this supply and demand. We have established that the need to economise on the allocation of resources is positively correlated with their relative scarcity and that that, in turn, is a function not only of crude supply as revealed via the self regulating system of stock control but is also a function of demand and of the technical ratios of inputs involved. Comparison of the relative scarcity of different inputs allows us to operationalise Liebig\u2019s law of the minimum. Having identified our limiting factors we can subject them to the guidance of our established system of production priorities to determine how they are to be allocated. In short, what we have finally arrived at is a coherent and functioning system of interlocking parts that at no point has need of economic calculation in the form of market prices whatsoever. What then remains of the Economic Calculation Argument? Based on a highly unrealistic set of assumptions about how a market economy actually operates in practice, it attacks what is clearly a gross caricature of a socialist economy which would be unworkable, in any case, on grounds other than that of economic calculation. In truth, the fortunes of the ECA were inextricably bound up with the rise of state capitalist alternatives to the so-called free market, parading as socialist economies, which were the real targets of its hostility. By that token, the historical relevance of the Misesian argument has disappeared along with the collapse of these self same state capitalist regimes. <\/p>\n\n\n\n Robin Cox<\/p>\n\n\n\n <\/a>\n 1. D R Steele, chapter 4 2, From Marx to Mises: Post-capitalist society\n and the challenge of economic calculation (Illinois; Open Court, 1992) <\/p>\n\n\n\n <\/a> 2. J O\u2019Neill, Nov\/ Dec 1995 \u201cIn partial praise of a positivist: the work of Otto Neurath\u201d , Radical Philosophy<\/em> no 74; p.30 3) <\/p>\n\n\n\n <<\/a> 3. L von Mises, Human Action: A Treatise on Economics<\/em> (Chicago: Henry Regnery, 1949), p.679 <\/p>\n\n\n\n <\/a> 4. J Salerno, 1994 \u201cReply to Leland B. Yeager on \u2018Mises and Hayek on Calculation and Knowledge\u2019\u201d, Review of Austrian Economics<\/em> 7 (2), pp 111\u201325. <\/p>\n\n\n\n <\/a> 5. Steele, p.11 <\/p>\n\n\n\n <\/a> 6. Steele, p.10 <\/p>\n\n\n\n <\/a>7. D.R.Steele, Libertarian Student<\/em> vol. 3 no 1, [n.d.], p.7<\/p>\n\n\n\n <\/a>8. http:\/\/www.projectcommunis.org\/articles\/000613.html<\/p>\n\n\n\n <\/a>9. L von Mises, p. 229<\/p>\n\n\n\n <\/a>10. Steele, 1992, p.15<\/p>\n\n\n\n <\/a>11. Steele, p.169<\/p>\n\n\n\n <\/a>12. Steele, p.16<\/p>\n\n\n\n <\/a>13. Steele, p.169<\/p>\n\n\n\n <\/a>14. Steele, p.419<\/p>\n\n\n\n <\/a>15. L M Lachmann, Macro-economic thinking and the Market Economy<\/em> (London: Institute of Economic Affairs,1973)<\/p>\n\n\n\n <\/a>16. D King, The New Right: Politics, Markets and Citizenship<\/em>\u201d (London: Macmillan, 1987), p.80<\/p>\n\n\n\n <\/a>17. B Caplan, http:\/\/www.gmu.edu\/departments\/economics\/bcaplan\/why.aust.htm <\/p>\n\n\n\n <\/a>18. L von Mises, Socialism: An Economic and Sociological Analysis<\/em> (Indianapolis: Liberty Fund, 1922), pp. 101, 105<\/p>\n\n\n\n <\/a>19. R G Lipsey and K Lancaster, \u201cThe General Theory of Second Best\u201d, Review of Economic Studies<\/em>, vol. XXIV , Oct 1956 pp.11-32<\/p>\n\n\n\n <\/a>20. K Polanyi, The Great Transformation<\/em> ( Boston,1957), p.140<\/p>\n\n\n\n <\/a>21. K Smith K, Free is Cheaper<\/em> (Gloucester: John Ball Press,1988)<\/p>\n\n\n\n <\/a>22. Steele, p.255-6<\/p>\n\n\n\n <\/a>23. Steele, p.256<\/p>\n\n\n\n <\/a>24. Steele, p.316<\/p>\n\n\n\n <\/a>25. Steele, p.50<\/p>\n\n\n\n <\/a>26. Socialism as a Practical Alternative<\/em> (London, SPGB pamphlet, 1994)<\/p>\n\n\n\n <\/a>27. O\u2019 Neill, p.35<\/p>\n\n\n\n <\/a>28. O\u2019Neill, p. 31<\/p>\n\n\n\n <\/a>29. quoted in M Lutz & K Lux, Humanistic Economics: The New Challenge<\/em>; (New York: Bootstrap Press, 1988), p.132<\/p>\n\n\n\n <\/a>30. quoted in M J Lee (ed), The Consumer Society Reader<\/em> ( Oxford: Blackwell Publishing, 2000), p.39<\/p>\n\n\n\n